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MCD era già stata in difficoltà in passato ma qualche tempo fa c'era troppo pessimismo, con quei grandi business che hanno quella che Tom Russo chiama "capacità di soffrire" non bisogna mai dimenticare la massima di Buffett: "Time is the friend of the wonderful company, the enemy of the mediocre."
It is the “dead zone” lull between lunch and dinner, yet McDonald’s is bustling with customers tapping their orders on huge screens. The Chicago store is acting as a blueprint for an overhaul of the world’s biggest fast-food chain in its biggest market. A glass case displays freshly baked apple pies and croissants. Smiling employees, dressed all in black, carry trays of burgers and fries to minimalist tables. “It doesn’t even smell like a McDonald’s,” says a colleague.When asked why he is spending $1.1bn to remodel thousands of US restaurants to mimic this one, Steve Easterbrook, McDonald’s chief executive, is interrupted by a customer who asks for his Instagram handle. “You have IG, right?”, he shouts, waving his iPhone. He is an aspiring photographer looking for social media followers, and his question answers mine — this is the consumer the 62-year-old burger chain is chasing.Mr Easterbrook, a soft-spoken British accountant, has worked at the fast-food chain for more than two decades. He took over in 2015 charged with reviving its reputation and regaining some of the half a billion customer orders it had lost in the US since 2012 and made it his mission to reinvent McDonald’s as a “modern, progressive burger company”.It is a phrase he used with investors when he first took the top job a month after the company reported its first annual drop in same-store sales in the US in 12 years. At the time observers declared the company, which helped define American diets, had lost its identity. Mr Easterbrook repeated the words throughout subsequent earnings calls.
“That was sort of their North Star,” says Sara Senatore, an analyst at Bernstein. A former employee is more blunt, describing it as a “cliché phrase” that could mean “anything and everything”.However vague the plan remains, it does appear to be working. It is a challenging time for the US restaurant business. The industry has seen “little to no” growth in visits to restaurants in the past two years, according to market researchers NPD Group, while trade publication QSR declared last year the worst for restaurants since the financial crisis, after sales dropped sharply in the second half of the year. Grocery price deflation has made a stronger case for cooking at home, and a glut of restaurants has given people more choice if they do decide to go out.
But after four years of shrinking traffic, McDonald’s this summer lured people back through its doors, posting a rise in customer visits in the second and third quarters. Comparable sales rose between 4 and 7 per cent each quarter this year. Investors have lauded Mr Easterbrook’s progress: the company’s share price has soared 70 per cent to $168 since he took over. The makeover has already been rolled out in much of Europe, with about one-third of French and German restaurants having been remodelled. McDonald’s feeds nearly 70m people every day, making the tale of how it dug itself out of “staggering” customer losses a case study for the business of eating. McDonald’s executives insist the success is built on a return to low prices and convenience, rather than chasing the whims of diners. With $25bn in annual sales and one of the most recognisable brands, the odds were in its favour to stage a comeback. But the way in which McDonald’s achieved it came as a surprise even to its own bosses.Back in 2014 the prevailing wisdom was that McDonald’s was being dethroned by new rivals such as Chipotle Mexican Grill, in a sector dubbed “fast casual”. These outlets emerged after the financial crisis with price points a few dollars higher than traditional fast food, but with a perception that the food might be healthier.Growth in global same-store sales for McDonald’s had been hovering around zero for the past few years, with demand sagging across the US, Asia and Europe, before plunging more than 3 per cent towards the end of 2014. This compelled Don Thompson, then chief executive, to promise “decisive action to fundamentally change” its business.
He pledged to slash costs by $300m and open fewer stores, before being replaced by Mr Easterbrook four months later. Its market share of US fast food slipped from 17.4 per cent in 2012 to 15.4 per cent in 2016, according to Euromonitor. Last year Mr Easterbrook hired Lucy Brady, a longtime Boston Consulting Group executive, to investigate what was going wrong. She led a wide-ranging study to dissect where people were eating. Her results, which Mr Easterbrook describes as “frustrating, but actually reassuring”, showed that the majority of the missing McDonald’s customers were going to other burger chains, such as Wendy’s and Burger King rather than rival fast casual outlets. Customers didn’t stop wanting fast food, they just didn’t want McDonald’s fast food. Mr Easterbrook’s response was to adapt the “modern progressive” doctrine and adopt a less aspirational focus: “the day-to-day basics”. This has materialised in cutting prices for coffee and soda, serving breakfast all day, offering mobile ordering and delivery, and improving the quality, if not the nutritional value, of its food.“To Steve’s credit, he is not stubborn,” says Larry Light, McDonald’s former chief marketing officer. “Instead of trying to come up with new kale and bean salads, fix the familiar. Fast food is not in decline, and I think it will always be the number one way the world eats.”
To walk through the McDonald’s campus is to go back in time. Four levels of faded brick balconies envelope a 1970s atrium, making it feel more like a bare bones public library than the headquarters of a $136bn burger company. The group is about to shift its offices to downtown Chicago, where its neighbours will include the likes of Google, after six decades sprawled across 150 wooded acres in suburban Illinois. Since first opening in 1955, McDonald’s has billed itself as a place to eat cheaply. It embedded fast food into American diets as the US industrial farm system developed to make $1 cheeseburgers feasible.McDonald’s executives, former employees and analysts all agree that pricing is one reason the company has bled customers. “McDonald’s lost the plot on value,” says Ms Senatore. “After the company stopped marketing its dollar value menu in 2013, they never came up with anything that was equally compelling.” The dollar menu accounted for about 14 per cent of total US sales at the time.
After keeping a lid on prices for years, rising commodity costs and wages put pressure on the independent franchisees who operate most of its 37,000 worldwide restaurants. They began increasing prices, which “destroyed the overall value message”, says Richard Adams, former director of franchising for the western US, who has since sold his restaurants and now consults for other franchisees. “They couldn’t advertise the dollar menu [nationally] because franchisees had raised prices way above that.”Wendy’s and Burger King churned out deals such as four items for $4, helping each preserve a market share of about 11 per cent of the US fast food market, while growth in smaller chains such as Sonic Burger and Jack in the Box loosened McDonald’s grip on the market. Some question the wisdom of the company’s decision to begin customising its menu by region in 2004. Mr Light, who led the effort, says it was internally “controversial” for a company who had codified its menu down to how many pickles are placed on different burgers.By 2014, facing fast casual insurgents, McDonald’s took it one stage further, offering mixed and sometimes awkward messages about its menu. The company put clementines into Happy Meals and avocado on chicken sandwiches, while still trying to tap into burger nostalgia with adverts mocking the new lifestyle trends. “There will never be kale here,” declared a 2015 advert for the Big Mac.Under Mr Easterbrook’s watch, the company has taken a “barbell approach” to its menu, beefing up its offers on both the low and high end of prices. Discounts are a core part of the Easterbrook ethos, with McDonald’s churning out $1 and $2 offers for coffee and soda.
In a nod to more health conscious consumers the chain has also promised to strip antibiotics from its chicken meat and corn syrup from bread buns, replaced butter with margarine and is working towards using fresh beef in its Quarter Pounders.But can the food be cheap and higher quality? “It’s about balance,” says Mr Easterbrook. “You can’t just go all in on the premium end, because then you disenfranchise more price-driven customers.” A new “value menu” will be unveiled next year, with price points of $1, $2 and $3. The premium offerings are not necessarily healthy. Its maple-bacon dijon sandwich with buttermilk crispy chicken contains 740 calories and 1,780mg of sodium, nearly 80 per cent of the recommended daily intakes. “American palates have become more sophisticated,” says Ms Senatore. “It’s not necessarily about lower calories, it’s about using whole foods, and McDonald’s is playing to that. But fundamentally the food is still pretty indulgent.”
Mr Easterbrook spent much of his tenure in the UK defending the golden arches’ image, going so far as to request the Oxford English Dictionary change its definition of the phrase McJob from “an unstimulating, low-paid job”. The OED refused. But his tactics paid off, and he was credited with reviving British sales in 2006. For decades the company has taken flak for its implied role in the global obesity crisis. Governments are stepping up their healthy eating campaigns, which analysts warn could threaten McDonald’s recovery.They caution that the company is not out of the woods. “We may have seen the end of market share losses,” say analysts at RBC. “[But] in the past, headlines related to the obesity epidemic have resulted in negative publicity for McDonald’s.” Any new regulations, such as mandated calorie counts, could “negatively impact margins”, they added. Still, analysts who cover McDonald’s remain bullish: more than two-thirds rate it as a “strong buy” even after its stock has already soared by more than 40 per cent in the past year.
The trend towards organic, customised products has jolted large consumer groups from PepsiCo to Procter & Gamble. While fielding online questions ranging from “do you even sell real food?” to “do you use pink slime in your burgers?”, McDonald’s now assures customers that it uses freshly cracked eggs in its Egg McMuffins and ground pork shoulder in its McRib sandwiches. “One of the most significant changes for all businesses since the financial crisis is consumers are more demanding and expect to know more about you,” Mr Easterbrook says. “They are more questioning of all authority . . . you are no longer in control of your message.”Bernstein’s Ms Senatore says it is “hard to argue that they haven’t improved the perception among at least some customers”. “Two years ago the question was whether [Mr Easterbrook] could bring what he did in the UK to the US, because it was such a bigger market,” she says. “It turned out that he could.”
CHANOS: YEAH. SO, WE'RE SHORT ACTUALLY A NUMBER OF THE FAST FOOD OPERATORS. WE'RE NOT SHORT McDONALDS AND THAT'S ONE OF THE REASONS, BUT ONE OF THE THINGS THAT'S SORT OF INTRIGUING TO US OVER THE PAST TWO YEARS IS HOW WALL STREET HAS EMBRACED THE FRANCHISE MODEL. SO IF YOU LOOK AT THE BUFFALO WILD WINGS DEAL, THERE ARE A NUMBER OF ANNOUNCED DEALS. THE WHOLE IDEA, EVERYTHING THAT RESTAURANT BRANDS, QSR DOES, FOR EXAMPLE, THEY'RE TAKING RESTAURANTS BY IN LARGE THAT WERE OWNED AND THEY'RE SELLING THEM TO FRANCHISEES AND THE FRANCHISER.
EVANS: ASSET LIGHT MODEL.
CHANOS: THE ASSET LIGHT MODEL. AND SO EVERYBODY GIVES A HIGHER MULTIPLE TO THE ASSET LIGHT MODEL. THE PROBLEM IS AT THE END OF THE DAY THE BOX HAS TO WORK. AND ONE OF THE EASIEST WAYS TO LOOK AT THAT, IF YOU LOOK AT QSR, WHICH IS A DARLING STOCK, HIGH MULTIPLE, BURGER KING, POPEYES, TIM HORTONS— THEIR LARGEST NORTH AMERICAN FRANCHISEE IS PUBLIC, COMPANY CALLED CAROLS, SIMPLE TASTE. AND IT'S FASCINATING TO LOOK AT THE FINANCIALS OF QSR AND COMPARE THEM TO THEIR FRANCHISEE. THE FRANCHISEE IS STRUGGLING. THE NUMBERS ARE THERE FOR EVERYBODY TO SEE. SALES ARE GROWING A LITTLE BIT BUT PROFITABILITY IS IMPLODING BECAUSE THEY'RE BEING LOADED WITH MORE AND MORE COSTS. AND THIS IS WHAT SOME OTHER FRANCHISEES IN THAT PARTICULAR COMPANY ARE ALLEGING AT TIM HORTONS. LAWSUITS.
EVANS: AND WHERE ARE THOSE COMING FROM, LABOR COSTS, ARE THOSE --?
CHANOS: WELL, THEY'RE HIKING ROYALTY RATES, THEY'RE PUTTING RESTRICTIONS ON THE FRANCHISEES, YOU KNOW, ALL SORTS OF DIFFERENT WAYS TO DO IT. BECAUSE AT THE END OF THE DAY, A FRANCHISE CAN ONLY GROW IN A FEW WAYS. THEY CAN INCREASE THE NUMBER OF UNITS IN THE SYSTEM, THEY CAN – SAME-STORE SALES CAN INCREASE IN THE SYSTEM, OR THEY CAN RAISE THE ROYALTY RATE. THOSE ARE THE THREE LEVERS, I SUPPOSE THEY CAN SELL THEM MORE THINGS OUT OF THE COMMISSARY == MAYBE FOUR LEVERS. SP EACH OF THOSE WITH THE EXCEPTION OF SAME-STORE SALES PROBABLY ULTIMATELY HURTS THE INDIVIDUAL BOX, BECAUSE YOU PUT MORE UNITS OUT THERE, WELL, IT HURTS SAME-STORE SALES.
CHANOS: YOU RAISE ROYALTY RATES, IT HURTS THE FRANCHISEE. SO, IT'S A LITTLE BIT OF THIS ZERO-SUM GAME AND YET WALL STREET GIVES HIGHER AND HIGHER MULTIPLES TO THE FRANCHISORS. NOBODY WANTS TO OWN THE RESTAURANTS ANYMORE. THAT'S KIND OF A PROBLEM AND A PARADOX, AND I SUSPECT WE'RE GOING TO SEE MORE AND MORE DISTRESS IN THE FRANCHISE SYSTEMS AS MORE AND MORE RESTAURANTS SORT OF STRUGGLE BUT YET THE PARENTS ARE DOING WELL.
EVANS: SO WOULD YOU BE SHORT, THEN, THOSE NAMES THAT YOU MENTIONED?
CHANOS: I'D BE SHORT PRETTY MUCH ANYBODY IN THE QUICK SERVICE INDUSTRY BESIDES McDONALDS. McDONALDS STILL CALLS THE TUNE. THEY'RE THE 6 BILLION POUND GORILLA. SO TO SPEAK THEY JUST WENT TO A NEW VALUE MENU A FEW WEEKS AGO, WHICH ALWAYS IMPACTS THE INDUSTRY. IT'S A DOG FIGHT. IT'S A DOG FIGHT DOMESTICALLY. WE AREN'T GROWING. I MEAN, WE'RE PHYSICALLY GROWING PROBABLY, BUT WE'RE NOT GROWING POPULATION THAT FAST. YET UNITS ARE STILL GROWING. EVERYBODY WANTS TO GROW UNITS.
EVANS: WHAT ABOUT FAST CASUAL THEN, WHICH HAS A LITTLE BIT DIFFERENT MODEL?
CHANOS: YEAH, BUT I THINK, YOU KNOW, WHEN YOU START TO SEE THE SHAKE SHACKS OF THE WORLD, THEY BEGIN TO BLUR, RIGHT. PEOPLE, SO ONCE THEY GO TO SHAKE SHACK, MAYBE I'M NOT GOING TO GO TO McDONALDS AS MUCH ANYMORE. SO YOU BEGIN TO BLUR SOME OF THE LINES. PARTICULARLY THE BURGER SPACE.
I would like to make one last comment on this one before I guess, you can answer the capital question is in the long-term, we are committed to China and for KFC, we always mention that we're in 1,200 cities but we still have 1,000 cities in China that we don't have a KFC.
For Pizza Hut, right now, we are only in 500 cities in China. So that means there are 1,700 cities in China that does not have Pizza Hut yet. So in the short term, obviously, we see the bumpiness. But in the long term, we believe the opportunity, the fundamentals are still very good.For KFC, we are already in 1,200 cities and it covers a range of top-tier to lower-tier cities. And the dynamic in the top-tier versus lower-tier cities is quite different.
So if I could use the way to describe it, it's a one country, two strategies. So in the top-tier cities, our focus has been driving same-store sales. We are opening stores but even for Q3, we can see we drive very healthy same-store sales with the offers, the value, et cetera.And for the lower-tier cities, we are very aggressive in opening new stores because there's a lot of white space still available in both the lower tier cities we are in and in the cities where we don't even have one single KFC store. And again, we have seen the result of lower-tier cities right now is giving us very nice system sales growth.
Even though the new store that we opened in imply sales transfer from the existing store to new store, but net-net, the system sales growth is what we want to see in lower-tier cities. So holistically, we believe that we are doing the right thing to drive both same-store sales in top-tier cities and system sales in lower-tier cities.
And you can see in KFC, we have opened more stores for the first nine months than the entire year last year, and that is driven by the economics. When we open a store, we evaluate each store what - on each store basis, whether it makes profit, whether it satisfies a criteria of payback. And we are very happy with the two years - less than two years payback when we open a new store.
So as long as we can open stores, satisfy less than two year payback, we are committed to the new store opening. Now, Pizza Hut, Pizza Hut obviously, we are going through a transition and we are adjusting our business model. As you can see, we are still opening stores in Pizza Hut despite the challenges in the revitalization because it's still the right thing to do.
With that said, we have adjusted our new store model. So what are the characteristics of the new stores that we have opened? First, they are more targeted toward certain customer behaviors, customer needs, locations and they are more delivery-friendly. Secondly, overall, the new stores of Pizza Hut are smaller in the - of the old store on average, the size is about 400 square meters.
The new store, on average, about 300 square meters, so it's a 25% reduction. And we believe this is a much better model to support the growth of both dine-in and delivery business going forward, with much better cost structure from CapEx to upgrading COGS, et cetera. So that's for the unit growth. In terms of coffee, my thoughts are as follows.
First, we are very excited about the coffee category. We believe the coffee category has huge growth potential in China in general. And we have been excited about the coffee category since 2015 when we significantly upgraded our coffee offering at KFC.
And in the past three years, we have seen a huge amount of growth right across China in all of our 5,600-plus KFC stores. And this year, we're going to exceed CNY1 billion sales for KFC coffee alone. But also, we also sell coffee in Pizza Hut as well. We will continue to improve our coffee offering at our core brands. At the same time, we are exploring a new standalone concept in COFFii & JOY.