Sort & Cull

A friend of mine is a longtime veteran in the construction business. Over the years, Vern's built small palaces for the rich and famous, and he's laid out sprawling cookie-cutter neighborhoods where the only difference between one tract home and the next is paint color.

I once asked what kind of projects are the most profitable. "Custom housing" he quickly replied, if you have the patience for the fickle nature of preference. His company's motto went right to the genius of the business model: "We'll make any change your checkbook desires."

He had another slogan that also made a lot of sense. While all consumers basically shop for the golden trifecta of good, fast, and cheap, they all learn that only two of these qualities ever come together in the real world.

For example, if you want something good and fast (e.g., a combo that will require extra and more talented labor), it won't be cheap. On the other hand, if you desire something cheap and fast, it probably won't be good. Finally, if you're out for something that's both good and cheap, it's not likely to come fast.

Vern's take on the elusive nature of the good, fast and cheap package came to mind this week when I read an article about McDonald's ongoing struggle to build a better burger and rejuvenate its bottom line.

The piece began by quoting a top McDonald's franchisee frustrated by lackluster sales and a dread that the world's largest hamburger maker had lost its magic touch. According to this key player, just one in five millennials, the fast-food industry's core customer, has tried McDonald's flagship product, the Big Mac.

More alarmingly, the number of hamburgers sold at McDonald's U.S. restaurants has been flat for the past few years, and was growing only at a 1% to 2% annual rate before that. The problem jumps out at you like Ronald's bulbous red nose: BUILD A BETTER BURGER.

But what does "better" mean? Does it mean tastier? Does it mean cheaper? Does it mean served faster? All three?

The challenges are formidable. McDonald's gets nearly 70% of its U.S. business through the drive-through. Burgers are usually made in advance and held in warming cabinets so they are ready when customers pull up. McDonald's official delivery goal from when the order is placed to when it is delivered to the customer, is a mere 90 seconds.

But what's the use of a rapidly deployed gut-bomb if consumer palates and stomachs are angrily torn up? McDonald's burgers came in last in a Consumer Reports taste survey of 21 hamburger chains in 2014.

And the test kitchen under the Golden Arches has been anything but idle. The mid-1990s Arch Deluxe, with a potato-flour bun and mayonnaise-mustard sauce, didn't fly with a $2.49 price tag, then 32 cents more than a Big Mac, and was phased out in 1998. In 2009, customers found $4 to $5 for a line of Angus beef burgers too expensive. Last year, McDonald's tried again to introduce a more-premium burger made from sirloin but customers weren't willing to pay $5 for that either.

Paper-hatted old timers will remind you the McDonald's empire was originally built on the twin pillars of low cost and speed. But in this new era of gourmet burgers, corporate bigwigs are increasingly nervous that products simply can't be designed to be so cheap and fast that bland taste is not a deal breaker.

You've probably heard of company ideas to use fresh beef to ramp-up desirable taste. Indeed, workers at 54 McDonald's restaurants in Dallas now salt and pepper fresh beef, which arrives already formed into patties, and sear it on the grill. Yet, many managers worry that such a shift will seriously delay service and sour the attitudes of on-the-go consumers.

And there's been steady attempts to expand the menu in non-burger ways, hoping to fill some of the revenue blanks. Yet the article clearly underscored that no one in the organization imagined it dare stop dancing with who brung'em to the party. Even though McDonald's has significantly expanded its offering, burgers still account for roughly 20% of the chain's total sales of $8.6 billion in the U.S. last year.

There are no easy answers. Building a "better" burger is no job for weekend grill masters. On the other hand, CEO Easterbrook could probably do worse than have a chat with Vern.

For more of John's commentary, visit http://feelofthemarket.com/…

(ES)

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