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Monday, March 11, 2013

McDonald’s Over-Reach: Trying to Be a Coffee Shop

In spite of essentially flat sales in the U.S. in February 2013 from the same month in 2012, McDonald’s CEO, Don Thompson, said he was confident that the people at the company had sufficient experience to “grow the business for the long term.” Even assuming that a business can be grown as if it were a geranium plant, the claim can be critiqued both in regard to the underlying assumption regarding “growth” and that of long-term viability.
Tackling first the question of a company’s long-term viability, changes in the business environment are important, if not vital to survival. The fast-food industry from 1970 to 2010 is a case in point. As restaurant chains like McDonalds gained substantial economies of scale with the proliferation of restaurants, the increasing popularity of healthy meals subtly undercut the prospects for continued growth.
 
                        From "Americana" to "Enjoy Getting Fat": A change in the business environment in the last quarter of the twentieth century in the U.S. that impacted McDonalds at its core.    source: McDonalds.com
 
The management at McDonalds did relatively well in introducing healthy alternatives to its menu by 2010. The strategy also included blending the restaurant with a coffee shop experience. New drinks, such as smoothies, mochas and lattes, and wireless internet service were added. As a result of having adjusted to the changes in the business environment, McDonald’s U.S. sales rose 11.1% in February 2012 from February 2011, and 2.7% in that month from the year before. By 2013, Burger King was renovating its restaurant and adding "coffee shop" drinks. I suspect that being first or second in introducing those products makes less difference than is typically assumed in the business world. Even so, the flat McDonald's sales figure in February 2013 was a bit of a surprise. Although the problem could have been the newly introduced fish product, I suspect that the market may have been questioning McDonald’s expansion into the coffee shop business.
McDonalds was admittedly poised to give Starbucks a "run for its money" concerning its inflated drink prices. That coffee chain was essentially charging a premium price for non-premium products, given the manner of production. Even though McDonalds could undercut Starbucks on price and thus potentially gain market share, it was not clear that being in a McDonalds could feel like being in a coffee shop.  Adding to the discordance was the management’s decision to continue to stress the “dollar menu” for the “budget conscious” customer. Put somewhat delicately, the business strategy assumed that two very different market segments would co-exist in the same room. Even just within the “budget conscious” area, incompatibilities exist, such as between university students and the long-term unemployed who are on government aid. The market segment that goes to Starbucks and skips the mocha in order to get a cheaper drink is not necessarily the segment that hangs out in McDonalds until the government check arrives. McDonald's management was essentially blurring the company's identity by seeking continued sales growth by trying to combine a restaurant with a coffee shop.
In general terms, a company’s senior management (or board) should not get so caught up in important changes in the business environment that the resulting strategic change involves trying to be something the company is not. In the case of McDonalds, a fast-food restaurant is not a coffee shop. Blending the social distance between the two would at the very least be a formidable task. Had McDonald's management concentrated simply on adding new healthy fast-food (i.e., restaurant) products, sales would be shored up without risking a corporate identity crisis. But merely shoring up sales is insufficient where a lack of growth means death. Internal pressure to venture into another line of business simply because it is “in” fits, unfortunately, with the mantra of business that to stop growing is to die.
Is it necessarily such a bad thing that sales in February 2013 were flat from the month a year before? Can it be assumed that a large global business such as McDonalds can continue to have increased sales from year to year ad infinitum? Furthermore, might the equilibrium of steady sales provide a large company with more stability? In nature, an ecosystem that is not in equilibrium may be in trouble, particularly if a species is maximizing itself. Reformulating the menu to have healthy items may result in only a few years of double-digit increases, which in turn would be within a longer-term equilibrium rather than in ever-increasing sales. Put another way, the senior management of McDonalds may have used a “shot gun” approach to reacting too broadly to important changes in the business environment. To keep up with societal shifts while not losing touch with the business’s identity is the sort of balance that a corporate management should attempt to reach and sustain in formulating strategy over the long-term.

Source:

Candice Choi, “McDonald’s Sales Drop Despite New Fish McBites,” The Huffington Post, March 8, 2013.