Business

McDonald's Faces 'Millennial' Challenge

Customers in Their 20s and 30s Are Defecting to Fast-Casual Restaurants Like Chipotle,
Five Guys
By Julie Jargon
Aug. 24, 2014 9:05 p.m. ET

Behind McDonald's Corp.'s worst slump in a decade is a trend that may auger even
tougher times ahead: The Golden Arches is losing its luster with younger consumers.
The world's largest restaurant company by revenue earlier this month reported its
sharpest monthly decline in global same-store sales since early 2003, adjusted for
calendar irregularities.
In the U.S., with more than 40% of McDonald's 35,000-plus global locations, sales at
restaurants open at least 13 months have been flat or falling for most of the past year.
The hamburger giant on Friday announced it was replacing the head of its U.S. division
for the second time in less than two years. The company tapped a former executive,
Mike Andres, to take the helm of the domestic businessanother sign that the company
is trying to revive its fortunes at home.
McDonald's stock has traded in a relatively narrow range in the nearly 26 months since
Chief Executive Don Thompson took the helm, while the share prices of many of its
rivals have soared. McDonald's shares are down about 2% since the start of the year,
closing at $94.45 Friday.

Demographics help shed light on McDonald's

woes. Data compiled for The Wall Street Journal
by restaurant consultancy Technomic Inc. point
to an age problem for the chain. Customers in
their 20s and 30slong a mainstay of
McDonald's businessare defecting to
competitors, in particular so-called fast-casual
restaurants like Chipotle Mexican Grill Inc. and
gourmet-burger chain Five Guys Holdings LLC.
Increasingly, younger diners are seeking out
fresher, healthier food and chains that offer
customizable menu options for little more than
the price of a combo meal.
The percentage of people age 19 to 21 in the
U.S. who visited McDonald's monthly has fallen
by 12.9 percentage points since the beginning of
2011, according to Technomic, while the
percentage of customers age 22 to 37 visiting
monthly during that period has been flat.
During the same period, the percentage of 19-to21-year-olds increased their monthly visits to
fast-casual restaurants by 2.3 percentage points,
and 22-to-37-year-olds by 5.2 percentage points, Technomic says.
Alec Petersen, a 21-year-old from Hoboken, N.J., rarely visits McDonald's anymore. "I
do have nostalgic memories of McDonald's, but Chipotle has much better quality food,
or at least it feels like they do," said Mr. Petersen, who recently graduated from Duke
University.
McDonald's says new items like its McWrap sandwicheschicken and vegetables
rolled in tortillasare helping to woo millennials, consumers in their midteens to mid30s. The Oak Brook, Ill.-based company also is trying to enhance its credibility with
young customers by marketing more on digital channels and testing mobile ordering
and payment.
"The millennial generation has a wider range of choices than any generation before
them," McDonald's Global Chief Brand Officer Steve Easterbrook said in an interview.
"They're promiscuous in their brand loyalty. It makes it harder work for all of us to earn
the loyalty of the millennial generation."
A U.S. flag flutters in the wind in front of a sign for a McDonald's restaurant in Los
Angeles in th

McDonald's U.S. sales struggles have also been compounded recently by other woes
challenging Mr. Thompson, a 24-year company veteran who became CEO in July 2012
after a decade of strong growth.
In China, a former bright spot, sales have fallen after authorities last month accused a
key supplier of selling expired meat. McDonald's said the problem drove sales at
existing locations in its Asia/Pacific, Middle East and Africa region down by 7.3% in July.
In Russia, amid heightened tension between the West and Moscow over the conflict in
Ukraine, authorities last week closed some McDonald's restaurants in Moscow for
alleged sanitary violations and are now inspecting its outlets across Russia.
Meanwhile, at home, it also is grappling with growing worker protests calling for higher
wages and the right to organize. And the National Labor Relations Board last month
determined that McDonald's could be treated as a joint employer with its franchisees in
labor complaints, which could make the company liable for the actions of its franchisees.
McDonald's has acknowledged other recent missteps, including an overcrowded menu
that slowed service. Executives have said that the nearly 60-year-old company has lost
relevance with consumers. In June it set up a "learning lab" at a restaurant in Laguna
Niguel, Calif., to better understand what people want and to experiment with
customizable burgers.
The fast-casual concept took shape in the 1990s, melding the fresher ingredients and
custom ordering of table-service restaurants with the convenience of fast-food joints.
Other examples include Panera Bread Co., Noodles & Co., and Corner Bakery Cafe.
The chains appeal to younger consumers who came of age at a time of skepticism of
fast foodevident in the 2001 book "Fast Food Nation" and the 2004 documentary
"Super Size Me"and a burgeoning foodie culture that emphasizes fresh ingredients.
A decade ago, there were 9,000 fast-casual restaurants in the U.S., versus nearly
14,000 McDonald's. Now, fast-casual restaurants number more than 21,000, according
to Technomic, while McDonald's U.S. restaurant count has risen only slightly.
Chipotle, founded in 1993, today has more than 1,600 U.S. outlets and a market value
of about $21 billion. Five Guys, which boasts that it offers more than 250,000 ways to
order a burger, has grown to more than 1,000 outlets since it was founded 28 years ago.
Last month Consumer Reports magazine said that in a survey of more than 32,000
subscribers, readers rated McDonald's burgers as the worst-tasting of 20 rival burger
chains.
The magazine cited the preferences of younger consumers as a main factor. "Diners,
especially younger adults in the millennial generation, may be more willing to go out of
their way to get a tasty meal," Consumer Reports said.
3

McDonald's responded that it is "proud to serve 27 million customers" daily in the U.S.,
and "It's important for us to listen to their feedback as it helps us better meet their needs
and expectations."
Fast-casual chains like Chipotle and Panera also have cultivated an image of social
responsibility that appeals to many young people, such as by offering organic
ingredients and pork from "naturally raised" pigs
Millennials "want to buy into a brand not just from it," said Mr. Easterbrook. He said
McDonald's is developing mobile apps that will enable people to access information
about the company's social responsibility. "What we've got to do is find interesting and
engaging ways to share that information with millennials, not old-fashioned corporate
lecturing.
Yet adjusting to the new competitive threats is tricky for such a giant and its huge,
complex supply chain. Fresher ingredients and more customizable orders could appeal
to some customers but alienate others by driving up prices or slowing preparation times.
Some analysts and investors feel McDonald's is simply too big to make meaningful
changes within its U.S. restaurants. Scott Rothbort, president of LakeView Asset
Management, who sold his McDonald's shares earlier this year, says the company
needs to do something bold to juice growth, such as acquiring a fast-casual chain.
McDonald's has been a player in the fast-casual segment before. It bought a stake in
Chipotle in 1998, which it later increased before selling it eight years later for $1.5 billion.
"McDonald's has an image problem and it needs to set out a vision of what it wants to
be," said Dieter Waizenegger, executive director of CtW Investment Group, which
advises pension funds that have holdings in McDonald's. "They need to chart a new
course."