Having dominated the global marketplace for such fare for decades, they are now finding that demand for their products may be evolving away from their core offerings, perhaps forever.
The question is how to respond and whether anything they do within the framework of the traditional brand playbook will be sufficient. Both companies face questions about the healthfulness and quality of their product. The questions about McDonalds present a more direct challenge to the carefully crafted brand image and reputation due to scandals regarding sourcing of beef and chicken.
But the larger issue is whether the marketplace now has preferable alternatives based on strategic changes in consumers assumptions. McDonalds, for instance, has based its reputation on universality: you get the same Big Mac in Sheboygan, Shanghai and Sheffield. The problem is that this runs counter to the internet-driven ability to craft one's own world - and world-view. Competitors like Chipotle have seized on this and grown as a result.
If the company addresses that by offering more selection, it then creates another problem: its menu is already so vast as to be incomprehensible, which has contributed to slowing order times, a reputational detraction from yet another core brand feature.
Before McDs can consider a radical restructuring to attract new customers, it must remember that its core customer wants burgers and fries, cooked fast and well. Abandoning that base without the assurance of attracting a newer, younger crowd could be disastrous.
Changing perceptions is invariably tied to changing - and improving - performance. The real challenge will be in determining which features of its brand aura must remain and which must be altered without alienating those who continue to buy what it's selling. JL
SeekingAlpha reports:
The new management currently faces the uphill task of re-elevating the McDonald's brand in the eyes of consumers. The new management will have to work towards improving consumer perceptions by food and service quality improvement.
Market leading fast food chain McDonald's (NYSE: MCD) has recently appointed former Senior Executive Vice President and Chief Brand Officer Steve Easterbrook as its new CEO after the retirement of Don Thompson. McDonald's has been struggling over the course of the last couple of years. The company's growth has thus been sluggish at best. McDonald's Corp's struggles have emanated primarily from its operations in the Asia Pacific region. The company suffered declining restaurant traffic in the Asia Pacific region owing to external factors such as the China meat scandal in August which flowed into the company's organic operations. The company has suffered across other geographical segments as well as it continued to face challenging conditions. McDonald's troubles in its international segments (Asia-Pacific, Middle East and Africa in particular) have flowed into FY 2015 as well as the company reported a year on year decline of almost 13% in global comparable sales from the APMEA region.
- McDonald’s (NYSE: MCD) has recently appointed former Senior Executive Vice President and Chief Brand Officer Steve Easterbrook as its new CEO after the retirement of Don Thompson.
- Upon the announcement of the new CEO the company’s stock has surged closer towards the $100 mark as investors have shown their faith in the ability of the new management.
- McDonald’s troubles over the course of the last couple of years have stemmed from demand side factors such as quality perception.
- The new management currently faces the uphill task of re-elevating the McDonald’s brand in the eyes of consumers.
- The new management will have to focus on brand recovery in the domestic segment as well through simplified national menu which caters to the preferences of consumers in the US.
The company has struggled owing to negative consumer perceptions regarding quality, especially in light of the meat scandal in China. McDonald's has thus been faced with higher prices of beef as a result of which the company has also struggled in domestic operations. The company has struggled as increased health awareness amongst US consumers made them switch away from beef and towards healthier meat thereby hurting McDonald's. The company's share prices exhibited downward trends throughout January. However, upon the announcement of the new CEO, the company's stock has surged closer towards the $100 mark as investors have shown their faith in the ability of the new management to turn things around for McDonald's.
McDonald's Corp's growth potential
The company's business model has allowed it to remain robust in the face of severe economic headwinds during the recession. McDonald's performed well during the recession as it offered a lower cost option for dining out to the people of the US. The company's business model will thus continue to allow the company to weather any major economic storms that may come its way, such as the slowdown of the European economy. McDonald's troubles over the course of the last couple of years have stemmed from demand side factors such as quality perception. The meat scandal in China in particular has hurt the company badly as it made consumers question the quality of McDonald's products. The new management currently faces the uphill task of re-elevating the McDonald's brand in the eyes of consumers. The investors have clearly placed their faith in Steve Easterbrook given his history as chief brand officer of McDonald's. Investors have gained confidence as they have identified how ideally suited Easterbrook is for reviving McDonald's overall consumer perception given his history as chief brand officer. The new management will have to work towards improving consumer perceptions by working on food and service quality improvement and thereby boosting sales in order to reassure investors that their faith has been correctly placed.
Other areas to focus on
McDonald's problems over the last couple of years in the US in particular have stemmed from an over-complicated and over-crowded menu. Owing to the lack of a simplified national menu, service times slowed down and customers were driven away as a result thereby leading to a fall in sales revenues. The company has also been facing increasing competition in the domestic market from the likes of Dunkin Brands (NYSE: DNKN) and Restaurant Brands International (NYSE: QSR). The new management will have to focus on brand recovery in the domestic segment as well through a simplified national menu which caters to the preferences of consumers in the US in order to improve service times and drive comparable sales growth. McDonald's brand recovery in the domestic as well as the international segment will be an important driver of investor value over the years to come. Investors have currently placed their faith in the new CEO to effectively tackle challenges and drive the company towards long term growth and hence generate value for investors leading to share price growth.
Conclusion
Despite being the market leader in the restaurant industry of the US, McDonald's is struggling for the past couple of years. A change in management will allow the company to take a different direction as a result of fresh perspectives and managerial input. The company is in need of a turnaround and the appointment of Steve Easterbrook has definitely proved popular with the investors. The company needed a change in perspective in order to revitalize its brand especially after the hits it suffered owing to meat scandals, an over-complicated menu and slower service times. The company also needs a new perspective in order to salvage its dividend growth. The company's stock is highly valued owing to its dividend yield and continued financial troubles will surely result in dividend cuts for McDonald's. Investor sentiment in the light of the appointment of Easterbrook as CEO has remained upbeat thereby indicating their approval of the decision and their faith in the ability of the new management to turn things around. Using the dividend discount model taking into account average dividend growth in the last 5 years, I estimate a potential $98 target for the company's stock which is roughly in line with current market price of $99. Despite its struggles, the stature that McDonald's holds in the restaurant industry makes it a worthwhile stock to buy into and hold on to.
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