McDonald's Gets Too Fancy
Last week Marilyn Hagerty, the world-famous restaurant reviewer for North Dakota’s Grand Forks Herald, weighed in on the state of affairs at the four McDonald's restaurants in her area. Despite all the reports in the national media of trouble and falling sales at the chain, she encountered bustling restaurants and tasty food. Good coffee, too. Even the caffe lattes were a “worthy” competitor to the more-expensive ones at Starbucks.
There were nonetheless a couple of ominous notes in her review. One was her repeated references to how filling and calorie-laden the food was. The other was this addendum about those lattes: “The only problem is occasionally, one of the restaurants will tell you their machine is not working.”
This is McDonalds’ conundrum. It is famous for its simple, low-rent fare, which may be selling well in middle-of-nowhere Grand Forks (seriously: look at a map) but is running into trouble with younger consumers elsewhere. When it tries to branch into other offerings, though, the company complicates its business and makes it more likely that something will go wrong.
Consider the Mighty Wings Debacle of 2013, recounted by Fortune’s Beth Kowitt in a revealing November account of the company’s troubles: the deep-fried cayenne-and-chili-pepper chicken wings originated in Hong Kong, were popular in a test run in Atlanta, and totally bombed when rolled out nationwide. They were reputedly quite yummy, but were also unfamiliar, possibly too spicy for mainstream tastes and seemingly expensive. The company ended up stuck with 10 million pounds of unsold wings.
In the article, Kowitt also told of repeated complaints through the decades about menu clutter at the company, which I reverse-engineered into this chart:
That the company has continued to mostly grow and thrive through all this menu expansion is evidence that it wasn’t all a bad idea. McDonald's ranks third among fast-food chains, behind much-smaller Chik-fil-A and Krispy Kreme, in average sales per unit, according to QSR magazine. Long-time rival Burger King is in 24th place, with less than half of McDonald's per-restaurant sales.
Technical sophistication seems to have been key to this success. Don Thompson, who lost his job as chief executive officer yesterday in the face of slumping sales, was an electrical engineer who started out at the company working on kitchen robotics and later was the executive in charge of the great espresso-machine rollout.
Still, that sophistication has its limits. More than 80 percent of McDonalds’ 36,000 restaurants worldwide are owned by independent franchisees who aren’t always thrilled about changes and new offerings. Plus, customers can be overwhelmed by too many options, as illustrated by the famous jam study conducted by psychologists Sheena Iyengar and Mark Lepper years ago -- visitors to a California gourmet market bought less jam when offered 24 flavors than when offered six.
In the company’s earnings call last week, McDonald's USA president Mike Andres said his operation was cutting back on extra-value-meals and looking at other ways “to address the simplicity, or the complexity, I should say, of our menu.” At the same time, though, Thompson talked a lot about the rollout of Create Your Taste, which allows customers to design their own burgers. McDonald's isn't going to go back to having just a few things on the menu.
McDonald's has run into walls before. In the late 1990s and early 2000s it ran through a succession of CEOs before things settled down under Jim Skinner, who led a restaurant-modernization drive that included those espresso machines and brought years of sales increases and strong stock performance before he handed the reins over to Thompson in 2012.
Surely somebody, whether it’s new CEO Steve Easterbrook or the next one or the next one after that, will figure out a formula for another run of growth and success. But the company also surely faces a future of intermittent crises like the one it’s going through now. There are limits to how many customers you can serve and how many things you can sell them. And McDonald's, as the long-time leader of the fast-food industry it helped invent, is destined to keep running into them.
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:
Justin Fox at firstname.lastname@example.org
To contact the editor on this story:
James Greiff at email@example.com