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Is McDonald’s menu simplification hurting it?

McDonald's Corp. is struggling to boost its business. What went wrong with the fast food business and what can be done to fix it?

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    A worker cleans the outside of a McDonald's restaurant, below a display for the "Minions" movie, in Chicago, Illinois, United States, July 23, 2015.
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McDonald’s Corp. President-CEO Steve Easterbrook boldly predicted the company’s now-seven-quarter-long string of down quarters globally will end in Q3. It came close in Q2: same-store sales were down just 0.7% in the quarter ended June 30, 2015. Certainly it helps to be lapping past declines, but the vow reflected his confidence that the turnaround he was brought in to engineer has begun. He cited several major markets showing sales and customer-traffic improvement.

But the U.S. business continues to lag other major markets. Domestic same-store sales were down 4% for Q2, but Easterbrook remains confident about an improvement. “I believe we’re making the right moves to stabilize the U.S. business,” he said. Those moves involve changes—more subtle than dramatic, he admitted—in value, service and menu. Toasting buns a few seconds more, changing how it sears and grills burger patties to improve juiciness: these are the menu improvements being made. Easterbrook reaffirmed that his plan is to improve core menu products and continue the menu-simplification initiative rather than return to a “frenzy” of new-product introductions. Is that the right strategy?

Easterbrook cited McDonald’s continuing success in the UK, Canada and Australia, and positive momentum in France and Germany. Since the beginning of the year, McDonald’s lone major addition has been the introduction of the there-item Sirloin Third Pound burger line. But the major markets that are recovering or improving have had more frequent and more varied product launches. Ironically, several of them are American-themed.

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The UK saw a five-week return of its Great Tastes of America promotion, with items such as the California Melt and Dallas BBQ burgers. France’s “American Summer” promotion included the California & Beef and Florida & Chicken burgers. McDonald’s “Great Canadian Taste Adventure” promotion earlier this year included such inventive items as Maple & Bacon Poutine, Western BBQ Burger and McLobster. Germany borrowed American flavors for a Wild Double BBQ burger. Australia got a new McWrap with lamb and feta cheese, a new three-item line of chicken burgers and the rollout of Create Your Taste in roughly six months. Sirloin Third Pound burgers seem tame to me next to these items. Is it surprising they didn’t meet sales expectations?

McDonald’s U.S. competitors are introducing more interesting new products including Jack in the Box’s Buttery Jack (and a Portobello Mushroom Buttery Jack launched this week). Carl’s Jr./Hardee’s has the Mushroom & Swiss All-Natural Burger; Wendy’s has the Baconator. These have the buzz–and sales–McDonald’s couldn’t generate for Sirloin Third Pound burgers.

Easterbrook says McDonald’s menu strategy will be “calm” at the national level “with more energy at the local level.” But local coops don’t create new burgers; they don’t create excitement. They create value; they do “2 for $5” promotions. That’s not why Canada and France and Australia have had positive sales.

McDonald’s has been losing customers on the “value end” to QSRs with lower-price options. But everyone knows value shoppers have little brand loyalty. You can’t win back and keep those customers. But can change negative perceptions with high-quality, higher-margin premium items that bring in customers who don’t eat at McDonald’s. They might return.

Easterbrook said McDonald’s operations in Germany “got their mojo back.” The U.S. needs that, too. Will all-day breakfast do it? Maybe, but Easterbrook says that won’t be introduced nationally “unless the net impact is simplification.” Consumer demand seems to be there, but how can breakfast be expanded without being disruptive? That’s what’s still being evaluated as McDonald’s broadens the test.

“We must operate better restaurants,” Easterbrook told analysts this morning. But there something compelling and appealing must be on the menu to bring in customers.

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