McDonalds has added 12 more sit-down diners in Indiana. Following a string of dispersed marketing initiatives to boost sales growth beyond 2%, McDonalds is investing further in its branded ‘fast casual’ diners. It could be a good way of tapping a current trend in food retail, but McDonalds must make sure that these efforts do not cannibalize traditional sales or worry franchisee owners further.
Fast-casual dining has become big in America. With consumers tightening their purse strings, restaurants that are neither upscale nor too downscale are seizing the market. Between 1998 and 2000, total ‘fast casual’ sales increased from $28.9 billion to $31.3 billion – a 15% increase. In comparison, the food industry as a whole normally grows at a rate of only 2-3% per year.
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McDonalds has been trying to tap into this trend for a while, acquiring Chipotle Mexican Grill, Boston Market, Donatos Pizzeria and the British-based Pret a Manger. Following a successful trial in Kokomo, Indiana,
McDonalds will now convert another 12 traditional fast-food restaurants, also in central Indiana, into sit-down diners. They will serve everything from breakfast combos to steak dinners, as well as the usual hamburgers and fries. Some existing McDonald’s with a Diner Inside will also be opened, leveraging existing distribution networks in a similar manner to last year’s McCafe experiments in Chicago.
Other growth initiatives include new sandwiches, increased value promotions and more restaurant types such as McSnack Spots and McTreat Spots. Which of these efforts will ultimately pay off is yet to be known, but McDonalds certainly needs the boost. In the first nine months of 2001, the company saw US system-wide sales rise just 2% to $15 billion. Same-store sales grew less than 1% in Q3.
In making these changes, McDonalds must be mindful of its existing business. New restaurant formats may cannibalize existing fast-food sales, and new in-store initiatives are not always easy to implement at the franchisee level. For example, a system recommended to speed service requires one employee to take the order and cash, while another fulfills it. This forces franchisees to add labor, thus compounding existing cost escalations.
There is also a growing desire for increased corporate communication, especially after the latest round of franchisee cuts. If McDonalds can meet these requests and leverage this existing immense network, it might find the key to the growth it has been looking for.
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