McDonald’s is having some Big Mac-sized problems as it finds its image and menu are poorly suited for consumers’ increasing preference for fresh, healthy ingredients.
The restaurant chain said Friday that its global profit tumbled 21 percent in the most recent quarter, and its sales at U.S. restaurants open more than a year sank 1.7 percent. Restaurant traffic was down in all its major markets across the globe.
This latest stumble caps a tough year for the world’s largest fast-food business, whose troubles are a marker of a broader cultural shift shaking the industry: Diners are increasingly seeking food that is fresh and healthy, and the explosion of fast-casual restaurants such as Chipotle, Panera Bread and Five Guys has given them alternatives that are nearly as speedy as a fast-food joint and perceived as much healthier.
But McDonald’s acknowledges that many of its problems are of its own making: As the company tried to take on these new competitors while also hanging onto its traditional business, its menu grew bloated and its pricing strategy became confusing.
McDonald’s has said that wait times were getting longer at its drive-through windows as its menu grew increasingly long and complicated, with some 100 items added over the last 10 years. Some restaurants didn’t have enough space in the kitchen to prepare such a wide array of dishes.
When the company unveiled a sweeping turnaround strategy late last year, it promised to streamline its menu to fix the bottleneck. But as the details of the plan have unfolded, analysts say it seems muddled.
The chain is eliminating eight menu items and five Extra Value Meals. But it is also promising to regionalize its offerings in the U.S. with different sauces or flavors to appeal to local tastes, a move that seems to contradict the stated goal of simplifying the menu.
McDonald’s has also been rolling out a custom burger option it calls “Create Your Taste,” in which diners can pick and choose their toppings — something similar to what might be offered at a more upscale fast-casual chain.
“It smacks a little of trying to be all things to all people, and I think that’s a very tough brand positioning to pull off,” said Mark Kalinowski, restaurant industry analyst at Janney Capital Markets.
Kalinowski says he’s skeptical of the choice to double-down on the “Create Your Taste” concept because it doesn’t translate well to the drive-through window, where he estimates McDonald’s pulls in more than 60 percent of its U.S. sales.
It’s not just the length of the menu that has been perplexing to McDonald’s customers — it’s the pricing structure. The company thinks of its products in three categories: entry level, core and premium. To keep its popular Dollar Menu pricing in place for entry-level items, it was forced to nudge prices up on core items, a category that includes the Big Mac and Quarter Pounder with Cheese. Executives have said the wide price gap likely confused diners and pushed more of them to opt for its cheapest offerings. In turn, that may have weighed on total sales and bruised perception of the overall quality of McDonald’s food, since perhaps more people were evaluating the brand based on its cheapest products.
The backdrop of these problems is the rocketing growth of fast-casual chains. Growth in the fast-casual category is easily outpacing growth in the restaurant industry overall, according to research firm Technomic. Fast-casual restaurants saw an average increase of 7.9 percent last quarter in sales at restaurants open more than a year, while quick-service restaurants — a category that would include McDonald’s — grew just 1.2 percent. The restaurant industry overall saw 2 percent same-store sales growth.
“The pace of change outside McDonald’s has become faster than perhaps the pace of change internally,” said Michael Andres, McDonald’s U.S. president, on a conference call with investors in December. “Consumers have redefined quality and value. And the focus more, as you all know, is more on wellness.”
McDonald’s has tried to respond to the desire for fresh food with items such as salads and wraps, but the company has said these items don’t sell particularly well. That is, perhaps, an indication that consumers want to come to McDonald’s for burgers and chicken nuggets just as they always have, but they want those dishes to be prepared more healthily.
The company said Friday that it expects comparable sales for January to continue to be negative and expects earnings results to be “pressured,” particularly in the first half of 2015.
“We’re changing, and we’re doing it aggressively,” chief executive Donald Thompson told investors during a conference call on Friday.
McDonald’s is deploying a variety of tactics to restore the shine of the Golden Arches, including a new marketing campaign. However, in a recent survey conducted by Janney Capital Markets, some McDonald’s franchisees said that new advertisements “don’t seem to be generating any meaningful near-term lift in sales trends.”
Since millennial-generation diners seem particularly curious about where their food comes from, McDonald’s in October announced a new effort to answer diner questions on social media about its supply chain and food preparation techniques.
And perhaps most importantly, the restaurant chain says it is committed to trying to find ways to improve the taste and quality of its food by experimenting with different cooking procedures and evaluating the ingredients it uses.
“What they really need to focus on is innovation on the value end of the menu,” said Will Slabaugh, a restaurant industry analyst with Stephens, instead of trying to push premium dishes.
McDonald’s will have some tailwinds as its fights to lure diners back to its restaurants. With lower gas prices and an improving economy, forecasters are predicting better traffic overall to the restaurant industry. After its Asia business took a hit last year when a key supplier was accused of using expired meat, that issue is likely to be in the rearview mirror in 2015. And while comparable sales were down for the quarter, they were up 0.4 percent in December, a sign that some of the company’s turnaround efforts might be starting to gain traction with consumers.
“I’m definitely not counting them out by any means, but it’s not an easy process to regain that customer momentum,” Slabaugh said.