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A Tall Order for McDonald's

Megan McArdle is a Bloomberg View columnist. She wrote for the Daily Beast, Newsweek, the Atlantic and the Economist and founded the blog Asymmetrical Information. She is the author of "“The Up Side of Down: Why Failing Well Is the Key to Success.”
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The McFamily is losing its McFather. After only two and a half years at the helm, McDonald's Chief Executive Officer Don Thompson is stepping down. Five straight quarters of disappointing sales apparently have shareholders longing for new leadership. The quintessentially American company, whose Golden Arches are a symbol of American marketing power across the globe, will be headed by a Brit, Steve Easterbrook.

Can Easterbrook chase the malaise out of McDonald's sales? He's done a good job in Europe. And some of the problems that plagued Thompson were one-off events, including a tainted-food scandal in Asia that temporarily forced McDonald's to stop selling chicken in the region.

On the other hand, some of the problems Thompson dealt with were not isolated events; they were symptoms of a broad change in American tastes. For generations, McDonald's was a favorite stop for traveling Americans, hungry teenagers and time-crunched parents, because of the breadth of the menu and the speed and consistency with which food was delivered. Now customers are turning away toward chains like Five Guys and Chipotle that do a single thing really well, if often a little bit slower.

The funny thing is, that is exactly where McDonald's started out. You could have a hamburger or a cheeseburger. You could add fries, or choose from a limited selection of drinks. And that was it. If you wanted something else, you ate somewhere else. Over the years, expanding its menu was one of the things that made it so successful: The company expanded to breakfast, which allowed it to get more shifts (and sales) out of a single location, added chicken and fish to tempt families with hamburger-haters, multiplied the size options in order to maximize revenue per customer. And so it multiplied across the land, and into every foreign clime.

The problem with expanding your menu and locations is that it requires absolutely ruthless standardization, at the expense of quality and customization. The appeal of McDonald's is that you can get a variety of options, always fast and exactly the same -- and because of its massive supply chain, you can get it dirt cheap. The drawback is that each of those things can be done better by someone else who has relentlessly focused on a single thing.

For the company, the other drawback is that it's easier to add something than to take it away. Each of its menu items has a group of loyal customers that is passionately attached to it, and will protest -- or drift away -- if you remove the item. It's hard to radically innovate while you are also trying to please every customer who ever liked something you already make. Fast-food options are not like mobile phones; we don't expect or want to switch to a new model every two years.

It's not that McDonald's is doomed. The company is an amazing innovator that has helped pioneer many of the trends that fast-food consumers now take for granted, such as the value menu and the drive-thru. It has been so ubiquitous for so long precisely because it is very, very good at running a business. But as my former professor James Schrager once told me, big companies are like battleships: They're hard to sink, but also very hard to turn.

If you were going to build a company to compete in today's retail food industry, would you want to choose a company that has thousands upon thousands of existing stakeholders committed to the way things have always been done: franchisees, employees, suppliers? Probably not; they'd just get in your way. That's the problem that any big company faces in a changing market. And many of them simply can't make the turn in time.

As I say, this is a ferociously competitive company that has survived -- and led -- many previous changes in the industry. I wouldn't count Easterbrook out, by any means. But he's going to have to haul pretty hard on that steering wheel.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Megan McArdle at mmcardle3@bloomberg.net

To contact the editor on this story:
Brooke Sample at bsample1@bloomberg.net