Article

McDonald’s 'aggressive change' includes localization, digitization

The company is betting on 'Experience of the Future' initiative to stop hemorrhaging sales.

October 21, 2014 by Alicia Kelso — Editor, QSRWeb.com

McDonald's is scrambling for solutions after its profit fell by 30 percent in Q3. The company turned in yet another disappointing quarter today, driven by a confluence of negative factors working against the business, including a higher-than-expected tax rate, the supply chain crisis in China, store closures in Russia and the Ukraine and a loss of luster in its flagship US system.

CEO Don Thompson outlined some strategies the company is working on to remedy this continued slide, many of which will be in effect in some capacity in 2015.

"The reality is we haven't been changing at the same rate as our customers. So we're changing and we're changing aggressively," he said during this morning's Q3 earnings call. "The key to our success will be our ability to deliver a more relevant experience. We have listened to our customers and we better understand what their future experience should look like – personalized, local, a contemporary and inviting atmosphere and choices on how they order, what they order and how they're served."

The company is calling this effort the "McDonald's Experience of the Future." Some highlights of the initiative include:

• A simplified menu.
• A more localized menu.
• More customization opportunities as part of its new "Create Your Taste" initiative.
• A broader digital experience that includes ordering, payment and promotions.McDonald's will take a page from its France and Australia systems to implement some of its digital efforts in the US, such as self-order kiosks and mobile ordering. Thompson also pointed out that McDonald's is the only restaurant brand to offer Apple Pay at the drive-thru.

Giving customers more choice in how they order is important, Thompson said.

"We've already moved beyond the Innovation Center and learning labs to implementation in markets such as Australia and France. They will be slightly different in each market but I'm excited to differentiate the brand and grow the business," he said.

In the US, these actions will be fully activated in three markets by the third quarter 2015 and will then be rolled out to additional markets "when they are ready." Global activation is currently underway.

US business to get back to ‘regional'

The US business experienced a comp sales decrease of 3.3 percent in the quarter, attributed mostly to negative guest traffic.

With the "Experience of the Future" plan in mind, Thompson calls the US McDonald's biggest area of opportunity. The company met with franchise leaders and executives this week to discuss "tangible steps" and how to make these aggressive shifts.

The menu pipeline is stronger than ever, Thompson said, which will complement McDonald's goal of localizing its offerings. At the same time, the brand will begin simplifying its menu in January.

"This will make the experience easier and open up opportunities for local markets to pull from our robust pipeline. It will also enable regions to address the unique needs and diversity of their customers, from the chorizo burrito (in test in Texas and other markets) to mozzarella sticks and other choices we have," Thompson said. "(Regional offerings) is a historical strength of the US business and we're putting it back at the forefront."

There are about 21 regions in the system where this focus will be applied, Thompson said.

There is also a marketing shift going on domestically, boosted by the recent launch of the transparency campaign, "Our Food. Your Questions."

"We are actively inviting customers to talk about topics that are most relevant to them. It appeals to our customers and it supports the work we're doing to offer greater menu choice," Thompson said. "We are going to have a stronger balance between regional and national-based marketing. The regional markets will typically focus on offerings and promotions, while the national will focus on quality, the brand, our people and larger events."

The mobile app – or "Global app" as it's called by the company – will  evolve throughout the next year as well, and will include mobile payment opportunities and also promotional offers, music and other features.

When questioned as to whether or not these strategies will slow down the operational process, Thompson responded that everything being implemented has been through a number of testing protocols, from the Innovation Lab to restaurants to global markets.

"The operations re-set in US, combined with menu simplification efforts, are aimed at reducing the complexity of low-volume items – things we're looking to simplify and remove. When we do that, we allow ourselves to pull down additional products we can flow through system," Thompson said, adding that the Create Your Taste initiative specifically is an in-store focus.

"We have a different solution we're working on relative to the drive-thru," he said.

Competition and commodities

Other major factors affecting the chain's bottom line are increased competition, notably from fast casuals, and stubbornly high commodities, which were up 3 percent in Q3.

Chipotle's CEO Steve Ells threw a not-so-subtle jab at legacy QSRs such as McDonald's during his company's earnings call this week, calling the segment "out of touch."

Thompson responded: "I wouldn't say he's right or wrong. Each organization has to look at that and look at it through the eyes of their customers."

Thompson said McDonald's aknowledges that "some folks are doing solid things" in the restaurant industry, but added that the company's biggest challenge is internal.

"Do we have aggressiveness in local markets or have we been aligned with national? We haven't been the strongest we need to be," he said. "Competitors have always been in the marketplace and that can't be used as an excuse but rather an opportunity to revisit our business."

In regards to any concerns about not connecting with the millennial demographic specifically, Thompson said that is a broader QSR issue versus a McDonald's-specific issue. The "Our Food. Your Questions" campaign and digital efforts are two ways the company is aiming to resonate more with this group.

"We want to make sure we're transparent. There are a lot of misperceptions relative to our food and we want to provide an opportunity for people to ask questions," Thompson said. "On the digital front, we believe digital and mobile technologies and kiosk ordering offer opportunities to allow customers to have a choice in their experience. The ‘Experience of the Future' resonates well with customers around the world."

_{Photo provided by the Augusta Chronicle.}

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