In 1954, Ray Kroc discovered a small hamburger stand in California owned by Maurice and Richard McDonald. Kroc volunteered to franchise their restaurants. It has now become one of the world’s leading fast food service retailer. It has changed American’s eating habits and increasingly the habits of non-American as well. McDonald’s has had a phenomenal growth. For instance, in April 1988, McDonald’s opened its 10,000 store after 33 years, but only eight years later, in 1996, the company opened the 20,000 store. At the end of 1997, 23,000 restaurants were opened. McDonald’s was opening 2,000 new restaurants each year, at an average of one every five hours (McDonald’s corporation, n.d.). McDonald’s is pursuing an ambidextrous approach by simultaneously exploiting existing markets in the US and in some foreign countries while exploring new opportunities in other foreign countries (Sarkees et al., 2010). For instance, the international units increased from about 3,600 in 1991 to more than 11,000 by 1998. McDonald’s was present in 59 countries by 1991 and in 1998 the number doubled to 114. In the US, the units grew from 9,000 units in 1991 to 12,500 in 1997. However, same-store sales for US restaurants dropped 2.5 percent from 1994 to 1995 and the situation was hardly improved by 2001. Indeed, after decades of uninterrupted growth in sales, profits, and number of stores opened, McDonald’s faced diminishing prospects in the domestic operation’s growth by the end of 1990. We will see the main reasons for this and what McDonald’s should do to deal with this issue.
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In 1993, domestic per-store sales were increasing at a 4 % annual rate but by the third quarter of 1996, sales had slumped to a 3-percent decrease, this being the fifth quarter in a row of declining sales. By 2001, it was averaging only 1 percent same-store sales growth. This can lead to unhappy franchisees, which is an issue for the company since it creates tensions between the franchisees and the company. These tensions can cause major disruptions in the well functioning of McDonald’s. A low or even negative per-store sales can also have a negative effect on future franchisees applications. Indeed, being a McDonald’s franchisees could become in the long-term unpopular and consequently McDonald’s would not be able to be very choosy anymore and they might enter into contracts with bad franchisees, which could have a negative impact on its corporate brand. However, corporate brand, which represents a value proposition that the organization sets out to deliver in all contact points with its stakeholders, is fundamental for the survival of McDonald’s (Jarventie-Thesleff et al., 2010). So a low or negative per-store sales could be extremely harmful to McDonald’s in the long-term. The main reasons behind this trend can be attributable to McDonald’s expansion growth policy in the mid 1990’s, the menu and the decline in the standards of quality, service and cleanliness.
McDonald’s growth policy had a huge impact on same-store sales in US restaurants. In the 1990’s, McDonald’s followed Greenberg’s law which stated that the more stores McDonald’s would put in a city the more per capita transactions it would result in. This is due to the fact that with more outlets, McDonald’s increased consumers’ convenience and it increased its market share at the expense of competitors. So, it was seen as being in the company’s best interest, especially as recent store construction became more cost-efficient. However, franchisees complained that the new units were “cannibalizing” sales from existing ones. The franchisees complaints went through and the frenetic growth in outlets is now over.
A major domestic challenge for McDonald’s is the menu. Greenberg tried to attack this problem by selling two of McDonald’s biggest sandwiches for $1 each, by introducing 40 new menu items and by spending $181 million in the company’s US kitchens in order to make food hotter and fresher. However, customer response was poor. In addition, it is believed that the domestic per-store sale decrease is partly due to older customer drifting away. So McDonald’s tried to target this segment of the market by introducing its first “grownup taste” sandwich, the Arch Deluxe line of beef, fish, and chicken burgers. Segmentation was introduced in order to manage the different customer needs by identifying homogenous market segments (McDonald & Dunbar, 2004; Simkin, 2008). This allows the organization, if done correctly, to have an improved understanding of consumers and better-tailored marketing programs (Albert, 2003; Beane & Ennis, 1987; Freytag & Clarke, 2001). However, McDonald’s attempt failed. Furthermore, the decline in growth can also be attributable to the shift in the public opinion towards eating healthy food.
Another reason for the decline in same-store sales major can be related to the fact that the standards of quality, service and cleanliness, which is one of McDonald’s core competencies, were declining. Indeed, a survey in 1995 gave poor results for the company in terms of food, service and cleanliness. In addition, a 2001 study ranked McDonald’s among the poorest-performing fast-food chains with 11 percent of customers dissatisfied because of slow service, wrong orders, dirty stores, and rude employees (Case Study). The reason for this can maybe be partly due to the fact that Greenberg stopped using the Franchise 2000 rulebook and it gave franchisees more power over their local menus. Another reason could be the low unemployment rates of the 1990s’. Since McDonald’s jobs are not very appealing, the pool of applicants that remained may not have been very competent and not as friendly as they should have been.
So having a low or decreasing same-store sales in the US is an issue for McDonald’s, and three underlining reasons for this trend have been highlighted. We will shed light on what McDonald’s should do to deal with this strategic problem.
McDonald’s should continue, on the one hand, to reduce significantly the growth in US outlets. Profitability could maybe be improved by carefully selecting fewer new store sites and McDonald’s could, at the same time, identify marginal stores that could be closed. On the other hand, McDonald’s should also continue to expand in foreign countries. Indeed, the 1995 Annual Report noted that “Our growth opportunities remain significant: on any given day, 99 percent of the world’s population does not eat McDonald’s…yet” (Case Study). In order to do so, they have to carry on being flexible with respect to local food preferences and customs. For instance, McDonald’s introduced a Kosher McDonald’s in Israel and they use “Halal” menus in Arab countries. So there are plenty of opportunities that can arise around the world, especially in emerging markets such as China.
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Another challenge that has to be tackled is McDonald’s menu in the US market. As we have seen before, there have been many failures in trying to change the menu. One of the reasons might be that McDonald’s don’t seem to have done an extensive market research. They need to search for what the customer want and need and understand why it is maybe the case that older customer are not eating anymore at McDonald’s. This could be done through surveys, focus groups and interviews. However, McDonald’s could use some consumer-oriented strategies to deeper consumer involvement (Nuttavuthisit, 2010). Indeed, it seems that consumers want to seek and shape their own experiences, whether individually or with others (Prahalad and Ramaswamy, 2000). One technique to provide the possibility for consumers to become engaged is crowdsourcing. Howe defines crowdsourcing as being “the act of taking a job traditionally performed by a designated agent (usually an employee) and outsourcing it to an undefined, generally large group of people in the form of an open call” (Howe, 2008). This method helps to gather the collective intelligence of online communities by soliciting their ideas and solutions (Brabham, 2010). It unlocks the potential of the masses (Belsky, 2010). This can be appealing for McDonald’s since it can generate new product ideas and create a direct and emotional connection with customers (Hempel, 2006). It can also heighten the products’ market success and McDonald’s could be able to most rapidly and economically understand market needs, opportunities and priorities (Cambrian House, 2010). According to Firat and Venkatesh, when customers are more involved in the process it will lead to more favorable consumers responses (Firat and Venkatesh, 1995). Once the new product has been developed thanks to crowdsourcing, McDonald’s could test it in just a few outlets and if the results are favorable, they could expand it further. This could provide a strong research tool. In addition, since the people that will participate in this crowdsourcing will be adults, McDonald’s will be able to better target them, which is one of their current biggest challenges.
Another aspect that McDonalds’s has to focus on, in order to deal with its strategic problem, is quality, service and cleanliness. The company has to develop a new set of internal controls. Quality, service and cleanliness were factors that made McDonald’s invincible. However, customers are not happy with them anymore but customer perception is very important for the well being of a company. Indeed, according to Fletcher, customer’s expectations and perceptions are crucial: if the bad perception becomes a general trend, the customer “will start to shop elsewhere” (Fletcher, 2001). Consequently, it affects McDonald’s corporate brand. So McDonald’s should be stricter towards its franchisees regarding quality, service and cleanliness. McDonald’s should introduce new regulations and inspectors that will check the different stores. There should be scheduled and surprise visits. If the franchisee doesn’t comply with the rules then a penalty should be applied. This will help McDonald’s to maintain a good reputation.
In conclusion, we have seen that McDonald’s is facing same-store sales that are low or decreasing in the US market. This is a huge issue for McDonald’s since this can lead to unhappy franchisees and it can also have a negative effect on future franchisees applications. So, a low or negative per-store sales could be extremely harmful to McDonald’s in the long-term. The main reasons behind this trend can be attributable to McDonald’s expansion growth policy in the mid 1990’s, the menu and the decline in the standards of quality, service and cleanliness. Firstly, the accelerating expansion growth policy is now over and McDonald’s should continue to reduce significantly the growth in US outlets and at the same time they should continue to expand in foreign countries while being flexible with their menus in those countries. McDonald’s should focus on emerging markets such as China. Secondly, concerning the menu, McDonald’s have tried to change it but it has been unsuccessful. We believe that McDonald’s should pay more attention to market research and that they should follow a consumer-oriented strategy i.e. crowdsourcing. This technique will help them to understand market needs, opportunities, priorities and it will probably lead to more favorable consumers responses. Thirdly, concerning one of McDonald’s core competencies which is the quality, service and cleanliness, McDonald’s should develop a new set of internal controls maybe by introducing new regulations, inspectors and penalties in case the requirements are not met.
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