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Morning Briefing Strap Line
Fri 8th Mar 2013 - Friday Opinion
Subjects: McDonald’s flexibility, the economy, the sad state of alcohol research
Authors: Paul Charity, Andrew Page and Paul Chase

The benefits of flexing your offer by Paul Charity
It goes without saying that McDonald’s has built a formidable leadership position in global foodservice. In European terms, this translates into sales that are an astonishing eight times greater than its nearest competitor – its European turnover is in excess of £18bn Euros within the 39 European countries where it currently operates. It next nearest non-contract caterer competitor is Yum! Brands, which has sales just below three billion Euros in Europe. (Mitchells & Butlers currently stands in eighth position in terms of total European sales with turnover of 2,069 Euros from the UK and its tiny German operation).

Its success in France, which has a particularly strong home-grown food culture, is an instructive example of how deftly McDonald’s adapts to different cultural environments. Currently, France is McDonald’s second most profitable territory – and it was embroiled in a row at the end of last year over how much additional profit it had made since VAT was reduced in the sector. 

McDonald’s entered the French market in 1979 and has grown its estate to more than 800 franchised sites. Its rival Burger King entered the French market in 1981 and grew to 39 sites in 1997 and then withdrew from the market completely. The difference in fortunes can be directly linked by the decision by McDonald’s to flex its French offer based on a firm understanding of the local market vagaries - while Burger King parachuted its US trading format unmodified into France.

The first smart move by McDonald’s was to tailor its offer to the structural challenges of the market. French consumers eat only 10% of their meals outside of the home – around 25% of the US figure and several times smaller than UK frequency. The French also tend not to snack between meals. However, the counterpoint is that they take longer to eat main meals and spend more. McDonald’s channeled staff hours towards main meal occasions and installed electronic ordering kiosks for other occasions – they are used by one in three customers that visit its restaurants. It pushed labour that was saved into table service that focused on up-selling of coffee and desserts. The outcome is that French customers spend an average of $15 per McDonald’s visit, which is four times the equivalent US spend.

McDonald’s has also pushed hard to bolster its quieter day-part periods by offering high quality coffee and pastries, supplied by the Holder Group which operates Paul and Laduree sites. It was clever positioning that further softened the hard edges of its otherwise formica-topped offer in a way that played to French tastes. In 2011, McDonald’s took another smart step by applying some of the success that Panera Bread has enjoyed around fresh-baked bread in the US. The company introduced baguettes supplied again by Holder but baked on the premises. The French consume nine times more traditional sandwiches than hamburgers – and more than 70% of all sandwiches consumed in France are baguettes. A McDonald’s executive has described the adoption of baguettes as a response to “natural demand” within the market. Even more radical was the opening of a McSalad concept store at La Defense, a giant Paris office park where burger, fries and shakes are banished. The site is aimed at the tens of thousands of local office workers whose taste are upscale and who want to maximise their lunch breaks by ordering from their desks.

More subtle is the wholesale adoption of different design standards among French franchisees. They have used subdued signage and created comfier, coffee shop-style interiors to encourage patrons to stay longer. McDonald’s restaurants in France vary a lot in terms of finer design touches to cater for local demographics. Overarching McDonald’s adaptations has been a push to ensure its supply chain is French – it’s the biggest buyer of beef in France and 95% of its produce is sourced within the country. As UK companies expand abroad, there will be a host of adaptations that will be required for local markets – it’s interesting to see how much YO! Sushi has tweaked its menu at the first opening in Washington DC. But it seems to me that McDonald’s success in France shows how much success can be achieved by a company willing to really study the local market carefully.
Paul Charity is managing director of Propel Info

Market dynamics and the economy by Andrew Page

Companies operating in the retail environment have found conditions tough in recent years and this seems to have become a persistent theme. A deep recession followed by rising taxes, household inflation, a fiscal squeeze with lower government spending and higher levels of unemployment (with the equally corrosive, concomitant, fear of unemployment) and negative changes in year-on-year real wages, have placed significant pressures on many consumer-facing businesses. This has proved particularly problematic for businesses with poor market positioning, weak business models and high levels of financial leverage. Attempts at stimulating the economy through expansionary monetary stimuli have had some success, but the economic backdrop remains quite tough. Selling goods and services to the UK consumer remains quite a challenge.

In addition to consumers being squeezed as a result of the difficult economic backdrop, other factors are also at work and some distinct trends, both operationally and behaviourally, have been evident. Those companies that have established strong market positions, with offerings that are accessible, attractive, convenient, well understood, trusted and are seen by their customers to offer good value have tended to outperform. Customers have become more selective about what, and how, they purchase and it is noteworthy how important a strong and clear online offering and communication platform has become for many parts of the retail marketplace. The ability to read and quickly adapt to customer trends is increasingly important.

With many households experiencing a squeeze on funds available for discretionary spend, harder choices between competing consumption wishes are having to be made. A propensity to save (or pay down debt) replaced the urge to buy on credit that was so prevalent just a few years ago. Consumer-facing businesses have had to work harder to claim a share of this smaller cake.

Those companies that operate in the dining out sector have approached these challenges in different ways. Many have chosen to compete for customers largely on price and this has often manifested itself via heavy promotions and deep discounting. “Buy one get one free” and other similar, deep discounting, offers have been rife, and still are. Our Group has adopted a different approach, focusing on value, choice and consistency of service and standards. Last year, the proportion of TRG’s revenues which were driven by promotions was, as in the previous year, very modest. We have also increasingly harnessed digital media to broaden awareness of our brands and what we can offer. These tactics have served TRG well, enabling it to continue to grow profits and protect margins.

Eating out has become habitual in the UK and it is an activity that many people are reluctant to give up. At our price point it represents a “small ticket” item or, to put it another way, “an affordable treat”. In times of fiscal restraint and stretched finances, it is a pleasure in which many people still feel able to indulge.

Growth in eating out is a secular trend, driven largely by socio-economic factors (ageing population, busy lifestyles, more women in the workplace etc.) and this is set to continue over the longer term. Despite the current climate TRG has been able to secure good levels of like-for-like sales growth in both 2011 and 2012 and, as conditions improve and particularly when people feel more confident about their jobs and incomes, this is likely to accelerate.

Economic conditions over the past 12 months have continued to be tough with periods of significant uncertainty. The first six months of 2012 were characterised by significant swings in confidence which in part were driven by the recognition that the correction of countries’ imbalances was likely to require radical and potentially very severe actions. This was particularly apparent within the Eurozone which, for much of the first half of 2012, was subject to considerable volatility. 

In July 2012, the President of the ECB, Mario Draghi, announced that the ECB was ready to “do whatever it takes” to preserve the Euro. This had a rapid and sustained positive impact upon confidence within the Eurozone; together with subsequent US and developing economies’ initiatives this seems to have illuminated a way forward. Although much remains to be done, this willingness to acknowledge and adapt presents an opportunity to rebalance and provides a foundation towards improving global prosperity.

The UK has benefited from these developments and, although sustained economic growth remains elusive, there are some positive signs. In particular, levels of employment are holding up well and this is very encouraging against the challenge of replacing public sector jobs with jobs in the private sector. Inflation has abated a little from the high levels seen in recent years and although pressures on household finances remain significant, the benefits of ongoing low interest rates should have a positive impact upon households’ finances, consumer confidence and the propensity to spend.

Currently, the outlook for UK GDP growth in 2013 remains uninspiring and regular downward revisions in recent months indicate that a measure of caution is appropriate. At this stage, we anticipate that the economic backdrop is likely to remain similar to that experienced over recent months and accordingly we will look to manage our business to continue to deliver profitable growth against this backdrop.
Andrew Page is chief executive of The Restaurant Group

The sad state of mainstream alcohol research by Paul Chase

Ever since the Great Depression science has been keen to justify its social relevance. This is particularly true of mainstream alcohol science, which began in the US in the mid-1930s. The alcohol scientists of post-Prohibition America were keen to produce research that avoided the virulent propaganda of ‘scientific temperance’, and actually demonstrated some scientific validity. Well, some of it did and some of it didn’t, but there was genuine integrity attached to the endeavour. Sadly, the same can scarcely be said of much that passes as ‘alcohol science’ today.

Two examples:

The Canadian research:
Tim Stockwell, in a recent study conducted in the Canadian province of the British Columbia (BC), claims that a “10% increase in average minimum price for all alcoholic beverages was associated with a 31.72% reduction in deaths wholly attributable to alcohol” in the period 2002 to 2009.

But how was this statistical correlation constructed? Official government statistics show that deaths in BC did not fall, but remained constant throughout the period of the study, and that alcohol prices roughly tracked the Consumer Price Index over the same period, but this study ignores the official mortality and CPI statistics. When you look in depth at this study it turns out that the association between an increase in minimum price and the claimed decrease in deaths is rather more complex than reports would have us believe.

You see, it all depends on your definition of a ‘death caused by alcohol’! The study uses three causal definitions: ‘acute’, ‘chronic’ and ‘wholly attributable to alcohol’, and in turns out that there are significant increases in deaths as well as decreases depending on which of the 16 quarters you focus on and the definition of cause. In the Canadian study liver complications caused by drinking are excluded from alcohol deaths ‘wholly attributable to alcohol’ thus facilitating a fall in alcohol-related deaths that is, perplexingly, not reflected in the official statistics for alcohol-related death kept by British Columbia. So, what we have here is a study that involves multiple tests involving different timeframes and different definitions of a ‘death caused by alcohol’. Picking the most extreme of the results, as the authors do, enables a sensational claim to be made which is then hailed as a major contribution to alcohol science that ‘proves’ the efficacy of minimum pricing.

European Public Health Association research:
Where the statistical manipulation of the Canadian research is utterly cynical, the methodology of the European Public Health Association’s research is simply incompetent. This research – which made headlines last week – highlights a gap between the amount of alcohol that people say they drink when asked in a survey, and the higher amount of alcohol which is actually being sold. In other words, reported alcohol consumption versus actual alcohol sales. The report suggests that the gap between reported consumption and actual sales is almost wholly explained in terms of people under-reporting their consumption, and that therefore consumption per head hasn’t fallen, and many more people than previously thought are drinking above the sensible drinking guidelines.

The survey referred to in the research is the General Lifestyle Survey which asks English/British residents how much they drink. The reported alcohol consumption of people resident here does not, for example, include alcohol consumed as a result of the 28 million tourist visitors per year, nor does it include alcohol consumed by non-resident migrant workers. To give but one example, and without wishing to engage in crude national stereotyping, the 280,000 non-resident Polish migrant workers who are here probably do contribute significantly to vodka sales – and without damaging their superb work ethic!

Light at the end of the tunnel?
A rather more open-minded, intellectually honest approach to the relationship between consumption and alcohol-related harms has been taken by Michael Livingston, a post-doctoral research fellow at the University of New South Wales. In a recent article he wrote: “One of the core assumptions of public health-focused alcohol research has been the overarching link between levels of alcohol consumption in a population and rates of harm. Recently these trends have begun to decouple in a number of places. In Sweden, per-capita consumption of alcohol has fallen in the last five years, while harm rates have remained fairly stable. In England harm rates have increased sharply since 2004 despite a steady decline in per-capita consumption levels. And a similar pattern is emerging in Australia.”

He explains this change in trends as follows: “A large number of light or moderate drinkers may have slightly reduced their alcohol consumption, while a smaller group of heavy drinkers increased theirs. This would lead to relatively steady per-capita consumption, but the potential for increases in alcohol-related harms, mostly experienced by heavy drinkers.” 

This is precisely the point that the industry has been making – that intervention needs to be targeted at troubled drinkers, not the whole population. The troubled drinking of the few cannot be used to justify policies that restrict the drinking choices of the many, whose drinking is moderate and controlled.
Paul Chase is a director of CPL Training and leading alcohol policy commentator

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