McDonald's Is Still Stuck in Burger Purgatory
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If you haven't tried a Big Mac, you're not alone. According to a new survey, only one in five millennials has ever tried one.
The fact that McDonald's(NYSE: MCD) trademark sandwich has been essentially ignored by the young adult generation is no small problem. The burger immortalized in TV ads as "two all-beef patties, special sauce, lettuce, cheese, pickles, onions, on a sesame-seed bun" has even spawned its own economic index, but that's not enough to maintain its relevance.
The Big Mac's waning popularity actually underscores a bigger problem for McDonald's: its burgers are falling behind. The better burger boom has swept the nation, bringing chains such asFive Guys, SmashBurger,Shake Shack, andHabit Restaurant, to prominence, with all of them are growing quickly, meaning McDonald's is losing the audience for the sandwich it helped popularize.
In a 2014 survey,Consumer Reports ranked its burgers dead last among more than a dozen burger chains, rating McDonald's 5.8, several degrees below the next-worst batch at 6.6.
McDonald's own results attest to those findings as well. Though same-store sales have rebounded in recent quarters on the strength of all-day breakfast, burger sales have been flat for the last few years, according to theWall Street Journal, and were only growing by 1-2% before that. Today, burgers only make up 20% of the company's sales.
No easy fix
When CEO Steve Easterbrook took the helm last March, he notably said McDonald's must be a "modern, progressive burger company" in order to succeed. But McDonald's hasn't exactly been ignoring the better burger boom. For years, the company has sought an upscale counterpart to the Big Mac. In the 1990s it introduced the Arch Deluxe, a burger slightly more expensive than the Big Mac with a different bun and sauce, but pulled it off the menu in 1998.Later came the Angus beef burgers and a sandwich made from a sirloin cut, both at a price around $5, which proved to be too high for most of its customers.
Currently, the company is testing its Create Your Taste, which allows customers to choose from a selection of buns, toppings, and dressings, but that procedure has been met with resistance from franchisees since it slows down McDonald's operations. 70% of the company's orders in the U.S come through the drive-thru, meaning speed and efficiency are key for the company to meet customer expectations. It aims to complete all orders within 90 seconds.
The quality conundrum
McDonald's is at a disadvantage against fast-casual competitors who make food to order and don't operate drive-thrus. Customers come in to those restaurants expecting to wait a couple of extra minutes and pay a little extra for quality. Mickey D's, whose brand is built on speed, convenience, and affordability, doesn't have that luxury. As history has shown, its customers are not willing to pay upwards of $5 for a burger, and the ones that are have moved to Five Guys and the other new competitors.
Perhaps the biggest challenge McDonald's faces is moving beyond frozen meat. Its current operating procedure, grilling frozen patties and then keeping them in hot holding units, cannot compete with fresh-grilled meat. The company has been experimenting with fresh patties at 54 Dallas locations where employees make quarter pounders using never-frozen, pre-formed patties.McDonald's hasn't given any word on results from the test, but the company has been using frozen beef since the 1970s, and converting to fresh beef in all its restaurants will not be easy -- it would require a different set of operating procedures and potentially new storage facilities.
At a time when peers likeRestaurant Brands'Burger King are moving downscale with hot dogs, chicken fries, and other low-priced items, and fast casual chains are taking the more upscale customers, McDonald's seems to be stuck in a fast-food no-man's land.
The company plans to introduce two new versions of the Big Mac next year, a larger one called the Grand Mac and a smaller called the Mac Jr.That could help restore some excitement for its trademark sandwich, but for now the question of how to grow burger sales remains an unsolved mystery.
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Jeremy Bowman owns shares of Habit Restaurants and Shake Shack. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.