Will McDonald’s Be Able To Revisit Its Past Glory Days?

by Trefis Team
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McDonald’s may be losing its sheen. While on the surface, the most recent third quarter earnings at McDonald’s may have seemed positive with comparables up in all the four regions, it is important to note that the quarter did not include the full impact of the performance after the launch of All Day Breakfast. Further, the revenues continued to fall even in the third quarter. To make matters worse, the company’s future guidance was at best uncertain, as it focused  “not on quarter to quarter performance but long term sustained growth.” Could it be that the biggest success story of all times is finally losing its sheen?

As a kid, I remember the buzz created by the opening of the first McDonald’s restaurant in my city. I remember dragging my parents to the restaurant to try their “Happy Meal.” While in school, McDonald’s was the one pocket friendly place to treat your friends. Since then, times have changed drastically. Even in developing countries such as India, there is a stark change in the number and class of people who used to eat at a McDonald’s two decades ago and now. This is attributable to factors ranging from how McDonald’s is no longer perceived equivalent to the coveted “American way of living,” to the change in consumer tastes towards more healthy and even exotic cuisines. The question to ask is, will this trend going to reverse? Will McDonald’s be able to revisit its past glory days? Will it be able to make the changes needed to keep its place in a fast changing world?

In the following note, we discuss how have things changed for McDonald’s and the way forward for the company.

One of the biggest competitive advantages McDonald’s has is its size, and the consequent economies of scale that can be applied. The economies of scale allow it to purchase its supplies in bulk at attractive prices, earning a fat margin in the process. Moreover, the savings can be utilized into advertising to maintain its brand image with consumers. However, its not sufficient to splurge on advertising, without taking corrective steps to adapt to consumer preferences. One such step is towards expanding its menu to include healthier and newer food items such as the Happy Meal for kids, and the Grand Mac and Mac Jr. (expected to be launched in the early part of 2017 for a limited time).

However, these measures haven’t really helped so far. McDonald’s has consistently seen its annual customers at its outlets fall for the past few years, and the trend isn’t expected to reverse any time soon as the headwinds in the fast casual segment continue. Further, the fitness fad among the millennials and a number of alternative options available to the customers, do McDonald’s no favor.

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It would probably be surprising for many to know that approximately two-thirds of McDonald’s sales are derived from outside the U.S. Given this, the company’s struggle abroad doesn’t bode well. The strong U.S. dollar, coupled with the economic slowdown in emerging markets have suppressed McDonald’s growth internationally. Moreover, China, which at one time the company bet big on, is being refranchised now. It is even being argued that there is better growth potential in coffee than in fast food in emerging markets, too, as is evident from Starbucks’ success in the region.

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Although McDonald’s economical menu works really well at times of recession, in such testing times, it is imperative for McDonald’s expand its core offerings. Earlier in the year the burger chain announced the development of a Create Your Taste customization platform in the U.S.

However, this development has stopped, as the franchisees were not keen to take on the task, given the monumental change needed on the operational end. The company is now working to expand an older (introduced in 2015) concept called “Taste Crafted.” Its menu includes Signature Buffalo Bacon, Pico Guacamole, Maple Bacon Dijon and Deluxe flavor options, as well as three different bun varieties. This is a newer concept aimed at diversifying from its core and promoting long term growth. McDonald’s is also likely looking at new type of stores, such as the one launched in Paris. These restaurants will be trying to mimic Starbucks by offering coffee and a multitude of bakery items, to attract a more premium customer base, as opposed to the existing McCafes. The $48 billion per annum coffee market in the U.S. holds huge potential for the company, given the saturation levels in the fast food space in the U.S.

Have more questions on McDonald’s? See the links below.

Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for McDonald’s

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