McDonald’s needs to change its model

When the world’s most famous burger chain announced in February its plan to open hundreds of restaurants over the next four years in the UK, it also had some very specific things in mind: size, location, venue, and, crucially, the kind of customers that come through the door.

The company’s plans are ambitious, but not without risk – McDonald’s is tapping into very dangerous territory in the UK and elsewhere. Put simply, in the 21st century, fast food and big restaurants are increasingly being out-competed by smaller joints with a lower price tag and a better profile. Think of it as the red-tape effect of the mainstream: instead of M&S cornering the market on tops, the changing economy now means that many people shop around for a wider choice of shops.

McDonald’s reflects this trend and is using its competitors to do so: in 2013, when the company announced it had built another 2,000 restaurants since 2009, it highlighted the growth of smaller restaurants, even if the sheer volume of recently opened locations gave an incomplete picture of its diversification.

The story is similar elsewhere. The world’s second largest fast food chain, Yum! Brands, is pushing further downmarket with its Pizza Hut chain, while KFC has relaunched itself as an exotic diner offering vegetarian and vegan options as part of its new “We’re Lovin’ It” campaign.

While many parts of the developed world no longer see the appeal of traditional burger and fries joints, McDonald’s is obviously trying to adjust to this shift by moving in different directions. It is, for example, moving upmarket with artisanal breads and ketchup-less meals, and offering more fresh produce, grilled meat, and even organic chicken.

Nonetheless, on top of all that, what McDonald’s really needs to do is stem the persistent decline in US sales (of which more below). A key part of this strategy is to spread its customer base away from young men and towards middle-aged females. This is far harder than it sounds: less than a quarter of women aged 18 to 34 eat at a fast food restaurant each week, as compared with 60% of women over 55.

As the quoted above points out, McDonald’s customers have been steadily making more self-directed decisions about food over the past few years. The Economist’s annual survey of consumer attitudes shows that a third of people now have their own food shops (versus just 13% in 2008), and four in 10 eat food from home, up from 31% in 2007.

By tweaking its menu, McDonald’s can attract more of these shoppers and stop struggling, at least in the short term. Meanwhile, the company has been carving out spaces to grow further. In China, it has had success by rolling out their Twister fries and other toys, while in Japan, where sales have slumped, it has rebranded as Japan’s number one sushi chain to win over a new generation of customers, and have an even greater share of the lucrative “grocer” segment (40% of all sales, up from 24% in 2007).

But McDonald’s is likely to need more than new menus and better packaging if it is to sustain its growth over the long term. By 2020, it may have to consider introducing something more creative than its McDonald’s Online or Direct Delivery (DDD) program.

Another calculation is whether it can survive in an era where the institutions that dominate people’s lives, in terms of what they buy, eat, or watch, are being systematically reshaped. Watch this space, for now, if you want to understand the changes at the heart of the fast food world.

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