The Drum

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There was a seismic shift in the business landscape on Friday, June 16, 2017. Amazon purchased Whole Foods, the organic food purveyor. The headlines and grocery stock prices reflected the surprise. There are discussions about the future of the grocery store. Just recently, in The New York Times, there was an article about what the challenges are with grocery stores, not the least of which is the array of products that do not match the way people actually want to eat today.

The US grocery business is under pressure. Mainstream, Main Street supermarkets, like Safeway, Stop & Shop, Kroger’s, Piggly Wiggly, are being stressed from the low price end by brands such as Aldi and Lidl. Purveyors of high margin foods such as Seattle’s PCC, Trader Joe’s, Sprouts, Big Bear, for example, put pressure on these brands by selling organic, fresh, chemical-free items. Walmart is committed to grocery and to online with the purchase of jet.com. Target has cut back on grocery. The industry is undergoing massive changes.

Amazon and Whole Foods is a brilliant combination. Both Jeff Bezos and John Mackey are passionate about their brands. Jeff Bezos’ driving passion is an unrelenting focus on very basic customer retail needs: selection, convenience (speed and delivery) and low price. John Mackey is passionate about organic, sustainably sourced foods with the mission under the heading Values Matter that says, “At Whole Foods Market®, “healthy” means a whole lot more. It goes beyond good for you, to also encompass the greater good. Whether you’re hungry for better, or simply food-curious, we offer a place for you to shop where value is inseparable from values.”

Both brands will learn and gain from each other. Amazon will learn about traditional retail and the customer behavior in traditional retail. Amazon will probably seize the chance to disrupt traditional with non-traditional approaches. By applying its superior technology and information management systems to traditional retail, Amazon will be able to provide superior, personalized service with better selection, convenience and lower prices. This will threaten the “traditional” retailer who does not have access to Amazon’s systems, power and scale. Whole Foods has the opportunity to expand outside of the physical store. In 2015, it created a new store concept in order to attract Millennials. It is hipper, cooler, a smaller format with less expensive prices. The jury is out on its performance. Now, rather than create a new physical store concept, Whole Foods can learn how to win online. One should not be surprised. In an interview with Annie Gasparo of The Wall Street Journal in 2015, John Mackey spoke of the new concept, saying, “ You have to be willing to evolve with the marketplace, You can’t not do that because it might possibly take sales from your existing flagship brand.” He also said that Whole Foods is compelled to “keep up with times.” Well, today’s announcement is just that.

The match-up of these two powerful brands and their respective passionate and powerful owners is a merger that has everyone buzzing about the possibilities and future of grocery. But, there is one other seismic change that happened with this merger. On Thursday, June 15, 2017, John Mackey publically condemned the behavior of Jana Capital the activist hedge fund that was hounding him to implement their type of financial engineering, and destroy his brand. According to John Mackey’s quote in Financial Times, “They’re greedy bastards, and they’re putting a bunch of propaganda out there trying to destroy my reputation and the reputation of Whole Foods, as its in their self-interest to do so. They just want to sell Whole Foods Market and make hundreds of millions of dollars, and they have to know that I’m going to resist it. That’s my baby. I’m going to protect my kid, and they’ve got to knock Daddy out if the want to take it over.” John Mackey lived up to expectations on Friday. And, he has accomplished what no other company has when faced with the activist invasion: he told Jana where to go, he told Jana that they would have to fight him, and then he pulled off one of the greatest anti-activist, anti-financial engineering coup of all times. He not only snatched his brand from the hands of financial engineers: he sees the future, and is on the pathway to future success.

 

 

 

How to Revive McDonald’s

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With fourth-quarter earnings dropping 21% and global sales down, the company needs a back-to-basics turnaround.

In 2002 McDonald’s was losing market share. Employee and franchisee morale were extremely low. The popular view was that the time for McDonald’s had passed. Shares were in severe decline.
Then the company’s chief executive officer, Jim Cantalupo, and president at the time, Charlie Bell, instituted a turnaround that took less than a year to show results. I was at McDonald’s and participated in designing and executing the turnaround plan. The momentum carried the brand until the effects of misguided decisions in recent years put McDonald’s into another downward spiral.

On Monday, the company announced that in January its global sales in restaurants open at least 13 months fell 1.8%—that’s a serious decline in the fast-food industry. Recently, McDonald’s reported a 21% drop in fourth-quarter earnings and announced that CEO Don Thompson would retire at the end of the month.

Another fast turnaround of the McDonald’s brand is possible—and it is essential for the company’s future. If you don’t take care of the short term, there will be no long term. Here are a few immediate actions that would reignite McDonald’s.

Stop the hemorrhaging: Plugging the holes in the bottom of the brand bucket must be the first priority. Going after new customers—as McDonald’s has lately been doing in trying to attract Millennials by offering more customization of its food—without focusing on customer retention won’t succeed. It costs much more to attract a new customer than it does to keep a customer loyal. Love the customers you have.

Focus on the direct competition: Why are Burger King, Chick-fil-A, In-and-Out Burger, Popeye’s, Subway, Wendy’s and others doing well while McDonald’s struggles? In the short term, the company needs to grow its share within the direct competitive set. Be the best in class. For McDonald’s, the class is quick-service hamburger, chicken and sandwich chains. “Fast casual” restaurants like Boston Market, Chipotle Mexican Grill and Panera Bread are rising in popularity, but they’re not the direct competition.

Fix the food: People are not lovin ’ McDonald’s food. A 2014 Consumer Reports survey of 21 burger brands ranked McDonald’s at No. 21, last place. McDonald’s is a restaurant; food taste matters. Popeye’s refocused on its Louisiana food heritage. In-and-Out nourishes its cult following. McDonald’s must revive founder Ray Kroc ’s food-quality passion. Continuous food improvement is a never-ending challenge. Making an even better hamburger is a bigger opportunity than launching a new snack wrap.

Restore fast-food service to fast food: Customers will not wait if they want fast food. Obsessed with how Chipotle does business, McDonald’s sees customization as magical brand elixir. But Chipotle doesn’t compromise service speed for food excellence and customization. Chipotle’s average service time is less than 60 seconds. Average service times in the California test markets for the new McDonald’s burger bar, called Create Your Taste, run as much as seven minutes, according to news reports. Slow service, in an effort to provide customization, won’t save the McDonald’s brand.

Focus is fundamental: Focus on doing a few things extraordinarily well. The “better burger” chains like Five Guys, Shake Shack and Smashburger raise the standard on food quality, but they also demonstrate the power of menu focus. The McDonald’s menu now has more than 100 items, which makes it harder to run the restaurant and harder for customers to decide what to order. It complicates the supply chain. It complicates employee training. Over the past few years, McDonald’s moved from a disciplined, strategic approach to a tactical, try-anything approach.
Restore relevance: Loss of relevance was one of the major issues the brand faced in 2002. In addition to significant demographic, behavioral, economic, social and competitive changes, there were significant changes in attitudes toward food. These same forces are still at work. For example, increased nutritional knowledge, as well as competition from fresh food at grocery stores, have changed the way people eat.

Re-energize the Plan to Win: The 2003 global turnaround plan, called “Plan to Win,” aligned the entire organization to execute “the right actions executed in the right way to achieve the right results.” The basis for it was a laser focus on the customer. Over the past decade the customer focus has been lost.
Adopt a disciplined new-product process: New products are important to maintain customer interest. Too many new products introduce complexity, and too many rollout failures damage brand credibility. In the previous McDonald’s turnaround, we adopted a management system for new products that carefully moved them through a three-year development pipeline. The goal: a few heroes and no zeros.

Internal marketing comes first: Customer focus is important, but employees come first. In 2003 we invested in an internal marketing effort to rebuild employee pride. Jim Cantalupo fought against the demeaning characterization of “McJobs.” Charlie Bell led the effort to build internal alignment behind the “Plan to Win” across 119 countries. (Jim died in 2004 and was replaced as CEO by Charlie, who died the following year.) We launched the new advertising approach internally, reaching out to about 1.5 million employees before the marketing was launched externally. In a service business, a proud, aligned workforce is powerful.

Rebuild trust: Without trust, nothing else matters. In 2003, McDonald’s had to regain credibility with employees, suppliers, franchisees and customers. We adopted a variety of trust-building programs around the world, such as Paul Newman endorsing our salads; an association with Oprah Winfrey’s trainer; the “Open Doors” program in France, with teachers, parents and children invited to the restaurants to see how the food is prepared; and a relationship with Food Group Australia, accredited dietitians who helped develop a healthier-food program Down Under.
The McDonald’s trust bank needs trust deposits. Yet it doesn’t help much to have transparency for food that customers don’t want to eat. Sometimes the more you know the worse it makes you feel: 19 ingredients in McDonald’s fries! These include sodium acid pyrophosphate, hydrogenated soybean oil with tertiary butylhydroquinone (TBHQ) and the delightful dimethylpolysiloxane added as an antifoaming agent.

In 2002 commentators said that McDonald’s was dying. They were wrong. The company became one of the best-performing U.S. businesses for nearly a decade. It can happen again.
Mr. Light, chairman of Arcature LLC, a brand management consulting company, is the former chief marketing officer of McDonald’s and the co-author, with Joan Kiddon, of “Six Rules for Brand Revitalization” (FT Press, 2009).