Brands in the News

McDonalds: Hunting for Growth

14 Jun , 2013  

You have to give the team at McDonald’s a lot of credit. Over the past decade, they have found a way to substantially grow sales at existing restaurants. This is a huge accomplishment.

The stock has certainly responded. Shares traded at about $30 in 2005 and closed yesterday at over $98.

The formula for growth wasn’t complicated, at least in theory: Embrace the core customer, improve the dining experience, capitalize on a struggling economy by addressing value and identify new meal occasions. This last strategy was particularly important; it is difficult to build volume during the lunch peak. So McDonald’s built volume in shoulder times such as mid-morning and afternoon.

Apparently McDonald’s is low looking at building the late-night segment. The company is considering offering the breakfast menu for an extended period in a bid to bring in people at 2 AM and 4 AM.

This makes sense to me; it is another meal occasion and an opportunity increase volume during another off-peak period.

But it also is a little concerning. The 3 AM meal occasion can’t be that big; most people are asleep at that hour. So if McDonald’s is studying that slot, there must not be easier, bigger ideas on the table.

Which means McDonald’s is looking at three strategic options.

First, the company could embrace slower growth. There isn’t anything wrong with delivering stable profits. Of course, growth investors are not likely to be thrilled with this approach, nor will franchisees.

Second, McDonald’s could focus on bigger growth platforms. These will be a challenge; with bigger opportunities come bigger risks. The new ideas might not work or might impact sales of existing items.

Third, McDonald’s could add a second brand. After pushing McDonald’s as far as possible, the only clear path to growth might be a new brand. This would probably be an acquisition, since starting from scratch would likely be too slow to have an impact on the overall company outlook.

Will McDonald’s buy Panera? Chipotle?

There are interesting times ahead for the Golden Arches.

 

*    *    *

This week I am teaching a corporate program in Denmark. While Europe is officially in a dreadful economic slump, spirits are good in Copenhagen; the people I’ve met are generally optimistic about how things are going and the city is investing in a new metro system.

On Friday I received the L.G. Lavengood Professor of the Year Award. This is Kellogg’s top teaching award. I was delighted to receive it.

 

Enjoying a chilly day in Copenhangen—

 

Tim Calkins

t-calkins@kellogg.northwestern.edu


10 Responses

  1. Interesting POV. Another possibility, or rather a minor tweak of your third option, is to repeat what they did in the late ’90s into the early ’00s where they essentially incubated new brands via large scale investments, but not full ownership.

    This worked well for Chipotle (basically funding their major growth spurt from ’98-’06 as the single largest investor) and for Boston Market (which was on a terror but later became a mismanaged catastrophe).

    I have not done the research, but if memory serves, McDonalds earned a solid return on both of these plays. They exited this business in 2006 to focus on their core brand, but now with the core brand “optimized” it might be a viable growth play.

    Congratulations on the POY award…not your first and I’m sure it won’t be your last. You definitely made an impression on me during my time at Kellogg!

    • Tim Calkins says:

      Jake—I agree this would be a good time for McDonald’s to start nurturing some new brands. The core business is doing well but it seems that before too long the company will need new sources of growth. If they start some new brands soon perhaps one of them will catch on and become a significant growth driver.

      Tim

  2. Bob Carroll says:

    Tim, congratulations! You were a great teacher as a brand manager and director at Kraft and you obviously continue to be!

  3. rahul says:

    Congratulations professor. You well deserved it. I am a 2013 student of yours.

  4. Riyaz Vazir says:

    Congratulations on the award Prof. Calkins!

    I always wondered why McDonald’s never entered the ‘food truck’ model — even under a different brand name.

    With technology enabling uber customized offerings (e.g. pop-up retail) this could afford McDs and its franchises the opportunity to go hyper local and engage with customers directly.

    It also allows them to tell a compelling story of food sustainability and nutrition – which seems to have been an achilles heel for them.

  5. Tim, I love your blog. I had your class back in 2002 and remember it well. Congratulations on the Professor of the Year Award!

  6. Joy Vimalarajah says:

    Congratulations on the Prof. of the year award – it was well deserved ! I was part of KMI in 2010 and enjoyed your sessions.

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