The Four-Year Trend That is Killing McDonald’s

It is all about traffic. For all the fanfare about All Day Breakfast, McDonald’s (NYSE: MCD) in the USA has not been able to stem its steady four-year decline in customer traffic. Guest counts have declined for over four years. True, the fast food restaurant category is experiencing decline. But, McDonald’s is declining at a faster rate.

Increased sales on an ever-shrinking customer base is a certain path to brand disaster. Bloomberg obtained an internal email which summarized a September meeting with McDonald’s executives and franchisees. It read, “Growing customer counts is our main challenge.” (Business Insider, October 16, 2016)

When Steve Easterbrook became CEO in 2013, he brought over his favorite slogan from the UK… “To be a modern and progressive burger company.” Yet, the business has experienced steady decline in customer counts over the last four years. The big turnaround initiative reflecting this new vision was providing a customized dining experience called, “Create Your Taste.” allowing customers to build burgers from more than 30 premium ingredients, buns, and sauces, including bacon, caramelized grilled onions, chili lime tortilla strips, guacamole, and jalapenos. While McDonald’s acknowledged that it was necessary to simplify the menu and reduce operational complexity, this customized meal initiative did the opposite. Service times took 8 to 10 minutes, a killer for a fast food brand. Focused on competing with fast casual brands like Panera Bread (NASDAQ:PNRA) and Chipotle (NYSE:CMG), “Create Your Taste” gave direct competitors like Wendy’s (NASDAQ:WEN) and Burger King an opening to increase their share of fast food customers.

All Day Breakfast was the next big effort to reverse transaction decline. It has failed to stem the transactions decline. Instead of bringing in more customers, All Day Breakfast items seem to be merely replacing other menu item options. Again, it is increasing operational complexity, slowing down service and increasing franchisee tensions.

The continued transaction decline in Q4 is being blamed on the bad weather in the USA. The bad weather cannot be the cause of a steady decline over the last four years. To address the continued transactions decline, McDonald’s primary focus is now an increased emphasis on discounts and special deals. Without a focus on a better quality food and service brand experience McDonald’s is trying bribes. Excessive discounting and deals are brand debasing rather than brand building. McDonald’s must stop the hemorrhaging of its customer base. Using extensive discounting to deliver top-line sales is the wrong medicine to cure this brand disease.

Adding fuel to the fire, information from the recent Nomura franchisee survey (Investor’s Business Daily, October 17, 2016) indicates that the continuous discounting is resulting in increased franchisee concern that McDonald’s only cares about top-line corporate sales and not about running profitable restaurants. “McDonald’s does not care about the operator. It only cares about stockholders.” The financial health of the franchisee is a brand-business imperative. Without franchisees upholding the brand, shareholders will wind up with nothing to hold. McDonald’s is cutting its costs by laying-off corporate staff, cutting back on corporate support and training, cutting back on real new product innovation. McDonald’s income goes up as franchisee profitability goes down.

McDonald’s is relying on financial engineering to prop up its shares, increasing debt to buy back shares and continuing to increase the dividend payout. One thing is certain, none of these actions will turn around the shrinking of the customer base. Financial engineering to enrich loyal shareholders is only a temporary cover up that in no way addresses the consistent declines in guest counts. Growing comparable sales while comparable transactions decline; growing corporate revenues while franchisee profitability declines; growing shareholder returns through financial engineering while failing to grow customer share through effective marketing; increasing revenues on a declining customer base, all lead to a weakened business that extracts value from the brand rather than invests value into the brand.

McDonald’s appears obsessed with becoming something that it is not rather than working to evolve based on its enormous brand strengths. McDonald’s does not seem proud to be the biggest and best fast food brand in the world. Why? Is this what becoming a “modern progressive burger company” is intended to mean? If so, then the brand will continue to experience traffic decline, and the challenge will continue to be to try to increase revenues from a shrinking customer base.

Here are actions McDonald’s should take now to revitalize the brand and increase traffic:

Provide great tasting food
It is great that McDonald’s wants to remove unwanted ingredients from its foods. It is admirable to focus on how animals are treated. However, McDonald’s is not a health food store or the Humane Society. McDonald’s customers will not trade-off taste for socially acceptable, “cleaner” food. Discounts will not make the food taste better. The McDonald’s customer wants delicious food, at a very affordable price, served quickly in a clean environment.

Innovate or die
Where are the new products? New technologies keep the brand up-to-date but we cannot eat a kiosk. Three types of Big Macs are just playing catch-up to Burger King and Wendy’s. Where are the real food innovations? Innovation is news; food news brings customers into the stores.

Improve service speed
Speed of service is still a problem. For fast food, it can be a killer. Consistency and speed are what attracted Ray Kroc to the McDonald’s business. The first word in fast food is “fast.” Complexity needs to be dramatically reduced.

Focus on franchisee profitable revenue growth
McDonald’s is built on the principle that by working together you work better. Ray Kroc said, “None of us are as good as all of us.” And when referring to the franchisees, “You are in business for yourself but not by yourself.” However, today franchisees increasingly feel that corporate support has been cut back. Costs are being transferred from the corporation to the franchisee. Focusing on top-line sales at the cost of franchisee profitability is not only bad management but goes against a core foundation of the brand.

Build real loyalty, not deal loyalty
Real loyalty cannot be bought with bribes. Luring customers with incentives makes people loyal to the deal instead of loyal to the brand. If guests do not prefer the experience, making it cheaper will not be the cure. McPick 2 will not reverse declining transactions.

McDonald’s current value is built on a consistent pattern of increased dividends and share buybacks not packed restaurants delivering delicious tasty food served quickly with a smile. Investing in growing a base of loyal customers must be McDonald’s highest priority. The bottom line must be more customers, more often, more loyal, more sales, more profitable. Fiddling with financial engineering while focusing on increasing sales from a base of fewer, less frequent, less loyal customers is a formula for failure.