McDonald’s: from Extra Value Meal to The Signature Collection (Do You Want Gluten-Free, King Edward Fries With That?!)

Our blog is largely about what’s happening in the world of supermarkets, but we are curious about anything to do with the business of food and drink! So, we’re interested in food service: in the USA, so-called “away-from-home’ expenditure on food and drink has just overtaken “at-home” and we’re edging in the same direction in the UK. Supermarkets and food service outlets both compete for the indelicately termed “share of stomach/throat” and, increasingly, food retail and food service are converging. Initially, it was supermarkets (led by Marks & Spencer) that ripped into traditional café and restaurant territory by offering sandwiches and snacks for lunch and ready meals for dinner – e.g. the “Dine in for 2 for £10” and, reflecting demographic trends (one person households are 56% of total in London), the “sad sack meal for 1”! But, now, it’s more than Indian and pizza restaurants that will deliver – in the USA, the likes of Amazon Prime Now, grubHub and Uber EATS are providing lightening fast home delivery links with your favourite restaurants.

Just as we have seen monolithic Walmart and fumbling Tesco struggle through turbulent economic times, so has the world’s largest fast food chain McDonald’s. Mainstream supermarkets have been squeezed between the hard discounters at the “value” end of the market and premium retailers at the other. It’s been pretty much the same in the fast food business: particularly in the USA, McDonald’s got caught in the middle between uncomplicated value-priced “homestyle” burger competitors like In-N-Out Burger and premium-priced fast casual outlets, such as Chipotle, smashburger, Shake Shack, and Five Guys much-loved by the millennial generation.

Like the grocers, McDonald’s has had to convince customers that it is very affordable (the McD’s Saver cheese burger is £0.99 and its American equivalent $0.99 [£0.65]); then, there’s the regular ¼ pounder with cheese (£2.69) but, for a more special occasion, mouth-wateringly premium items are available (e.g. the brioche bun Signature Collection burger at £4.69 [$6.80]). Note the similarity with UK retail’s “Good, Better, Best” tiering. Now, while Tesco and Sainsbury’s with their finest* and Taste the Difference premium ranges have seen success even through difficult financial times, it is moot whether McDonald’s can do so. UK retailers have had 15+ years to establish their premium product credentials and, arguably, finest* and TTD are the UK’s Number 1 and 2 largest premium food brands. For McDonald’s, the move to match smaller, swift-footed, premium burger chains in the UK – such as new entrant Honest Burgers, Byron, Meat Liquor, and more established Gourmet Burger Kitchen – is more challenging, as indeed is the case back home in the USA.

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The Signature Collection, the Premium range at McDonalds UK

Within the McDonald’s empire, Australia is often the market where the company tries out new concepts, not least at the premium end where it has dabbled for 10 years or more – Macca’s (Australians can and do shorten every word) Mighty Angus comes to mind and, most recently, the “Create Your Taste’ offer whereby customers can design their own burger online, download their order to the phone and place the order at the nearest Macca’s outlet.  McCafé has worked well in many markets and, in the UK, sells more cups of coffee than Costa Coffee the largest coffee chain. Table service is coming to a McDonald’s near you in 2016. All this should help legitimize McDonald’s presence in more premium snacks and meals.  But, it certainly accelerates the evolution and increases the complexity of the fast food model established by Ray Kroc 60+ years ago –  quick delivery of burgers, fries and milkshakes the new model ain’t! That’s one reason why in the UK, McDonald’s are hoping that the “All Day Breakfast’ initiative which has been launched in the USA, and has been credited with improving dismal sales’ performance there, will not have to be rolled out in Blighty! Store operators are desperate to simplify the offer not further complicate it!

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McDonald’s allowed customers in Australia to tailor their food.

Back to the comparison with UK retail, Tesco has been busily experimenting with and, then, ditching food service concepts such as “In Food We Trust”, hot classic British meals with provenance, a Tesco Express burrito bar, and an USA-inspired sandwich shop (Fred’s Food Construction). Its Harris + Hoole coffee shop may have more legs, although the family restaurant Giraffe looks shaky. Waitrose, Marks & Spencer and Whole Foods have made a decent fist of cafés and in-store eateries, perhaps not surprisingly given their superior performance to mainline grocery chains on customer service. But, in general, grocery retailers struggle with servicing seated customers – their hot food smacks of school meals and the dining ambience redolent of the school canteen!

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Fred’s Food Construction. Tesco’s attempt to lure City workers at lunch time.

Other similarities between Big Grocery and Big Fast Food? Both are closing stores in mature markets (e.g. Walmart and McDonald’s in the USA). Both are being more selective in their expansion in emerging markets – slowing economic growth in China not only constrains expansion in China itself but, also, in neighboring Asian economies. Both are finding that local Asian companies are difficult to beat on their home turf (e.g. the Philippino fast food company Jollibee and Korean firm Lotteria ably compete with McD’s in Asia). But the lure of Asia is compelling for McDonald’s: there’s one McD’s outlet per 22,000 people in the USA (54,000 in the UK); but only 1 per 1.5 million consumers in Indonesia!

McDonald’s and Tesco are both struggling in an extraordinarily competitive world to remain relevant to their customers and to maintain and build trust in their respective brands. Arguably, McDonald’s has done a much better job on trust. It was lily white during the Horsegate debâcle which damaged Tesco badly. Constantly under the microscope on its procurement practices and supply chain integrity, it has scored particularly well on transparency brilliantly using youtube to explain how chicken nuggets are made and where the eggs for McMuffins are produced. On sustainable seafood procurement, it’s been years ahead of the major retailers with MSC accredited filet-o-fish. McDonald’s has been leaking customers for 3 years but its most recent sales results are more encouraging – perhaps surprisingly, its share price is close to a 5 year high. Tesco’s declining sales may have bottomed out – however, its share price is close to a 5 year low! Go long on one and short the other? But which way around?!

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Posted in Foodservice, Private Label

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About the authors
Prof David Hughes: Around the world, David speaks to senior agribusiness and food industry managers about global food industry developments that are and will affect their businesses and industry. Energetic, engaging, humorous and insightful, David gains the very highest evaluations at seminars, conferences and Board level discussions in every continent he visits. Miguel Flavián: works for several Spanish organisations and companies to help them to learn from the developments of the British grocery market and improve their business back home.
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