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McDonald's Real Trouble: It's Losing Millennials

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Unstoppable McDonalds
AP/Charles Rex Arbogast
McDonald's (MCD) is still the king -- sorry Burger King (BKW) -- but a lot of competitors are making it's reign uneasy.

The company is losing ground among a key demographic -- people in their 20s and 30s. These young consumers, who often have young children, have long been the foundation of McDonald's empire.

While millennials have not entirely abandoned McDonald's, they're much more willing to try new things -- especially fast-casual restaurants such as Chipotle Mexican Grill (CMG), Panera Bread (PNRA), Five Guys and others.

"Those are the brands that are seeing the greatest amount of growth right now," said Rich Shank, senior consumer research manager at Technomic, a restaurant consulting firm.

At the same time, McDonald's has been stagnating, raising questions about its dominance. A key measure of sales at its more than 14,000 U.S. restaurants has been consistently flat or slightly lower over the past year, compared the numbers from a year earlier. While the Golden Arches has stagnated, its competition has grown in terms of sales and the number of restaurants. Technomic says the number of fast-casual restaurants in the U.S. has more than doubled over the past decade, while the number of McDonald's outlets has increased only slightly.

The latest in a series of brand tracking surveys by Technomic finds that McDonald's has not been growing its base. Shank says millennials have taken advantage of the tremendous growth in restaurant options. A recent Consumer Reports survey found that consumers are also demanding better food quality and healthier options. "A lot of younger diners go out of their way for a tastier meal," according to Tod Marks, senior project manager at Consumer Reports.

The magazine ranked McDonald's last among the 21 burger restaurants on the survey list.

Analysts say that millennials are driving a lot of the consumer ingenuity in food industry, thanks to their willingness to pay up for better quality meals.

But this is hardly the first time McDonald's has faced a serious threat. "Around 2000, they faced a similar slump and they had a fairly successful time before and during the recession," according the Shank, as the company emphasized value. "And in 2004, they were getting beat up with the 'Super-Size Me' phenomenon, but they focused on food quality, launched McCafe, refreshed the brand."

He says the fast food industry needs to recapture some of that excitement and innovation, and he thinks it will. "We're fairly optimistic they'll figure things out, based on past performance."

In fact, McDonald's is working to shed its reputation for serving cheap, unhealthy food, and improve how it's perceived by younger consumers. It recently rolled out chicken and vegetable McWrap sandwiches, as well as egg white substitutes in its breakfast sandwiches.

And earlier this summer, the company opened what the company calls a "learning lab" at a restaurant in California to experiment with various menu items.

"McDonald's gets beat up," said Shank. "People rate their brand lower than others, but they still go there quite often. McDonald's has nostalgia behind it which is quite powerful." Despite its troubles, McDonald's remains one of the most recognizable brands in the world.

"People will go to Panera when they want a salad," according to Shank, "but they'll still go to McDonald's when they want a burger and fries."

He adds that McDonald's has been in this position before and it has the resources to steer the ship in the right direction. "I wouldn't count them out," Shank said.

 

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