11/16/2015

Will McDonald's Latest Strategy Work?

After several years of declining sales and decreasing market share, McDonald's has tried many different strategies to remain competitive in the fast-food industry that  they once dominated. Each strategy seemingly comes at the problem from a different angle, trying to entice new customers or simply to keep current customers coming back. Years ago, in an effort to capitalize on the gourmet coffee craze, McDonald's introduced a line of premium coffee drinks to entice new customers to their restaurants, hoping they would also purchase food that wasn't offered at the time by competitors. That strategy had mixed success, and a number of different strategies followed along similar lines. McDonald's latest strategy is to place "Create Your Taste" kiosks in its restaurants that let customers customize their burgers with premium buns and toppings.  But is McDonald's really taking a hard look at their core customers base?  Why do customers frequent McDonald's, as opposed to the many other available options for burgers?  Will McDonald's customers be willing to pay more for premium sauce, cheese, and toppings, such as guacamole and chili lime tortilla chips? Will they be willing to wait longer for their burger? Or do they just want a cheap and fast hamburger?  My bets are on cheap and fast.

Aside from possibly missing the mark on how much their customers are willing to pay for a burger, according to Hayley Peterson in the Business Insider, McDonald's turnaround strategy has one key problem: customers can only order food from the "Create Your Taste" kiosks by walking inside its restaurants.  That's a real problem when McDonald's gets as much as 70% of its sales from the drive-through.  So given the cost of the new technology for each franchise of between $120,000 and $160,000, will there be any payoffs, and will the franchise owners be able to recoup those sunk costs for the kiosks?  It's quite a price for technology that will only be available to a fraction of its customers.  McDonald's certainly believes the pricey kiosks will reap rewards as more and more customers are looking for menu customization at restaurants.  But is that what a typical McDonald's customer is looking for?  Especially when the vast majority of their customers are using the drive through, which implies they want their fast-food FAST.

According to Darren Tristano, Executive Vice President at Technomic, "the danger is in moving away from what made McDonald's successful in the first place: speed of service and affordability." I couldn't agree more.

Peterson, Hayley (2015).  McDonald's Turnaround Strategy Has One Major Flaw, Business Insider, August 25, 2015.  
www.businessinsider.com/mcdonalds-turnaround-strategy-doesnt-help-drive-thru-2015-8
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1 comment:

Dave Tufte said...

Reddish-Day: 100/100 (I think "drive-through" is the preferred spelling, but I didn't take off for that: there's a variety of spellings for this that seem acceptable).

How does this relate to the ideas you learned in Managerial Economics? I'd like to see less repetition of what the source article says, and more thinking about how this relates to what you've done this semester.

Are you saying that McDonald's is running essentially two different businesses: a drive-through, and a walk-in restaurant? If you are, then the kiosks are a demand shifter for only one of them.

If a McDonald's is running two different businesses, who are the substitutes and complements to each one? Are you saying that the kiosks will cannibalize from the drive-through? Then the kiosks are shifting both demands.

I think you're also misusing the phrase sunk costs. Yes, once the kiosks are in place, those costs will be sunk. But when you bring up whether or not they will be able to recoup those costs, then you are talking about fixed costs. (That distinction isn't that hard to make, but my experience is that most texts — and real world managers — throw them around without much care).

5:26 PM

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