Written by Chris Fan & Jacob Romansky
Brand elasticity has its limitations, and McDonald’s might be stretching theirs beyond its zone of believability. McDonald’s has introduced a number of changes in its international stores that indicate a departure from its traditional brand positioning. In the UK, it launched a pilot program to introduce its new Signature Premium Burger that it hopes will help it compete against the likes of Shake Shack and Five Guys – darlings of the fast casual burger space in the US. The premium burger will be thicker and use fresh, local ingredients. In Asia and Europe, McDonald’s is experimenting with its “Experience of the Future” retail concept to bring the brand upscale and capture the attention of consumers.
These decisions show McDonald’s is trying to elevate the brand to a more premium space in some markets. Reaching for more premium consumers is not, in itself, a poor decision. The decision to do so with the McDonald’s brand, however, will be increasingly problematic as the brand overstretches. The core of the McDonald’s brand is serving inexpensive, fast-food in a family-friendly environment. Fast casual restaurants like Shake Shack and Chipotle come in at a higher price point and offer a more upscale, adult-oriented feel. Look at the “Experience of the Future” retail concept and you see a contemporary, upscale store that seems aimed at young professionals rather than those that typically frequent quick-service shops in the McDonald’s price tier.
Three reasons limit McDonald’s from plausibly stretching its brand to serve fast casual consumers. First, the McDonald’s consumer purchases at a low price point and is not necessarily able to buy these more premium products. This factor may create a price ceiling that keeps these core consumers from buying a more premium offering. Second, the perception of the McDonald’s brand as cheap, fast-food service remains. Lastly, McDonald’s is perceived as an unhealthy dining option with few quality choices for individuals that are looking for a healthy meal.
McDonald’s cannot be all things to all people. Although the ability to continue extending the McDonald’s brand to increasingly premium tiers would seem to be the progression needed to compete with these fast-casual upstarts, it contradicts the characteristics of the core brand. Every piece McDonald’s removes from its core space creates the potential to alienate its existing customers.
Our recommendation for McDonald’s is two-fold. First, McDonald’s must make a strong commitment to changing its ingredients and current menu items in an effort to shed its “unhealthy” image. When 71% of American consumers claim healthfulness impacts their food and beverage purchases (according to the 2014 Food and Health Survey), McDonald’s must give more than a perfunctory nod to the trend if it wants to win. This is not to say that McDonald’s hasn’t made an effort to address this consumer behavior. It has removed ingredients such as sodium phosphates and maltodextrin from its grilled chicken sandwich, but health conscious consumers don’t want to be limited to only one or a few items. Success looks like a major revision of its menu, similar to the promise Panera made to remove all artificial ingredients by 2016, as it communicates a clear commitment to health by way of premium food.
Second, if McDonald’s strategy is to compete in a more premium space, then a new brand should be introduced. The introduction of a premium brand – let’s call it Ronnie’s as an ode to the brand’s iconic mascot – alongside McDonald’s enables the company to segment its target consumers, retain its core consumer base, and avoid dilution of its premium business. Through Ronnie’s, McDonald’s will be able to serve consumers with more disposable income and more effectively compete with Shake Shack and Five Guys without being associated with the negative connotations of the McDonald’s brand. This type of strategy is not unheard of, as there is evidence of it in many different industries. For example, when Toyota began competing in the luxury vehicle category, it introduced the Lexus brand. Even more recently, Hilton Hotels and Resorts introduced its affordable Tru brand, which is focused on targeting millennials.
With a revamped menu that acknowledges the growing health consciousness trend and a new but separate premium brand, McDonald’s should be positioned to win. The McDonald’s brand carries considerable weight with consumers and should be preserved, while a new brand can be used to compete in the more profitable premium market without alienating the core consumer base.
