McDonald’s losses reflect the end of the ‘golden age’ of fast food
McDonald’s has made fast food popular around the world and becoming synonymous with the burger, fries and soft drink combo. Its business model has been copied everywhere, leading the onslaught of franchise businesses that extend from burgers to tacos and coffee. However, for the past ten months the famous restaurant chain has suffered a malaise that seems inexorable. The Golden Arches are a little less precious today as McDonald’s suffered a 30% drop in profits to USD$ 1.07 billion year to year. This is no accidental drop; it reflects a significant societal trend and the loss is so large as to warrant its own brand: how does a ‘McLoss’ sound? CEO Don Thompson reflected management’s bewilderment over the results: “the challenges are more formidable than we imagined.” He blamed the results on a recipe of pressures ranging from negative events in Europe and Asia to shifting attitudes of American consumers. Sales fell 3.3 per cent overall during the third quarter.
In Asia, where a major McDonald’s supplier was shown on TV repackaging expired beef, the sales drop was 9.9%. Dragon TV reported last June that Husi, a meat supplier owned by OSI Group of Aurora, Illinois, altered expiration dates on what was stale beef and chicken, selling these to McDonald’s and KFC among others. Doubtless, this contributed to a major reputation loss in the world’s fastest growing market. Meanwhile, in the United States, McDonald’s is facing tougher competition, which stems less from other fast food chains than it does from something more difficult to challenge: consumers are changing their tastes, preferring what they perceive to be more wholesome foods. In Europe, there were closures of restaurants in Russia, charged with having inadequate sanitary conditions while the usually strong German market was weaker contributing to 1.4% losses in the ‘old continent’. This offensive is interpreted by the Russian media as retaliation against the United States’ sanctions against Russia since the beginning of the Ukrainian crisis.
As difficult as the third quarter has been, McDonald’s admitted that the fourth quarter appears to be enduring the same headwinds. McDonald’s will surely be considering ways to refresh their entire business model. This will go beyond the occasional addition of healthy alternative menu offerings such as salads. McDonald’s main competitor Burger King showed the way by acquiring Tim Horton’s; the Golden Arches are surely already searching for new opportunities to re-package their brand. The ‘breakfast’ market is an already too crowded niche. Now there are no fewer than a dozen rivals, from Starbucks to Taco Bell through to Burger King, Chipotle, Dunkin ‘Donuts, and Wendy’s. Younger generations have been gradually losing their interest for McDonald’s. Teenagers and thirty-something’s prefer local casual and better menus and this has meant that McDonald’s faced the weakest sales in over a decade last August, while September was even worse.
McDonald’s was founded in 1955 by Ray Kroc. Sixty years later, it is facing its biggest challenge ever. It was inevitable perhaps that tastes would change and the losses are attributable to far more than mere strategic mistakes; it has to endure tough competition in the United States, health shortcomings allegations in Asia and geopolitical tensions in Europe and Russia in particular. Analysts suggest that McDonald’s must strive above all to simplify its menus, improve the quality of its service and its prices again as the restaurant group is also preparing to sell packets and coffee pods in supermarkets in North America to expand the McCafe brand. Ultimately, McDonald’s losses reflect the end of the golden age of fast-food. The phenomenon, which started in North America and which managed to gain a foothold in Europe in the 1980’s and in the past decade in Asia may account for the most important reason that McDonald’s ‘customers served’ count has been growing more slowly. In the United States, the classic hamburger sandwich and fries are being attacked by new forms of fast food and higher-end food chains. Even famous ‘slow food’ or gourmet restaurants and chefs have launched their own brands of fast food such as Wolfgang Puck. The formula for success increasingly depends on prices, quality and service. But McDonald’s faces a steep uphill challenge if it wants to survive; fast food operators are doing everything to attract new customers as traditional coffee shops and breweries/pub establishments make a comeback, serving higher end food.
Burger King and Tim Hortons win the battle for breakfast domination
Burger King has conquered Tim Hortons for $ 11.4 billion in cash and stock thanks to the contribution of hamburger connoisseur and finance wizard Warren Buffett. The merger of these companies will become one of the world’s largest and most powerful fast food chains. Upon completion of the merger, the newly formed parent company will have 18 thousand restaurants in more than 100 countries and revenues of $ 23 billion, making it one big world of fast food. There has been much speculation as to the motivations for the union. One of the most popular suggests that Canada’s lower business tax rate played a big role in persuading Burger King to look for partners north of the US border. Apart from his business acumen, Buffet has earned a reputation for supporting democratic and progressive causes, including the idea that those taking home higher incomes should pay more tax. In the case of Tim Hortons, Buffet has allowed his investment instinct to operate unencumbered by civic responsibility. Through the Tim Hortons acquisition, the Miami based Burger King plans to establish the headquarters for the newly formed blend of donuts and burgers – after all, there exists the ‘Luther Burger’, which does away with the sesame seed, placing the patty between a glazed donut – in Ontario, reducing the tax burden from the nominal all-American 40% to the Canadian 27%. Mr. Buffett was heard rebuking the stern reaction of the transaction from the White House, quoting Doug and Bob Mackenzie saying “take off, eh!”
Canadian authorities had their own concerns in approving the iconic and much beloved Canadian brand’s transfer to foreign hands. More than a business, Tim Horton is an Institution in Canada and is as popular in Vancouver as it is in Toronto or Montreal. It is no less a symbol of Canada than the Olympic ice hockey team. In response, the two companies, while sharing the parent company 51% controlled by Brazil’s 3G Capital Management (Burger King’s owner); the two brands will operate independently. However, the Burger King’s quest for a more regal tax regime only partly explains the transaction. The two fast food groups clearly have complementary businesses and goals: Burger King wants to expand and Tim Hortons offered a well established international coffee and donut empire. What’s a King to do but to take it over? Tim Hortons, for its part, has now found a powerful ally to help it spread in the United States, where it is still weak. The ‘King’ can also help Tim Horton take advantage of his vast international presence.
Mr. Buffett, moreover, has enjoyed a profitable relationship with 3G Capital. Last year they pulled USD$ 23 billion out of their coffers to buy HJ Heinz, king of the ketchup makers, in a transaction that has served as the model for the one involving Tim Hortons from the 9% yield to the business management remaining in 3G Capital’s hands. Finally, and unrelated to the urban legend that would have Tim Horts adding nicotine in coffee to make it more addictive, there is a more cultural inspiration for the caffeine fueled marriage of the burger and the donut. In the United States, there has been a fast food war over breakfast. Just last May, Burger King delivered a powerful hit, by including burgers in its breakfast menus. The goal is for customers to start their day in the way that suits them, savoring the barbecue flavor of their burgers and sandwiches if they wish or choosing one of its breakfast classics. As part of the breakfast strategy, Burger King also introduced a ‘Chicken and Waffle’ Sandwich, featuring a waffle and topped with sliced chicken breast. These initiatives reflect the fact that fast food chains are targeting ever more niche breakfast customers, increasing the range of food far beyond the classic pancakes and coffee.
The Burger King-Tim Hortons merger may have also dealt a big blow to rivals Taco Bell and McDonald’s, which have been struggling to boost breakfast service sales. The ‘King’ has finally managed to wipe the smirk off of Ronald McDonald’s face. The Golden Arches have responded, a bit too late, by stretching the time slot dedicated to breakfast last spring, all but groveled, trying to seduce the public by offering free coffee during a much hyped two-week period. In March, Taco Bell announced the introduction of a breakfast menu in a TV ad campaign mocking Ronald McDonald, showing the famous clown enjoying breakfast served in Taco Bell restaurants. The menu features including a waffle taco. The latter is a waffle folded like taco, topped with egg, cheese, sausage or bacon. As a sauce, the brand offers a ‘lightly’ sweetened sauce to pour over the sandwich. And then there are Starbucks, Dunkin’ Donuts, all of which have invested in the breakfast market war. There is no word on whether Tim Horton’s famous ‘Timbits’ will change name to King’s Bits…