How a Bag of Fries Can Save McDonald’s
Luke is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Working as a regional airline pilot, I have the advantage of a more random sampling of fast food franchises than the average french fry connoisseur. In an admittedly informal survey I have been taking of McDonald’s (NYSE: MCD) restaurants over the last few months, a common theme seems to be occurring. Out of ten purchases, from stores ranging from Wilmington, Delaware to Houston, Texas, eight of them included orders with reduced servings of fries. The first time I thought it might be an oversight, but it was rather consistent and often obvious, so I have to conclude that this is the new normal. I am assuming that this is the way individual owner/operators are now increasing profits after McDonald’s first negative month (October) for comparable sales in nine years.
If this is the battle plan for recovery, I feel I must interject for the good of the Golden Arches that I so love. In essence, this is a very short sighted, unnecessary tactic. Specifically, it angers customers. In the broader spectrum, it is poor management technique to essentially bait and switch your clients, especially when it is unneeded. Raising the price of fries twenty cents and actually filling the container is a better way of treating the consumer than handing him a container with thirty percent of the fries missing.
This leads to a much larger question: although sales rebounded in November, is McDonald’s losing its once tight rein on local franchises? And what can be done to increase revenue without biting the hand that feeds you?
Some marketing specialists have proposed increasing the variety of items on the dollar menu or reducing overall prices to induce customers to return. Others claim that healthy foods or even more “exotic” foods such as a McBratwurst (no kidding) might do the trick. The problem with the former is that reducing prices forces local owners to pull tricks such as the “partially-empty fry container” to cover that revenue loss, which becomes a terrible long term solution. The latter has been tried as well, but unfortunately stores end up giving away apple slices with the Happy Meals because nobody wants them.
So, I am offering five simple but innovative solutions free of charge to McDonald’s, not only because I love their fries, but also because I am frankly afraid of the idea of a McBratwurst.
Bag of Fries
Most of the time when I am going into McDonald’s, I am on a mission. And that mission is to consume as many french fries as I can. The soda is fine because it washes down the fries, but the burger is just a distraction from my goal. I would pay the equivalent of the lowest extra value meal price for just a double order of fries thrown in a bag. I don’t even want the container (just a good old fashioned bag o’ fries). You could even call it a McBagO’Fries. The privately-owned and rapidly-expanding Five Guys Burgers and Fries franchise has already successfully used this marketing concept to great effect, and I think it would work at MCD’s as well.
Monopolize on Monopoly
This campaign should be run longer and more often, since everyone seems to love it. The Monopoly board game gets customers back in the stores better than any other marketing venture that this corporation does. Instant prizes should be restricted to items on the dollar menu, since a small prize is effective in enticing a customer to return without overly burdening the bottom line.
Concentrate efforts on expansion into Chinese and Southeast Asian markets. That is where new growth will be strongest over the next five to seven years. The US market is near saturation, so it will be a matter of enticing customers from Wendy’s (NASDAQ: WEN) and Burger King (NYSE: BKW), who are currently wasting money either trying to compete with the likes of so-called full service restaurants such as Ruby Tuesday (currently working through growing pains of its own) or simply emulating the McDonald's menu. It shouldn't be hard to steal market share from them as they are bumbling about trying to entice domestic customers to switch over to a new restaurant experience, when they should be concentrating branding efforts overseas. Meanwhile, global demand for American brands is increasing thanks to the internet and satellite television.
One might argue that Wendy's has recently invested much-needed cash into enhancing it's brand, which should translate into higher store revenue in the next few years. It's true that half of Wendy's stores (mostly domestic) will be renovated under a campaign known as Image Activation (business geekspeak for new urban design, better natural light, and flat screen televisions). Unfortunately, this may not generate the sales volume necessary to justify the cost. A few of the menu item improvements may prove more effective (including a delicious-sounding bacon portabella melt). But my main concerns regarding Wendy's exist in the balance sheet. After carrying long term debt of over $1.3 billion into 2012, is it wise for this company to be simultaneously remodeling half its stores, doubling it's dividend, and announcing a $100 million share repurchase program? Only time will tell.
Burger King has a new, sexy marketing campaign that includes famous actors such as David Beckham and Sofia Vergara, and enhanced but uninspired menu offerings designed to bring the menu on par with that of McDonald's. In addition, Burger King recently announced a new joint-venture in Central America with Beboca Ltd, an established Burger King franchisee. Globally unprecedented, this new vehicle (called BK Centro America), will acquire the master franchisee rights of 178 stores across Central America and act as developers of the Burger King brand in several countries. Again, a lot of expense for a company whose most recent quarterly revenue growth was very poor (-25%). I would rather see BK's international growth lean more toward fast-growing Asia.
Fortunately for McDonald's, its reach into foreign markets on six continents is already well established. By simply scaling back in Europe and agressively targeting Asia, they can concentrate on growing international markets without a lot of unnecessary costs. The McDonald's value formula is already successful -- it just needs to expand into the right markets.
Coca-Cola Freestyle machines are drink dispensers that have popped up in select markets around the US. They have all the ingredients stored to create over 100 different drink products from one dispenser. Kids love the novelty of them and adults appreciate the variety. A word of warning though; make sure that there is a maintenance and repair process in place, because when they break down they become a rather large paper weight, and if the syrups are not maintained the devices are rather dysfunctional and useless. In addition, keeping a regular run of good old fashioned dispensers benefits the customers who don’t want to wait in line behind the clueless who invariably stop all progress at these machines.
Die, Apple Pie?
The McDonald’s Apple Pie reminds me of the family in the neighborhood of my youth who used to give out apples for Halloween. No, not candy apples; just plain old apples. Those fruits never made it past the next block. Without fail, the next day there would be scores of smashed apples on the street just out of view and earshot of the offending family. I don’t know what the sales are for these “pies,” but judging from the fact that I’ve never bought one and never seen anyone buy one and only know of their existence because they often give them away with an extra value meal whether you ask or not, I had to conclude that sales are not brisk.
In this case, I am wrong. Apparently, the apple pie is a strong seller for Mickey D’s, with a high mark up as well. So, I would recommend keeping it on the menu, but always ask if the customer wants it before giving it away in the Extra Value Meal (to avoid the waste of her throwing it away). Another case of a restaurant giving the customer something they don’t want while denying them something they do. Keep the apple pie and give me a full container of fries, thank you. Oh, and you can hold the McBratwurst as well.
lukey911 has no positions in the stocks mentioned above. The Motley Fool owns shares of McDonald's. Motley Fool newsletter services recommend Burger King Worldwide and McDonald's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!