The Golden Arches lost some of their lustre last month when McDonald’s revealed it would be posting its first quarterly loss in its 47-year history.
The full extent of the fourth-quarter net loss will become clear later this month, and will include a $435m (£269.5m) one-off charge relating to restaurant closures, which were ordered as part of a restructure that cost chairman and chief executive Jack Greenberg his job. Greenberg has been replaced by former vice-chairman and president Jim Cantalupo, who is reviewing all aspects of the business. The UK market has not escaped retrenchment, with at least six London sites set to close.
At the heart of McDonald’s problems is a slump in sales that has affected the company for almost two years. But the fast-food chain is not alone in experiencing difficulties.
Rival Burger King has seen its global operating profit fall 20 per cent from $114m (£70.6m) for the six months to December 31, 2002 compared with the same period in 2001. And, after months of uncertainty, the burger chain was sold by parent Diageo Group to a venture capital company in December. Meanwhile, the UK and Ireland marketing director, Anna Joseph, resigned after just three months in the role (MW December 19, 2002).
A number of factors account for the waning of consumers’ love affair with burger chains. In the UK McDonald’s has failed to shake off negative perceptions raised by the McLibel trial, but more recently it had to cope with BSE. Worldwide, it has faced attacks from anti-American and anti-capitalist demonstrators because of its global expansion strategy. And now KFC is in the spotlight as animal welfare group Peta launches a global boycott of the chain in a bid to improve living conditions of the chickens used in KFC products.
But the biggest threat appears to come from an increasing awareness among consumers of the benefits of healthy eating. In the US, this translated into a rash of lawsuits against McDonald’s, Wendy’s and Burger King from overweight consumers blaming the restaurants for their health problems.
There has been an increase in alternative “healthier” high street food outlets too. A Euromonitor report published in November, found that “a sandwich is viewed by the majority of consumers as an inherently healthier product than burgers, chicken, fish and chips, or many other fast-food subsectors.”
What is more, Euromonitor analysts say the UK burger market has reached saturation point and that, although companies have increased the number of units to boost sales, the average sales per unit has steadily decreased. The decline in sales per restaurant may well have been acerbated by fiercely competitive pricing by the burger chains.
In the US, a price war has not had the affect the burger chains had hoped. McDonald’s introduction of Dollar Menu, instead of fuelling sales, has led to a fall in the average amount a customer spends. Burger King also angered some of its franchisees by reducing the price of its flagship Whopper burger from $2.19 (£1.35) to 99 cents (61p) for this month.
“In desperation, they’ve hit price points,” says John Williamson, board director at brand consultancy Wolff Olins. “When your brand loses relevance, the temptation is to work on price, when you should be rethinking the brand.”
Alongside price, product promotions and film tie-ups drive sales. Once able to depend on basic burger products to attract consumers, the fast-food giants are having to be more innovative with new product development – as illustrated by Burger King’s Swiss Melt product and McDonald’s Italian selection.
With a UK advertising budget of more than £40m a year, McDonald’s spend far outweighs KFC’s £14m and Burger King’s £11m, reflecting its position as market leader. But McDonald’s has realised – albeit belatedly – that it dominates a particular section of the changing fast-food market and one that is at saturation point.
The company is trying to appeal to a wider market: it has used only free-range eggs in its breakfast products for two years and is now to sell organic milk. It has tried to diversify outside its core restaurant business by investing in sandwich chain Pret A Manger among others, and experimented with the launch of the Golden Arches hotel in Switzerland.
However, not all ventures have worked. In April 1999, McDonald’s bought the London-based Aroma cafÃ© chain, but sold it to the Caffe Nero Group less than three years later for almost half the price it had paid.
McDonald’s has since attempted to revive its coffee strategy under its own McCafe’s brand and is trialling three such outlets in Victoria Street, London, Solihull and Meadowhall, Sheffield. “The McCafe’s concept is about offering choice and variety, and having a range of products that appeal to different parts of the day,” says a McDonald’s spokeswoman.
But, observers are divided over whether the fast-food company’s use of its brand name and identity will work against these new cafÃ© and hotel concepts. Any move by Burger King to diversify in a similar fashion using its brand name could create negative perceptions among consumers.
Burger King has already lost out to KFC in the UK, with the latter’s sales overtaking those of the burger chain for the first time in 2001, according to Mintel.
KFC has been swift to recognise concerns about healthy eating by using marketing messages emphasising the quality of its food and by undertaking initiatives such as banning reconstituted chicken products from its outlets. “KFC has always been about an original recipe and great taste,” says KFC UK marketing director Claire Harrison-Church.
Despite its recent successes even KFC, alongside Burger King and McDonald’s, may have to go some way further to protect sales in the face of an increasing trend towards healthy eating – as well as making their products more relevant to an ageing UK population.