McDonald's Faces 'Millennial' Challenge
Customers in Their 20s and 30s Are Defecting to Fast-Casual Restaurants Like Chipotle, Five Guys
Behind McDonald's Corp.'s MCD -0.08% worst slump in a decade is a trend that may auger even tougher times ahead: The Golden Arches is losing its luster with younger consumers.
The world's largest restaurant company by revenue earlier this month reported its sharpest monthly decline in global same-store sales since early 2003, adjusted for calendar irregularities.
In the U.S., with more than 40% of McDonald's 35,000-plus global locations, sales at restaurants open at least 13 months have been flat or falling for most of the past year.
The hamburger giant on Friday announced it was replacing the head of its U.S. division for the second time in less than two years. The company tapped a former executive, Mike Andres, to take the helm of the domestic business—another sign that the company is trying to revive its fortunes at home.
McDonald's stock has traded in a relatively narrow range in the nearly 26 months since Chief Executive Don Thompson took the helm, while the share prices of many of its rivals have soared. McDonald's shares are down about 2% since the start of the year, closing at $94.45 Friday.
Demographics help shed light on McDonald's woes. Data compiled for The Wall Street Journal by restaurant consultancy Technomic Inc. point to an age problem for the chain. Customers in their 20s and 30s—long a mainstay of McDonald's business—are defecting to competitors, in particular so-called fast-casual restaurants like Chipotle Mexican Grill Inc. and gourmet-burger chain Five Guys Holdings LLC.
Increasingly, younger diners are seeking out fresher, healthier food and chains that offer customizable menu options for little more than the price of a combo meal.
The percentage of people age 19 to 21 in the U.S. who visited McDonald's monthly has fallen by 12.9 percentage points since the beginning of 2011, according to Technomic, while the percentage of customers age 22 to 37 visiting monthly during that period has been flat.
During the same period, the percentage of 19-to-21-year-olds increased their monthly visits to fast-casual restaurants by 2.3 percentage points, and 22-to-37-year-olds by 5.2 percentage points, Technomic says.
Alec Petersen, a 21-year-old from Hoboken, N.J., rarely visits McDonald's anymore. "I do have nostalgic memories of McDonald's, but Chipotle has much better quality food, or at least it feels like they do," said Mr. Petersen, who recently graduated from Duke University.
McDonald's says new items like its McWrap sandwiches—chicken and vegetables rolled in tortillas—are helping to woo millennials, consumers in their midteens to mid-30s. The Oak Brook, Ill.-based company also is trying to enhance its credibility with young customers by marketing more on digital channels and testing mobile ordering and payment.
"The millennial generation has a wider range of choices than any generation before them," McDonald's Global Chief Brand Officer Steve Easterbrook said in an interview. "They're promiscuous in their brand loyalty. It makes it harder work for all of us to earn the loyalty of the millennial generation."
McDonald's U.S. sales struggles have also been compounded recently by other woes challenging Mr. Thompson, a 24-year company veteran who became CEO in July 2012 after a decade of strong growth.
In China, a former bright spot, sales have fallen after authorities last month accused a key supplier of selling expired meat. McDonald's said the problem drove sales at existing locations in its Asia/Pacific, Middle East and Africa region down by 7.3% in July.
In Russia, amid heightened tension between the West and Moscow over the conflict in Ukraine, authorities last week closed some McDonald's restaurants in Moscow for alleged sanitary violations and are now inspecting its outlets across Russia.
Meanwhile, at home, it also is grappling with growing worker protests calling for higher wages and the right to organize. And the National Labor Relations Board last month determined that McDonald's could be treated as a joint employer with its franchisees in labor complaints, which could make the company liable for the actions of its franchisees.
McDonald's has acknowledged other recent missteps, including an overcrowded menu that slowed service. Executives have said that the nearly 60-year-old company has lost relevance with consumers. In June it set up a "learning lab" at a restaurant in Laguna Niguel, Calif., to better understand what people want and to experiment with customizable burgers.
The fast-casual concept took shape in the 1990s, melding the fresher ingredients and custom ordering of table-service restaurants with the convenience of fast-food joints.
Other examples include Panera Bread Co. PNRA +0.14% , Noodles NDLS -1.36% & Co., and Corner Bakery Cafe. The chains appeal to younger consumers who came of age at a time of skepticism of fast food—evident in the 2001 book "Fast Food Nation" and the 2004 documentary "Super Size Me"—and a burgeoning foodie culture that emphasizes fresh ingredients.
A decade ago, there were 9,000 fast-casual restaurants in the U.S., versus nearly 14,000 McDonald's. Now, fast-casual restaurants number more than 21,000, according to Technomic, while McDonald's U.S. restaurant count has risen only slightly.
Chipotle, founded in 1993, today has more than 1,600 U.S. outlets and a market value of about $21 billion. Five Guys, which boasts that it offers more than 250,000 ways to order a burger, has grown to more than 1,000 outlets since it was founded 28 years ago.
Last month Consumer Reports magazine said that in a survey of more than 32,000 subscribers, readers rated McDonald's burgers as the worst-tasting of 20 rival burger chains.
The magazine cited the preferences of younger consumers as a main factor. "Diners, especially younger adults in the millennial generation, may be more willing to go out of their way to get a tasty meal," Consumer Reports said.
McDonald's responded that it is "proud to serve 27 million customers" daily in the U.S., and "It's important for us to listen to their feedback as it helps us better meet their needs and expectations."
Fast-casual chains like Chipotle and Panera also have cultivated an image of social responsibility that appeals to many young people, such as by offering organic ingredients and pork from "naturally raised" pigs
Millennials "want to buy into a brand not just from it," said Mr. Easterbrook. He said McDonald's is developing mobile apps that will enable people to access information about the company's social responsibility. "What we've got to do is find interesting and engaging ways to share that information with millennials, not old-fashioned corporate lecturing.
Yet adjusting to the new competitive threats is tricky for such a giant and its huge, complex supply chain. Fresher ingredients and more customizable orders could appeal to some customers but alienate others by driving up prices or slowing preparation times.
Some analysts and investors feel McDonald's is simply too big to make meaningful changes within its U.S. restaurants. Scott Rothbort, president of LakeView Asset Management, who sold his McDonald's shares earlier this year, says the company needs to do something bold to juice growth, such as acquiring a fast-casual chain.
McDonald's has been a player in the fast-casual segment before. It bought a stake in Chipotle in 1998, which it later increased before selling it eight years later for $1.5 billion.
"McDonald's has an image problem and it needs to set out a vision of what it wants to be," said Dieter Waizenegger, executive director of CtW Investment Group, which advises pension funds that have holdings in McDonald's. "They need to chart a new course."
