Marketing and Franchising Strategies by McDonald's - Case Study Example

Executive Summary McDonalds had been achieving growth through aggressive expansion and in the process they lost track of where they were heading. They ignored the changes that had been taking place in the external environment and tried to combat the declining profits through price war and new menu items. These are short-term solutions and to recover after this is difficult. The changing consumer preferences have transformed the fast food sector. Price is no longer an incentive to walk into any fast food outlet. Comfort, quality and convenience are given higher weightage by the consumers. Proper segmentation, product targeting and positioning are important. McDonalds also needs to be selective in their franchisee selection as it should not disturb the existing franchisees in the region. Customer-oriented approach is essential in the fast food industry. Mass marketing techniques and standardization are no more applicable. Local adaptation is now essential to fight competition. All these indicate that McDonalds need to redefine their marketing strategy. Introduction McDonalds, that had once changed the way a nation ate and provided jobs to millions, is now reeling under difficult times. They lag behind in service and quality and despite bringing about changes in their food offers they have met with little success. The main issue is the unpopularity that has developed towards the McDonalds burgers. This has given rise to franchisee relations, downward sales and profits which ultimately are leading to closure of many units across countries. Product diversification without focus, lack of strategic direction and marketing strategies along with the top-down manner in which they dictate the franchisees is responsible for the stunted growth of the company. Attempts to create price war have yielded negative results. The profit margins of the franchisees have reduced between 2-4% against the 15% they enjoyed earlier. The retired CEO has been brought back along with two experienced executives to assist him but there are no signs of recovery. About 30-40% fewer outlets are being added to the chain each year while many close down every month. McDonalds need to realize that their marketing and franchising strategies have to be altered to suit the changed market environment and the ever-changing consumer needs. Discussion Product-oriented approach Kara, Kaynak and Kucukemiroglu (1997) contend that fast-food marketing strategies should have a sound understanding of consumers’ perceptions of and preferences for fast-food outlets and how they differ across cultures/countries. It was assumed in early 1960s that due to globalization, as economic development took place, tastes and needs of consumers would converge which would lead to standardized marketing and advertising (Mooij, 2000). McDonalds developed a standard menu for their global outlets and overlooked the fact that immigrants make up for a sizeable population. They could not anticipate that because of this the markets are becoming fragmented. At the same time, people are opting for slightly costlier menus. In addition quick meals could be found in supermarkets, bending machines and convenience stores. Standardization of the marketing strategy would mean that the same marketing strategy is applied in all markets without taking into account the local factors (Zou, Andrus, Norvell, 1997). This implies that markets and consumer behavior is homogenous. Hence standardization would mean identical product lines at identical prices through identical distribution systems with identical promotional programmes. Standardization implies a product orientation and is not customer-centered. A product-centered approach more often than not leads to failure as has been seen in many cases. Focusing on the product can blind a person to customer preferences and needs. McDonalds concentrated on the children’s segment and did not come out food items that could appeal to any other segment specifically. Product diversification Risner (2001) contends that franchisers feel that cultural differences do affect the demand for their product or service but they prefer keeping the brand standardized over too much cultural adaptation. Diverse customer needs and sophisticated marketing techniques have made mass marketing impractical. Market segmentation allows marketers to cater to diverse customer needs in a resource-efficient manner. The market segmentation theory suggests that customers can be grouped using variables that help to discriminate between product needs and buying behaviour (Lindridge & Dibb, 2003). Ethnic market segmentation has become important for marketers because of their increasing size, purchasing power, and geographic concentration provides a unique opportunity to modify the marketing strategies. This can lead to increased market share and profitability. This was ignored by McDonalds as they concentrated on adding items without considering the customer preferences. The fast food sector is losing the pull factor, according to Richardson and Aguiar (2004). It is undergoing transition from selling of burgers to the arrival of the fast casual food industry. Consumers too have become more alert due to the implication of the effect of modern life and are scrutinizing the fast food companies. An effective brand must be able to respond to the changing technological and global environment. Knowledge of the external environment helps a company to determine its future products. The fast food culture is threatening the ‘ways of life’ and hence has come up with controversies. McDonalds planned their own menus and took decision without talking into account the external environment. Strategic Focus Targeting implies renouncing a great number of potential consumers and it contradicts the tendency to sell as much as possible (Daneels, 1996). Thus it differs from the sales oriented approach and is more customer-focused. If a company tries to appeal to all the customers, it may end up appealing to none. McDonalds never anticipated problems related to product diversification. Attention was diverted in too many things, focus was removed. The company did not have any clear vision to focus on and went in for aggressive expansion plans. They introduced 40 new menu items, purchased handful of non-burger chains and kept on adding any number of new outlets every year. This adversely impacted the existing franchisees. McDonalds had assumed this would translate into sales growth but to lack of a clear vision soon they found that the franchisees started withdrawing from the agreement due to poor investment returns. They tried to be innovative by adding new items but according to Cunneen (2008) innovation that drives growth has to be just new and relevant. While their items may have been new but they were not relevant as proper segmentation was not done. Franchisee agreements The franchisees of McDonalds had more at risk than in the usual franchisor-franchisee agreements. It was a top-down dictatorship where the company was not willing to accept standards lower than that prescribed by them. While this may be necessary in maintaining the required standard globally, McDonalds ignored the fact that the franchises had invested a huge sum to open the outlets. Franchisees are forced to bear inefficient risk. Their investment portfolio is insufficiently diversified (Krueger, 1991). The franchise contract binds the franchisee from diversifying its risks. This requires the franchisees to have a higher rate of return on their investment. The franchisees of McDonalds had spent huge sum to install company-mandated “Made for you” kitchen upgrades in each restaurant. Suddenly, when the retired CEO was brought back, they decided that if the foundation was weak growth was fruitless. Hence they adopted the strategy of “up or out” and started terminating contracts of underperforming franchisees. This approach did not help them to maintain standards or control growth. It adversely affected the brand name and the franchisees started migrating to other rival products. Fast food companies should be able to respond to the diversity of demands (Richardson & Aguiar, 2004) but McDonalds with its top-down attitude did not allow the franchisees to cater to such demands. Price War Price wars create a false demand, says Hall (n.d.). A price war is not attractive to any party because there are no winners at the end of it. McDonalds created a price war but this only led to reduced incomes for the franchisees that had to operate at times even with losses. While the sale grew, the profits reduced. McDonalds catered only to the middle and the lower income group whereas the common Americans or even people all over the world have become health conscious. They are willing to pay a higher price for better and fresher food. The price war strategy can attract customers initially but it gradually dies down. Price war is a short-term strategy and at the end when the company is forced to increase the war, they lose the newly created market share. Innovation Innovation is the application of knowledge in a novel way, primarily for economic benefit (Blackcoat, 2007). Innovation is essential for growth but innovation need not be complex (Cunneen, 2008). Firms collaborate with customers to produce innovative products and personalize it. Visual imaging when applied to the food service environment can inform, merchandise, and create a level of excitement which is not possible with static or paper menus (Frable, 2008). Showcasing product offerings and making a customer feel excited about their options is one of the benchmarks of a good retailer. Through digital video display the customers can be presented with a glowing menu and daily specials in an exciting manner. Digital signage can also be installed to attract, inform and entertain customers at the point of sale. In line with the above technological innovation, while McDonalds did not introduce any innovative products one their franchisees did bring about innovation at the outlet by installing video monitors showing what would be attractive to the visitors. In the changing technological environment companies have to respond to keep pace with the changes. McDonalds is learning from its franchisee who has introduced innovation. They need to draw up marketing and advertising campaigns to re-brand their product and target a specific segment. Conclusion McDonalds had been going in for aggressive expansion without taking into account the external environment and the technological changes that have taken place in the global market place. No industry can survive independent of the external environment. Consumer tastes and preferences have changed. They are more educated about health factors and with higher disposable income they are willing to spend more for better quality food. The franchisees too have better and wider options due to increased competition in the fast food sector. They would rather invest where the risk is evenly distributed. Price war is not the answer as it is a short-term strategy. Price war indicates that the product caters to the middle and the lower income group, which negatively impacts the brand image. When profit margins declined, they started withdrawing the contracts with underperforming franchisees. While maintaining standards in service and quality is certainly desirable through out the chain, product diversity has to be taken into account as tastes depend upon culture and religion. The franchisees had no such authority. McDonalds needs to alter their strategy drastically in order to survive in the face of competition. They have to attend to changes in technology, product mix, price, location of their outlets and the promotional measures. Recommendations McDonalds need to first focus on market segmentation. They have to decide which segment they want to cater to and not just open outlets and alter menus. Only after segmentation they can do the targeting and then the product positioning. Not having a clear focus is what has led to the failure and chaos. Hence the first is segmentation. They have to be selective in appointing the franchisees including the location or country. Having too many outlets in one region does not favour the existing franchisees who then tend to jump to other products/brands. Franchisees have been showing operating loss and have been forced to close their outlets. Mass marketing techniques cannot be applicable in today’s scenario and it demands local adaptation. Thirdly, since the consumer is now health conscious and not as much price conscious, they should enhance the food quality and charge a decent price for it. Too low a price sends the wrong brand signals in the market and then would attract only the lower income group. Innovation in product and the outlet plays a very vital role in attracting the consumers. As discussed innovation need not be complex but it certainly needs to be relevant. Hence, they have to keep pace with the ever-changing consumer tastes and preferences. They need to adopt technology for brining about innovation. Video imaging and digital video display should be made mandatory at all their outlets. Investing merely in kitchen upgradation will not suffice because consumers are attracted by what they see externally. As they walk into the outlet, the first impression decides whether they want to sit down or walk out. Technology would assist in marketing communication. McDonalds needs to have a customer-oriented approach rather than a product-oriented approach to the market. They need to focus on the changing lifestyles and demands of the customers. They need to consider that the fast food sector is undergoing transition and nutritional value has gained importance. Online food service is gaining importance and McDonalds can tap the potential in this area as more people prefer to order for food from the comfort of their homes. References: Blackcoat (2007). The Black Coat. Available from http://theblackcoat.com/2007/05/20/harajuku-man-1/; accessed 11 May 2008 Cunneen, C. (2008). McDonalds turnaround offers crucial lessons for all operators. Nations Restaurant News; Feb 18, 2008; 42, 7; ABI/INFORM Global pg.40 Danneels, E. (1996). Market segmentation: normative model versus business reality. European Journal of Marketing, Vol. 30 No. 6, 1996, pp. 36-51 Frable, F. (2008). The Digital Show: Show Off Your Menu. Nations Restaurant News; Apr 14, 2008; 42, 15; ABI/INFORM Global. pg. S14 Hall, N. (n.d.). The Importing of Pricing. Available from http://www.petercheales.co.za/lookout/chapter5_content.htm; accessed 11 May 2008 Kara, A. Kaynak, E & Kucukemiroglu, O. (1997). Marketing strategies for fast food restaurants: a customer view. British Food Journal 99/9 [1997] 318–324 Krueger, A. B. (1991). Ownership, Agency, and Wages: An Examination of Franchising in the Fast Food Industry. The Quarterly Journal of Economics, Vol. 106, No. 1, (Feb., 1991), pp. 75-101 Lindridge, A. & Dibb, S. (2003). Is ‘culture’ a justifiable variable for market segmentation? A cross-cultural example. 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