May, 2015

Fruits of Thought

McDonald's Identity Crisis

McDonald’s chief executive Steve Easterbrook recently gave a much-anticipated video presentation in which he announced “the initial steps of the company’s turnaround plan.” He really didn’t announce a turnaround plan; he announced an organizational revamp — basically dividing McDonald’s up into four internal “market segments.” The idea being to unite businesses with similar growth strategies rather than those that happen to be geographically contiguous. It may be marginally better than the current organization — though I doubt China and Switzerland, both “high-growth markets” for McDonald’s, actually have many similarities.

The other big initiative is to sell off 3,500 company-owned restaurants to franchisees. This is standard strategy. Selling the restaurants means the corporation makes money off licensing fees and whatnot; since very little capital is involved in this, it leaves the company with a much higher return on investment than if it owned a lot of brick-and-mortar property. However, it is also true that it makes the company harder to control. The chefs at headquarters have some brilliant ideas; but bringing something from inspiration to actual product on the menu is very difficult at McDonald’s, because they have to win franchise approval.

The rest of the announcement was financial legerdemain — returning money to shareholders or vague promises of General and Administration (G&A) cost reductions that somehow will fall right to the bottomline.

The obvious questions confronting McDonald’s:

  • How will it compete with more hip or upscale offerings — everything from In-N-Out Burger, to Five Guys Burgers and Fries, to Shake Shack?
  • What will it do about menu proliferation and its impact on service time?
  • What will McDonald’s mean in the years ahead?

The presentation was silent on all these topics and more.

Strategically, McDonald’s faces the same problem that mainstream supermarket chains do. Not all that long ago, the local supermarket served everyone in the community. Now, markets are fracturing. So the competitive threat is not typically another supermarket trying to do the same thing a little better. The new competitive threat is an Aldi opening down the block, a Costco opening in the neighborhood, a Whole Foods appearing nearby, an Internet shopping service opening, the drug store adding a larger food department that includes more fresh items — none of these shopping iterations take the place of a supermarket, but all threaten its livelihood.

Equally, now one can have breakfast at Starbucks, grab a more upscale burger at BurgerFi, or eat alternative cuisine at Chipotle, and like that old community supermarket, McDonald’s just isn’t clear on how to position itself.

Shortly before the McDonald’s announcement, Chipotle also made an announcement that it was eliminating ingredients containing genetically modified organisms (GMOs) from its menu. It is a brilliant move, deeply cynical and bordering on ridiculous, but brilliant nonetheless. It shows that Chipotle understands its market positioning in a way McDonald’s does not.

Chipotle’s move is pure marketing genius. There is no indication that eating GMOs is bad for a person, and Chipotle doesn’t make that claim. It can’t. As a matter of fact, if the chain did claim anything of that nature, then it would be sued for product disparagement.

Its plan is filled with giant loopholes. Even the normally left-wing folks at the Center for Science in the Public Interest called the position hypocritical — essentially on the grounds that sodas are made with corn syrup, and all corn syrup basically is made with GMO corn.

But Chipotle is not planning on enforcing these rules against the soda companies. Chipotle itself uses very little GMO product — corn tortillas and soybean oil mostly — so renouncing these ingredients is cheap. The big use of GMOs is the soda and the animal feed. But Chipotle doesn’t count the animal feed — that would be pretty expensive to replace.

The big health concerns at Chipotle? The sugar in soda and lots of salt. A recent New York Times article critiquing the chain’s menu said a typical Chipotle meal uses up to a full day’s recommended salt allowance, but there are no plans to deal with either of these issues.

There is a bunch of technicalities proving Chipotle’s position is inconsistent. Chipotle doesn’t like GMOs, because GMOs allow farmers to use an herbicide named glyphosate (most commonly associated with Roundup), which kills weeds but not the GMO plants. Sunflowers, which make the new sunflower oil Chipotle is switching to, are bred without GMOs to tolerate ALS inhibitors, another class of herbicides. There is no reason Chipotle should prefer one over the other.

Despite all this, the always incisive essayist and author Virginia Postrel nailed the point: “... even if you don’t care about GMOs, the decision sends a positive signal. It’s a high-profile sign that Chipotle is paying close attention to the ingredients in its food. Replacing GMOs required reworking recipes, finding new suppliers and paying more for canola oil. It demanded concentrated effort. The process reinforces the message that Chipotle isn’t just doing what’s easy or cheap. It reminds customers that the company isn’t delivering generic, mass-market meals … Chipotle cares about the food.”

If McDonald’s wants to succeed, it doesn’t need to reorganize which country is in which division. It needs to answer the question: “What does McDonald’s care about?”   pb