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What’s With McDonald’s? “Too Big to Fail?”

Posted by on January 6, 2015

McD logo

The phrase, “too big to fail” was bandied about a lot during the financial crisis, especially in discussions about banks, insurance companies, car manufacturers. I’m not sure if that was true or not – of course there would have been a lot of pain if one of those companies had gone under, and a lot of lost jobs.

But how about a company like McDonald’s? They are certainly not at risk for folding anytime soon, but they sure seem to be on a roll of negative results and publicity, and it’s coming from all quarters, whether the “news” is about ingredient issues, employee discontent, shrinking of menus, or marketing “new” items, such as the triple burgers.

The latter move seems to be an attempt to woo away customers from the brilliant success that Hardees/Carls Jr have had targeting a niche customer (young males) and their respective appetites.

As everyone is aware, there have been a number of fast-growth burger start-ups in the past several years, like Smash, Five Guys, Shake Shack, and Umami. None of them, in my opinion stand a chance of every challenging McDonald’s on size, but they may hurt them in localized markets.

The majority of the customers heading to these new chains are millenials. Customers who want to have it “their way,” and for that generation, it means fresher food, prepared to order, quality ingredients. Or at minimum, the illusion of those components being present.

McDonald’s reminds me of the newspaper industry of ten years ago, hemorrhaging customers, unsure of how to gain them back, struggling with new ways to achieve customers and revenues. The newspaper (and broadcast) industry still hasn’t figured it out. Their core group of users has completely changed the way they receive content, and what content they want to receive, and the media refuses to accept that change.

McDonald’s seems to be in the same boat. Instead of seeing how they might change to suit their customers, they seem to be hoping customers will change to suit McDonald’s

What’s really fascinating to me is how McDonald’s does such a bang-up job in adapting to the demographics with its international locations, and changing the culture and menu to suit the locale, but they seem unwilling or unable to do that at home.

Despite the current issues, McDonald’s corporation is still cranking out EBITDA that is about a third of their gross revenue, and what company wouldn’t envy that kind of return? (Yahoo finance, January 6, 2015).

Unfortunately, a restaurant doesn’t come anywhere near those kind of margins, and over 80 % of McDonald’s restaurants are franchises, many of which would qualify as typical small businesses. As most of them are closely held, it’s hard to determine what their financial results are, but one can surmise there may be more than a few that are suffering.

That ‘over 80%’ figure represents about 28000 restaurants worldwide, and if each has a team of around 50 employees, that equals a workforce of a million and a half persons. McDonald’s, without successful, profitable, franchise partners, doesn’t have much of a future.

McDonald’s needs to take a much harder look at not only the current customer base, but the habits of customers that will be coming of ‘fast food age’ over the next few decades.

For right now, fresher foods, higher quality ingredients, and cooking as much as possible on site will woo some customers, but you will have to spend some of your billion dollar ad budget explaining that.

Recycling old ad campaigns and slogans (as you are now) may make older customers happy, but they mean nothing to younger generations.

Or perhaps you’re hopeful you can change your business model to “all senior coffee, all the time?”

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