How McDonald’s Thrived During the Recession

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The recession, now officially over and down in history books the longest since the Great Depression, was not kind to the business world. Once-proud General Motors succumbed to government takeover. Disgraced financial giant AIG (AIG) needed taxpayer bailouts to survive. Countless smaller, uncelebrated businesses closed their doors completely.

An exception to all of this economic despair has been fast food chain McDonald’s (MCD). While rivals Burger King (BKC) and Yum! Brands (YUM) struggled during the recession, McDonald’s has not only stayed afloat since 2008: it has grown.

In August, McDonald’s reported that sales at stores open at least 13 months rose 4.6%. Burger King, meanwhile, announced on September 2 that it has agreed to sell itself to investment firm 3G Capital in order to “gain breathing room to fix its business,” according to Reuters. At that time, Burger King shares were down more than 31% since the end of 2008 – while McDonald’s shares rose nearly 18% during the same period.

Here’s how McDonald’s did what so many other businesses coundn’t during the recession: thrive.

Recession-Friendly Pricing

As early as November 2008, Forbes recognized McDonald’s low pricing strategy as a pillar of its recession-era success. At that time, Burger King’s stock had fallen 24.6% over the prior year, while Yum! Brands had plummeted 28.6% during the same period. Ruby Tuesday (RT) went into a free fall, with its stock falling 88.3% at that time. McDonald’s, meanwhile, dropped only 3.4% during this time frame. The reason, Forbes maintains, was its “recession-friendly Dollar Menu.”

In addition to that, McDonald’s occupies in the food service industry roughly the position that Wal-Mart fills in retail: the lowest-cost producer. When recession strikes, cost becomes paramount.

New Products For Different Markets

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CNN, while acknowledging the cost issue, says that there is more to why McDonald’s has thrived. Referring to the company’s “liquid profits,” CNN finds that McDonald’s has “given more kinds of people more reasons to head to its stores throughout the day, buying an ever-wider range of products.” Throughout its history, McDonald’s has been a place for young people to quickly get their hands on cheap, greasy food and leave as fast possible.

Today, McDonald’s has grown far beyond these needs. For one thing, the fast food chain now sells premium coffee which, Consumer Reports says, beats Starbucks for taste and quality. A new line of now-popular frappes and fruit smoothies was released. Most McDonald’s locations also offer free wifi Internet access, with the goal to not only bring in more customers through the doors, but once in, get them to stay longer (and consume more) as well.

Reduced Advertising Costs

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McDonald’s has also shrewdly taken advantage of lower TV advertising rates to reinforce its unique selling proposition to customers. As CNN explained in August, rates for local television advertising are down across the board due to lower promotional spending across the business-to-consumer world.McDonalds, whose same-store sales rose 7% internationally in July versus a year ago (and 10.1% in “non-American, non-European parts of the world) has seized the opportunity to mount an all-out promotional blitz for its various products without having to substantially grow its advertising spend.

Improved Operations

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Another driving force behind McDonald’s success in the last few years has been a company-wide push for improved operations. In a March 2009 article, the Wall Street Journal told readers about Ralph Alvarez, the Cuban-born ex-accountant who served as McDonald’s president and chief operating officer through the end of the year and spearheaded a full-fledged crusade to make McDonald’s more efficient. (Alvarez announced his retirement in December 2009, citing health reasons.) During his short-term leadership, however, his work included:

“…pruning gas-guzzling cars from the company fleet, pressing media buyers to negotiate lower advertising rates and putting the brakes on building new outlets on street corners where nearby development shows signs of weakness.”

While tackling these challenges, Alvarez is managing the company’s gigantic investments in the coffee drinks and other new product lines that have helped McDonald’s stand tall against the recession. He is so committed to his efficiency campaign that he reportedly visits stores unannounced wearing baseball caps and sunglasses to verify first-hand that his instructions are being followed.

Rapid Price Adjustments

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The same Wall Street Journal piece also discusses how McDonald’s has begun using computer systems for in-store decision making. Using the “reams of customer data” at its disposal, McDonald’s now closely analyzes “everything from whether customers are trading down to smaller value meals or dropping cokes from their orders to exactly how much they’re willing to pay for a Big Mac.” Alvarez, who confessed to loving numbers, said that these kinds of computerized systems allow McDonald’s restaurants to rapidly adjust prices based on current customer demand.

One result of this process occurred in China, where some restaurants reportedly slashed the price of certain combo meals by up to one-third – but only during lunch hours.