Mc Donald's Decline

Decline of MacDonald’s

1. In the late 1980s and 1990s, McDonald’s growth began to taper off. Analysts attributed this to a growing interest in a healthier lifestyle among people, which made them shun fat-laden fast food, and also increasing competition. By the late 1990s and the first two years of the early 2000s, the company's profits had decreased drastically. In January 2003, McDonald's posted its first quarterly loss since it went public in 1965 ($343.8 million for the last quarter of 2002). Then, the share price fell to an all-time low of $12 and McDonald’s seemed to have lost his magic. The company faced a decline in its portion of the fast-food market and in the estimation of many of its customers. Since 1997, McDonald’s share has fallen more than 3% (15.2% of the market). Subway has supplanted McDonald’s as the largest chain in the U.S. Among hamburger chains, it has lost the lunchtime battle to Wendy’s, which first offered an alternative menu and a salad bar. Sales of the popular happy meal have slid (no blockbuster Walt Disney since Toys story 2). People have the perception that McDonald’s is downmarket. In a survey among customers, it was ranked 15th in food quality at hamburger chains, whereas competitors were doing well. The company’s image problem started to affect its bottom line. Under the pressure of Wall Street and investors, McDonald’s CEO, M. Greenberg, said he would step down at the end of 2003. He was replaced by M. Cantalupo that announced a turnaround plan aimed to restore the company's tarnished image and crumbling operations. It was the same standardization that made McDonald’s a household name that hindered it as customers’ tastes and expectations for food began to change. Health concerns emerged. McDonald’s attempts to add items that would appeal to new cravings were very often failures. The company has been losing market share to fast-casual restaurants as Prêt-A-Manger that has successfully brought new tastes to mass audience. Successful custom-made food systems at Wendy’s and Burger King were siphoning McDonald’s lunch clientele. So, McDonald’s decided to launch such a system, but largely in charge of its franchisees, who started to underperform and complain. In 2003, the chain planned to add 40% less stores in U.S., 30% less in Europe and close 176 stores in Japan.

2. The main causes of the decline are: declining profits, stagnant growth rate, new trends in the fast food market, declining market share, continuous expansion that led to a fall of the franchisees’ revenues and profits and of the service and quality, underperforming franchisees, changing consumers preferences, law suits for people’s health problems, fierce competition of other fast food chains (Burger King, Pizza Hut, KFC, Subway, Wendy’s) and decline in customers’ satisfaction.

One big issue is that MacDonald’s franchisees faced big problems that were relevant to their operation standards or to their relationship with McDonald’s corporation. The relationships with franchisees were deteriorating. The continuous expansion resulted in a fall of the franchisees’ revenues and profits. McDonald’s introduced a made-to-order system (Made for You) in 1999 to counter the successful custom-made food systems of Wendy’s and Burger King, but the cost of the renovations and the lunch menu specials were largely supported by the franchisees. Some of them started to complain, saying that the profits margins were going slimmer, costs higher and that corporate management has largely removed the owners from the decision-making process. The cost of a franchise was high and the return on investment was not what it used to be anymore. A lot of franchisees sold the restaurant back to MacDonald’s (126), which affected McDonald’s profitability. It took a pretax charge of $292 million to close 719 restaurants. The franchising system failed for 2 reasons: very transparent practices which encouraged imitators and created competitors; and the franchisees did not maintain McDonald’s standards of cleanliness, customer service and product uniformity. The lack of these elements (since McDonald’s stopped grading the franchisees) had a negative effect on customer satisfaction.

Another big issue is the changing consumers’ preferences and the growing competition. In the early 2000s, the fast food industry was undergoing a transformation. Hamburgers, fries and sodas were being replaced by sandwiches and salads. Customers became more health conscious and started to prefer fresh food. Obesity became a major health problem. McDonald’s attempts to add new products to its menu were most of the time failures. They didn’t managed to introduce the right new products to respond to the market demand for healthier and better tasting food and to the recent change in consumer’s behavior, who started to like more exotic food like sushi or quick meals of all sorts. McDonald’s share of the fast food market has fallen more than 3%. The company has been losing market share to fast-casual restaurants such as Prêt-A-Manger proposing slightly more expensive but healthier and better tasting menus. Subway became the largest chain in the U.S. and Wendy’s won the lunch time battle by offering first alternative menus and a salad bar. People had ranked McDonald’s 15th in food quality at hamburger chains; they have the perception that McDonald’s is downmarket compared to its competitors.

The last big issue is the performance of MacDonald’s restaurants. For every new restaurant in the vicinity, McDonald’s lost 6-20% of its revenues. Its continuous expansion and the fact that they stopped grading their franchisees on aspects like cleanliness, speed and service had an adverse effect on service and quality. The new made-to-order system stretched the time required to serve the customers. They failed to come out with new blockbuster products such as the Big Mac. 40 new food items such as pizzas or other burgers failed.

Changing consumers eating habits, increased competition and complacence on the part of the company and its franchisees were the main reasons for McDonald’s difficulties. McDonald’s faced the premature aging syndrome (excessive exploitation), because they faced a stagnating growth, a weak leadership (Greenberg), a lack of success culture and a tentative of change (their formula for success became obsolete and they lacked the ability to innovate and change in a changing market environment).

3. Concerning the problems with franchisees, to get rid of the weakest of them, Cantalupo reinstituted the “up or out” grading system that would kick out underperforming franchisees. This is a good measure to keep only the “good” franchisees in order to have a good customer satisfaction and keep them loyal.

Concerning the changing customers’ preferences

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