What next for McDonald's?

LONG READ: Changing consumer tastes and rival chains are forcing the first fast food giant to reinvent itself.

by Matthew Gwyther
Last Updated: 11 May 2017
Also in:
Future Business

McDonald's - the original food industry disruptor - recently received the ultimate US accolade: a Hollywood film about its history. The Founder - starring Michael Keaton as the hard-driving, erstwhile paper cup salesman Ray Kroc - didn't do big box office and met with mixed reviews. Using Kroc's no nonsense autobiography Grinding It Out as source material, the movie finishes with Kroc in 1970 doing up his bow tie while practising a speech to be delivered in front of the then California governor, Ronald Reagan. 'Nothing in the world can take the place of good old persistence,' Kroc insists. 'Talent won't. Nothing's more common than unsuccessful men with talent. Genius won't; unrecognised genius is practically a cliche. Education won't; the world is full of educated fools. Persistence and determination alone are all powerful.'

Although it didn't invent fast food, McDonald's is the industry godfather and changed the eating habits of a nation. And it has held this position for decades through dogged determination not to mention making the most of its bulk. It is the largest restaurant chain in the world by capitalisation - 35,000 locations in 119 countries - just edging out Starbucks. The UK is its sixth largest market - behind even France - but its British business is high margin and, more importantly, still growing.

Since its arrival in the UK back in 1974, McDonald's has woven itself into our social fabric and now has 1,250 restaurants. Where the business back home in the States has stumbled, McDonald's in the UK has delivered 11 years of consistent quarterly growth now turning over around £1.5bn. This so impressed the board in Chicago that they took the Brit CEO Steve Easterbrook and installed him as global boss to administer some Limey medicine to the ailing 14,000 odd branches on the home turf.

McDonald's entered the UK market with the tag line 'There's a difference at McDonald's you'll enjoy.' This was a dig at Wimpy, the aptly named, down-at-heel Brit burger chain that dated from the mid-1950s. McDonald's slick razzmatazz with Ronald the clown larking around on TV screens was a rapid hit. In recent years, however, the marketing has softened and adapted to its surroundings with Northern English voices in its ads, an emphasis on family and the dominant red in the brand palette giving way to green and woody tones. Many millennials don't even regard the company as American.

London’s Leicester Square branch now has a contemporary wood interior and giant touchscreens for ordering. Credit: benlister.com

But it hasn't all been plain sailing. In the 90s the company unwisely became entangled in the notorious McLibel case when it sued a pair of unemployed vegetarian environmentalists who distributed a leaflet 'What's Wrong with McDonald's: Everything They Don't Want You to Know'. The case dragged on for 20 well-reported years and the hearing became the longest trial in English legal history, at the end of which McDonald's declined to collect the damages awarded by the judge. The grim episode has become a casebook study in David vs Goliath PR disaster. The saga took a final bizarre twist recently when it was revealed that the original defamatory leaflet had been co-written by an undercover Metropolitan police officer posing as an eco-warrior.

Then came the torrid years of the early noughties when many members of the British chattering class, fretting about the obesity epidemic, went to see Morgan Spurlock's film Super Size Me and read Eric Schlosser's gruesome page-turner Fast Food Nation. McJob entered the dictionary - 'an unstimulating, low-paid job with few prospects, especially one created by the expansion of the service sector.' The company actually made a loss in 2002.

McDonald's had become the poster child for the ills of corporate globalisation. So huge and so ubiquitous that it became a target.


Read more: The Food Revolution - have restaurants had their chips?


The fightback here was led by Durham University natural sciences graduate Easterbrook, who became CEO in 2006. He confronted the reputation issue head-on - even facing up to Schlosser on Newsnight - and started making changes. McDonald's UK went on an exhaustive campaign to show the provenance of its offering: only the best British and Irish beef, free range eggs, organic milk, Rainforest Alliance coffee beans. They turn chip fat into biodiesel to fuel their lorries.

A trip round its beef processing plant in Scunthorpe - run by OSI which has been a supplier since Ray Kroc signed up the family business in 1955 - shows high-tech tracing and food security measures that would impress GCHQ. The machines turn out 520 patties per minute for flash freezing, which are even put through a metal detector to ensure no unwanted object gets into a Quarter Pounder. It was significant that when the horse meat scandal hit, McDonald's was able to hold its head high while supermarkets such as Tesco were humbled by equine burger content.

But McDonald's remains under attack on many fronts: from fast food rivals like Pret (once part-owned by McDonald's), Subway and Costa but also from the new wave of more upmarket or 'artisanal' burger chains such as Byron and Five Guys. And Nando's is also expanding at a serious pace as chicken grows in popularity.

The new UK CEO is the highly energetic Paul Pomroy - a McDonald's lifer who ran the property, supply chain and finance dept before getting the top job. Pomroy is classic McD's - open his vein and ketchup oozes out. He's overseeing a major 're-imaging'. In has come the gourmet Signature burger range, table service, digital ordering and every sort of Italian coffee to add to the porridge and carrot sticks plus fruit. A business that attracted Kroc because of its rapidity and simplicity is now highly complex. They are even going to get into food delivery.

'I was sick and tired of people writing myths,' he has said. 'To be honest I was pissed off about it.' He is allowed a good deal of autonomy to set his own path: 'of course there are sacred cows like the Big Mac but we can adapt ideas from France or Australia. This is part of making us a modern and progressive burger company.' He's even reasonably confident he can handle the possible adverse effects of Brexit - his wife is French.

Although in the kids' Happy Meal they have reduced the salt by 50% and sugar by 30% in the last decade, they are never going to be able to keep the hardline nutritionists happy. A Big Mac is 508 calories but a Pret Classic Super Club sandwich contains 519. When pushed, Pomroy says that he isn't advocating that people have to eat in his restaurants seven days a week. But neither would they want salad day-in, day-out.

Pomroy dealt with the increase in the minimum wage in his own way. He put through a 10% wage increase across the company including 14% for those aged 16 to 18. But, unlike fast food rivals, he left the benefits such as free lunches and overnight premiums intact. He also offered staff on zero hours contracts the chance to move onto fixed hours if they wished. The McJob tag hurt them more than almost anything as they are quite highly regarded in HR circles for investment in training and education. Nine out of 10 of their restaurant managers started as crew, and on average stay with McDonald's for 15 years. One in five franchisees and a third of the UK Executive team started out working in the restaurants.

Interestingly McDonald's has also recently unwound its controversial Luxembourg tax structure and will now put a billion dollars of European income through the UK. How much of that will find its way into the hands of the Treasury depends on the IP fees going back to the parent company in the US.

Food is these days more deeply political than it's ever been. McDonald's is still left as the biggest purchaser of beef on the planet, when the smart talk is turning to the environmental cost of raising cows and how cool it is that Bill Gates and Google are disrupting the meat game by investing tens of millions in creating synthetic meat, which even bleeds on the grill.

The newest look McDonald's can be found in London's Leicester Square where its franchisee Claude Abi-Gerges, who is Lebanese, has just spent £3m doing the place up with massive touchscreen ordering devices greeting you as you walk in. It's all warm wood and table service. Abi-Gerges has a total of 18 restaurants in the West End and City of London and must now be a wealthy man, having taken the leap from his job as head of franchising at the Finchley mothership. He's happy - unlike many franchisees in the US. One study from two years back found that average score of the relationship between US franchisee and head office, marked on a 1-5 scale where 1 is poor and 5 is excellent, was just 1.48, down from a historical average of 2.1.

In Leicester Square, Abi-Gerges is allowed to stay open from 5 in the morning until 3am the following day. Longer hours than the local police station, probably. This way he gets trade from office workers collecting breakfast to drunken clubbers wanting something to soak up the booze at two in the morning. (McDonald's in the UK, unlike many European countries, does not sell alcohol and has no plans to apply for licences.) He employs a security guard on the door. With free Wi-Fi and phone-charging, it is clean, cheap and welcoming. As such it still fulfils the same function it has done for decades: to put - increasingly varied - food into the bellies of not-so-rich and time-poor Brits. Now it faces the latest wave of change as its customers reject Kroc's cookie cutter, wanting to design their own burgers and wash them down with a toffee latte instead.

Matthew will present an episode of Radio 4's In Business on the future of McDonald's at 8:30pm next Thursday and at 9:30pm the following Sunday

Top image: Mike Mozart/Flickr

Tags:

Find this article useful?

Get more great articles like this in your inbox every lunchtime

Subscribe

Get your essential reading delivered. Subscribe to Management Today