McDonalds: Comeback in The U.S. Burger Maker McDonalds, one of the worlds most iconic brands and companies, faced a crossroad in its comeback path. When Steve Easterbrook was appointed CEO in 2015, the company had lost an astonishing 500,000 U.S. customers in the previous four years. In 2015, for the first time, McDonalds closed more restaurants than it opened. Same-store domestic sales fell 1.3 percent in 2016, and the number of customers visiting McDonalds fell 2.1 percent that year, the fourth straight year for a decline in customers. Reflecting this trend, many younger people had never dined at McDonalds. As indicated by its recent declines in revenue and profit, McDonalds faced a variety of challenges. Prices in groceries fell at the same time that the minimum wage was increasing and increasing dramatically in some cities and states. Given that labor was the largest component of cost for restaurant chains, the cost gap between dining out and eating in was at its largest since the 1980s. Efforts to add more products for health-conscious customers such as salads and oatmeal had failed to attract enough new customers to stem the decline. The all-day breakfast menu, introduced in 2015, was a hit, but by 2017, it was losing steam as an engine of growth. A particularly salient threat was the rise of fast, casual burger chains that focused on better-tasting burgers. Chains such as Five Guys, The Habit Burger Grill, SmashBurger, and In-N-Out among others were expanding at a rapid rate. Such chains typically started as regional enter-prises, but each was expanding geographically. Five Guys, particularly, had clearly broken out as a national competitor. To combat the various threats it faced, McDonalds was implementing digital kiosks for ordering. The company was also experimenting with home delivery and table ser-vice. Perhaps most importantly, McDonalds was consider-ing changes in the way it prepared its burgers to improve taste. Such changes had the potential to significantly alter McDonalds strategic position with respect to cost and differentiation. With McDonalds stock price lagging behind both the S&P 500 and Dow Jones Industrial Average, the company needed to figure the right path to a more sustain-able turnaround. McDonalds Model McDonalds employed the franchise business model for the vast majority of its restaurants. The franchise model was credited with McDonalds sustained growth and global expansion. In many instances, McDonalds acquired and developed prime real estate locations that it then leased back to franchisees. Some observers argued that McDonalds restaurants often enjoyed locational advantages com-pared to other burger chains. McDonalds set a goal of going from 83% to 95% franchise ownership of its restaurants. This would follow several other chains in what some termed the asset-light business model. Burger King, Carls Jr., Hardees, Dunkin Donuts, and Subway were all either 100-percent or nearly - 100-percent franchised owned. The franchise model posed some challenges. Getting franchisees to upgrade locations, adopt new technologies, and change the standard McDonalds menu often took considerable time and effort. Such changes could take several months at a minimum and, in some cases, several years. Though there was some regional variability such as the Mc Lobster in Maine, McDonalds offered a high degree of standardization in its menu across the U.S. McDonalds offered a breakfast menu, which in 2015, was extended from only morning hours to an all-day offering. McDonalds was best known for its hamburgers, but offered other items including Chicken Mc Nuggets and a variety of sandwiches. McDonalds had emphasized with some success a McCaf line of items such as coffee, latte, shakes and smoothies. From time to time, McDonalds had offered special items for a limited time and had incrementally changed its menu from time to time. Many observers argued that, because of McDonalds immense scale, menu changes often occurred slowly both in formulation and implementation. For exam-ple, it did not expect to complete its plan to switch to free range eggs until 2025. Despite the extent of its franchising, McDonalds was renowned for the uniformity of experience and consistency in quality that it offered customers. McDonalds typically served food within minutes of a customers order. It was not unusual for customers to receive their food within one PC 23 minute of ordering. While downtown McDonalds locations in the largest cities were an exception, most U.S. McDonalds locations offered drive-through service. Some estimates put the percentage of revenue from drive-through customers at 70 percent of revenue for the typical McDonalds. McDonalds had optimized its food production over several decades to deliver food of consistent quality with the short waits that customers expected. McDonalds supply chain could procure, process, and deliver frozen beef and potatoes to its stores with both high reliability and scale. This system helped McDonalds both reduce costs and ensure a high degree of consistency. McDonalds hamburgers were generally cooked and then warmed before delivery to a customer. This allowed McDonalds to serve customers much faster than waiting for orders before cooking the burgers. Trends in Hamburgers The market for premium burgers made with fresh beef had increased dramatically in the previous decade and was expected to double over the next five years. As recently as 2001, Five Guys had consisted of five stores in the Washington D.C. area. By 2016, it had more than 1,400 locations. Though much smaller than Five Guys, Shake Shack was founded in 2004, and Smash-burger in 2007, while The Habit Burger Grill expanded from 23 restaurants in 2007 to 145 by 2016. Even In-N-Out, a California-based chain that had traditionally eschewed growth and geographic expansion, had grown from 89 locations in California and Las Vegas in 1999 to over 300 locations in the western United States and Texas. All of these chains featured menus with significantly fewer items than McDonalds and were, arguably, much more focused on burgers. All featured burgers made from fresh beef that were cooked upon order. This necessarily involved longer wait times. Most did not offer drive-through service. In-N-Out was the exception in that much of its business was drive-through and its hamburgers were not offered at a premium price. In addition to the several fast-growing chains that had emerged, there were many smaller chains that operated in various cit-ies across the U.S. Multiple polls had shown consumers preferred the taste of burgers from chains such as Habit, Smashburger, In-N-Out, Five Guys, and Shake Shack among others to those of McDonalds. Many were limited to specific metropolitan areas while others had a larger geographic footprint. McDonalds also faced competition from its larger traditional competitors such as Burger King, Wendys, Jack in the Box, as well as Carls Jr. and its sister chain, Hardees. Unlike the upstarts in the premium segment, the traditional competitors had not experienced significant growth in previous years. At one point after 2010, Burger King experienced same-store sales declines for 11 consecutive quarters. The number of Wendys locations had declined from approximately 6,500 to 5,722 in the U.S. since 2011. McDonalds Strategy The growth in premium burgers made from fresh beef was not lost on McDonalds as consumer ratings showed the company lagging behind competitors on burger taste. The company initially responded by experimenting with the removal of artificial preservatives and replacing margarine with butter among other similar changes. McDonalds then used Dallas as a test market for hamburgers made from fresh beef. The fresh-beef burgers were well-received by customers who rated them higher in taste than McDonalds traditional burgers. McDonalds announced in March 2017 that, by mid-2018, Quarter Pounders would be prepared with fresh beef in a majority of its restaurants. Quarter Pounders would also be cooked when ordered rather than cooked previously and stored in warmers. A shift to fresh beef was not without risks. Industry insiders suggested that employing fresh beef in burgers could extend the time between the order and the serving of a burger. Using fresh beef would likely increase the cost of burgers. Price sensitive customers might be less inclined to purchase McDonalds burgers. The use of fresh beef increased health risks as well. Fresh beef was much more susceptible to viruses than frozen beef. Chipotles had still not fully recovered its customer base from problems with bacterial contamination more than two years earlier. A change to fresh beef would also dramatically change McDonalds supply chain and logistics for delivering beef to its stores. roll out mobile ordering to all of its U.S. locations. Pizza chains had successfully used mobile ordering for years. In another action that followed long-standing practice by pizza chains, McDonalds also announced that it would dramatically accelerate and scale food delivery. The company had long experimented with delivery and already offered it in markets other than the U.S., particularly Asia and the Middle East. It was not clear how McDonalds planned to rapidly scale delivery, but there was considerable industry speculation that the company might enter an alliance with a delivery service firm such as GrubHub, Inc. McDonalds vast superiority in the number of its restaurants was seen as an advantage in delivery. Many more potential customers lived or worked close to a McDonalds compared to rivals in burgers and fast food generally. In addition to delivery and mobile ordering, the company also planned to spend approximately $1 billion renovating its existing stores. As part of McDonalds turnaround strategy, the company planned to emphasize the McCafe drinks. In February of 2017, the company announced that McCafe drinks would sell for $2. More generally, McDonalds had placed a global emphasis on serving high quality coffee at a price considerably less than coffee houses. Question Pass the two strategies through VRIO. Use the VRIO table and briefly explain your choices with additional paragraphs