McDonald’s, the seemingly invincible fast food giant and stalwart of American business, has been an ironclad money-making machine for decades now. Sure, they’ve had their issues with bad press concerning the negative health effects of their food, but otherwise the company is as sure to post profits quarter after quarter as anyone. At least that’s been true until recently, as it appears that McDonald’s has hit a bit of a snag.
In a rather significant sales slump, McDonald’s profits dipped a whopping 30% for 2014’s third-quarter, bringing in net income of $1.07 billion. That’s down from $1.52 billion from the third-quarter of last year. After the company released its fourth-quarter and 2014 full-year earnings, things didn’t look much better. Share prices took a hit, and comparable sales declined overall, and eventually, CEO Don Thompson was forced to step down. Naturally, many people are wondering just what, exactly, is going on over at McHeadquarters.
“McDonald’s third quarter results reflect a significant decline versus a year ago, with our business and financial performance pressured by a variety of factors — from a higher effective tax rate, to unusual events in the operating environments in APMEA and Europe, to under-performance in the U.S., our largest geographic segment,” said McDonald’s-then President and CEO Don Thompson upon the release of the company’s third-quarter earnings, when it became very apparent that things had gone off the rails. “While our ability to withstand these factors is a testament to the Company’s enduring brand and strong financial foundation, by all measures our performance fell short of our expectations.”
“Fell short” is a pretty dense term in this case, as many are wondering if the numbers indicate a much more serious problem than just having a bad quarter. While the restaurant’s brand has been able to weather just about everything that’s come its way over the years, something seems to finally be effecting the company’s bottom line. But what?
Without a doubt, McDonald’s doesn’t seem to hold as much power in the minds of younger consumers as it once did, including the all-important millennial demographic who are instead patronizing the restaurant’s rivals, and don’t seem to be interested in coming back to Big Macs and McFlurry’s. “There’s just some share loss that’s going on,” Sara Senatore, a New York-based analyst at Sanford C. Bernstein & Company told Bloomberg. “It’s probably going to some of their direct competitors, and it’s probably going to potentially some of the fast-casual” chains.
Those fast-casual chains are the most likely culprit. But they also don’t represent the entire portrait. Fortune has also done some digging into the underlying issues, and says that some factors outside of the company’s control have also played into its recent problems. A handful of stores in Russia were shut down by that nation’s government, and a supplier in China was caught in a scandal over the selling of expired meat. Fortune says that the average McDonald’s restaurant brings in $2.6 million in sales, so when a group of restaurants suddenly go dark, there can be an impact on the bottom line overall.
But getting back to another point, the real problem is that the younger crowds seem to be headed elsewhere when they get hungry. That’s also something that hasn’t been lost on the McDonald’s brass, either. “The millennial generation has a wider range of choices than any generation before them,” McDonald’s Global Chief Brand Officer Steve Easterbrook told the Wall Street Journal. “They’re promiscuous in their brand loyalty. It makes it harder work for all of us to earn the loyalty of the millennial generation.”
According to data compiled by the Wall Street Journal and restaurant consultancy group Technomic Inc., millennials are not only going to other restaurants, but are abandoning McDonald’s with haste. People ages 19 to 21 in the U.S. who visited McDonald’s monthly has fallen by 12.9% since the end of 2010, and the percentage of customers ages 22 to 37 visiting monthly during that period has been flat. However, During the same time, 19- to 21-year-olds increased their monthly visits to fast-casual restaurants by 2.3%, and 22- to 37-year-olds by 5.2%.
Right there, McDonald’s, is your issue. The question is, how do you win them back?
Most American-born individuals who comprise those two demographics grew up with McDonald’s, and know what they’re getting. That means they are making the choice to not go there any more, not simply dodging it due to price or inconvenience. Restaurants like Chipotle and Five Guys definitely cost a little bit more in the end, but millennials seem willing to pay more if it means going somewhere else. McDonald’s isn’t alone, however, as Burger King has also been suffering from the same issues.
Therein likely lies the solution to McDonald’s problems: Bring back the younger demographics, win back the fast food market. Does that mean that some serious overhauls to the menu need to be implemented? Probably. Not only would a significant increase in food quality and nutrition go a long way, but it would also be pretty expensive. McDonald’s is also fighting PR battles on the labor front as well, as strikes and calls for increased wages have likely pushed even more younger crowds away and to other restaurants.
The company is facing a battle on several fronts, and it will need to engage in some nifty maneuvering to keep its position of power.