Question

McDonald’s: Comeback in The U.S. Burger Maker

McDonald’s, one of the world’s most iconic brands and companies, faced a crossroad in its comeback path. When Steve Easterbrook was appointed CEO in 2015, the company had lost an astonishing 500,000 U.S. customers in the previous four years. In 2015, for the first time, McDonald’s closed more restaurants than it opened. Same-store domestic sales fell 1.3 percent in 2016, and the number of customers visiting McDonald’s fell 2.1 percent that year, the fourth straight year for a decline in customers. Reflecting this trend, many younger people had never dined at McDonald’s. As indicated by its recent declines in revenue and profit, McDonald’s faced a variety of challenges. Prices in groceries fell at the same time that the minimum wage was increasing and increasing dramatically in some cities and states. Given that labor was the largest component

of cost for restaurant chains, the cost gap between dining out and eating in was at its largest since the 1980s. Efforts to add more products for health-conscious customers such as salads and oatmeal had failed to attract enough new customers to stem the decline. The all-day breakfast menu, introduced in 2015, was a hit, but by 2017, it was losing steam as an engine of growth. A particularly salient threat was the rise of fast, casual burger chains that focused on better-tasting burgers. Chains such as Five Guy’s, The Habit Burger Grill, SmashBurger, and In-N-Out among others were expanding at a rapid rate. Such chains typically started as regional enter-prises, but each was expanding geographically. Five Guys, particularly, had clearly broken out as a national competitor. To combat the various threats it faced, McDonald’s was implementing digital kiosks for ordering. The company was also experimenting with home delivery and table ser-vice. Perhaps most importantly, McDonald’s was consider-ing changes in the way it prepared its burgers to improve taste. Such changes had the potential to significantly alter McDonald’s strategic position with respect to cost and differentiation. With McDonald’s stock price lagging behind both the S&P 500 and Dow Jones Industrial Average, the company needed to figure the right path to a more sustain-able turnaround.

McDonald’s Model

McDonald’s employed the franchise business model for the vast majority of its restaurants. The franchise model was credited with McDonald’s sustained growth and global expansion.

In many instances, McDonald’s acquired and developed prime real estate locations that it then leased back to franchisees. Some observers argued that McDonald’s restaurants often enjoyed locational advantages com-pared to other burger chains. McDonald’s set a goal of going from 83% to 95% franchise ownership of its restaurants. This would follow several other chains in what some termed the asset-light business model. Burger King, Carl’s Jr., Hardee’s, Dunkin Donuts, and Subway were all either 100-percent or nearly - 100-percent franchised owned. The franchise model posed some challenges.

Getting franchisees to upgrade locations, adopt new technologies, and change the standard McDonald’s menu often took considerable time and effort. Such changes could take several months at a minimum and, in some cases, several years. Though there was some regional variability such as the Mc Lobster in Maine, McDonald’s offered a high degree of standardization in its menu across the U.S. McDonald’s offered a breakfast menu, which in 2015, was extended from only morning hours to an all-day offering. McDonald’s was best known for its hamburgers, but offered other items including Chicken Mc Nuggets and a variety of sandwiches. McDonald’s had emphasized with some success a McCafé line of items such as coffee, latte, shakes and smoothies.

From time to time, McDonald’s had offered special items for a limited time and had incrementally changed its menu from time to time. Many observers argued that, because of McDonald’s immense scale, menu changes often occurred slowly both in formulation and implementation. For exam-ple, it did not expect to complete its plan to switch to free range eggs until 2025.

Despite the extent of its franchising, McDonald’s was renowned for the uniformity of experience and consistency in quality that it offered customers. McDonald’s typically served food within minutes of a customer’s order. It was not unusual for customers to receive their food within one PC 2–3 minute of ordering. While downtown McDonald’s locations in the largest cities were an exception, most U.S. McDonald’s locations offered drive-through service. Some estimates put the percentage of revenue from drive-through customers at 70 percent of revenue for the typical McDonald’s. McDonald’s had optimized its food production over several decades to deliver food of consistent quality with the short waits that customers expected. McDonald’s supply chain could procure, process, and deliver frozen beef and potatoes to its stores with both high reliability and scale. This system helped McDonald’s both reduce costs and ensure a high degree of consistency. McDonald’s hamburgers were generally cooked and then warmed before delivery to a customer. This allowed McDonald’s to serve customers much faster than waiting for orders before cooking the burgers.

Trends in Hamburgers

The market for premium burgers made with fresh beef had increased dramatically in the previous decade and was expected to double over the next five years. As recently as 2001, Five Guys had consisted of five stores in the Washington D.C. area. By 2016, it had more than 1,400 locations. Though much smaller than Five Guys, Shake Shack was founded in 2004, and Smash-burger in 2007, while The Habit Burger Grill expanded from 23 restaurants in 2007 to 145 by 2016. Even In-N-Out, a California-based chain that had traditionally eschewed growth and geographic expansion, had grown from 89 locations in California and Las Vegas in 1999 to over 300 locations in the western United States and Texas.

All of these chains featured menus with significantly fewer items than McDonald’s and were, arguably, much more focused on burgers. All featured burgers made from fresh beef that were cooked upon order. This necessarily involved longer wait times. Most did not offer drive-through service. In-N-Out was the exception in that much of its business was drive-through and its hamburgers were not offered at a premium price. In addition to the several fast-growing chains that had emerged, there were many smaller chains that operated in various cit-ies across the U.S. Multiple polls had shown consumers preferred the taste of burgers from chains such as Habit, Smashburger, In-N-Out, Five Guys, and Shake Shack among others to those of McDonald’s. Many were limited to specific metropolitan areas while others had a larger geographic footprint. McDonald’s also faced competition from its larger traditional competitors such as Burger King, Wendy’s, Jack in the Box, as well as Carl’s Jr. and its sister chain, Hardee’s. Unlike the upstarts in the premium segment, the traditional competitors had not experienced significant growth in previous years. At one point after 2010, Burger King experienced same-store sales declines for 11 consecutive quarters. The number of Wendy’s locations had declined from approximately 6,500 to 5,722 in the U.S. since 2011.

McDonald’s Strategy

The growth in premium burgers made from fresh beef was not lost on McDonald’s as consumer ratings showed the company lagging behind competitors on burger taste. The company initially responded by experimenting with the removal of artificial preservatives and replacing margarine with butter among other similar changes. McDonald’s then used Dallas as a test market for hamburgers made from fresh beef. The fresh-beef burgers were well-received by customers who rated them higher in taste than McDonald’s traditional burgers. McDonald’s announced in March 2017 that, by mid-2018, Quarter Pounders would be prepared with fresh beef in a majority of its restaurants. Quarter Pounders would also be cooked when ordered rather than cooked previously and stored in warmers.

A shift to fresh beef was not without risks. Industry insiders suggested that employing fresh beef in burgers could extend the time between the order and the serving of a burger. Using fresh beef would likely increase the cost of burgers. Price sensitive customers might be less inclined to purchase McDonald’s burgers. The use of fresh beef increased health risks as well. Fresh beef was much more susceptible to viruses than frozen beef. Chipotle’s had still not fully recovered its customer base from problems with bacterial contamination more than two years earlier. A change to fresh beef would also dramatically change McDonald’s supply chain and logistics for delivering beef to its stores. roll out mobile ordering to all of its U.S. locations. Pizza chains had successfully used mobile ordering for years. In another action that followed long-standing practice by pizza chains, McDonald’s also announced that it would dramatically accelerate and scale food delivery. The company had long experimented with delivery and already offered it in markets other than the U.S., particularly Asia and the Middle East.

It was not clear how McDonald’s planned to rapidly scale delivery, but there was considerable industry speculation that the company might enter an alliance with a delivery service firm such as GrubHub, Inc. McDonald’s vast superiority in the number of its restaurants was seen as an advantage in delivery. Many more potential customers lived or worked close to a McDonald’s compared to rivals in burgers and fast food generally. In addition to delivery and mobile ordering, the company also planned to spend approximately $1 billion renovating its existing stores. As part of McDonald’s turnaround strategy, the company planned to emphasize the McCafe drinks. In February of 2017, the company announced that McCafe drinks would sell for $2. More generally, McDonald’s had placed a global emphasis on serving high quality coffee at a price consider-ably less than coffee houses.

Most of McDonald’s strategic moves—such as the emphases on mobile ordering and store renovation—were seen as either low-risk or catch-up strategies. A shift to fresh beef would potentially have a more profound effect on the company.

Question

Would McDonald’s traditional price-sensitive customers pay a premium for more costly burgers? Would they tolerate longer waits both in restaurants and drive-through

Answer 1

McDonald’s is reported to have decided that it is dropping the idea of “one price fits all” for it’s chain of over 1,200 franchise-based stores across the UK and may move towards regionally-based pricing for cheeseburgers and other products. Like many other fast food retailers, McDonald’s has come under huge pressure because of rising operating costs. The key issue is how much of the rise in the price of ingredients and wages for staff can be passed onto consumers without it damaging sales volumes.

The Financial Times has reported that Revenue Management Solutions has been commissioned to do some market research to find out how price-sensitive customers are in Britain and recommend where and on what menu items it can raise prices by 10p-20p. This would move McDonald’s closer towards Burger King which allows franchises to charge different prices and Sainsbury and Tesco which charge different prices at high street stores.

EOs of America Tricon Global Restaurants is the group that owns KFC and Pizza Hut and promotes Traditional Peking Chicken Roll at a KFC restaurant in Shanghai.

At present there are more than 1,000 KFC restaurants in China and they are increasing at annual rate of 200. A new KFC restaurant opens every other day. Western counterpart McDonald’s also continues to expand its premises.

Having arrived on the mainland in the early 1990s, McDonald’s has more than 600 restaurants in nearly 100 cities. Although there have been fewer golden arches in America, its native country, in the past two years, China’s McDonald’s have grown at a rate of 100 restaurants per year.

McDonald’s traditional price-sensitive customers pay a premium for more costly burgers-

Mcdonald`s has tried a lot of hit and trail methods and they have divided there product according to the customer base they have or likewise studying the market ,competitors and all .

The SWOT ANALYSIS team of Mcdonalds is very good and bright so the always go with the market seeing the demand and quality of customer .

McDonald's is one of the world's largest fast food chains founded in 1940 in San Bernardino, California and incorporated in Des Plaines Illinois in 1955. Since then, McDonald's has become a household name in America, known for selling a variety of convenience food items at thousands of locations worldwide. Throughout its history, McDonald's has experimented with a number of different offerings on the menu. In 2007, McDonald's had only 85 items on its menu, by 2013 this number had risen to 145 items on its menu.

In March of 2017 McDonald`s introduced our Velocity Growth Plan named as such because they are moving fast – and in a clearly defined direction.  

McDonald`s know the most meaningful way to grow the business and create value for all of our stakeholders is by serving more customers more often. That’s why they focus on giving customers what they really want: hot, delicious food served quickly – with an overall experience and value for their money that meets their rising expectations.

Velocity makes the most of McDonald`s competitive advantages from their unmatched global scale to our iconic brand to their tremendous presence in local markets around the world.

The key pillars of McDonald`s growth strategy are to:

Retain

Retaining the customers McDonald`s have, fortifying and extending our areas of strength with focuses on breakfast and family occasions.

Regain

Regaining the customers we McDonald`s lost by improving the taste and quality of our food, enhancing convenience and offering strong value.

Convert

Converting casual customers to more committed customers with coffee and snacks.

McDonald`s also identified three accelerators, intended to drive growth on top of everything they are doing:  

Digital

Re-shaping McDonald`s interactions with the customer – whether they eat in, take out, drive thru or order delivery.

Delivery

Bringing the McDonald’s experience to more customers – in their homes, their dorm rooms, their workplaces and beyond.

Experience of the Future in the U.S.

Elevating the customer experience in the restaurants through technology and the restaurant teams who bring it to life.

McDonald`s is proud of the progress they have made the last couple of years – and confident that guided by their Velocity Growth Plan.

So  McDonald’s traditional price-sensitive customers will not pay a premium for more costly burgers because the use of fresh beef increased health risks as well so everyone thinks HEALTH COMES FIRST !!!!

-Following below are some points justifying thatnWould they tolerate longer waits both in restaurants and drive through -

McDonald’s uses different types of segmentation to break a bigger market into small customer

groups. They are given below:1.Geographic Segmentation:

Geographic segmentation divides markets according togeographic

criteria. McDonald’s breaks its business into different geographical segments

like•America

•Europe

•Asia/Pacific, Middle East, and Africa

•Other Countries ( like Canada, Latin America)Based on

their geographic segmentation, McDonald’s optimizes its Menu and food offerings to

suit the regional tastes and needs. For example: McAloo Tikki and McVeggie are available inIndia, Bacon Smokehouse Burger and Quarter pounder (beef) burger are available in the USA andMcArabia Chicken and Beef Burger are available in Arabian countries.Restaurants in several countries, particularly in Asia, serve soup. This local deviation from thestandard menu is a characteristic for which the chain is particularly known, and one which isemployed either to abide by regional food taboos (such as the religious prohibition of beefconsumption in India) or to make available foods with which the regional market is more familiar(such as the sale of McRice in Indonesia, or Ebi (prawn) Burger in Singapore and Japan.

In Germany and some other Western European countries, McDonald's sells beer. In New Zealand,McDonald's sells meat pies, after the local affiliate partially relaunched the Georgie Pie fast foodchain it bought out in 1996.In the United States and Canada, after limited trials on a regional basis, McDonald's began offeringin 2015 and 2017, respectively, a partial breakfast menu during all hours its restaurants are open.

2.Demographic Segmentation:

Segmentation according to demography is based onconsumer- demographic variables such as age, income, family size, socio-economic status,etc.

McDonald’s mainly segments the market in below

demographics:Age: 8-45Life cycle stage: Newly married couples, youngest child six or overBachelor Stage: Young, single people not living at homeStudents: Students, employees, professionals

3.Behavioral Segmentation:

Degree of loyalty: Hard core loyals and switchersBenefits sought: Cost benefits, time efficiencyPersonality: Easy going and carelessUser Status: Potential and regular fast food eaters

4.Psychographic Segmentation:

Convenience and lifestyle

McDonalds has adopted itself according to the convenience and lifestyle of the consumers,as India has a huge vegetarian population so McDonalds came up with a different and new product line which includes items like Mc Veggie burger and Mc Aloo Tikki Burger. Theyalso made McDonalds as a place to relax and even for entertainment.

McDonald’s target customers are:

•Children

: McDonald’s offer a lot of goodies, toys, happy meals

etc. to attract this youngersegment audience. The happy meal is ubiquitously known among kids around the world.In an effort to appease health conscious parents, fruits such as apples and orange slices areoffered as substitutes for French fries. Yogurt is a replacement for the cookies that wereclassically included in the boxed meal, and fruit juices and milk as alternatives for softdrinks. As young children are very active with high energy levels, play grounds that allowclimbing , crawling and other moderately strenuous activities are typically includedrestaurant locations

•Young Adults (Age group between 18-29)

: Without much thinking, this segment is themain source of income for any business, let alone

McDonald’s. This market segment may

be having a disposable income which is lower than the average, their consumption patternsare far much more than old the other market segments. Advertising which includes trendymusic and images of youths enjoying McDon

ald’s food while engaging in vigorous and

energetic activities is the predominant integrated communications for the young adults.

•Adults

: The third segment is the adults’ segment, in order to target this segment,McDonald’s tweaked its menu and made its of fering less in calories and healthy.

•Business Customers

In an effort to attract and retain these customers, lighter and healthierfood offerings are replacing traditional fat-

laden foods at McDonald’s. The franchise firm

is attempting to lure business customers with foods that are fresh, organic and sustainable.Advertising is geared toward information which provide U.S Department of Agricultureguidelines for dietary recommendations, and include sample menu suggestions which are based on gender, age, weight and daily physical activity levels. Breakfast and lunch mealsare most often consumed by business customers.

So, Not every customer will wait too long in restaurants and Drive Through !!!!