McDonald's: A History Of Innovation

By Eric Fontinelle | April 14, 2010 AAA
McDonald's: A History Of Innovation

When you think about your local McDonald's (NYSE:MCD) restaurant, you probably don't think "innovation". We've all become accustomed to the many novelties that McDonald's has introduced over the years. You might know that McDonald's was the first major international fast food restaurant, and that it had the first drive-through window. What you may not realize is that McDonald's continues to drive innovation in fast food. Some of these innovations are well advertised, but others are designed so that customers will never notice.

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Outsourcing Order Taking
When you're ordering a Big Mac at the drive thru, you might assume that you're talking to an employee just inside the building. However, at certain McDonald's restaurants, you may actually be talking to an order taker in the next state.

A New York Times article chronicles the efforts of one McDonald's franchisee in Missouri who has outsourced his drive through order-taking to Colorado. According to the franchise owner, outsourced order taking allows him to handle 30 additional cars per hour. At the same time, the error rate in order taking was cut significantly as the ordering process has become more efficient and accurate.

According to the article, there are still many issues to be resolved in order for it to be feasible to introduce such a system in all stores. Further study of outsourcing technologies will be required before any changes are made system-wide, but with such dramatic improvements, you can bet McDonald's executives will be looking seriously at outsourced ordering. The cost cutting experienced from this innovation enhances the company's lean business model. (You may have heard of this method of evaluating currencies, but make sure you know the whole story. Read The Big Mac Index: Food For Thought.)

Expanding Dollar Menu to Breakfast
Has unemployment kept you from enjoying a morning breakfast at a fast food chain? If so, McDonald's wants you back.

McDonald's breakfast sales have failed to experience the necessary growth desired by the company since 2007. As the theory goes, higher unemployment rates means less commuting traffic. In turn, less commuting traffic means fewer rushed workers in need of a McDonald's grab-and-go breakfast. While breakfast accounts for only about 25% of McDonald's revenues, breakfast food is sold at a higher-than-average profit margin.

As a concession to the recession, at the beginning of 2010 McDonald's introduced a breakfast version of its popular dollar menu. Through the new menu, McDonald's hopes to capture more morning business, or at least retain the traffic it has. Items on the breakfast dollar menu include a small regular coffee, a sausage burrito, a sausage biscuit, a sausage McMuffin and hash browns. (Find out what you can get for less than $1 and how it compares to cooking it yourself in Top 5 Fast Food Value Menu Deals.)

Specialty Coffee
With the introduction of specialty coffee, McDonald's became more than just a fast food restaurant. Now you could come during the evenings and sit in the McCafe, sipping cappuccino while discussing the subtleties of 20th century French philosophy.

Ok, perhaps not, but that seemed to be part of the idea when McDonald's launched its specialty coffee line in mid-2007. In reality not much has come of the so-called "Coffee War" between McDonalds and Starbucks (NYSE:SBX), although coffee experts have given the burger franchise due praise for their affordable yet delicious cup of coffee. (How much is your morning jolt hurting your wallet? More than half of Americans drink coffee every day, and the costs add up. Learn more in The Real Cost Of Drinking Coffee.)

What has actually happened is more of a split between two types of coffee drinkers: one in need of a cheap coffee and the other looking for a cafe experience. McDonald's promotes its coffee to the former customer. Its ads portray its coffee as being a good value, with higher quality than you would expect, at a lower price than Starbucks.

However, the focus on price is one which Starbucks has decided to ignore, sensing its clientele exist primarily within the latter group. The focus for Starbucks has been more on the quality of the café experience, not on the price of coffee. As many have pointed out, people simply don't say, "Let's meet for coffee at McDonald's," (at least not yet).

McDonald's has continued to advertise heavily however, and has made considerable progress in attracting those looking less for an experience and more for an economical coffee fix. The expanding coffee sales figures are lauded by shareholders, as these products bring exceptionally high margins during the slow late evening sales period.

As McDonald's U.S.A. President Don Thompson announced, "You can't get much better profit than adding water to beans."

The Bottom Line
Innovation in the fast food industry may not be rocket science, but it does take a special type of practical genius. Through its innovations, McDonald's has managed to squeeze ever higher sales and greater profits from the American fast food industry - an industry which many were calling oversaturated as far back as the 1980s. The next time you stop in for a hamburger, or a latte, think about how different fast food would be without the continuing innovations introduced by McDonald's.

Check out last week's business highlights in Water Cooler Finance: My iPad Beats Your Toyota.)

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