Dispatches from the Burger Wars

In my travels around the US and occasionally outside of it I have encountered a number of quick-serve restaurants, mainly burger stands, that are attempting to knock off McDonald’s as the top company in that industry, and I have noticed one element they all appear to have in common: they are all failing miserably. This is not to suggest that the competition isn’t successful in its own right, or that all of the other companies in this industry are poorly run or unprofitable, because clearly this is not the case. But a recent article on the Bloomberg/Business Week site points out that in 2012 (the last year for which there is complete data) the average McDonald’s location made $2.6 million in revenue, while the second-best company, Burger King, averaged only $1.2 million per location. And despite the website’s attempt to make the reasons behind this seem dark, complex or arcane, they are for the most part depressingly predictable…

First off, there’s the difference in advertising budgets. If this story is accurate, McDonald’s is spending about $16.30 in advertising for each dollar Burger King spends, and that doesn’t even consider any of the other expenses involved in the Marketing function. Based on the relative success of the advertising and promotional programs alone, we can say with some confidence that McDonald’s has a superior understanding of their primary customer demographics and better forward planning for future products and programs. But even assuming that all of the other functions have parity in terms of budget, it does not seem far-fetched that a company outspending its largest competitor by a factor of 16.3 to 1 in advertising budget would be more successful in selling consumer products. Unfortunately, things just go downhill from there…

According to Bloomberg, McDonald’s is outselling the competition in off-peak times, such as breakfast and mid-afternoon snacks, because of its superior product mix. Industry efforts to duplicate the famous McDonald’s breakfast menu have not been completely successful, and the introduction of viable snack foods (like the successful wrap products) and a competitive line of coffee products (good enough to cause trouble even for Starbucks in some markets) has made the company far more profitable. Even worse, the attempts by industry competitors to duplicate the success of the infamous Happy Meal ™ have met with indifferent results, which not only increases the number of families doing business with McDonald’s but helps the company develop life-long customers beginning at preschool age. At this point the popularity of the product has made it the premiere choice for movie tie-in promotions, which is just reinforcing the success of what was already the leading program in the industry…

Now, it should be obvious that none of these products would work nearly so well if the company offering them was not able to execute the programs correctly, and the same article goes on to point out that in addition to the well-known food quality and consistency measures, McDonald’s also surpasses the competition in terms of operational efficiency. This may not seem like a big issue, but consider the difference that a faster drive-through operation can make to the over-all profitability of a quick-serve restaurant, given that some locations will obtain upwards of 65% of their sales through the drive-through window. Now consider that McDonald’s averages almost 5% faster on drive-through orders over the competition. I don’t have current numbers on walk-up speeds, but the last time I looked the company’s edge was even higher there, given the efficiency of their kitchen designs and the high degree of automation in use in many of the restaurants…

I call this to your attention because most of the competitors I have studied tend to attribute their lower performance, or inability to compete with the industry leader on equal terms, to one or more of the advantages an entrenched opponent who already occupies the top spot will enjoy. And, in fairness, there are any number of ways in which McDonald’s does command specific advantages that derive from their market position, from improved name recognition to better negotiating terms when obtaining movie-tie in promotions. But if these statistics are correct, then the key factors that explain the firm’s dominance are simple enough to explain on a single web page – or a 732-word blog post…

Overcoming those advantages would be another matter entirely. But that’s a post for another day…