McDonald's bites back

21 February 2007 by
McDonald's bites back

In the past few years, the ups and downs at McDonald's have been well documented, and yet it just keeps rolling along. Nic Paton looks at the burger giant's ever-evolving strategies

Early last year, a Swedish scientist by the name of Fredrik Nyström carried out an intriguing experiment. Inspired by Morgan Spurlock's ground-breaking 2004 documentary Super Size Me, Nyström, a professor at the University of Linköping's department of internal medicine, decided to replicate Spurlock's junk food diet on seven healthy medical students.

For weeks they stuffed themselves with hamburgers, pizzas, milk shakes and fried breakfasts, and rigidly followed a "no exercise whatever" regime. But the findings were surprising. In Spurlock's film, his liver was described as turning to pâté, his cholesterol rocketed, he suffered sharp mood swings and his libido sagged. Nyström's volunteers gained weight and complained of feeling tired and bloated, but, by contrast, suffered few other significant side effects.

The reasons for this apparent disparity remain unclear - with Nyström's final report on a second group yet to be published. For McDonald's, however, the impact of Spurlock's film, books such as Eric Schlosser's Fast Food Nation, the ongoing obesity debate and changing eating habits continue to reverberate.

McDonald's woes have been well reported. The dip into the red in 2003, for the first time in its five-decade history. The untimely deaths of two chief executives in quick succession. The admission last year by UK chief executive Steve Easterbrook that its much-vaunted healthier menus accounted for fewer than 10% of sales, and the launch of its Big Tasty burger derided as a retreat.

Alongside this, in the UK at least, the company has struggled to shake off a poor sales record. Its 1,200 restaurants are saddled with a tired, outdated image and a reputation for being manned by a low-wage, unskilled workforce - the dreaded "McJob" tag that the chain has since tried to turn to its advantage.

Then there's the changing high street. It's no longer a straight fight with the likes of Burger King, Wimpy or KFC. Upmarket burger chains such as Gourmet Burger Kitchen, The Fine Burger Company and Hamburger Union have started to provide a direct alternative. More indirectly, competition from the likes of Pret A Manger (in which McDonald's now holds a stake), Nando's, Subway, Wagamama and coffee-bar chains such as Starbucks, plus better supermarket offerings and more family-friendly pubs, have all meant there's now a multitude of other outlets where people can grab a quick meal.

Let's not hurry to bury McDonald's quite yet, though. Things are distinctly looking up. Last month it reported revenues up 9% last year to a record $21.6b (£11b), with operating income up an equally robust 11% at $4.4b (£2.24b) - figures described by chief executive Jim Skinner as its "strongest business results in 30 years". Global sales were up 5.7% for the year and 7.2% during December, with Europe leading the charge, up 5.8% for the year and 8.2% for December.

It's clear that Skinner's "Plan to Win" is having an effect. European sales this time last year were growing at just 2.2% year on year, with the UK a financial millstone. But since April last year - coincidentally the month Easterbrook was appointed - sales have been on an upward curve and accelerating, rising 3.9% that month, 4.1% in both May and June, 4.3% in July, 4.9% in August, 5.3% in September, 5.4% in October and 5.6% in November, with even the UK now back into positive territory.

Speak to McDonald's, of course, and it's all seamless progress. The notion that the chain somehow "switched" to healthy foods and then back again to big burgers is wrong, insists spokeswoman Lorraine Homer. "It's just been about putting more choice on the menus," she says. "People are more demanding they want to be able to choose from the menu, so it's about offering greater variety and choice."

European menus

In fact, when it comes to the food offer, the company argues its European menus have changed more in the past three years than in the previous 30. Apart from the Big Tasty, the UK has seen a rush of innovations, including toasted deli sandwiches, "winter warmers", vegetable melts, fruit bags and the option of water instead of soft drinks.

One of the criticisms levelled at McDonald's is its ubiquitous presence. But what is not often appreciated, and remains one of its key strengths, is how successful it is at providing a good-quality, consistent offer day in and day out on this scale, argues Jonathan Doughty, managing director of food service consultancy Coverpoint. "It doesn't pretend to be something it's not. It's still the location for breakfast foods on the move and the products it does it does well, with excellent consistency and standards across the country," he explains.

But the healthier options are never going to be a huge earner, because they're not the reason the vast majority of customers go there, suggests Tom Fender, sales and marketing director of consultancy HIM Retail. "People are talking about a more healthy lifestyle but not necessarily doing it. There are a heck of a lot of people out there who are either not interested in being healthy or are just looking for the occasional indulgence," he says.

There has also been a recognition that the McDonald's brand, while elastic, can stretch only so far, its £50m deal in January with the Rainforest Alliance to serve ethically sourced Kenco coffee being simply the most recent in a string of deals, argues Doughty. "It's now making more use of other brands alongside its own brand - Cadbury's in the McFlurry, Tropicana for its orange juice, Kenco for its coffee and so on," he says.

Another area being developed is the franchised network, with about half of the UK restaurants set to be franchised by the end of this year. This, argues John Dickinson, an analyst at stockbroker Brewin Dolphin, is good news. "As a franchise operation it has been trading very well," he points out. Nevertheless, the growing complexity of the eating-out market means constant change and evolution will remain the order of the day. "People still like to eat out, but there's definitely more of a trend towards healthy eating, so they're going to have to keep changing the menu," says Dickinson.

The chain is also working hard to shrug off the "McJob" tag (now in dictionaries as "dead-end work"), not least through a high-profile advertising campaign last year that specifically aimed to turn the phrase into a positive by publishing pay and benefits. It also launched a training and lifestyle website for its workers last year and recently won Caterer‘s overall Best Place to Work in Hospitality award. View this report on CatererTV here >>

On the property side, while Skinner has said McDonald's plans to open 800 new sites globally this year, within the UK Easterbrook has said he expects to open only between five and 10, and about 30 over the next three years. The focus instead is very much on reinvigorating the existing estate. In fact, the quality of the estate is one area both observers and the company agree needs work. "We'd agree some of our restaurants look a bit tired and dated, so it's about making sure they look and feel more what the customers want," says Homer.

The notion of a one-size-fits-all look and feel has now gone. Last year the company announced it was to spend £140m testing eight new formats, and so far some 60 restaurants have been "reimaged", with new fascias, furniture and colour schemes. This year another 150 will follow suit.

Doughty, for one, contends that this is becoming a pressing issue as some restaurants have started to report a fall in the average transactional value as a result. The UK operation needs to look to its European counterparts for inspiration and guidance, he suggests. "The quality of McDonald's fit-outs in Europe is much better than in the UK. The quality of the materials and the design of many of the refits in France and the Netherlands have been exceptional they're stylish, they have internet terminals and so on. They don't look or feel like a UK McDonald's, but I think it will catch on here," he adds. Some recent refits, such as in Croydon, Surrey, where the restaurant has been fitted out with a slate wall and dark-wood furniture, could point the way to the future. "It's no longer discounting the guest experience," says Doughty.

Other formats

With its already massive property estate, McDonald's may also try out other formats or bring other brands that it owns (such as casual-dining chain Boston Market) over from the USA, particularly if a site is no longer working as a McDonald's anyway, he adds. Fender concurs. "In some McDonald's restaurants in Europe, for instance, you can get a glass of wine with your meal, so it's a different eating occasion. Or it could, perhaps, look at things like selling magazines or newspapers," he says.

McDonald's - largely because it means so many things to so many people, some of them fair, some of them not - will always generate heat and debate. But it's clear that after the wobble of the past few years it's now getting it more right than wrong.

As with so many things in hospitality, the solutions it has arrived at have not been complex - consistency, quality, value, a varied menu, better product ranges and a greater mix of formats. While there are still challenges to be resolved, not least within its UK estate, it has shown itself to be both resilient and, despite being such a large operation, able to respond to changing trends. As Doughty puts it: "Despite its problems, McDonald's is far from dead. It has some good people on board and it has the ability to deliver consistency across its operation that's second to none."

The burger market

Since 2002, the UK market for burger restaurants has declined by about £150m, fuelled in part by concerns over BSE, obesity and the rise of alternative operators, says Peter Backman of consultancy Horizons for Success.

Last year, the UK quick-service sector, in terms of food and drink sales, was worth £9.2b. Of this, fast food accounted for about half, or £4.7b, with burgers coming in at about £2.5b, pretty much split between McDonald's and Burger King.

Comparable figures for 2005 were £9b, £4.5b and £2.5b. But in 2003 and 2004, the burger element of the market was valued at £2.6b, Backman adds.

Gourmet burgers

While in pure size terms its operators are all minnows compared with McDonald's, the gourmet burger market has been expanding rapidly within the UK over the past few years.

With an emphasis on organic, hand-made ingredients and wider menus, outlets provide, if not exactly serious financial competition, then certainly an alternative.

The most significant player is the Clapham House-owned Gourmet Burger Kitchen, which now has 20 sites but is on the acquisition trail, and hopes to reach 100 sites across all its brands, which include Real Greek, Bombay Bicycle Club and Tootsies.

Before Christmas, chief executive Paul Campbell said he was looking to buy another chain, ideally one with a high property component that could be converted to the Gourmet Burger Kitchen brand.

Hamburger Union now has six sites, all in London, with its latest just off Leicester Square, while five-strong Fine Burger Company is also London-based.

Other even smaller alternatives include Real Burger World in Lavender Hill and the young family-oriented Babes ‘n' Burgers on Portobello Road.

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