The Line-Extension Time Bomb Claims Another Victim: McDonald's
Decades ago, I was kicked out of a Young Presidents' Organization seminar for claiming that line extensions were destroying the McDonald's brand.
It's too late to get back into that YPO meeting, but recently I got some proof to back up my claim.
McDonald's is in trouble.
Earlier this year, its chief executive was fired amid a barrage of negative publicity. Franchisees, in particular, are unhappy. "They accuse the company of ignoring their concerns," according to a recent article in BusinessWeek, "on everything from bloated menus to ever-more-costly kitchen equipment to wages for counter workers."
A recent consumer survey by Nation's Restaurant News documents how far McDonald's has fallen. Among 111 limited-service restaurant chains, McDonald's ranked second to last, with a score of 37. The No.1 chain, with a score of 72, was In-N-Out Burger.
In-N-Out Burger is a West-Coast chain launched at about the same time as McDonald's. The difference is, McDonald's has relentlessly expanded its menu while In-N-Out Burger has not.
The first McDonald's had just three things to eat: Hamburger, cheeseburger and French fries. The first In-N-Out Burger had just four things to eat: Hamburger, cheeseburger, Double-Double (a double hamburger) and French fries.
Today, of course, a typical McDonald's has more than 100 things to eat while a typical In-N-Out Burger has the same four items it started with.
Last year, the average In-N-Out Burger unit ($2,546,000) had greater revenues than the average McDonald's unit ($2,476,000.) Even though the average McDonald's had more than 25 times as many items to eat on its menus.
If In-N-Out Burger were a national chain with a better name, its lead over McDonald's might be much greater.
Forgetting what made them famous
In 1940, Richard and Maurice McDonald opened McDonald's Bar-B-Q restaurant in San Bernardino, California, with 25 menu items, mostly barbeque.
Eight years later, the McDonald brothers realized that most of their profits came from hamburgers so they closed down their carhop drive-in and after renovations reopened with a simple menu of just three items to eat, plus shakes and drinks, a total of 11 menu items.
The carhops were eliminated to make McDonald's a self-service operation. That was the key idea that created today's fast-food industry. No waiters or waitresses.
Maybe McDonald's needs to do today the same thing they did 67 years ago. Analyze their business and focus on their most popular and profitable items. My guess it would be hamburgers, cheeseburgers and French fries as well as the soft drinks that go along with them.
It's funny. For "expanding" McDonald's, Ray Kroc is considered a marketing genius while the media mostly ignores Richard and Maurice McDonald's brilliant idea of "narrowing the focus" and creating the fast-food industry.
What keeps McDonald's going?
McDonald's was the first national fast-food chain, not just the first hamburger chain. Aggressive expansion to 14,350 units in America alone has allowed McDonald's to dominate the category in most of the communities it serves.
With annual sales of $35.4 billion, McDonald's dwarfs the No.2 brand, Starbucks with $13.0 billion in sales and No.3 Subway with $12.3 billion.
Leadership is such a powerful position it can withstand decades of marketing mistakes. Yet companies almost never equate their success to their leadership positions. It's always attributed to better products and better service.
So how will McDonald's cope with its current difficulties? You know the answer to that question: Expansion.
Expand the breakfast menu to lunch and dinner. (But won't that slow down service later in the day?)
It's never going to work. McDonald's need to create a better perception. And the only way to create a better perception is to drastically cut the menu so consumers have an answer to the question, What does McDonald's stand for?
Once the largest retailer in America, Sears in now in 16th place. (And that includes Kmart, part of Sears Holdings.)
Furthermore, Sears is rapidly losing both sales and money. Sales have fallen from $43.3 billion in 2010 to $31.2 billion in 2014, a decline of 28 percent. In those five years, Sears Holdings has lost $7.0 billion.
Sears was relentless in expanding its business. Over the years, Sears bought the stock-brokerage firm Dean Witter, the real-estate company Coldwell Banker and Allstate Insurance. Sears even launched Discover, its own credit card.
In 2002, Sears bought Lands' End. Then came Eddie Lampert's 2004 acquisition of Sears by Kmart. Headline in BusinessWeek announcing the acquisition: Eddie's master stroke.
Eddie's master stroke? Why does the business press almost always see "expansion" as a winning strategy and ignore the time bombs that are almost certain to go off later?
Yahoo follows Sears' path
Yahoo was the first major search engine and once was worth $140 billion on the stock market. (It's now worth $27 billion, thanks in part to its holdings of Alibaba stock.)
But search wasn't good enough for Yahoo. So it rapidly made many acquisitions and turned them into Yahoo Mail, Yahoo Games, Yahoo Groups, Yahoo Pager, etc.
Since Marissa Mayer joined the company as CEO in 2012, Yahoo has made 50 acquisitions, including Tumblr for $1.1 billion. But Yahoo revenues continue to fall. Here are annual revenues for the past seven years.
2008: $7.2 billion
2009: $6.5 billion
2010: $6.3 billion
2011: $5.0 billion
2012: $5.0 billion
2013: $4.7 billion
2014: $4.6 billion
You know you have a good strategy when you have a single-word answer to the question, What's a Yahoo? That answer used to be, Search.
Today, Google owns "search," Larry Page and Sergey Brin's "master stroke" that made the company worth $427 billion on the stock market.
Check the websites. Visually, the Google site says "Search." Visually, the Yahoo site says "Mess."
What's a Yahoo today?
Marissa Mayer uses the acronym Mavens to describe the company's new strategy. Here is how to dissect the word.
Ma . . . Mobile apps.
Ve . . . Video.
N . . . . Native advertising.
S . . . . Social.
Let me suggest a better strategy and a better acronym.