Happy Meals are giving McDonald's the blues.
"We are beginning to see a softening in our key drivers: drive-thru and kids," McDonald's Corp. warned in an internal memo sent by regional marketing executives to franchise operators. "Happy Meals have declined in the drive-thru and front counter."
Economic worries, fickle customers and changing demographics are stunting growth in kids' meals - a category the Oak Brook-based burger behemoth single-handedly built and owned for decades. As a result, the chain - which last month issued its third-consecutive profit warning - is considering several strategic kids' initiatives to spark a growth spurt.
The June 1 internal memo, a copy of which was obtained by Crain's sister publication Advertising Age, was sent to franchisees to update them on McDonald's 2002 plan that was presented to its national owner-operator group, known as Opnad, in late May. The goal is to spur sales in a restaurant category mired in one of its worst slowdowns ever.
"Customers want a better fast-food experience, and they are not recognizing any points of difference between the (quick-service restaurant) brands," the memo continued. Traffic has been a weak spot, with customer counts down 2.6%, "primarily the result of (quality, service and cleanliness) issues."
One remedy the chain is planning is a mid-year effort to shift focus toward improving drive-through vs. eat-in sales, according to executives close to the company.
According to Port Washington, N.Y.-based NPD Group, 37% of all kids' meals were ordered from a car in 2000, up from 31% in 1993. "Parents aren't going to stand in line with kids. It's a bad experience, especially when kids take off into the playground while mom is in line," said Dick Adams, a former McDonald's operator and franchisee consultant.
The fact that Happy Meal sales are growing at a slower rate than in the past is consistent with national trends. "On average, the annual growth rate (of kids' meal consumption in restaurants) was running between 5% and 8%, but last year it was 1% to 2%," said Harry Balzer, vice-president of NPD Group, which tracks sales patterns in numerous retail categories.
Competitors are also giving the chain a run for kids' business. Diageo plc's Burger King Corp. is aggressively targeting children and will launch a new branding effort for its Big Kids meals later this summer; Wendy's International Inc. has been winning higher profile tie-ins such as "The Grinch Who Stole Christmas," and Subway Restaurants has become more active in kids' meals. Earlier this year, McDonald's launched its Mighty Kids Meal aimed at children 8 to 10.
Said Brian Gies, director of youth and family marketing for Burger King, "Kids are a fickle bunch and we're trying to seed loyalty so we can avoid the 'flavor of the month' behavior." He added that investment means more than money; it also means innovation in food and marketing partners.
The chain introduced wild-colored food items to appeal to kids, and is launching a summer tie-in called "Action Stunt All-Stars," including TV spots featuring Dave Mirra, the most-decorated BMX all-star. The promotion also will include miniature bicycles, skateboards and other toys. Interpublic Group of Cos.' Campbell Mithun in Minneapolis is Burger King's kids' advertising agency.
Undaunted, McDonald's has set a 2002 comparable-store sales growth goal of 4% to 5%, and intends to achieve this by focusing on what has been driving kids' meal and drive-through sales: ethnic consumers and convenience. Hispanic consumers buy more Happy Meals than general-market or African-American consumers, according to the memo, which says the chain will target these groups with Happy Meal advertising, the quarterly McMoms newsletter and new menu items.
Media spending in 2002 will be boosted 5% toward Happy Meals and Mighty Kids in both the general and multicultural markets. Chicago-based BCom3 Group's Leo Burnett USA is McDonald's general-market agency for kids; del Rivero Messianu Advertising of Miami is its Hispanic shop, and Publicis Groupe's Burrell Communications of Chicago is McDonald's African-American agency.
"McDonald's is typically strong among Hispanic consumers because kids are an important member of the dining party, more so than in general-market consumers," said Bob Sandelman, president of restaurant researcher Sandelman & Associates. He said Hispanic families are also more likely to eat with others in the restaurant as a "dining occasion vs. a fuel stop," than are general-market consumers.
While McDonald's wouldn't comment on its specific tactics, a spokesman acknowledged that the company is reacting to the changing kids' market.
"When you're the leader in an area like we are, you adapt with the change and you work hard at developing new ways to reach kids," he said.
Walt Disney Co. will continue to drive much of the marketing calendar for McDonald's, including tie-ins with "Lilo & Stitch" and "Treasure Planet." The relationship appears to be paying off. "Disney Happy Meals posted 3.5 percentage points (growth) better on average than non-Disney meals," said the memo.
But the magical lure of Beanie Babies has proved too powerful to ignore. After taking the tiny plush toys off this year's calendar, McDonald's will return them in 2002.
"When you hold the top slot in all-time Happy Meal performance, of course were going to look at ways to utilize that property," said the McDonald's spokesman.
Kate MacArthur, Crain's Chicago Business. July 9, 2001