How are customer taste’s changing in the fast-food industry?

What impact do these changes have

on McDonald’s?

There is decreased satisfaction with food quality in the industry and consumers are
becoming more health conscious. Young adults and baby-boomers are turning away from fast
food, although the market is growing albeit slowly. Chains are moving toward discounts, new
products, and store designs to address customer concerns.

In order for McDonalds to retain its competitive presences in this ever changing market, they
have to find ways to remain appealing to consumers. They’ve accomplished this by adding lower
calorie items to their menu such as salads and grilled chicken wrap. They have also added
calorie content to the menu which makes consumers feel as though they are able to make
informed decisions on their items of choice. Another angle McDonalds has taken is to offer
items at a reduced cost on their “value menu”. With reduced priced burgers and fries, consumers
can make a choice for a slightly healthier 5$ foot long sub or a 1$ burger. Another segment
which is growing is “fast-casual” dining, featuring a more upscale environment with faster
preparation than traditional restaurants and better quality food product than quick-service. This
segment is growing at a 15-20% pace while quick-service is growing at about 2%. The quick-
service growth is significantly lower than the fast-casual segment, but is confounded slightly by
McDonald’s disappointing growth and its enormous size. McDonalds growth was 2.2% while
their nearest competitors’ growth was closer to 3%. In 2010, the “fast-casual” segment was still
growing: while the restaurant industry declined 1% from 2009 to 2010, total visits to these
restaurants grew 17% One of the segment leaders in “fast casual,” Five Guys Burgers, is a
hamburger-specialty chain indicating that consumer preference away from hamburgers may
indeed be a statement of dissatisfaction with the quality of “quick-serve” burgers, not burgers in
general. Given a comfortable environment and a high-quality product, there seems to be a market
for burgers.

McDonalds is affected by these changes in a need to address the diversity of their menu items,
restaurant design including location placement and accessibility, and marketing strategies.
Consumers, while price conscious, have placed a demonstrated premium on comfortable
environment and some increase in nutritional value. Consumers have also placed a premium on
accessible and efficient service, as evidenced by the drive through numbers.
 1. How well are these changes in customer tastes and preferences being reflected in
competitive strategies in the industry?

The restaurant industry is a mature, heavily segmented one from fine dining to fast food.
McDonalds accounts for almost $35-Billion in sales and shares in the company have increased
47% since November 2008, but the restaurant companies in the Standard & Poor’s 500 index
have increased 90% in the same period, and sales industry wide in 2010 increased 1.8% to $234-
Billion. One of the fastest gainers in the industry has been Starbucks coffee – since November
2008, their shares have increased 500% and it is now the #3 restaurant chain after an 8.7%
increase in sales last year. This would indicate that the established restaurant chains – Burger
King and Wendy’s specifically – are failing to resonate with these customer preferences in their
competitive strategies, opening the door to non-typical competitors. Starbucks food offerings are
pre-packaged salads and sandwiches, and a small offering of hot sandwiches to complement their
coffee selections. Their stores are comfortable places in which to work with wireless internet
access available, work spaces, and comfortable seating.

McDonalds has differentiated its product through using differentiate strategy by improving its
store quality, offering an expanded range of product of increased perceived value, and its
marketing. Customer preferences have been addressed through an increase in salad offerings,
reduced fat offerings, and expansion of wireless internet access. In a mature market where
expansion is limited, industry focus has been on improving store level productivity and
profitability. This means increased attention to customer preferences and marketing. Given the
anemic industry growth represented in the numbers from 2000-2001 in the case, and the more
recent numbers from 2010, indications are that the industry in general is not sufficiently
reflecting these preferences in competitive strategies. McDonalds, Burger King and Wendy’s
have specifically underperformed in terms of growth against the industry with their diversified
approach, while focused competitors such as Subway (healthy choice, individually prepared
sandwiches) and Starbucks (high quality coffee with food service to compliment) have
demonstrated significant success at addressing customer preferences.

The changes in customer tastes and preferences are highly reflected industry wide. They can be
seen through the layout of restaurants, décor, menu, pricing and how these industries are
marketing their products. Not only have traditional burger and fry fast food industries changed
what they are offering such as McDonalds with healthier oatmeal or fruit cup for breakfast or
Wendy’s salads and grilled chicken sandwiches. Other fast food chains that are traditionally
thought to be a healthier choice, such as Subway, have started to offer breakfast options to
compete with the thought-to-be unhealthy McDonalds breakfast choices. McDonalds and other
fast-food places have also improved upon its store quality. Rather than slick plastic lunchroom
1
seats there are cloth cushions to enjoy one’s McCafé and free internet. This is so they can
compete against the ever popular Starbucks.

2. What are McDonald’s strengths and weaknesses and what conclusions do you
draw about its future?

Strengths

• Intangible assets – Positive company social-image (Ronald McDonald House), Name

recognition, brand-loyalty
• Market leader in mature market possesses three times thee sales volume of nearest
competitor and 7% of market sales.
• Increases in assets, shareholder equity and numbers of restaurants with decrease in
number of shares outstanding
• Accessible locations
• Strategic marketing alliances – movie tie-ins, McDonald’s brand toys
• Scalable product marketing and pricing – uses company owned locations to test market
product and price

Weaknesses

• 2001 income shrunk 17%, significant decline in affiliated sales

• Market share grew more slowly than that of competitors
• Debt increases in 2000 & 2001 not producing asset gains shown in previous three-years
• Operating income, EBT, free cash flow declines
• Dissatisfaction with food quality
• Susceptible to negative publicity

Opportunities

• Drive through sales & efficiencies

• Growing trend toward non-hamburger sandwiches
• Heavy users – typically blue-collar, single males under 30
• Fast casual segment – McCafe entry

Threats

• Expansion of penetration by non-traditional competitors

• Consumers seeking “better” alternatives
• Strong and growing Competitors in all segments
• Opportunistic health-related Legal challenges directed at the industry and McDonalds

2
 specifically due to its size
• Food cost increases due to production and distribution cost increases and price pressure
at the retail level.

From these strengths and weaknesses, McDonalds appears to be changing with the
consumers tastes. As long as McDonalds continues to be attentive to the wants of its
consumers, they should be successful at keeping a foothold in the restaurant industry.

3. Should McDonalds’s develop a separate strategy for the heavy user segment of
the fast food industry?

The documentary “Super Size Me” demonstrated a non-scientific approach to researching the
issue of obesity, however one of the methodologies employed was to emulate the lifestyle of that
“heavy user” segment. What came from that was a highly critical view of the negative effects of
consuming McDonalds food offerings over a long period of time: significant weight gain, an
increase in emotional disturbance, a decrease in physical activity and physical fitness.

The company has also been sued in several high-profile cases from unhealthy food options
directed at children through the use of toys to the simple assertion that consuming their food
makes consumers obese.

While there may potentially be revenue left on the table by not pursuing a specific marketing
strategy for the “heavy user,” the costs associated with further tarnishing the value of the brand
as being unhealthy and in negative publicity through lawsuits associated with low nutritional
quality, socioeconomic discrimination such a strategy would specifically target lower wage
earners would harm the company further. One of the company’s strengths is the good corporate
citizen recognition of the work that results from the Ronald McDonald House. Such a strategy
targeting the “heavy user” (the double-entendre of the phrase should not be lost on the reader)
would have the potential to damage this reputation. For these reasons, my conclusion and answer
to this question is no.

4. What should CEO of McDonalds do to grow sales, profits and market share at
McDonalds?

In order to grow profit and sales, McDonalds should take the lead from Pizza Hut which now
offers both the traditional pizza place, fast-food atmosphere or alternate locations which are
Pizza Hut Bistro sit down restaurant options. McDonalds should introduce upscale Café
locations to compete with the likes of Starbucks or Panara Bread. These locations would
have plush lounge areas and offer the line of McCafe as well as other meal options that focus
on the more nutritious minded consumer. While other locations should continue to offer the

3
current menu combination of fast-food burgers as well as the limited Café items to appeal to
the fast-food clientele. The company should do what it has done. It has differentiated itself
with an increased product offering of premium sandwiches, health-conscious offerings such
as salads and apple slices in lieu of fries, and bottled water. It has improved store quality and
increased marketing for product offerings. By maintaining a core of standard offerings, but
adding to them “premium” offerings such as chicken sandwiches, brings with it a two-fold
effect: it allows the company to differentiate product offerings and allows the consumer to
make some trade-offs for food of higher perceived quality by voluntarily paying more for it.
This builds into their large customer-base the association that there is a cost associated with
higher-quality fare, but because of their position as a low-cost provider, McDonalds can
probably provide higher quality at a lower cost than others. A complex calculation to ask of a
consumer, but with time and the company’s ability to reach many people over an extended
period of time, it becomes a valuable long-term strategy.

The industry is highly competitive and McDonalds has a singular competitive advantage size.
The company should remain attentive to consumer trends, but should not necessarily attempt
to be a leader in innovation. The company should focus on healthier offerings.