In 2015, McDonald's Kept Making New Enemies | Top 15 Annual Report

A growing list of formidable rivals — and itself.

Like any CEO called in to rescue a struggling company, Steve Easterbrook was greeted with enormous expectations when he took the helm in February of last year.

Perhaps because he came up through the brand side, what he brought to McDonald's in his first year was above all a dizzying run of marketing campaigns.

In January, McDonald's "revived" its classic slogan "I'm lovin' it," first launched in 2003, hoping the theme of "love" would close the emotional distance between the brand and its customers. On March 24, the year's most eagerly awaited marketing push reached its peak: 24 cities worldwide — including Sydney, Auckland, Hong Kong, London, and Guangzhou — pulled off a relay-style flash mob called "I'm Lovin' It 24," carrying McDonald's into the Top 10 of Twitter's global buzz rankings for the first time.

Elsewhere, McDonald's launched a YouTube reality-show platform in the UK, plotting programs that would appeal to young viewers; in Japan it introduced a full-service concept called Restaurant M, with an open kitchen and Michelin-starred chefs making burgers; in Canada it opened Salad Society pop-ups pushing health-oriented products; in France it wove Emoji into its advertising; in China it rolled out theme campaigns in quick succession — a 3.14 Pie Day, a "Mama's Black Soft-Serve" promotion, and more. In July it opened the first two Create Your Taste restaurants, in Shanghai and Guangzhou. By year's end it had turned a full year of sales data into an animated "2015 McDonald's Popularity Rankings" GIF, riding the wave of the year-end retrospective.

But business still showed little real improvement.

The first three quarters of 2015 were better than the year before, yet revenues and profits kept falling — profit dropped 33%, 13%, and 23% across the three quarters. The third quarter brought a glimmer of hope when all-day breakfast rolled out to roughly 14,000 U.S. locations starting in October, ending a seven-quarter run of same-store sales declines. But the turnaround came at the cost of closing 700 restaurants.

McDonald's was no longer the defiant loner it had once been. For an entire year it sought reinvention, and nearly everything it did was aimed at courting young people — because young people were no longer its natural constituency.

The things that had once drawn them in — quick, convenient service; safe and consistent quality; a comfortable place to eat; and that slightly rebellious tagline, "I'm lovin' it" — were all, technically, still there.

But their pull had weakened. Food delivery apps could solve the convenience problem with a few swipes; central kitchens could guarantee consistency for chain Chinese restaurants too; and for the experience, Starbucks and Wagas both felt decidedly more upscale.

For young people, McDonald's was no longer cool, and the old sense of brand prestige had drained away — even if you hadn't given up on McDonald's, you probably no longer took any particular pride in being its customer.

McDonald's had stopped exciting young people, and almost every change it faced traced back to one thing: lifestyles had shifted. Yet that shift left McDonald's with a great deal to contend with, and much of what it did looked like a defensive reaction to its rivals. McDonald's was piling up enemies.

1. Food Delivery

This was arguably McDonald's number-one enemy. Remember that "convenience" was the very thing McDonald's was built on — it has always been the brand's most essential quality.

But the online food-delivery boom was redefining what convenience meant. All you needed was a phone and a few swipes, with a vast range of choices. Why had food delivery become such an obvious rival to McDonald's over the past year? The numbers tell the story.

According to Analysys International, the Chinese online food-delivery market recorded over 12 billion yuan in transaction volume in the first half of 2015, up 140% year-on-year — more than the full-year figure for 2014. Baidu Takeout, Ele.me, and Meituan-Dianping together held more than 85% of the market. Baidu Takeout claimed its total transaction volume for 2015 would top 8 billion yuan; Ele.me closed four rounds of funding in a single year, totaling US$2.25 billion.

Don't dismiss the comparison on the grounds that the two are different businesses — at their core, both are solving the same problem: how young people can eat more conveniently.

So on platforms like Ele.me and Meituan, alongside the familiar neighborhood eateries, fast-food chains including McDonald's, KFC, and Burger King all began showing up last year. For McDonald's own delivery service, McDelivery, that was a threat of a different kind. As the delivery platforms grew their share and their bargaining power, McDonald's risked becoming just one supplier among many.

And for McDonald's, that would badly erode everything its brand was built on — its personality, values, and user experience, along with its power to shape the way people live.

2. Mobile Payments

It has to be said: mobile payments gave food delivery a tremendous boost. Analysys International's data also showed that the mobile payments market — driven by Alipay, WeChat, and others — expanded at a breakneck pace over the past year.

Mobile-payment transaction volume in the first three quarters of 2015 had already passed the full-year figure for 2014; in the third quarter alone it reached 4.391 trillion yuan, up roughly 63% year-on-year.

But why call a payment tool an enemy of McDonald's? No one ever said credit cards were a threat to a fast-food giant, right?

Look at it another way. KFC spent more than 20 years in China accepting only cash. McDonald's had long been an equally firm holdout against bank cards and POS terminals — not only because swiping a card, entering a PIN, and signing a receipt ate up precious seconds, but also because the per-transaction fees on small purchases added up to real cost. None of that had ever dented the appeal of McDonald's or KFC for young Chinese people.

But now? Going out without cash and paying by phone had become the younger generation's way of life. See the problem? McDonald's and KFC had lost the power to set the terms on their own turf.

So when KFC started accepting Alipay, it made news. And McDonald's went so far as to open a WeChat flagship store in Guangzhou in November of last year, packing the in-store experience with WeChat touches: on opening day, WeChat red envelopes were reimagined as "red burger packets," and customers who gave their phones a shake could win burger vouchers to redeem on the spot.

3. Convenience Stores

Let's stay on convenience and turn to another stand-in for McDonald's in that same dimension: the convenience store.

If food delivery mostly handles eating at home or the office, the contest between convenience stores and McDonald's plays out largely offline. But it only becomes a real contest once convenience stores reach scale.

In Shanghai — currently China's most developed convenience-store market — there are already more than 6,000 such stores. By comparison, McDonald's has 180 locations in Shanghai; FamilyMart alone has over 800.

Data from Sequoia Capital showed that in 2015, three new convenience stores opened every single day, an industry expanding at unprecedented speed.

At FamilyMart, Lawson, and 7-Eleven, the ready-made boxed meals, rice balls, and sandwiches in the cold case — along with hot items like oden, steamed buns, grilled skewers, and fried chicken — account for roughly 40% of total in-store sales. To draw young shoppers, these chains keep developing seasonal products and rolling out new items without pause.

Both are open 24 hours a day. Walking downstairs to grab a quick meal at a convenience store doesn't sound like a bad option. And compared with fast food, it tends to feel healthier.

4. Health Consciousness

QDaily's research arm once ran a poll asking, "What came into your life that gradually led you to abandon McDonald's?" Out of 5,979 responses, the second most common answer was, "After I developed an awareness of health."

People's health consciousness is now stronger than ever. Green, organic, detox juices, exercise, fitness — all have become part of a prevailing trend. The health messaging of niche brands has started to resonate with young people, to the point where a whole crowd of companies have rushed in to stake their own claim on health.

McDonald's, as the symbol of the fast-food industry, has increasingly been lumped in with junk food in the public mind. The chain has tried hard to reverse that image — introducing a menu where every item comes in under 400 calories, with green salads, lower-calorie fries, and wraps, even deploying kale, the most fashionably virtuous of vegetables. The open kitchen, the salad pop-ups, and the steamed-bun burger are, at heart, attempts to ride the same trend.

But let's be honest: McDonald's was never really about health. Young people once flocked to it because it felt on-trend. And there too, McDonald's is no longer the one making or leading the trends.

That role now belongs to Starbucks, Wagas, and others. Watch Starbucks switch to its red holiday cups every year before Christmas — a routine, predictable move that still sets off an enormous wave of social sharing — and you understand its pull among young people today. Since Starbucks quietly dropped the word "Coffee" from its logo in 2011, it has steadily widened its food offerings; last year it deliberately introduced branded snacks, a move that may eventually turn Starbucks into a fast-food company of an entirely different kind.

As for how Wagas has won over young people, we analyzed it in detail in our "QDaily 2015: Going Younger" series.

Both have become McDonald's most direct competitors: a better space to spend time in, a more premium feel — without giving up service efficiency.

5. Chain Chinese Restaurants

Chinese cuisine has always been hard to standardize, which made large-scale chains nearly impossible, so a sit-down Chinese meal — especially a proper full-service one — rarely entered the running when you needed a quick bite. Central kitchens changed all that.

With a central kitchen, Chinese restaurants can guarantee the same consistency and speed that fast food offers, while serving flavors that suit local diners far better than McDonald's does.

Take Green Tea Restaurant. From the start it used a central-kitchen model: chef training was simplified, ingredient costs came down, and there was enough margin to keep prices low. At the same time, affordable Chinese chains like Green Tea and Grandma's Home have always cared about atmosphere, so the distinctive décor at each location shows far more character than McDonald's interchangeable interiors.

To stretch their productive hours, they also offer set lunches aimed squarely at young office workers — good value, and a genuine threat to McDonald's lunch business.

Then there are the single-dish hits and snacks that have taken on a life of their own. The clearest example is braised chicken rice (黄焖鸡米饭): in the poll above, it was among the most-named alternatives. We traced the arc of its popularity in a separate article — it hits a mass-market sweet spot. People feel it's "a real meal," "hot and satisfying," available on seemingly every corner, and reasonably priced.

As a casual, everyday option, it has become a genuine rival to McDonald's.

6. The Decline of Physical Retail

As more people move their eating and shopping online, the slump in brick-and-mortar retail has become an undeniable fact. Department stores were the relaxed shopping destination for Chinese consumers in the early 2000s; today that era is over.

By June 30, 2015, 25 department stores had closed — more in the first half than in all of 2014. The department stores still standing saw their total floor space shrink by 16.2 million square meters year-on-year, equal to losing 81 complexes the size of Xidan Joy City. McDonald's had traditionally secured prime spots in department stores and shopping malls; stopping for McDonald's after a shopping trip was once a fashionable thing to do. Now, when people head into a venue to socialize, they are usually out to satisfy a craving for "something good" — and McDonald's no longer counts as a presentable place to relax and take a break.

This is also reshaping where McDonald's chooses to open. In the new wave of malls that manage to draw young shoppers, McDonald's rarely has a standalone location anymore — it tends to get folded in among a cluster of snack stalls. Some malls don't have a McDonald's at all.

7. And, of Course, Its Biggest Enemy Is Itself

Before McDonald's came along, the hamburger was not a widely popular food category, and no company had spread the idea of "fast food" across the world.

But after McDonald's, the format itself — then a genuinely new idea — along with everything it stood for, became mainstream for a long stretch: convenience, speed, quality control, standardization, and culinary cool.

The red-and-yellow double-arch logo became one of the most recognizable trademarks on earth. McDonald's is the world's largest fast-food chain, with 32,000 locations in 119 countries and annual revenues above US$27 billion. When it entered Asia's emerging markets in the 1980s, sociologists briefly held it up as the definitive marker of globalization. This new thing called "Western fast food" not only changed how people in the East ate — it shaped social norms.

When McDonald's first entered China, it was practically shorthand for "advanced Western civilization." Beyond burgers and fries, it taught people to queue when ordering, gave consumers a clean and brightly lit place to eat, bundled toys with combo meals, and regularly staged engaging interactive events.

In Golden Arches East: McDonald's in East Asia, the scholar Yunxiang Yan argues that when McDonald's entered Beijing, it targeted children as its main customers. But today, the generation that grew up eating McDonald's has come of age — while McDonald's itself has barely changed. It is still, more or less, the place we knew as children.

That's not to say McDonald's has done nothing new. The Create Your Taste burger concept and the salads piloted in Australia do exist. But they still feel more like one marketing push after another than genuine reinvention.

Back to that poll — "What came into your life that gradually led you to abandon McDonald's?" — the top answer was, "I haven't abandoned McDonald's." But that's exactly the problem: it has become one option among many, not something people actively long for.

The times and the market have changed. More and more new things are seeping into the food-and-beverage industry and turning it over, redistributing the market. What is cool, what is on-trend — that is no longer McDonald's call to make.

Steve Easterbrook has some serious thinking to do about these enemies.

(Graphics: Xu Bingqing)

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