McDonald’s reaps the benefit of all day breakfasts and table service

February 9, 2016

McDonald's signature rangeEven though we’re only into its second month, 2016 been rather a good year for Steve Easterbrook, McDonald’s chief executive. His football team, Watford, is enjoying its best season in years and much the same can be said for the US fast-food giant.

The company surprised analysts with its latest quarterly results last week, with sales up 5.7pc in the US – nearly twice as much as had been predicted. Global sales are up by 5pc.

It has taken a Briton – albeit one steeped in McDonald’s corporate culture – to revive the most American of institutions, which was in danger of being left behind by rather nimbler competitors in the fast food industry.

From introducing all-day breakfasts throughout the US to testing waiter service at some of its outlets, including in the UK, Easterbrook has overhauled how the company operates at a bewildering pace.

The chain was in something of a mess when Easterbrook took over as chief executive in March 2015. Last August, for the first time in more than 45 years, McDonald’s announced that it was closing more outlets than it was opening.

European sales had dropped by 1.4pc, between 2008-14. In the US, the decline was 3.3pc and in Asia, the Middle East and Africa, once considered a growth region, a rather frightening 9.9pc.

It was not just the dire figures which suggested that McDonald’s was in need of a cultural shift. The company was facing competition from not only its traditional rivals, such as Burger King and Wendy’s, but also from hipper new competitors entering the market, such as Honest, Byron, Five Guys and Shake Shack.

It was pretty clear that the golden arches had lost their sparkle. Within weeks of taking over the reins, Easterbrook appeared on CBS’s This Morning television progamme in the US to signal that the 60-year-old company was in for a radical overhaul.

“We really want to assert McDonald’s as a modern burger company. To do that you have to make meaningful changes in the business,” he said. “The pace of change outside McDonald’s has been a little quicker than the pace of change within. You act your way to success, you can’t talk your way to success.”

For once, this was not empty corporate-speak. All-day breakfasts were tested in San Diego in April, and within months were available at all the company’s 16,000 US restaurants. This has brought back customers who might have gone elsewhere and even tempted in newcomers.

Other changes have seen the introduction of a “McPick menu” where US customers can have two items for only $2, despite the wafer-thin profit margin the deal provides.

The range of burgers has also been increased to include Pico Guacamole and Buffalo Bacon, and diners are now being allowed to customise their burgers. McDonald’s has also launched its first loyalty programme for people who register their details, offering, for example, a free cup of coffee for every five bought at one of its restaurants.

Easterbrook has also done something to improve McDonald’s corporate image, announcing a 10pc pay rise for the 90,000 people who work in outlets directly owned by the company in the US. This has taken their hourly minimum wage to $9.90 an hour – increasing to more than $10 this year – considerably higher than the legal minimum of $7.95.

The one caveat, however, was that the pay rise was limited to those staff who work for the 10pc of restaurants which are owned by the company rather than franchisees. Even the white packaging is being ditched after more than a decade. Instead, food now comes in brown paper bags which, in theory, are seen as more environmentally friendly.

According to a company spokesman, the change is “consistent with our vision to be a modern and progressive burger company” –a phrase now something of a corporate mantra.

“One of the things Easterbrook has done is create a sense of urgency in the the McDonald’s business culture,” said Mark Kalinowski, a restaurant analyst at Nomura in New York. “When the company started trialling the all-day breakfast in San Diego county in April, it only took until October before it went nationwide.

“He doesn’t want to waste time, he operates on speed to market and saw it was clearly something customers wanted.

“For McDonald’s, that is rather quick. Although it can be innovative, the company is traditionally slow- moving. I think it’s a reflection on its sheer size.” Even though Easterbrook has spent much of his career with McDonald’s, having joined in 1993, he also spent time with the rather more upmarket Wagamama and Pizza Express chains. He returned to McDonald’s in 2013 as chief brand officer, having held previous roles including its head of Europe.

“Most of the presidents and chief executives at McDonald’s we have seen have been promoted from within. Having somebody with an outside perspective is exactly what the company needed” said Darren Tristano, president of Technomic, a Chicago-based company specialising in the food industry.

Tristano believes that Easterbrook’s strategy has been shrewd. “He has aggressively marketed the all-day breakfast, which has put McDonald’s back at the top of the mind of consumers.

“The price point appeals to lower and middle-income consumers who are looking for something which is less expensive than the dinner menu. This has helped McDonald’s get back some of the market share which it had been losing to rivals.”

McDonald’s has also been helped by the rehabilitation of the egg in the mind of the consumer, Tristano added.

“If you go back a few years, eggs were seen as high-cholesterol. Now they are seen as high-protein and eggs are a key part of breakfast.

“The sales growth on a year over year basis is over a few years of weak sales performance, so the numbers are good but we should expect to see sustainable growth and especially year over year, fourth quarter 2016 would signal McDonald’s is officially back.

“McDonald’s appears to be listening to their customers and staying more true to their brand under Easterbrook.”

The consensus appears to that Easterbrook has enabled McDonald’s to regain its mojo. “He has brought a sense of strategic clarity, said John Quelch, professor of marketing at Harvard Business School.

“There is a tendency when a company gets into trouble to sling products at the wall and see what sticks. All that does is adds complexity. If you reach a point when you can’t explain to an employee or a franchisee what the point of a product is, then how can you expect them to explain that to a customer?

“The bench strength of McDonald’s is enormously good. It is no surprise that they were able to find somebody like him to step up,” added Quelch.


This is what happens when McDonald’s listens to its customers

February 2, 2016
By Roberto A. Ferdman
Washington Post
January 25, 2016
https://www.washingtonpost.com/news/wonk/wp/2016/01/25/the-incredible-power-of-the-egg-mcmuffin/
It’s no secret that McDonald’s has been struggling. At a time when specialization is increasingly important in the food business, the brand has opted for breadth, offering everything under the moon: hamburgers, salads, yogurt parfaits and fancy chicken wraps. And it hasn’t worked. In fact, that’s putting it mildly.Each time McDonald’s has announced how much money it’s making, the company has been forced to share an embarrassing truth: Americans are eating less and less of its hamburgers, chicken nuggets and French fries. The routine became so consistently depressing that McDonald’s decided to quit sharing monthly performance data altogether in March.

But all of that seems to be changing: For the first time in a long time, McDonald’s is thrilled to tell everyone how it’s doing.

On Monday, McDonald’s said that same-store sales (those open for at least 13 months) increased by 5.7 percent in the last three months of 2015, more than twice what analysts had expected. The hefty jump is the largest the company has reported in almost four years.

The news comes on the heels of a major concession by the fast-food chain, which is no coincidence. For years, adoring fans pleaded with McDonald’s to extend its breakfast menu beyond the current 10:30 a.m. cutoff. For nearly as long, the fast-food behemoth shrugged off the ask, saying it doesn’t have the capacity to make breakfast and everything else at the same time. But this October, McDonald’s finally gave in, agreeing to offer Egg McMuffins and other breakfast fare from open to close. And the reaction has been overwhelmingly positive.

“All-day breakfast was clearly the primary driver of the quarter,” McDonald’s Chief Executive Officer Steve Easterbrook told investors in a conference call following the company’s earnings announcement. “We knew it would be.”

In some ways, the immediate success of all-day breakfast is a reminder of one of McDonald’s biggest follies: its inability to see itself what for what it is. Rather than embrace what its fans adore it for most — a place that serves hamburgers, French fries, chicken nuggets, and yes, an exceedingly popular breakfast menu — McDonald’s tried to become something other than itself, expanding its menu, largely with salads, wraps and other healthier but also more expensive fare, to mimic new competitors.

The Chipotles and Shake Shacks of the fast-food world have managed to sell pricier food, at least in part, because of their association with meaningful trends in the food world that prioritize good food over cheap food. But it’s a much harder pitch at cheap burger chains, which people visit for a respite from their (hopefully) healthier dietary regimen, rather than a reminder that they could be eating something better. It’s no coincidence that fast-food chain Sonic has flourished by accepting what it is, while McDonald’s has struggled by doing just the opposite.

The chain’s re-energized business can also be seen as a testament to the enduring popularity of the Egg McMuffin, arguably the most iconic breakfast sandwich in the world. The affordable egg sandwich, which was first served in the early 1970s, caught on so quickly that it helped popularize the entire breakfast sandwich category. But it hasn’t been replaced. Today, demand for it is such that the chain buys more than 2 billion eggs per year in the United States alone, or almost 5 percent of all eggs produced in the country.

“It’s one of the oldest items they’ve had on their menu, and it’s still one of the most popular,” said Darren Tristano, who is the president of Technomic, a food industry market research firm. “Selling it all daylong was a no-brainer.”

Since Easterbook became McDonald’s CEO last March, he has shown that he’s willing to not only listen to but also heed requests from the fast-food chain’s customers. The introduction of all-day breakfast is perhaps the best example, but during his short stint, he has already also shortened the McDonald’s menu and announced plans to switch to cage-free eggs and antibiotic-free chicken in the United States, among other things.

Tristano reminds that it’s too early to tell whether the most encouraging earnings in years is a sign of things to come. The real test will be what happens in the rest of 2016, and beyond. The excitement around all-day breakfast, and Egg McMuffins specifically, might not last, which even Easterbrook admitted to investors this morning. But the move has set an important precedent.

“I think listening to the customer is going to the most important rule McDonald’s has to follow,” said Tristano. “As long as they’re doing that, they should be fine, because the customer usually has the answer.”

When markets opened Monday, McDonald’s shares were up 3 percent on the news, but finished the day up less than 1 percent. Despite the company’s recent struggles, its stock is at a near all-time high.