The Golden Arches are looking a bit rusty.
McDonald's (NYSE:MCD) is facing its biggest challenges in over a decade as a food safety scare in Asia and rising competition have combined to send sales swooning. In the third quarter, global same-store sales were down 3.3% and operating income fell 14%. McDonald's shares are now down about 12% since peaking in May, but investors aren't the only ones upset with the fast-food chain's recent performance: franchisees are furious, too. In a recent survey by Janney Capital Markets, a number of them spoke out against management, accusing the company of being "leaderless" and saying that building upgrades and aggressive promotions are bankrupting them. Most of the franchisees were indisputably negative about the company's future, complaining that there was "nothing new" to offer customers and that growth was dead.
McDonald's isn't sitting still in the midst of all this turmoil, however. Here are three ways the company is trying to galvanize sales.
Engaging with the customer
Last week, McDonald's rolled out its newest marketing campaign called, "Our food. Your questions," featuring a number of questions about its food, including: "What's in your beef?"; "Are Chicken McNuggets made with pink slime?"; and "Is your food real?" You can see the questions here. The campaign also features a series of videos with former Mythbusters co-host Grant Imahara, who shows how Mickey D's burgers are made, among other things.
McDonald's is clearly trying to clear the air about the freshness and the quality of its food, and to reassure potential customers who might have heard too many rumors about its food over the years. CEO Don Thompson said during the latest quarterly conference call that the purpose was "to create a dialogue," and to be more transparent.
It could be too early to tell if the campaign has had an effect, though data from polling firm YouGov BrandIndex indicates the McDonald's effort appeared to lift the perception of the brand among millennials. Still, something about the campaign falls a bit flat. The fact that McDonald's needs to address a question such as "Is your food real?" speaks to how low the brand image has fallen. It's commendable for a company to recognize its mistakes, but while the campaign might help change the company's image, it does not change anything about the actual food quality.
Localizing the menu
Though same-store sales were poorest in the Asia-Pacific segment, that was the result of a one-time incident, and management expects performance to return to its normal level within six to nine months. The decline in the U.S., meanwhile, is more of a secular issue, as McDonald's loses customers to rising competition from fast-casual purveyors such as Chipotle Mexican Grill and Five Guys.
To combat this shift, McDonald's is adding more local items to its menus, a concept that has always been part of its strategy, but one the company has moved away from in recent years, according to Thompson. In the New York City area, for example, the burger chain has begun testing mozzarella sticks, which had received rave reviews upon being added to the menu in the U.K. Other local offerings being tested include a chorizo burrito in Texas, and the company is also rolling out the McRib this year in only part of the country in an attempt to tap into regional tastes.
Along with localizing the menu, McDonald's also plans to simplify its options in January. Allowing more control at the local level seems like a smart move, as the new items could bring in new customers and a standout on the regional menu could easily be added nationally.
Building on the idea of localization, McDonald's wants to give customers more ways to personalize and customize its menu selections. The company next year plans to roll out a program called Create Your Taste, which will allow customers to add items such as jalapeno peppers and tortilla strips to their burgers, after testing it at four locations in Southern California.
Like the localization addition, the push to customization seems designed to match what consumers want. As Thompson said on the recent earnings call, "Customers want to personalize their meals with locally relevant ingredients. They also want to enjoy eating in a contemporary inviting atmosphere. And they want choices; choices in how they order, choices in what they order and how they're served."
The high-end ingredients on the Create Your Taste menu, such as brioche buns and herb aioli, should appeal to consumers who have left McDonald's for higher-quality competitors.
With the menu changes and the company's recent store modernization, the chain is shifting toward the fast-casual segment and targeting millennial consumers that have flocked to Chipotle and other fresher-food options. McDonald's is no stranger to imitation, often borrowing from competitors -- for example, deriving the McCafe from Starbucks and the Southern Style Crispy Chicken Sandwich from Chick-fil-A -- so the move comes as no surprise.
We can't know yet if these changes will have an effect, as they are being rolled over the next several months, but they appear to be a step in the right direction. Still, a brand as big and well known as McDonald's can't turn on a dime. I would not expect strong growth out of McDonald's in the future, but even positive comps would assuage worried investors. Keep an eye on U.S. same-store sales. If management can lift those into positive territory, that will be the best sign that McDonald's investors will be able to count on a Happy Meal of their own.