Unpacking McDonald's 3Q23 Traffic Dip: Is the Lack of Promotional Innovation a Culprit?
In 3Q23, the Quick Service Restaurant (QSR) sector saw increased competitive pricing and promotions. Our last month's QSR Idea Hunt and Industry Trends Black Book highlighted a notable upswing in discounting activities by 14% in 3Q23, as illustrated in the accompanying chart. Contrary to the trend, McDonald's (MCD) seemed to have pulled back on its promotional endeavors, registering a decline in one promo.
This development coincided with a discernable slowdown in MCD's traffic during the third quarter of 2023. After a robust growth of +8.3% in 2Q23, the traffic dwindled to a slight contraction of -0.3%. The decline brings to light some pertinent questions regarding the company's promotional strategies in an era where customer engagement is the linchpin traffic growth.
McDonald's has been riding on its "Free Fries on Friday" promotion for over a year. While this may have been successful initially, prolonging the same offer, devoid of any new deals apart from the Grimace promotion, could be viewed as a stagnation in promotional innovation. In a landscape where competitors incessantly roll out novel discounts and offers, McDonald's static promotional stance might have contributed to the diminishing traffic. The MCD's year-to-date October traffic also paints a sobering picture, with a dip of 15%, albeit against challenging comparisons. On a brighter note, the 2-year stack displayed a month-over-month improvement, increasing from 1.9% to 2.7%.
As we approach McDonald's earnings call scheduled for October 30th, coupled with the impending December analysis day, the spotlight is on how the corporation addresses this traffic slowdown and its plans to rejuvenate promotional activities. The 3Q23 traffic figures underline a crucial narrative: the imperative of continual promotional innovation to keep customer engagement lively and foot traffic buoyant. The upcoming discussions could provide a deeper insight into McDonald's strategy to navigate the competitive QSR terrain and regain lost momentum.
Golden Arches: Navigating McDonald's Global Stances Amid Regional Tensions
The current situation underscores the complex interplay between global brands, geopolitics, and regional dynamics in a 'Fourth Turning' environment.
Navigating the global market, a brand often encounters a mosaic of ideologies from diverse cultural, political, and societal norms inherent in different regions. The recent responses of McDonald's franchises to geopolitical tensions exemplify the complex interplay between global brand identity and regional ideologies. While a global brand like McDonald's, Pizza Hut, KFC, or Starbucks may harbor a unified corporate ethos, its localized operations must often adapt to and respect the prevailing ideologies of their regions. If maintained adeptly, this delicate balance allows the brand to resonate with local audiences while retaining its global brand narrative, thus fostering a harmonious interaction amidst a spectrum of ideologies. Unfortunately, customers in one country might not appreciate the goodwill of franchisees in another country, so the strain on these global systems may only mounting.
McDonald's has always championed the mantra, "McDonald's is local." This phrase encapsulates the brand's strategy to harmonize its global identity with local cultures, tastes, and societal norms. Here are some examples of how this mantra has been manifested across the globe: "Local Menu Innovations," "Supporting Local Suppliers," "Employment Opportunities," "Community Engagement," "Local Store Ownership," "Adapting to Local Regulations," and "Customs and Marketing Strategies" We can extend these thoughts to brands like KFC, Pizza Hut, etc. Sadly, we find ourselves in a situation where the entanglement of global brands in geopolitical issues is becoming more apparent, with the Israel-Hamas conflict as a notable instance. McDonald's franchises across the Middle East and Israel are at the crossroads of global corporate identity and regional political dynamics.
Here's what we can find about impacted McDonald's franchisees, their responses, and the broader implications for McDonald's globally:
Israel's Stance: A McDonald's outlet in Israel took to Instagram to express support for the Israel Defense Forces, pledging meal donations to defense personnel, hospitals, and nearby locales. This move underscores the sometimes intricate relationship between local franchises and their host nations' political landscapes.
Preemptive Measures in Lebanon: Amid the heightened tensions, Lebanese authorities deployed military personnel outside popular American food chains, aiming to deter potential retaliatory attacks. This illustrates the ripple effects of geopolitical tensions on global brands.
Autonomous Policies: Considering the situation, McDonald's branches across the Middle East were quick to delineate their operations from those of McDonald's Israel. Many highlighted their independent policy stances, with several announcing contributions to Palestinian humanitarian efforts.
McDonald's Malaysia's Reiteration: McDonald's Malaysia, a wholly Muslim-owned entity, distanced itself from the actions of individual franchisees and reiterated the company's core values. They pledged humanitarian aid to Gaza, illustrating how franchises can retain a distinct identity while aligning with a global brand.
Unified Messages Across Middle Eastern Franchises: McDonald's outlets in Jordan, the United Arab Emirates, Oman, Qatar, Saudi Arabia, Turkey, Kuwait, and Bahrain echoed similar sentiments of autonomy and humanitarian support. These statements underline global brands' need to navigate regional sensitivities while maintaining a cohesive brand image.
Reflection on the Golden Arches Doctrine
First published as an Op-Ed piece in The New York Times in December 1996, Thomas Friedman's "Golden Arches Doctrine" posits that nations having McDonald's outlets are less likely to engage in military conflicts with each other. Recent events, however, pointed out the limitations to that theory in explaining real-world complexities. Global enterprises like McDonald's often encounter challenges conveying consistent messages amidst a spectrum of customer opinions, especially during geopolitical unrest. Historical examples of brands suffering from boycotts and other consequences due to political unrest serve as examples. The unfolding events accentuate the delicate balance global brands must maintain amidst diverse political landscapes. It's a stark reminder of the broader business ramifications that arise from the complex interplay of international brand identity, geopolitical tensions, and regional dynamics. The diverse responses from McDonald's franchises reveal a microcosm of global brands' challenges and considerations amidst evolving geopolitical scenarios. The importance of adeptly navigating these challenges cannot be overstated, as the implications extend beyond the immediate business environment to the broader socio-political sphere.
Bring back the Golden Arches doctrine!
Starboard's Strategic Stir: Bloomin' Brands on the Brink of Bloomin Onion?
All of the operational improvements will take time and likely require new leadership.
Starboard Value, a 10% shareholder in Bloomin' Brands, aims to invigorate the performance, targeting primarily its flagship, Outback Steakhouse. Starboard's blueprint, mirroring its past successful revamp of Darden, proposes enhanced operations and a rejuvenation of Outback's "fun" marketing approach. They argue Bloomin's current market valuation is at a discount, especially when juxtaposed with rivals like Texas Roadhouse and Darden Restaurants, despite Bloomin's superior free cash flow. Yet there is a reason the stock trades at a discounted valuation, and that was not addressed in the deck, but we addressed it in our BLMN Black Book. Though Starboard envisions various growth levers across Bloomin's brand portfolio, the details of the operational ameliorations remain vague. The strategy also underscores the potential of Outback's burgeoning Brazil market, which will likely be sold, and anticipates growth in Carrabba's and Fleming's. Bonefish will also be sold.
Other considerations:
- Starboard's turnaround strategy reminisces about its past successful overhaul at Darden, hinting at a board reshuffle and operational refinements.
- The detailed operational improvement plans remain undisclosed, contrasting Starboard's prior exhaustive presentation to Darden.
- Starboard highlights the untapped potential in Bloomin's Brazil market, with Outback's notable popularity and robust same-store sales growth.
- The emphasis on a more engaging marketing strategy for Outback, recalling its former "fun" campaigns, is pivotal for reviving customer traffic and brand appeal.
