Too much marketing, and a bad discount, hurt McDonald’s last quarter

A K-Pop Demon Hunters promotion was the first in a string of McDonald’s marketing last quarter. | Image courtesy of McDonald’s.

McDonald’s threw a lot at its customers last quarter. And maybe that was the problem. 

The fast-food giant, pushing for more sales and traffic, had a lot going for it in the period. 

It started the quarter with a marketing promotion in connection with the highly popular Netflix show K-Pop Demon Hunters. 

It added an expanded line of beverages like dirty sodas and boba teas and now energy drinks. 

It added a new menu with 10 items priced at $3 and under and changed its loyalty program. 

And then the FIFA World Cup came to North America and McDonald’s started pushing one of the biggest marketing promotions in its history to go along with it.

What did the company get for all that? A 0.8% same-store sales increase and falling traffic in the U.S., the chain’s biggest market. “This was below our expectations,” CEO Chris Kempczinski told analysts at the outset of the company’s second-quarter earnings call on Tuesday. 

“We don’t have a strategy problem,” he added. “We simply didn’t execute at the level we needed to in the second quarter.”

Kempczinski and CFO Ian Borden then detailed the problems they see in the U.S. market on a day in which the company named Skye Anderson its new president. 

While McDonald’s described that decision as part of a planned succession, it was difficult to separate that decision from the executives’ comments detailing the market’s challenges. Most of the earnings call was devoted to what they see as execution problems in the U.S., where McDonald’s has nearly 14,000 restaurants.

In his comments, Kempczinski laid blame for some of the quarter’s challenges on the constant nature of the company’s marketing initiatives in the period. 

That many promotions made life tougher on the restaurant’s managers and employees responsible for executing these strategies. 

Each of the promotions, Kempczinski said, requires preparation work, including training and merchandising. To do these back-to-back-to-back put pressure on in-store operations, slowing traffic and hurting sales in the long run.

“If you just put yourself in the shoes of a restaurant manager, beyond the day-to-day stuff, that’s a lot of things to be throwing at a restaurant,” he said. 

There’s also the impact on the customer. It’s tough for each individual marketing message to break through to consumers when the company is doing so much at the same time. 

“You’ve got a K-Pop Demon Hunters message, then you have a value message, then you have a beverage message, then you have a FIFA message,” Kempczinski said. “It’s tough to drive awareness when you’re sort of jumping around and giving those two, three, at most four-week windows.”

But that’s not the only problem. The company’s value offers in particular did not resonate with the chain’s consumers, and traffic declined as a result. 

McDonald’s has spent the past two-plus years working to improve its value reputation, often convincing franchisees to lower prices on national value offers. Most recently, the company convinced operators to lower prices on items like McChickens, McDoubles and other products to get them comfortably under $3 as part of a new value push offering 10 items for $3 or less. 

McDonald’s Under $3 Menu was a “bad trade.” | Image courtesy of McDonald’s.

But that replaced a separate offer giving customers a second sandwich for $1 when they bought one. So if a customer bought a McChicken for, say, $3.50, they’d get a second McChicken and pay $4.50. 

If McDonald’s lowered that price to $2.50, the individual sandwich would be cheaper, but two would cost $5—an effective price increase.

In addition, the company removed some of the digital offers it used to get customers into its loyalty program. To consumers, in particular the chain’s most loyal, the result was a restaurant chain that offered less value, not more.

“We made a bad trade in Q2,” Kempczinski said. “And we’ve got to get that fixed.”

What’s more, many of the franchisees didn’t follow pricing guidelines with that $3 and under menu. Kempczinski estimated that only 60% to 65% of stores did so, leaving about a third or more of stores with prices that didn’t follow the national strategy. The $3 price limit also gave some operators wiggle room with which to raise prices on some items.

All this comes at a tough time for McDonald’s, which is debuting its “Next” business strategy, which will include improvements to food quality, technology, and hospitality. Indeed: The company in October plans a massive training program that will affect more than 2 million restaurant workers and suppliers to improve service.

It also wants to open more locations and remodel existing locations. McDonald’s has vowed to get to more than 50,000 restaurants by 2027. That goal has been pushed back to 2028. This includes aggressive growth plans in the U.S.

And franchisees are about to be due to remodel their stores as part of a 10-year cycle. Yet the failed value offer reduced their per-store profitability, which may make it more difficult for the company to reach those goals. 

“We have to be really sharp on value,” Kempczinski said. “We absolutely had a miss in Q2 on how we executed it, and that’s what we’re working to fix right now.” 

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