McDonald’s is the latest company to succumb to the digital age. Faced with a competitive and increasingly crowded marketplace they have had to contend with changing tastes and consumer trends as well as the difficult job of enticing millennials into their stores.
CEO Steve Easterbrook, who took over in mid-2015, has attempted to streamline the company model, introducing all-day breakfasts, reducing the number of items on offer and pushing for a healthier menu. This resulted in six consecutive quarters of growth in the US. However, traffic to US restaurants has been falling for four straight years. Since 2012, McDonald’s has lost an estimated 500 million transactions in the US. The trend looks set to continue with global sales falling 5% last quarter.
McDonald’s operates 36,000 restaurants in over 100 countries around the world. It is the largest restaurant brand in the US and is 85% franchised. Whilst franchising has allowed them to rapidly expand around the world, it has made quick innovation hard and the company has to offer additional incentives to encourage franchisees to take up new technology they introduce in their unfranchised stores.
They have recently faced criticism over their real estate business. A report by two major food and service industry unions titled ‘McLandlord: Global Rent Excess at the World’s Largest Franchisor,’ condemned McDonald’s due to their system of requiring franchisees to rent property from them at more than the average fast food franchisee as a percentage of sales – at an estimated four times its own real estate costs in the US, and three times in Europe. The report complains that excessive rent payments reduce wages and raise prices in their franchises.
The Minimum Wage
McDonald’s rely heavily on cheap labour to keep costs low in many of their key markets. In 2017, it is estimated that 21 states across the US will raise their minimum wage, some by a significant amount. Arizona, for instance, is seeking to raise theirs by $1.95 per hour, equivalent to a 25% hike to labour costs. This trend looks set to continue with a number of states aiming to raise their minimum wage to the $15 mark by 2020.
The Millennial Challenge
As the largest generation of the nation and big spenders on casual eating, McDonald’s is facing a catch-up to attract this generation to their stores. Only one in five millennials has ever tasted a Big Mac in their lives. Competition from the likes of Five Guys and other chains have constrained profits and reduced footfall. They have begun serving preservative-free patties and chicken nuggets, lower-calorie sauces and reducing sodium in their chips as part of a healthy eating drive. This is a far cry from their original business model – a brand built on providing cheap and convenient food. It shows how vital a consumer group millennials are to their continued growth.
The new model will aim to improve efficiency and expand the customer base, reducing waiting lines whilst getting more customers in the door. Customers will be able to order and pay for meals from their phones, in addition to the self-ordering ATM-like kiosks which allow them to skip the queue. They also plan to provide table service to customers who order digitally. Whilst many of its competitors had the same idea and have a head start, the disruption has seen huge change for other companies like Starbucks.
A new drive towards sustainable operations has included reusable cups, biodegradable cutlery and smart hand-wash systems. However, they have also made a push to purchase ‘sustainable beef’ which they plan to roll out in their top 10 markets by 2020.
Part their bid to win over millennials has led to McDonald’s expanding its digital division with hopes of becoming more relevant on Twitter and Facebook, giving them a chance to interact with customers as well as a chance to receive online feedback.
After piloting third party delivery schemes in Florida, McDonald’s has stated its intention to roll out similar services across their markets. The use of third parties such as Uber Eats will allow the company to deploy their new business model quickly and efficiently without employing many new drivers themselves.
There is large scope for new profit sources given that 75 percent of residents in its five largest global markets live within three miles of a McDonald’s and 85 percent of people in those markets live within five miles of a McDonald’s restaurant according to company records. With consumers increasingly demanding instant gratification and convenience, restaurants across the industry have been trying to get one step ahead.
As Steve Eastbrook said. “Do we want to be disrupted, or do we want to be the disruptor?” McDonald’s is seeking to stay ahead of the trend, attracting millennials whilst not losing their foundation of cheap and convenient fast food.