Changing consumer tastes hurt McDonald’s and Coca-Cola

This month, McDonald’s unveiled a sweeping restructuring plan. It was widely expected after years of slumping sales growth, and an admission by the newly installed chief executive that the company had not kept up with a revolution in consumer tastes.

Analysts applauded the plan’s $300m in cost savings, and an organisational restructuring that should streamline operations and strip out layers of bureaucracy.

But many wondered where exactly — in the 23-minute unveiling video, the press release and the hour-long analyst call — was the meat of how McDonald’s would revive a brand that has been battered, as consumers shift from greasy burgers and fries toward food marketed as fresher and more natural. The company’s shares traded down nearly 2 per cent in the hours after the announcement.

“Consumers vote with their dollars, and right now the brand has seemed to stagnate in the eye of the consumer,” says RJ Hottovy, analyst at Morningstar in Chicago. “[Addressing] that was the big hole in the presentation.”

McDonald’s, the world’s largest “restaurant group”, is among the biggest victims of a shift in consumer tastes toward health and wellness that extends from food and beverage to apparel and cosmetics. While strong brands are as important as ever, this change has transformed the way consumers interact with them, and created an environment in which authenticity is highly regarded.

Chipotle, the burrito chain that is exploding in growth and — many analysts say — eating McDonald’s lunch, is a master of authenticity, says David Garfield, head of the consumer products practice at consultancy AlixPartners.

“They’ve never said: ‘We’re the healthiest alternative to quick serve or fast casual dining’,” he says. “What they’ve said is that they will try to bring natural and fresh ingredients to their consumers and bring interesting and flavourful meals to their customers. I think they are an authentic brand in that respect.”

Consumers believe that Chipotle’s dedication to antibiotic-free meat and organic ingredients is sincere. So they are considered “healthier”, despite the fact that a Chipotle burrito with chicken, white rice, pinto beans, cheese, guacamole and salsa contains 1,100 calories — 60 more than a Big Mac and large fries.

McDonald’s has tried to counter its reputation as a purveyor of fatty, unnatural junk food with a video series in which a host marvels at the real meat that goes into its Chicken Nuggets. It has also launched a marketing campaign that allows consumers to ask questions about the company’s food. But the user-submitted questions speak to the scale of its challenges: “Is the McRib made from real pork?”, “Are there worms in your beef?”, “Do you make fries with real potatoes?”

It is important that brands strive for transparency, because in the age of Google and social media, consumers demand it, says Shilpa Rosenberry, of consultancy Daymon Worldwide.

“In the early years, consumers were infatuated with brands. The notion of quality was assumed and consumers were very content that brands were a primary marker,” she says. “Authenticity goes far beyond brand today — consumers must understand how it was made and who made it. Is the company being true to fair trade practices? How does it treat its employees?”

The driving force behind these changes is millennials, who are “more than ever looking for this type of authenticity and honesty from companies they want to do business with”, she adds.

For decades, sales of Big Macs grew along with their natural accompaniment, Coca-Cola. At the same time, portion sizes and American waistlines were also expanding.

Coke, too, has found itself on the wrong end of the shift in consumer tastes. Fizzy drinks sales volumes in the US fell for the 10th consecutive year in 2014.

The company has diversified into juices and bottled water in order to compensate. But it has taken a radical approach to rebranding Coke itself, by reframing a product it once tried to get consumers to drink in half-gallon portions to one that comes in an 8-oz glass bottle and is, according to US head Sandy Douglas, a “treat”.

“Strategically, I think of Coca-Cola as the greatest treat,” he says, noting that that is how the brand was marketed when he was growing up.

This is Coke finding a way to engage within the new, health-obsessed environment.

Mr Garfield says: “If you have a product that really doesn’t have any of the core health and wellness aspects, you have to be honest and say this is the once-in-a-great-while selective indulgence for when you grow weary of the drive to be healthy and well.”

The goal is to bring the brand back to its roots through the use of smaller cans and bottles, which currently make up 5-6 per cent of total sales, but are growing at 10-15 per cent annually.

“I believe that the Coca-Cola brand in 2050 will be [in a] 6.5 oz and 8 oz bottle,” he says. “The consumer will take it back to that special experience.”