Burdened by size and success, McDonald’s is losing customers to smaller, nimbler rivals
There once was a time when McDonald’s was just a restaurant. “Billions” weren’t part of the brand or the plan or the problem.
It was 75 years ago that Dick and Mac McDonald first opened McDonald’s Bar-B-Q, a drive-in with waitresses known as carhops and menu items ranging from tamales to peanut-butter-and-jelly sandwiches, in San Bernardino, Calif., a town on the outer fringes of the great sprawl emanating from Los Angeles. Such drive-ins were hot in Southern California in those car-crazed days, and McDonald’s was an instant hit: Its parking lot was full till late at night. But the McDonald brothers grew frustrated with how long their largely teenage clientele stayed parked, how many plates and glasses they broke, and how big a staff it took to serve them, so in 1948 they shut down for a couple of months to reengineer the business.
When McDonald’s reopened, it featured an all-male staff working on a hyperefficient kitchen assembly line that the brothers dubbed the Speedee Service System. There were no longer carhops, and the menu was pared down to hamburgers, cheeseburgers, soda, coffee, milkshakes, potato chips, and pie—all served on or wrapped in paper.
The first day was a flop. It snowed in San Bernardino, which never happens, and the few locals who braved a voyage to McDonald’s sat in their cars angrily wondering why no carhops were showing up to take their orders. But San Bernardinans soon figured things out and began lining up outside for the 15¢ burgers and 10¢ packs of french fries (which replaced potato chips in 1949 and have been singularly addicting ever since).
In 1954, a 52-year-old seller of multispindled milkshake mixers, Ray Kroc, became the company’s first franchising agent and eventually its owner and chief executive officer. McDonald’s is now the world’s largest restaurant chain, its biggest buyer of beef and potatoes, and one of its biggest private employers.
On a recent late afternoon, I visited a McDonald’s just off Interstate 5 in Santa Nella, a sun-baked California townlet about 300 miles north of San Bernardino. It was quiet. There were 12 cars in the parking lot, none in the drive-through line, and only five customers in the restaurant when I walked in. I gazed somewhat uncomprehendingly at the crowded menu and ordered something that stood out because the letters were bigger: iced coffee. “With just milk,” I said. “You don’t want any liquid sugar in it?” the guy behind the counter asked. “No,” I replied.
Just across the street was an In-N-Out Burger. In-N-Out was founded in 1948, the same year McDonald’s switched over to Speedee Service. Now it has just 300 locations compared with McDonald’s 36,000. But this location was wildly popular. I counted 62 cars in the parking lot and 10 in the drive-through line. Every table was taken. Apart from beverages, there are just four things on the menu: a hamburger, a cheeseburger, fries, and the famous Double-Double (two patties, two slices of cheese)—with variations on how each is served. I waited 10 minutes for a Double-Double Protein Style (sans bun), which In-N-Out serves expertly wrapped in crisp lettuce, and an order of fries, which didn’t taste as good as McDonald’s but seemed somehow more wholesome.
This says a lot about McDonald’s current predicament. The excitement is elsewhere now—at In-N-Out and kindred “better-burger” purveyors such as Five Guys and Shake Shack, and even more so at “fast-casual” restaurants such as Chipotle Mexican Grill and Panera Bread. McDonald’s attempts to keep up with them have mostly fallen flat and left it with abloated, ill-defined menu. Sales at existing locations have dropped in five of the past six quarters, with the rate of decline accelerating to 2.3 percent in the first quarter of 2015. Overall revenue is declining, too.
Even with those issues, McDonald’s still dwarfs its more fashionable rivals. In 2014 it made $4.8 billion in profit on revenue of $27.4 billion. Chipotle, the most significant of its new-style challengers, made $491 million on revenue of $4.3 billion. And yet that too is part of the problem—just coming up with an innovation big enough to shift its trajectory is a huge challenge. That still doesn’t excuse the decision to spin off Chipotle, which McDonald’s owned from 1999 to 2006, but it does explain a bit about why McDonald’s struggles. It struggles in part because it is so big.
As such a giant company, McDonald’s possesses advantages in marketing budgets, purchasing power, and overall efficiency. But with size comes difficulties as well. “You can’t just snap your fingers and say you’re going to do things differently,” says economist and historian Marc Levinson. “It becomes a huge, huge burden on management to try and change.”
Levinson is the author of The Great A&P and the Struggle for Small Business in America, the story of the rise and fall of what was for decades the biggest retailer in the U.S. The Great Atlantic and Pacific Tea Co. rose to dominance under the longtime leadership of John Hartford by repeatedly reinventing itself, from economy grocery store to grocer that also sold meat and produce to self-service supermarket. After Hartford’s death in 1951, his successors chose stasis and got rapid decline. Their biggest mistake, in Levinson’s telling, was completely missing out on the postwar California boom that launched McDonald’s and most of the rest of the fast-food industry.
That story is particular to A&P, and McDonald’s—with its long and admirable history of leadership development—surely has more competent executives than the jokers who took over from Hartford. But the notion that companies eventually get too big for their own good has more universal application. For example, physicist Geoffrey West of the Santa Fe Institute, a nonprofit research center, has found that while cities keep getting more productive and dynamic as they grow, corporations “grow fast, and they stop.” That’s because cities keep adding dimensions as they expand, he’s said, while big companies tend to become one-dimensional.
So has McDonald’s reached that point where growth stops? It seemed to have a decade ago, but then-CEO Jim Skinner renewed it with a focus on improving existing restaurants rather than adding so many new ones. New CEO Steve Easterbrook is closing hundreds of underperforming restaurants and will offer more details on a turnaround plan to be unveiled on May 4. He says his vision “is for McDonald’s to be seen as a modern progressive burger company delivering a contemporary customer experience.” That seems a lot less clear than Kroc’s vision, though. And Easterbrook really can’t shut the company down for a couple of months to get things right like the McDonald brothers did.
There’s another issue. As Eric Schlosser recounted in his book Fast Food Nation and Morgan Spurlock subsequently illustrated in the documentary Super Size Me, the rise of McDonald’s and other fast-food companies has brought a lot of unpleasant side effects, including the consolidation and industrialization of the agricultural sector, the growth of a working underclass, and the global burgeoning of waistlines. Lately, McDonald’s has been taking small steps to remedy some of these ills, saying it will raise workers’ wagesand push to get antibiotics out of the chickens it buys. But on the whole, it’s hard to see how a McDonald’s this huge can ever be entirely benign.
Things surely aren’t hopeless for McDonald’s. A&P is still around, after all, as an assortment of Northeastern food and beverage retailers (Food Emporium, Pathmark, Best Cellars Wine & Spirits) three years out of bankruptcy. So is General Motors! Maybe those aren’t the most encouraging examples. As history attests, bigger just isn’t always better.