Americans are becoming more health conscious, choosing food that is organic, packed with antioxidants and free of preservatives and antibiotics. So it is small wonder that McDonald’s, a global fast food juggernaut known for less-than-nutritious food, has seen sales stagnate.
But the company recently decided to join the health-conscious bandwagon: This month, McDonald’s said it has completed a commitment to phase out the use of chicken raised with antibiotics used in human medicine at its U.S. restaurants. It also plans to remove artificial preservatives from popular items such as McNuggets and McGriddles. Sandwich buns will no longer contain high fructose corn syrup.
But will diners buy it? Jason Riis, a Wharton marketing lecturer, and Sherrill Davison, associate professor of avian medicine and pathology at the University of Pennsylvania’s School of Veterinary Medicine, discuss McDonald’s latest strategy on the Knowledge at Wharton Show that airs on Channel 111 on SiriusXM.
An edited transcript of the conversation follows.
Knowledge at Wharton: From a marketing perspective, how much of an impact do you think these changes are going to have? The sales numbers are still not what McDonald’s would like to see at this point.
Jason Riis: There are some encouraging signs for McDonald’s. Sales are down, or at least sales growth is down in the restaurant industry, generally. There are a number of other threats including minimum wage [increases], which is hitting them harder than supermarkets, for example. But this is the kind of thing that they have to do. The president for McDonald’s USA said Americans are now more concerned about where their food comes from than they have ever been. That’s what this is a response to.
Knowledge at Wharton: The company has a global perspective. But seemingly the idea is that they need to focus on this issue more in the United States than overseas.
Riis: Yes, something like 40% of their profit comes from the U.S. market, so trends that are of a concern here are absolutely central to the company.
Knowledge at Wharton: A lot of Americans eat chicken because they see it as a healthier option than a burger or a steak. Yet McDonald’s has had a bad reputation for a long time where chicken is concerned. How much of an impact do you see these changes having, Sherrill?
Sherrill Davison: We’re not quite sure exactly what the impact is going to be because we do know that the consumer wants products where the poultry is raised without antibiotics. But all poultry that end up on your plate is antibiotic-free. What we’re talking about is they’re not using antibiotics during the life of that bird versus some companies that use antibiotics if they have a disease problem. The key here is that a veterinarian is involved with the appropriate use of those antibiotics.
“We’re seeing many more companies not using antibiotics than we had seen in past years.”–Sherrill Davison
We’re in a transition phase right now to see how this is all going to affect the market. The FDA has put a directive out [to phase out antibiotic use for animal production taking effect on] Jan. 1, 2017. That puts the veterinarian at the forefront of making sure the antibiotics are given appropriately, that we’re not using those growth-promoting antibiotics — those low-level antibiotics — and they’re used appropriately for treatment of those birds.
Knowledge at Wharton: There are types of antibiotics that may still be used in this process, so which ones are being taken out?
Davison: The ones that are used in human medicine are the ones being taken out. The other ones that are not related to human medicine are still under the direction or are going to be under the direction of a veterinarian. We’re going to be writing prescriptions, we’re going to be writing directives for feed — inclusion of antibiotics in the feed. The key here is that at the end of the day, there are no antibiotics in your food that’s on the table.
Knowledge at Wharton: How much does that realistically change the industry going forward?
Davison: It has already changed the industry. It’s changed the profile of the industry. We’re seeing many more companies not using antibiotics than we had seen in past years. They do have to change their management on the farm to make sure that [the animcals] don’t get bacterial infections. It’s really a preventive medicine-type of situation so they don’t get diseases.
Knowledge at Wharton: From a marketing perspective, any time companies start to mention antibiotic-free, you know they’re trying to take a path down a business angle. Those are terms that draw the attention of the consumer.
Riis: That’s right. For McDonald’s, this is largely a move about health perceptions rather than a move about health, per se. Health perceptions have been changing for some time. A number of chains like [Mexican fast casual chain] Chipotle have tried to position themselves around a certain type of health perception. For them, that ended up backfiring. Let’s see how McDonald’s does with it.
Knowledge at Wharton: The E. coli outbreak linked to Chipotle probably shows that no company can be totally protected from having something happen to them, especially when you’re talking about locally sourced food.
Riis: That’s always going to be a risk. There are always going to be safety issues in food. And professionals in the industry led by people like Sherrill know how to protect us from that. But consumers’ perceptions of those processes are very different from the nuanced reality Sherrill is describing.
“All poultry that end up on your plate is antibiotic-free. What we’re talking about is they’re not using antibiotics during the life of that bird.”–Sherrill Davison
Knowledge at Wharton: Is that a fair statement? What happened at Chipotle could just as easily happen in the next several months to a McDonald’s or a TGI Friday’s.
Davison: That’s correct, and that’s where the veterinarian comes in. You just talked about local sourcing. That’s one area I do have a concern about with some of these smaller flocks where they don’t have veterinary input. I’m urging those folks … to [develop] a relationship with a veterinarian so we can make sure they have safe food.
Knowledge at Wharton: How many farms like that are out there?
Davison: We don’t know the numbers, but we know that they’re growing.
Knowledge at Wharton: One article I read said McDonald’s is trying to become a premium, fast casual chain. Is that something that’s possible?
Riis: It’ll be a slow play, but it’s a direction that they feel they need to go, and it’s certainly a direction that they can go. The biggest place where fast casual plays out is in the interiors of the restaurants. Do they look and feel more comfortable? Are they a place where you would like to sit with a coffee and work on your computer and have it not just be a place where there are kids running around eating their chicken nuggets and french fries? They have made some efforts to create interiors that look and feel like that.
The second [facet of fast casual revolves] around perceptions of food quality and moving in the direction that Chipotle went — they were one of the founders of the fast casual category. McDonald’s is starting to use that kind of language and to have the kinds of processes that back it up. Again, there are perceptions of quality and perceptions of health. [The fastfood chain] is still an environment where people are getting very energy dense foods that are extremely high in calories and lead to weight gain.
Knowledge at Wharton: You mentioned how burgers sales are down at places like McDonald’s, but we’re seeing more specialty burger places popping up every week.
Riis: The success of Five Guys really caught entrepreneurs’ attention, and a number of other chains have developed accordingly. Shake Shack, however, probably would fit into the fast casual category rather than quick serve like McDonald’s. It’s a slightly better environment inside. … They’ll serve you a beer. But no, sales there have been hammered as well. Shake Shack is down in double-digit percentages based on the last [sales] numbers I saw.
Knowledge at Wharton: Can a company like McDonald’s really set up a structure where they can locally source a lot of the food they need in their restaurants, whether these are in Philadelphia, New York or Chicago?
“For McDonald’s, this is largely a move about health perceptions rather than a move about health, per se.”–Jason Riis
Riis: I think the local story is really only part of it. McDonald’s is an iconic American brand. At a certain level, people do feel comfortable with it. It feels like something that they are familiar with, part of their childhood. There is a fundamental quality perception there that they have an opportunity to build on, just using the kinds of contemporary imagery and perceptions and concerns that Americans have now. Local is one of those and probably will continue to be part of the dialogue and part of their process, at least at a symbolic level.
Davison: The Northeast has all the chicken grown in the Delmarva region, and we’ve got a large population of hens that lay eggs in Pennsylvania. So, local will be very easy to achieve in certain markets. It may not be so easy, in areas where you don’t have a large population of poultry, trying to put that infrastructure in place and get those fresh products to their stores.
Knowledge at Wharton: There’s also the McNugget. Maybe they need to consider getting rid of it because I don’t think there’s anything positive they can build off from that term.
Riis: Not from the term, except that people have positive associations of the taste. Kids love them. Many adults love them. Chicken fingers — is that a better term? That’s widespread on children’s menus, even at casual dining restaurants. It’s almost a staple food for restaurant-goers when it comes to feeding small children.
If they can make people believe the product is [now] better and healthier, that is the direction that they [could aim for]. It’s not just [about removing] antibiotics, but also taking some of the preservatives out of the batter and the meat itself. However, there’s no evidence it would make chicken nuggets healthier — and I don’t even think McDonald’s would make that claim — but it does change the perception of them just a little bit. And that may be enough.
Davison: I think it’s essential that they have some form of a chicken finger, chicken nugget, whatever, on their menu. They have to have that. Because when parents go into that restaurant, that’s what the children want. You need to keep some form of it on there. What they’re doing right now with changing the ingredients and with the perception that it will be healthier, that’s a good way to go. But they have to keep it on their menu.
Riis: And they’re being really careful not to change the taste. That was a big part of the announcement when they said they’ve taken some of the preservatives out. They did months of experimentation and innovation and then months of testing to make sure the consumers could not tell the difference taste-wise.
Knowledge at Wharton: You still have the calorie issue. Federal law will require all chains to have calorie counts on their menus, and many places already do. But the calorie issue is still a big problem for places like McDonald’s and other fast-food restaurants.
Riis: A national mandate for calorie labeling was built into the Affordable Care Act. It’s behind schedule. Presumably, it will eventually happen. But in the jurisdictions where it has taken effect, including Philadelphia and New York, it’s not clear that calorie labeling has a huge impact on consumer choices. Eventually, it just becomes part of the background and people kind of ignore it and it’s easy to do fuzzy math with calorie labels.
“Don’t make people choose between salad and french fries, give them just enough of both. That’s where we’re going to win the calorie battle.”–Jason Riis
The difference between eating a 700-calorie meal and a 500-calorie meal — that’s the difference between gaining weight and not. But it’s difficult to do the math at the cash register and be sure you’re ending up with just enough. I think a Big Mac has fewer than 500 calories, so there isn’t a ton of sticker shock in the calorie numbers just from the labeling.
The innovation in calories, if the restaurant industry ever does come to take it on, is going to come from a few different places. One of them will be creating the right kinds of bundles. Having some of the calorie dense stuff that’s absolutely delicious that they’ve been great at making inexpensively, quickly and conveniently for years, but mixing that in with less calorie dense items like vegetables that is not such a hit on the taste. Don’t make people choose between salad and french fries, give them just enough of both. That’s where we’re going to win the calorie battle.
Knowledge at Wharton: Still, that relationship between the farm and the corporation becomes that much more important going forward because of a consumer shift in what they want from a product when they go to a fast casual restaurant.
Davison: The industry itself has dealt with these changes that we’ve seen over the years, whether it’s related to how a bird is raised, whether they’re in a cage or they’re not in a cage. We’ve seen the industry be flexible and look at how they’re producing these products for the companies, so I don’t see that they’re going to have difficulty in making those changes. They have slowly been making those changes for the consumer and what the consumer wants and what the companies need to put out.
Knowledge at Wharton: Is it the expectation now with some of these changes that McDonald’s may be able to turn a corner?
Riis: It’s possible. They’ll continue to have a successful business and that there is a path to growth there. But there’s going to continue to be innovation from other players in the field, including the other big fast food chains. McDonald’s is probably getting close to parity or maybe even ahead. Chains like Burger King, KFC have not tried to be ahead of the game on some of these kinds of innovations. Places like Burger King are aggressively ramping up the calorie content to some of the items in their dishes. But they’re not doing the things like antibiotic-free that some of the fast casual chains were doing, and that McDonald’s is now doing.
Knowledge at Wharton: But as you said, there’s an expectation of a higher calorie count when you go to a place like that rather than a Chipotle or a salad place.
Riis: No one’s going there for a low-calorie meal, but can it be more [healthy]? And it’s not higher calorie than Chipotle. That’s part of the amazing thing about the psychology of health perception. When we hear terms like natural, organic, GMO free, antibiotic free, we kind of lump that in with calories, and it’s a completely separate issue.