Fast food food fight

Fourteen years after the publication of “Fast Food Nation” by Eric Schlosser, with its fierce indictment of the industry, consumers prefer a healthier brand of fast food. This is especially true of millennials, those 18-to-34-year-olds who have increasingly busy work lives and eat out a lot.

This spells trouble for traditional fast food restaurants like McDonalds, which need to make up for lost time when it comes to adjusting to new customer preferences.

In addition to wanting the convenience of paying for purchases with mobile devices, this generation’s preference is for locally and humanely sourced meats, seafood, and produce; natural ingredients; and freshly prepared, bespoke food.

Fast food behemoths such as McDonald’s have dominated the fast food landscape for decades with an industrial model defined by providing cheap and convenient food in a way that maximizes volume and reduces costs.

McDonald’s has been around for more than 60 years and operates more than 36,000 restaurants worldwide, of which about 14,000 are in the United States. The company feeds nearly 69 million customers in over 100 countries each day. While the beef and potatoes may not be locally sourced, more than 80 percent of their restaurants are franchised, owned and operated by independent local business persons.

McDonald’s named a new CEO last month amid a worsening sales slump. In 2014, the firm posted one of its worst performances in years. Revenue fell 2.4 percent to $27.44 billion as net income declined 15 percent to $4.76 billion. It was the first time both measures have declined in the same year since 1981. Its same-store sales, a key metric for restaurant chains, fell by a stunning 4 percent in the United States and 1.7 percent worldwide, which suggests that interest from existing customers is declining.

One major factor contributing to McDonald’s disappointing performance is its failure to evolve with a new generation that has different attitudes about what they buy and how they buy it. The changes add up to a new playing field for traditional fast food firms. Being slow to respond to changes in customer tastes has created an opening for so-called fast casual restaurants that have responded to changing expectations of what fast food can be.

Restaurants like Chipotle and Panera offer fresh ingredients and customized food at prices that are higher, but still affordable. While these restaurants still make up a much smaller portion of the market than their traditional fast-food counterparts, they have grown very quickly, spreading like kudzu across the land. A food fight is brewing for sure.

The three largest segments of the restaurant industry are full service, fast food and fast casual. While the fast casual segment is the smallest of the three, it accounts for $34 billion of the overall $710 billion restaurant market. It is also the fastest-growing segment, with an 11 percent growth rate. And while the average McDonald’s customer spends about $5 a visit, the average Chipotle customer spends more than twice that amount.

McDonald’s and the other traditional fast food firms will have to make some difficult decisions if they hope to attract regain their historical rate of revenue growth Millennials, that fast-growing demographic of young, single, health conscious professionals who earn above-average incomes and eat out twice a week or more, represent a gold mine of sales and profits. Appealing to such new market segments may well require McDonald’s to develop its own fast casual concept in the United States.

One thing is for sure, when it comes to satisfying changing consumer tastes and expectations, announcements like those recently made by the McDonald’s new CEO that all the chicken served at its restaurants will be free of antibiotics used to treat humans and that the 120 menu items in its 14,000 United States restaurants will be rationalized are unlikely to do the trick.  

originally published: April 4, 2015

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