McDonald’s, the long-time leader in the fast-food wars, faced a crossroads
in the early 1990s. Domestically, sales and revenues were flattening as
competitors encroached on its domain. In addition to its traditional
rivals—Burger King, Wendy’s, and Taco Bell—the firm encountered new
challenges. Sonic and Rally’s competed using a back-to-basics approach of
quickly serving up burgers, just burgers, for time-pressed consumers. On
the higher end, Olive Garden and Chili’s had become potent competitors in
the quick service field, taking dollars away from McDonald’s, which was
firmly entrenched in the fast-food arena and hadn’t done anything with its
dinner menus to accommodate families looking for a more upscale dining
While these competitive wars were being fought, McDonald’s was gathering
flak from environmentalists who decried all the litter and solid waste its
restaurants generated each day. To counter some of the criticism,
McDonald’s partnered with the Environmental Defense Fund (EDF) to explore
new ways to make its operations more friendly to the environment.
McDonald’s roots go back to the early 1940s when two brothers opened a
burger restaurant that relied on standardized preparation to maintain
quality—the Speedee Service System.
So impressed was Ray Kroc with the brothers’ approach that he became their
national franchise agent, relying on the company’s proven operating system
to maintain quality and consistency.
Over the next few decades, McDonald’s used controlled experimentation to
maintain the McDonald’s experience, all the while expanding the menu to
appeal to a broader range of consumers. For example, in June 1976,
McDonald’s introduced a breakfast menu as a way to more fully utilize the
physical plant. In 1980, the company rolled out Chicken McNuggets.
Despite these innovations, McDonald’s tremendous growth could only
continue for so long. Its average annual return on equity was 25.2%
between 1965 and 1991. But the company found its sales per unit slowing
between 1990 and 1991. In addition, McDonald’s share of the quick service
market fell from 18.7% in 1985 to 16.6% in 1991. Plus growth in the quick
service market was projected to only keep pace with inflation in the
McDonald’s faced heightening competition on several fronts. First, its
traditional rivals—Burger King, Wendy’s, and Taco Bell—were eating into
its margins through promotions and value pricing strategies. Taking a leaf
from McDonald’s own playbook, Sonic and Rally’s were using a very limited
menu approach to attract time-strapped consumers. Finally, Chili’s and
Olive Garden were appealing to diners looking for something a little more
enticing that the familiar Golden Arches for their families.
In the late 1980s, McDonald’s began recognizing the importance of
maintaining an ecologically correct posture with the public, which was
becoming more concerned about the environment. For example, in 1989, 53%
of respondents in one survey revealed that they had not bought a product
because they didn’t know what effect the packaging would have on the
environment. Closer to home, a 1990 study showed that each McDonald’s
generated 238 pounds of on-premise solid waste per day.
It’s no surprise, then, that McDonald’s sought a way to reduce its solid
waste while providing a more environmentally acceptable face to the
public. Beginning in 1989, it partnered with the Environmental Defense
Fund, a leading organization devoted to protecting the environment, to
seek ways to ease the company’s environmental burden on the landscape.
Together, EDF and McDonald’s considered its impact on a wide range of
stakeholders—customers, suppliers, franchisees, and the environment. The
company gave its franchisees much autonomy in finding ways to eliminate
environmental blight. The company’s hope was that from these divergent
approaches, it stood a greater chance of finding solutions with broad
applicability than if it had tried to pursue a one-size-fits-all approach
from the outset.
Some of the environmentally inspired solutions that came out of the
collaboration with EDF were the:
Introduction of brown paper bags with a considerable percentage of
Solicitation of suppliers to produce corrugated boxes with more recycled
content, which had the twin effect of reducing solid waste and building
a market for recycled products.
Abandonment of polystyrene clamshell containers to hold sandwiches in
favor of new paper-based wraps that combined tissue, polyethylene, and
paper to keep food warm and prevent leakage.
The secret of McDonald’s success is its willingness to innovate, even
while striving to achieve consistency in the operation of its many
outlets. For example, its breakfast menu, salads, Chicken McNuggets, and
the McLean Deluxe sandwich were all examples of how the company tried to
appeal to a wider range of consumers.
The company has also made convenience its watchword, not only through how
fast it serves customers, but also in the location of its outlets.
Freestanding restaurants are positioned so that you are never more than a
few minutes away by foot in the city or by car in the suburbs. Plus
McDonald’s is tucking restaurants into schools, stores, and more.
The key threats to McDonald’s domestically are the lack of growth
opportunities. The market is well saturated, and it would difficult to
achieve double-digit growth. Other concerns are a newfound emphasis on
healthier eating. Most of McDonald’s most popular fare probably in some
small way contributes to the increasing incidence of cancer, heart
disease, and diabetes among the population.
But I feel the key threat to McDonald’s continued success is its very
ubiquity. Because McDonald’s are everywhere, the dining experience is
never special. And as Baby Boomers age and become more affluent, it is
likely that they will leave behind their fast-food ways, if only to step
up to moderately priced restaurants like Olive Garden, Bennigans, and
Pizzeria Uno. These chains have the added advantage of serving
higher-margin alcoholic drinks. McDonald’s, meanwhile, has to continually
battle Burger King and Wendy’s, which leads to an erosion of margins for
everyone. Even alliances with toy manufacturers, while popular with
consumers, do little for the bottom line because the cost to run these
promotions can be quite expensive.
Responding to Burger King’s October 1 Announcement
The October 1 announcement from Burger King that it would begin offering
table service is not much of a threat at all. You can try to dress up fast
food, but it’s still fast food. I couldn’t imagine this being a potent
draw for consumers. McDonald’s best course is to ignore this development
as irrelevant. As the market leader, McDonald’s does not need to respond
to every competitor’s initiative. Indeed, doing so would have the effect
of making McDonald’s look reactive and less like a leader.
The advantage of not responding to Burger King’s initiative is that the
company can preserve its resources for other marketing thrusts that may
provide a bigger payoff. The disadvantage of not responding to Burger
King’s initiative is that you allow the firm to establish itself in a
unique way in the minds of consumers—that of a fast-food restaurant that
provides sit-down service. But again, is this inherent contradiction of
fast-food fare and upscale dining experience likely to resonate with
consumers? I would say no. If Burger King’s initiative does prove popular
with consumers—as evidenced by expanding sales and market share—McDonald’s
would be forced into catch-up mode. But I think that this is a risk that
the company should be willing to take.
Promoting Flexibility Through Its Operating Strategy
The key thing that McDonald’s operations strategy has to support is
experimentation. Now somewhat long in the tooth, McDonald’s needs a
breakthrough that will provide new avenues of growth. It has a long
history of such experimentation, which has resulted in some new profit
centers like Chicken McNuggets and the breakfast menu. Some later turn out
to be duds like the McLean Deluxe, but inevitably experimentation in
limited outlets offers McDonald’s a way to retain its key
strengths—quality and consistency—while continuing to evolve for new
palates and pocket books.
McDonald’s and the Environmental Defense Fund
In some ways, partnering with the Environmental Defense Fund was a
masterstroke. It brought both respectability and valued expertise to its
environmental efforts. It also provided a primetime venue for EDF to make
a difference. Any successes, even if only incremental improvements, would
have major ramifications because of the sheer size of McDonald’s
McDonald’s should continue its partnership with EDF. With ecology a
growing concern among consumers, it makes sense to be a good corporate
citizen and get all the public relations accolades that go along with such
an alliance. It also pays off in the bottom line by reducing shipping
costs for supplies as well as garbage removal fees.
McDonald’s would do well to stay in the vanguard of corporations who have
become environmentally aware. If it tries to shirk its responsibilities,
it can foresee a public relations nightmare in the making. But if it does
manage to come up with some breakthroughs through its collaboration with
EDF, it can score a tremendous amount of goodwill with the public, which
may even provide a halo effect to mitigate any other PR troubles.
How far should McDonald’s go on environmental issues? There is definitely
a public relations benefit in being seen as an environmental leader, and
the collaboration with EDF goes a long way in making that happen. Still
McDonald’s has had a lot of success in giving its franchises some latitude
in developing new solutions.
The line in the sand in determining how far McDonald’s should go with its
environmental efforts is determined by the cost of the initiative relative
to the hard-dollar benefits and harder-to-quantify public relations buzz
it gets from being in the forefront on environmental issues. The bottom
line is that environmental efforts can’t detract the company from its
primary mission of providing consistent quality to consumers. If
environmental efforts start to be a drag on the company’s future profits,
it’s time to ease up. Ideally environmental initiatives should pay for
themselves by reducing other kinds of costs.
Dealing With the Product Range Explosion
McDonald’s had done well with a fairly limited product range. But falling
per unit sales is a danger sign for the firm. With competitors gaining
ground on McDonald’s, it may indicate a need to refresh its product line.
Perhaps the best way to do that is by rotating in a couple highly promoted
new menu items. This would have the effect of enlivening the product menu,
without the need to go head to head with competitors on price.
This slackening of per unit sales might also indicate that McDonald’s
critical success factors have changed. Perhaps in the new environment,
fast, convenient service is no longer enough to distinguish the firm. At
this time, a new critical success factor may be emerging: the need to
create a rich, satisfying experience for dinner consumers.
To maintain consistency in new products as it expands the product line,
McDonald’s must rely on test marketing new menu items in pilot locations.
This approach will let the firm identify which items are likely to prove
popular with consumers while ensuring that the company can deliver new
products with consistent quality nationwide. McDonald’s already has a
history of doing this so it will not require major changes to its
operations strategy—at least initially. If the product line-up gets too
large, then the task of maintaining quality becomes exponentially harder.
The trick is to consider how to eliminate some of the existing menu items
when you introduce new ones, while making sure the staff is fully trained
in how to execute these products successfully.
Because McDonald’s has pretty well saturated the U.S. market, it’s only
real opportunities for growth lie abroad, where the competition is not so
cutthroat or by introducing new restaurant concepts under brands other
than McDonald’s. After all, McDonald’s is known for fast food. It’s not
really a pleasant dining experience, just a cheap and convenient one. I
feel that McDonald’s has reached the point of diminishing returns with the
McDonald’s brand and now needs to roll out new types of restaurants.
Indeed, McDonald’s has the opportunity to apply its core
competencies—scrupulous adherence to quality standards and continual
promotion of experimentation—in new venues. Imagine, if you will,
McDonald’s opening a new casual dining restaurant under the name of
Splendor. It could then franchise that concept nationwide and get some of
the dollars from consumers who have grown past fast food. But its
fastidious approach to operations would ensure that consumers everywhere
would experience the same dining experience—a tremendous advantage for
consumers who don’t want to be surprised with a bad meal.
McDonald’s could try a number of concepts simultaneous in different parts
of the country. Those that seemed promising could be rolled out further.
The duds could be left to die quickly. While this will be an expensive
undertaking, it holds the potential to unleash new areas of growth in a
McDonald’s faces some difficult challenges. Key to its future success will
be maintaining its core strengths—an unwavering focus on quality and
consistency—while carefully experimenting with new options. These
innovative initiatives could include launching higher-end restaurants
under new brands that wouldn’t be saddled with McDonald’s fast-food image.
The company could also look into expanding more aggressively abroad where
the prospects for significant growth are greater.
The company’s environment efforts, while important, should not overshadow
its marketing initiatives, which are what the company is all about.