McDonald’s was once a multibrand company. In 1998 the Oak Brook, Ill.-based firm invested in Chipotle Mexican Grill, a fast-casual chain with just 16 locations. By 2005 that number had climbed to 500. In January 2006 Chipotle made an initial public offering, which was well-received. Its stock price rose 100 percent on its opening day, marking the best IPO in six years.
Later that year, as part of a plan to focus on its hamburger chain, McDonald’s fully divested its interest in Chipotle. It had proved to be a great 8-year investment. For about $360 million, McDonald’s took out $1.5 billion.
But I don’t think they should have cashed in.
Some of the most profitable companies in the world are those that market multiple brands. Over the past 10 years, The Campbell Soup Company generated a net profit margin of 10.5 percent, and PepsiCo, Procter & Gamble and The Coca-Cola Company reported net profits of 12.6 percent, 14.0 percent and 21.6 percent, respectively.
Multiple brands help a company in two different ways: They allow it to enter a totally new field, and they enable it to keep its core brand narrowly focused.
McDonald’s is the largest restaurant chain in the world, with sales last year of $27 billion and net income of $5.5 billion, or a net profit margin of 20.4 percent. That’s the good news.
In August 2012 Nation’s Restaurant News delivered the bad news. Among the 152 chains included in NRN’s annual Consumer Picks survey — which measures customers’ attitudes toward restaurant brands — McDonald’s ranked third from the bottom, with an overall positive score of 38.1 percent, a weighted average calculated from top-two-box responses on various attributes and customer-reported importance ratings for those attributes. The other chains’ Overall Scores ranged from 75.8 percent for casual-dining brand The Cheesecake Factory to 36.4 percent for the limited-service Chuck E. Cheese’s.
McDonald’s, in my opinion, is today’s restaurant chain. Chipotle is tomorrow’s.
There’s no question that a restaurant chain — or any company, for that matter — should focus on today’s customer and today’s business. That’s how a company makes enough money to have a future.
But it also can pay off to plan for changes that are likely to occur in the future. And there have been strong signals about what those changes might be.
Accommodating change
Healthy, natural and organic are the three buzz words most often attached to new food products. Furthermore, the media has devoted considerable space to documenting one of America’s biggest health problems: obesity.
A recent headline in USA Today read, “Percentage of Severely Obese Adults Skyrockets.” And it’s not just adults the media is talking about — childhood obesity is also in the national spotlight.
The restaurant industry is waiting for the U.S. Food and Drug Administration to propose its final rules requiring chain restaurants and other businesses to post calorie counts on menus and menu boards.
Meanwhile, Proposition 37, requiring food companies to label genetically engineered food, failed in California balloting in November, but 47 percent of consumers voted for it.
Changing the food is easy; changing a brand is difficult. What should Burger King do about its 670-calorie Whopper? If the Miami-based chain reduces the size of the Whopper, consumers are going to desert the brand. If it doesn’t change the size of the Whopper, in the long run consumers are going to go elsewhere for healthier food.
Existing brands can’t win at this game. But a new brand can.
Existing brands are too identified with the past. And the stronger the brand, the more difficult it is to change its perception. That’s why McDonald’s should have kept control of Chipotle, a brand of the future.
Most companies cope with change by changing their brands when they should cope with change by launching new brands.
When high-end coffee became a big deal, McDonald’s added high-end coffee to its menu. What it should have done was launch a high-end coffee chain like Starbucks.
When fruit smoothies became a big deal, McDonald’s added smoothies to its menu. What it should have done was launch a smoothie chain like Jamba Juice.
In the mid-1990s McDonald’s introduced a new product called McPizza, which went nowhere. The company and its franchisees were left on the hook for expensive new ovens and widened drive-thru windows that weren’t needed. What they should have done was launch a new pizza chain.
Supermarkets aren't so super
The foodservice industry is not alone in dealing with this problem, either. The supermarket industry is coping with change in a similar manner to McDonald’s.
Whenever a new trend occurs, like the shift toward organic food, the nation’s supermarkets are happy to carry the new, trendy products — which leaves an opening for new chains like Whole Foods.
Compare Kroger, the largest supermarket chain, with Whole Foods. In the last 10 years Kroger has been skating on thin ice. With revenues of $684.1 billion, Kroger’s net profit margin was just 1.1 percent. Whole Foods, in the past decade, had a net profit margin of 2.8 percent.
Safeway, the second-largest supermarket chain, is in even worse shape than Kroger. With revenues of $394.3 billion over the past 10 years, Safeway’s net profit margin was just 0.7 percent.
SuperValu, the third-largest supermarket chain, with revenues of $319 billion, actually lost $2.8 billion in the past 10 years and has put itself up for sale.
Walmart sells more groceries — $145 billion last year — in the United States than any supermarket chain. But Walmart wisely hedged its groceries bet by opening a warehouse operation, Sam’s Club. Last year Sam’s Club did $53.8 billion in sales.
Multiple brands are like an insurance policy. They can protect your company from future changes in the marketplace.
Think healthy, natural and organic, for example. And then ask yourself, “What are we going to do about these trends?”
A second brand could be your best strategy.
Laura Ries is president of Ries & Ries, a marketing consulting firm located in Atlanta. Her e-mail address is [email protected].