Why have McDonald's sales been declining?
Founded in the 1940s, McDonald's has become the largest, the most successful and most well known fast-food chain in the world. When ranked amongst the rest of their industry competitors, McDonald's are consistently ranked as the most valuable fast-food brand in the world as well as being in the top 10 of all the overall brands in the world . Achievements like this highlight the enormity of the firm when they are ranked amongst the likes of Apple, Google and Coca-Cola year after year (Forbes, 2015).
Between 2003 and 2011, McDonald's saw a rise in its value from $12 per share to $100 per share at its peak in 2011 (The Economist, 2015b). However, over the last 18 months, the firm's dominance is not as apparent as it once was. With a fall in sales revenue and a more substantial challenge from other fast-food competitors, the question being asked is - why, after so long, is McDonald's starting to falter and what can they do to solidify their top spot?
This essay will argue that the main reason behind the decline in McDonald's sales is the change in the social and cultural makeup of many of its consumers. Whilst other factors will be highlighted through the use of a PEST analysis, this essay will argue that the main reason is a generational shift that McDonald's has failed to keep up with and will ultimately offer recommendations that could potentially help the fast-food chain increase sales. The essay will primarily focus on ways to increase sales in the UK.
The UK is home to over 1,200 McDonald's restaurants. In recent years it has become the UK's third largest fast-food chain behind the likes of Costa and Greggs (Armstrong, 2015). Despite sales increasing in the UK by 0.5%, worldwide, the firm saw a decrease of 1.8% in sales (Fortune Magazine, 2015). There are things that are out of the control of those in charge of UK operations such as food safety scares in Japan and China but there can be measures taken to increase sales so that it can offset the problems in other parts of the world (Fortune Magazine, 2015).
All businesses, no matter the size of the company, or the scope of their operations, must consider the external environment they are operating in. Failure to do so can result in missed opportunities to maximise one's profit-making or allows competitors to come into the market and control a significant portion of the market share (Worthington, 2009). PEST analysis (an acronym for Political, Economical, Social and Technological) is a tool used to examine the external environment to outline potential limitations in various aspects of a business' operations. Anything that can hinder the ultimate aim for a company, to make money, needs to be a priority for any business on the behalf of their shareholders.
The political environment analyses the political sphere and the way the it can have a direct effect on the way business operates (Worthington, 2009). This incorporates aspects such as the political system and its attitude to private enterprise; as well as legislation and regulation that governs the way firms operate at various levels from local government to international governance.
The UK is a very business-friendly political system. The UK operates with some of the lowest corporation tax rates in the developed world with companies such as McDonald's having to pay a rate of 20% as they earn over £300,000 in profit and this to be cut further in the future to 18% (HMRC, 2015). With this being kept in mind, the UK political environment encourages enterprise and is therefore difficult to suggest that the political workings of the UK are contributing to the downward spiral of the company's sales revenue and ultimately, limited actions the business could take within this environment to increase sales.
A similar conclusion can be made of the economic environment. This environment focuses of the wider macroeconomic activity and the way it affects the way businesses operates (Worthington, 2009). This includes taxation in its various forms such as, in the UK, national insurance, income tax and corporation tax; the unemployment level, as higher unemployment means less demand for products due less money flowing through the economy, or interest rates. The economic and political environments are closely interlinked and economics can dictate policy and policy can dictate.
The economic crisis saw a rise in unemployment which has a knock-on effect on the ability for a business to generate revenue. However, growth in the economies of the highly developed nations has resulted in unemployment falling. As of April 2015, the UK unemployment rate stood at 5.6% (Eurostat, 2015). Therefore despite the fact that the macro- and microeconomic climate is improving, the revenue of McDonald still falls suggesting that the reason behind it is not economic.
The aim of this essay is to argue that the main reason for McDonald's recent failings is due to its neglect in adapting to the current social and, by extension, technological environments. The social environment is concerned with the social and cultural aspects that can affect a way a business operates and technological environment is concerned with the use of modern day technology to maximise opportunities, for example, cheaper methods of production or more efficient ways of delivering a service or product (Worthington, 2009). Regardless of the industry, a business needs to understand the societal norms of the area they operate. For example, a company like McDonalds should not sell beef burgers in a country like India, where the Hindu population does not eat beef. Whilst it appears that McDonald's has catered for the various social differences in the variety of countries it operates in, on the surface level at the very least, the company has failed to keep up with cultural changes in its base - the West.
Businesses maximise their sales through segmentation. Segmentation is the process where companies focus their marketing by segmenting the market into small groups of shared traits such as demographics, age, gender and occupation. Segmenting the market has no merit in itself; a business needs to understand the consumer behaviour of that particular segment. Consumer behaviour entails all the activities that are normally associated with the purchasing of a product by examining why people buy what they buy and not just what they buy (Kardes et al, 2014).
McDonald's have been caught between two different marketing methods - aiming to the lower end of the market and directly competing with the likes of Burger King and attempting to aim for the higher-end fast-food restaurants such as Chipotle, Wahaca and Five Guys; who are a little more expensive but are growing in popularity. There has been a growth in the demand for the upmarket, fast-food chains due to their key selling point being high quality food with the option to customise one's dish (The Economist, 2015b).
The rise in the high -end fast-food chains can be attributed to the rise of a particular segment - Generation Y or otherwise known as the 'Millennials'. Generation Y, is the term that refers to individuals born after 1982 and grew up in a post-Cold War age, through unprecedented prosperity, and throughout the advent of the internet and globalisation. Over the last decade, they have begun to make up the majority of the market (Strauss & Howe., 2009). As a result of the age Millennials grew up in, they are less susceptible to traditional marketing techniques and are much more cynical in what a brand has to offer them. Gray (2015) believes that whilst Generation Y are still very aware of the marketing techniques but because they have been targets to it at various levels for their entire life, as opposed to many individuals from Generation X, Millenials are much more desensitised to it. They no longer accept products on face value, but attach a greater concern for being valued as a customer. Jobber (2013) writes that we have entered into a New Marketing Era where the customer is the centre of the marketing mix and attempting to build a long-term relationship with the customer as opposed to previous era in which Generation X were part of. A study into Millennial consumer loyalty found that Millennials will often choose where to shop based on the quality of the product or service and being rewarded for their loyalty. This study found that 74% of participants were more likely to choose a brand that offers a reward or loyalty programme (Ferguson, 2012). This can be seen amongst the fast-food chains such as Starbucks, Costa and Nando's where consumers are rewarded through loyalty cards or apps that can be redeemed for free products and discount.
Many argue that McDonald's should head back to its roots and continue to focus on the lower end of the market with the likes of Burger King. However, with this increasing trend in upmarket food-chains, McDonald's should focus on this market if they hope to increase sales. Martin (2002) found that one third of Millennials in the US are from an ethnic minority which brings about a global mix-and-match culture amongst Millennials resulting in a greater demand for culturally diverse foods.
One of the key selling points of chains like Chipotle or Five Guys is the ability to build your own dish. With a combination of ingredients, these restaurants offer customers a chance to create something that matches their taste as much as possible. McDonald's in Australia is trailing a new 'Create Your Taste' menu, where customers have the ability to create their own gourmet burger from a selection of ingredients through a digital kiosk and have it delivered to their table (Macleod, 2014). A trial like this automatically combines that customisation element that many of the Generation Y individuals enjoy so much as well as making use of the modern day technology and is therefore the first thing that McDonald's in the UK should introduce to increase sales. Due to the fact that many of these restaurants such as Five Guys are relatively expensive compared to the likes of Burger King and KFC means that it is not an economic issue; consumers are willing to pay if they feel the quality is appropriate and they are valued. This means that McDonald's could charge more for their customisable burgers and further increase revenue.
The greatest innovation over the last 20 years has been the advent of the internet and many companies have made it their priority to make use of it to expand their business opportunities. When it comes to fast-food restaurants, the opportunity to expand on the internet is limited due to the nature of the industry. However, through the introduction of smartphones and smartphone applications, a number of fast-food chains are utilising these to allow a smoother and more convenient experience for their consumers. For instance, Nando's in the UK uses an application that allows customers to pre-order their meal for it to be ready for collection. It means that commuters on their way home from work can order their food whilst mid-journey and their meal will be ready to be collected for take-way when they have arrived at their local Nando's restaurant. Therefore a second recommendation that would help increase the sales in the UK for McDonald's would be to increasingly utilise the technology available to them. Ferguson's study into Millennial consumer loyalty (2012) found that 59% of Millennials use smartphones and with the increasing availability of smartphones at a more affordable price since 2012, it can be assumed, that the figure in 2015 is greater. This further supports the claim that McDonald's is missing out on an opportunity to enter into a thriving market where the tools such as affordable application development and smartphones are readily available. .
To conclude, whilst these recommendations on how McDonald's should change the way it operates does not guarantee success, it at the very least means that it is competing with its fellow fast-food chains on an even keel. However, there is the possibility that McDonald's has reached the maturity period of its lifecycle. Like Nokia and Microsoft, two giants in their respective industries, before trendier competitors were introduced to the market, namely Apple, Samsung and Google, no matter how these two giant corporations tried to update their operations and appeal to a newer, more modern market, they have failed to hit the heights of the 1990s. Many of the recommendations are slowly being rolled out by McDonald's throughout the course of 2015 and will undoubtedly reach the shores of the UK shortly afterwards. However, McDonald's is too successful to be judged by a few bad years.
Armstrong, A., (2015) "'McDonald's holds global 'day of joy' after worst sales in a decade", The Daily Telegraph, (24th March) [Online] Available at: http://www.telegraph.co.uk/finance/newsbysector/retailandconsumer/11491125/McDonalds-launches-day-of-joy-after-worst-sales-in-a-decade.html
The Economist (2015a), 'When the chips are down', The Economist, (10th January) [Online] Available at: http://www.economist.com/blogs/economist-explains/2015/01/economist-explains-7
The Economist (2015b), 'Why McDonald's sales are falling?' The Economist, (14th January) [Online] Available at: http://www.economist.com/news/business/21638115-after-long-run-success-worlds-largest-fast-food-chain-flounderingand-activist
Eurostat (2015), "Unemployment rate by sex and age groups - monthly average %", [Online] Available at http://appsso.eurostat.ec.europa.eu/nui/show.do?dataset=une_rt_m&lang=en
Ferguson, R. (2012), "How Generation Y Will Reshape Customer Loyalty" Born This Way: The UK Millennial Loyalty Survey, London: Aimia
Forbes (2015), 'The World's Most Valuable Brands', Available at: http://www.forbes.com/powerful-brands/list/#tab:rank
Fortune Magazine (2015), 'McDonald's posts a global sales decline as troubles linger', Fortune Magazine, (February 2015)
Gray, R (2015), 'Generation Y: What Every Marketer Needs to Know', The Marketer, (2015)
Jobber, D., & F.Ellis-Chadwick (2013), Principles and Practices of Marketing, 7th ed. Berkshire: McGraw-Hill Education
Kardes, F., M. Cronley, T. Cline, (2014) Consumer Behaviour, Hampshire: Cengage Learning, Macleod, D. (2014) 'McDonald's Create Your Taste in Learning Lab Restaurant', The Inspiration Room, ( 9th October),
Martin, L.P. (2012) 'Targeting Generation Y', Public Relations Quarterly, 47(2). , pp.46-48
Strauss, W. & N. Howe (2009), Generations: The History of America's Future 1584-2069, London: Vintage Books)
Worthington, I. and C. Britton (2009), The Business Environment, 6th Ed.. Harlow: Pearson Education Ltd.,