The Journal. - McDonald’s Wants To Offer Quality And Value. Can It Do Both?

Episode Date: July 5, 2024

Joe Erlinger, President of McDonald’s USA, sits down with Kate Linebaugh to talk about how the company is trying to keep customers happy despite rising prices and a shift towards healthier eating. Further Reading: - The Fast-Food Fight Over the $5 Meal Deal  - A Day in the Life of a California Fast-Food Manager Who Makes Up to $174,000  Further Listening: - Farm-to-Table Pioneer on Why We Still Need Better Food  - Beyond Meat Loses Its Sizzle  Learn more about your ad choices. Visit megaphone.fm/adchoices

Nearly 90% of Americans eat at McDonald's at least once a year, the company says. It's fast, convenient, and of course, cheap. But in the last few years, with inflation rising, prices at McDonald's have gone up too. It's a fact that's not lost on customers. Have you noticed the prices at McDonald's going up? It was once possible to get a quarter pounder with cheese meal at McDonald's for less than $6. Now you're paying $12 on average. What are you doing, McDonald's? You were the affordable option. You were the chosen one.

You were the affordable option. You were the chosen one. In April, McDonald's acknowledged that fewer people are eating out at fast food restaurants, a trend they expect to continue. And this is a challenge for the business. In a bid to win back diners, last week, McDonald's rolled out a $5 value meal at locations all over the country. The next day, I sat down with Joe Erlinger, the president of McDonald's USA. We were on stage at the Wall Street Journal's Global Food Forum. In an era of high inflation and economic uncertainty, I asked him how he plans to keep 90% of Americans eating at McDonald's.

Welcome to The Journal, our show about money, business, and power. I'm Kate Leinbaugh. It's Friday, July 5th. Coming up on the show, McDonald's U.S. president on what the Golden Arches can offer American consumers. How do stop losses work on Kraken? Let's say I have a birthday party on Wednesday night, but an important meeting Thursday morning. So sensible me pre-books a taxi for 10 p.m. with alerts. Voila. I won't be getting carried away and staying out till 2.

That's stop loss orders on Kraken. An easy way to plan ahead. Go to kraken.com and see what crypto can be. Non-investment advice. Crypt. business over four years ago. I started off my conversation with him asking about the price of hamburgers. So we're going to start with the hard stuff. Okay. I mean, not the hardest of stuff, but we're going to go back to a tweet from last year.

Okay. From a Connecticut rest stop where a Big Mac meal cost $18. Why? I mean, it's the exception, not the rule at the end of the day. And in our business, because we're fully franchised, our restaurants set their own prices. Our franchisees set their own prices. And so that's not representative of the value and affordability that we offer as a brand every day and that our customers seek from us.

Almost all of McDonald's 14,000 U.S. restaurants are owned and run by franchisees. They have control over wages and menu prices. McDonald's supplies the fries, nuggets, and egg McMuffins. But prices at McDonald's have gone up by 20% since 2019. They have gone up. I acknowledge that, and I've acknowledged that actually in an open letter that's available for anyone to check out on McDonald's.com. And we did that at McDonald's because of all of this scrutiny and attention that we receive. this scrutiny and attention that we receive. And I think it's important for a brand like ours to be transparent, to be open, to be honest, especially because we touch so many communities,

we engage with so many customers. And so there's a little bit of a myth fact reality that's out there that I think is really important. And it's captured in that letter. What is the myth and what is the fact? I mean, sometimes you hear about prices going up 150%, 130%, but that's not the reality across the system. So those are some of the myths that we busted. And so this week you have launched what appears to be a response to that with your $5 value meal. Tell us about how you decided to do that and what the offering is. Yep, yeah, so we launched the $5 meal deal.

So great excitement and energy in our restaurants. It was actually the idea of a group of franchisees. They've been running a similar promotion in upstate New York for over a year at this point. And they've seen great success in building their business. And at McDonald's, when you have good things happen, they tend to spread around the country. And so that's exactly what's happened in this,

and it's become a national promotion. It's the choice of a McDouble or a McChicken, four-piece chicken McNuggets, small French fries, and a small carbonated soft drink. Is this a loss leader for McDonald's? It is not a loss leader. We are totally comfortable with the profitability of it. Our franchisees are comfortable with the profitability of it. It's a way to really

bring value and affordability to our customers at a time when the consumer is really stretched and is feeling, I think, the stress of several years of inflation. And so this is our opportunity to give customers what they really need at this time. Okay. So it's just one day. One day. This has been going on. How has it been received? It's been received very well. Now, I'm not going to take the numbers of one day and extrapolate them out across a promotion. Oh, please. No, I can't do that because in my career,

sometimes things peak really quickly and then fall off. Sometimes things will also build. And so I did talk to and text with a few franchisees this morning. The energy was palpable in the restaurants. We had customers come in that were surprised that a four-piece nuggets was part of the meal. That was a pleasant surprise to them, which was great. You didn't run out? You know, this is an interesting question because we had a large group of franchisees who wanted to start this early. And we actually had to ask them not to start early. We needed to build up our supply chain. Yeah, because it is very important at McDonald's that we always have what we refer to as a shared

supply. There may be even people in this room that help us achieve that. And so thank you if you do. So it took us a little bit of time actually to build that supply. In recent years, McDonald's has been making some changes to how it works with its thousands of franchise owners. Two years ago, the company changed some of the terms in the contracts, and many of the franchisees weren't happy. You have made some changes to your franchise agreements. What are you looking to fix? Yeah, I mean, I think that we rolled out a host of changes back in 2022 to our franchising policies. And it really was to bring our franchising policies up to where we are today. And one of the important ones,

and this is especially important because we're attracting more and more new people from the outside to become franchisees of McDonald's. But when you actually look at the ability for those people to enter, they had a higher bar than people who were already in McDonald's. So we essentially leveled the playing field and created a common program, a common bar for anyone to get into the McDonald's system as a franchisee. I think that's important. for anyone to get into the McDonald's system as a franchisee. I think that's important. Are you saturated store-wise? How difficult is it to bring in new franchisees? Well, we actually have announced that we're going to build up to 900 restaurants in the U.S. by 2027, 900 new restaurants. And we want a lot of new franchisees to be available to run those restaurants or to take up other growth opportunities within the system. And so we thought it's a great time. We refer to, we always want our franchisee

base to be green and growing. Our founder said, you're either green and growing or ripe and rotting. And for those of you who have farms out there, you don't want to be ripe and rotting. You want to be green and growing. And so, yeah, that's what we want to do with our franchisee base as well. How have your legacy franchisees responded to these rule changes? I mean, I think that McDonald's is always changing. We are always a brand that's trying to stay with the times and advance forward. And so there always is this question. I think it's happened throughout different parts of our history as to whether you want to make the change with us or whether you decide it's time to, what we always say, is hang up your spatula. I think that people probably went through this same discussion 50 years ago when we started drive-thrus and launching drive-thrus.

There are some franchisees that probably didn't want to make that investment, didn't believe that drive-thrus were the future. Obviously, they would have been wrong. But if they had sold their restaurant then, good for them. I think there's some franchisees that are dealing with the reality of our digital business and how big our digital business is getting today. And some of those are also thinking that maybe the digital future is not for them. So that's just going to be the reality in a system as big as McDonald's. We're going to have people turn out. Coming up, why McDonald's has no plans to bring back salads. Introducing TD Insurance for Business, with customized coverage options for your business.

Because at TD Insurance, we understand that your business is unique, so your business insurance should be too. Whether you're a shop owner, a pet groomer, a contractor, or a consultant, you can get customized coverage for your business. Contact a licensed TD Insurance advisor to learn more. Okay, but we are here at the Global Food Forum, so let's talk about your food. Yep. How often do you eat at McDonald's? Yesterday I ate. I ate the day before that as well. And your family? I've got one kid that really, really loves McDonald's and she eats fairly regularly. My son, whenever we're traveling on a road trip, always wants to go to McDonald's as

well. And you got to know your loved one's order, by the way. So if you don't, that's a real problem. And so my wife is a Big Mac, no onions woman with a Diet Coke. What's your order? I actually don't have a go-to order. I'm one of these exceptions, if you can believe it. Yesterday, we actually have what we call our global restaurant at the headquarters here in Chicago. It serves food from around the world. And so I actually had our McSpicy chicken from Hong Kong yesterday. I do not have a regular though. I mean, as a parent of a 14-year-old, he doesn't listen to my podcast. So if your kids didn't eat McDonald's, I'd understand.

Yeah. Yeah. Anyway. But how much should people be eating McDonald's? I think that's an individual choice. I mean, I'm not going to make the choices of individuals, you know, in this room, let alone, you know, across the U.S. So people utilize McDonald's for all sorts of different reasons, for the convenience, for, you know, when they're on the road, for the indulgence and experience of it. So I'm not going to make that decision. Indulgence. Is it an indulgence or is it an everyday meal?

I mean, I think that, again, that's a customer decision. I mean, I think it all depends upon, you know, what job you have, what type of activity you get yourself involved in, as to whether you decide you want to have McDonald's every day or you want to have McDonald's once a month or once a year. I mean, remember that almost 90% of the U.S. population has McDonald's one time a year. So even all those people who say they're not having it, they're having it, actually. But what is your responsibility

to have a healthier menu for people? I mean, we've made significant investments in the quality of our food. I mean, we've made significant investments in the quality of our food. I mean, we've cleaned up our labels over the last five to ten years. We are now cage-free eggs within our restaurants, fresh cracked. So feel free to have an Egg McMuffin and feel confident about the Egg McMuffin that you have. We made a series of changes around our core hamburgers, improving the quality

of those, improving the juiciness of the beef, improving the quality of the bun. And so we're really leaning into quality as something that customers really are seeking from us. What does cleaning up your labels mean? We had a lot of preservatives that were not needed. And so this was done prior to me taking on this role, but it was taking a lot of preservatives out of our ingredients. What about salads? Why not bring back salads? You know, our founder famously said in 1970, I don't know what people are going to be eating in the year 2000, but we're going to serve more of it than anybody else. And so if people really want salads from McDonald's,

we will gladly relaunch salads. Another experiment McDonald's ran was with a plant-based meat option called McPlant. But Joe said customers didn't really go for it. We actually tested the McPlant, and I asked the team to test the McPlant in two very different markets. And so they chose San Francisco and Dallas. And I said, perfect. It was not successful in either market. And so I don't

think the U.S. consumer is coming to McDonald's or looking for McPlant or other plant-based proteins from McDonald's now. They're looking for great French fries. They're looking for a $5 meal deal. They're looking for a hot, fresh sandwich. And so that's what we're going to continue to provide them. How do you think about climate change and your menu? I mean, I think that we all have a responsibility, you know, in this room to think about climate change. I mean, I think it is going to be a significant threat that we're all going to have to think. I mean, you just see the volatility and weather across the world, even today. And so, you know, we've got active tests going on in farms to work through aspects of sustainable agricultural, sustainable farming, sustainable grazing. And so,

you know, we obviously have to be thoughtful as we do this, but as we work through some of these things, our ability to have a big impact across the food industry and a big impact on our supply chain is important and significant. Last night on the stage, Alice Waters criticized McDonald's and fast food in general for creating the wrong set of values in the country. Fast, cheap and easy, I think she said. How do you respond to that? You know, let me do a little poll here real quick.

Who in this room has actually worked at a McDonald's before? OK. There's some hands. So one in eight people have worked at a McDonald's in the U.S. And thank you for those who have worked at McDonald's. So I think we need to recognize that we're not in a room that's representative of the U.S. population. And I think it's always important for us to ground ourselves in the consumer population, the population that I think we all aim to eventually serve. And so I think that's the discussion that needs to be had is what does the consumer need right now

and the consumer right now certainly needs great value and affordability and that's why McDonald's is with the consumer with this $5 meal deal. Joe, thank you so much. Thank you very much. Thank you everybody. Awesome. That's all for today, Friday, July 5th.

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