Early in 2003, fast-food giant McDonald’s announced losses of $343.8 million for the final quarter of 2002. It was the first time in the company’s 48-year history that it had reported red ink. In addition to the losses, which resulted from a drop in sales, there was a sharp drop in the company’s share prices. At the time, many people wondered if this meant that the fast-food hamburger model, as we have known it until now, was exhausted. A few months after this happened, McDonald’s responded with a new global marketing strategy that claims to rejuvenate its image and maintain its leadership in the fast-food market.
The Fall of the Super-brand
Although the McDonald’s chain counted 30,000 restaurants in more than 100 countries, and more than 47 million customers a day, the colossus of hamburgers realized late last year that its growth was stagnating and its falling earnings had brought down the price of its shares.
There were several reasons for this spectacular decline. In the United States, McDonald’s was forced to deal with obesity lawsuits that were ultimately rejected by American courts, as well as a fierce price war with its main competitors that substantially undermined the company’s operating profits. Overseas, anti-globalization groups launched attacks on the multinational’s localities in several cities around the world.
But the real growth problem confronting the king of hamburgers was the change in consumer habits. More and more, people are looking for healthy food that is low in calories, especially after the food crisis caused by Mad Cow Disease. Last, but not least, obesity affects 25% of the American population and 15% of Europeans.
Since 1997, the American fast food market has lost 3% of its market share. That’s the same percentage that the “casual food” sector gained last year, using a formula that involves offering prepared food with fresh and healthy ingredients, as well as the meticulous decoration of restaurant units. Says Mats Lederhausen, who is responsible for plotting McDonald’s global strategy: “Clearly, we are living through the death of the mass market.”
According to Antonio Diaz Morales, marketing professor at the Instituto de Empresa de Madrid (IE), McDonald’s problem is that “although consumption outside the home is never going to stop, it is hard to have just one format that addresses people’s needs. One day, you can go to a restaurant like McDonald’s, but you can’t go every day … The American consumer can be more loyal, but it is unthinkable that this would happen in Europe where there is more supply.”
Given these events, “McDonald’s had two strategic choices,” says Wharton marketing professor Stephen Hoch. On the one hand, they could “try to keep the growth rate up – which [meant they had to] develop other restaurant formats different from their hamburger operations; or [they could] pull back and pause and get the operations back in shape. They chose the latter direction.”
“i’m lovin’ it”: An International Motto
McDonald’s has now prepared a fast food model for the 21st century, in which every aspect of the business is going to be revised. This includes not only the way the company creates and presents its products, but how it designs new restaurants, how it goes about its merchandising – and even the way people work.
The image of the company is one of several things that is being adapted to new times. For example, McDonald’s launched a new – and for the first time, global – marketing strategy in Germany at the beginning of September. The campaign focuses around the motto, “i’m lovin’ it” and it is part of a new and broader marketing approach that McDonald’s calls Rolling Energy. The company says this approach will revitalize the brand in the entire world, unify its messages and integrate all its marketing moves.
Santiago Marin, an analyst at Euro Safei, is certain that “McDonald’s realized that it can save money. To create a campaign of this sort, which is not individualized for each country and each market and which is going to use the same slogan, presumes a terrific cost savings that could have an impact on [McDonald’s] accounting results.”
Adds Hoch: “I am sure that there are multiple reasons for the worldwide campaign: consistency of image, cost containment on both the advertising and operations side, and a more disciplined and limited focus to what their restaurants are and are not. For awhile, not only was McDonald’s trying to be too many things to too many different kinds of people, they were going off in a lot of different directions operationally, which was costly to them from a control perspective.”
Despite the benefits that this campaign offers, “it contains the risk of not being able to adjust to the peculiarities of each individual market”, says Juan Villanueva, marketing professor of the IESE in Barcelona. And he adds, “the values shared by the youths in different countries makes it possible today more than ever to create global campaigns with a same message”.
In fact, the strategy of unifying a campaign behind the same message for the brand is nothing new. Nike, with its “Just Do It” slogan had already done that, and enjoyed very good results. Santiago Marin recalls that when Nike launched its campaign, “in some countries they had to change the fundamental image of the advertising because of cultural questions. That’s the most that can happen to McDonald’s in its global campaign.”
According to Hoch, this clear global focus is necessary. “Not only are the growth prospects tapped out in the U.S., it also is the case that between 40 and 50% of their revenues come from overseas operations.” It must be noted, nevertheless, that the campaign is simultaneously international and local. According to company sources, the advertisements have been adapted to each market in which the company has a presence. In each, they are going to reflect the culture, the lifestyles and the attitudes of McDonald’s customers throughout the world. To deal with this global objective, the central motto, ‘I’m lovin’ it,” has not been translated. The advertisements have been shot in 12 languages in locations as far apart as Brazil, Malaysia, the Czech Republic and South Africa.
Concerning this international campaign, Hoch says that “McDonald’s is all about uniformity and it is very American, which clearly is both good and bad in the eyes of the rest of the world. The global coordination is a platform for efficiency, not about growth.”
With this campaign, the company with the golden arches claims to be giving a boost to its image and providing its brand with a new attitude and direction. Shortly after unveiling the campaign in his country, Philippe Walch de Almeida, president of McDonald’s España, put it this way: “Our product continues to be the same, but we want to dress it up a different way.”
To carry out this change in its style, McDonald’s has contracted for the first time with a foreign advertising agency. That firm is Heye & Partner, a German company that belongs to the DDB group and has collaborated for some time with the company. The agency has created five advertisements in which it tries to boost the brand by focusing on youth and sports, with a hip hop rhythm. In fact, for the English-language ads, it has signed up singer Justin Timberlake, who recently won three MTV prizes.
“McDonald’s is trying to increase the loyalty of its customers, because the consumer is not loyal to any fast food chain in particular. Specifically, it is trying to get young people to identify themselves with this brand,” says Miguel Angel Gavira, a reporter who covers the food industry for Expansión, a Spanish daily.
Antonio Diaz shares that view. “The positioning has changed from targeting the family to targeting the young adult. The company is wooing young adults in order to win business volume.” In general, he says, “Every company that counts on children for its success wants its brand to continue with them for the rest of their lives, and there are some products that manage to do that because of the versatility of their brand.” Nevertheless, the McDonald’s brand is so popular among families and children that you have to be credible when you say all this [about the new positioning] in your advertising. “The problem that McDonald’s is going to have is credibility among young people who want to break away from the way they have been doing things with their parents,” says Diaz.
For several reasons, Diaz doubts the effectiveness of the campaign. First of all, “after having seen the advertisement, I don’t see how it reflects on McDonald’s; it could work for any company.” On the other hand, “there is a ‘disconnect’ between the audience to which this advertisement is targeted, and the product itself – which in this case is a restaurant oriented toward families. You cannot communicate a product that doesn’t exist.”
In Diaz’ opinion, “they should have created the product first, not the demand [for it]. It is hard for young people to keep going to McDonald’s just because of the commercials unless you also provide them with something different.” Moreover, “institutional advertising that is directed at young people has very little weight in the totality of messages because nearly all of the company’s advertising – about 80% – is focused on promotions.”
In addition to advertising targeted specifically at young adults, there are two other versions [of ads] directed at families and the general public. In one version, the leading role is played by Ronald McDonald, the clown who is the company’s symbol.
“Let’s wait and see how it works over the longer term,” says Hoch of the new marketing strategy.
Fewer Locations, Different design
Coinciding with the launch of this campaign, McDonald’s announced a change in the design of its restaurants. Starting now, restaurants will contain specific environments for different segments of customers. However, says Diaz, families and young adults “are two different targets, and you can wind up alienating them because they are looking for different [kinds of] places.”
France is the first country where the company has changed the design of local restaurants, in some cases adapting them to different themes, such as mountain huts and gymnasiums.
In Spain, according to company sources, they are considering the possibility of designing locations called “McAuto,” where customers, while waiting in their cars, can see the food being prepared in the kitchen as a form of entertainment. According to Hoch, this is a measure that shouldn’t have too much positive impact. “The highly routinized food preparation that McDonald’s uses is not entertaining in the ‘circus’ sense.”
Moreover, McDonald’s is going to continue its policy of cutting down on opening new locations, which in the United States has meant opening 40% fewer restaurants [this year] than last year. In Europe, where there are 6,000 establishments, new openings have been cut by one-third. That is a good idea, says Hoch. “The new CEO (Jim Cantalupo) clearly has decided to clean up and make more efficient the current operation before getting distracted by new restaurants.”
A Slow Recovery
During the first few months of 2003, the business numbers continued to reflect the same trends as in 2002. Nevertheless, the situation in the United States began to recover during the second quarter of this year, and the company announced an increase in sales for the third quarter amounting to 10 % compared with the year earlier.
Europe represents 25% of global sales and constitutes 46% of the operating profits of the company. Sales slipped slightly in September to 0.9% and to 0.1% for the quarter.
Diaz says, “It is going to cost more and more to do large volumes of business, so the market is going to remain stagnant outside of the emerging nations.”