May 22, 2009

Fast food talk with McDonald's

Bane Knezevic, McDonald's (photo: LZ-Archiv)
Bane Knezevic: "Consumers socialise more in a crisis" (photo: LZ-Archiv)
Branislav (Bane) Knezevic, President Western Division of McDonald's Europe, is a man you can steal horses with. There is something pleasantly roguish about him, and he likes to tell a joke with a captivating twinkle of the eye.

Perhaps it is the same optimistic animal spirit which allows the US fast-food giant to invest anti-cyclically in the current economic turmoil.

In this interview, our newspaper wanted a fast food and global brand's view of food retailing in order to gain some cross-sector insight.

A polyglot Serb, Bane Knezevic (pronounced: knee-za-vitch) represents the world's largest fast-food company in Germany, Austria & Central Eastern Europe (Croatia, Czech Republic, Hungary, Poland, Serbia, Slovakia, Slovenia).
Knezevic sees the current crisis as a chance. 
Parent company McDonald's Corporation achieves two-thirds of its consolidated global revenues (2008: €15.9bn) in 117 countries outside the USA. Germany is its most important world market after the US and France.

"We must strive to make personal contact" 

Mr. Knezevic,
 where do you go shopping in Germany?
I love to shop at Viktualienmarkt, the traditional street market in the old part of Munich, because it is unique. I like the downtown atmosphere, the fresh, green products, and the sheer variety of the food on offer. Also, there are so many shops and restaurants in the vicinity that I can learn things from. 

Does your love of open-air markets also imply criticism of modern self-service stores? Perhaps you find them too sterile and lacking in ambience and flair?
This is almost a sociological question. I don’t think that any retailer, however good, can really replicate the unique atmosphere you find in street markets. Even a Tesco or a Marks & Spencer can't really replicate their flair and international variety in terms of assortment. Open air markets have a totally different feeling to them.

Has the current crisis hurt consumer appetites for fast food? Are your customers eating differently and how is McDonald's reacting to this?
Every crisis influences social behaviour, and I am sure that this one will be no different. In prosperous times, it’s all about “me” and “I”, but in a crisis people become more sociable and eat in groups. The time one spends together becomes more valuable.

Friends tend to talk with each other more because they are tired of hearing the bad news generated by the crisis, so, in a way it’s a type of self-defence. McDonald’s obviously needs to adapt to this. 

By lowering prices?
It’s not only a question of price, it’s also about the way you follow consumer trends. Any business needs to know its customers. That's why we conduct many studies aimed at understanding different customer segments. So we know exactly what today's teenagers think and what people up to 60 and beyond really want.

Obviously, you can’t satisfy everyone at once, but at least you need to play your role in the crisis and to match customer needs.

Some retailers claim that they are benefiting from the current recession at your expense...
The numbers don't bear this out. If retailers were really gaining, then they would post gains, but, if I read the newspapers correctly, they don’t exactly seem to be in a growth mode  on the contrary.

We had good growth in our last business year and have experienced moderate growth so far this year. Admittedly, growth this year has not been as strong as in the previous couple of years, but it is still growth.

What do you think has been happening?
I think that consumers are staying at home more, but, when they do go out, they experiment less and prefer to choose those places and products which they know well. Obviously, they will also opt for products and venues with a good price-value relationship, so this will play an important role over the coming year. 

Stomachs don't care where their daily calories come from. Why should customers eat at McDonald's when, they can buy chilled ready meals at their local retailers' and eat them at home with the family?
I've got some good news for you! We are not competing with microwaveable chilled food meals. We are in the hamburger business! McDonald’s is a unique place with a unique menu, so we're difficult to compete with.

If you want to have a really fresh burger, then it will taste much better at McDonald's than any frozen one you can make at home. After all, we have 50 years of know-how when it comes to preparing food.

So, people who crave for the food we offer will still buy from us, and those who like to have full meals will either eat out or microwave a chilled meal from Marks & Spencer, Tesco etc. That said, however, food sales at Marks & Spencer, Tesco etc. seem to be flagging, but, at the end of the day, we live in different universes.

McDonald’s intends to open 240 restaurants in Europe this year. Why are you investing anti-cyclically in a crisis?
We are in business for the long-term. We know that every crisis has a beginning and an end. We compare the crisis to a tunnel. You drive in and you drive out. The crisis will end sooner or later, and every crisis also brings opportunities. For example, real estate prices, construction and equipment costs etc. can also fall. So some factors are beginning to work in our favour as investors.

Furthermore, you build a restaurant for 30 years and not for one or two years only. Therefore, we remain absolutely confident that we are in a good position — even in a recession.

Your outlets are also trading-up in terms of ambience etc. Wouldn't it be better to offer a no-frills alternative in the current recession?
Our decision to trade up wasn't made in the recession. In 2005, we decided to upgrade and remodel our restaurants because they had become slightly old-fashioned. Above all, we wanted to enhance the customer experience and to re-engineer the brand. This involved integrating McCafé within our concept which has made us more sociologically relevant.

Today's kids go to discos etc. on their own, but McCafé is a destination where they sit together. So the trend towards more people coming together is good for our business. As people become more sociable in the crisis, consumers trust our restaurants to meet their expectations as regards both ambience and product offer.

I come from a former socialist country and know that, when you don't have much, friends mean much more to you. When you eat with a friend, it is a social rather than an individualist experience. So, in retrospect, the decision we made in 2005 looks like strategic wisdom, but, in reality, we were lucky as the trend was our friend.

Are you increasing promotions and special offers in order to attract more customers?
Obviously, we also focus on price in a recession. Over the last four to five years, we have profited from being very consistent regarding price lines of around €1 for a cheese burger, chicken burger, coke, salad etc. Here we are truly grateful to our franchisees for supporting this strategy because it wouldn't have been possible without them.

Secondly, we launched a snack deluxe program in March based on tasty little burgers. This gives customers a fine quality product, but at a lower price. Then, obviously, we are also looking at marketing activities within our local stores, such as a "bundle" menu, where you will have more products at a cheaper price.

So, we do look at price, but there is more to our business model than that. Today, everything is about price, price, price, but we also want to talk about the eating experience.

Have you changed the design and décor of your restaurants to meet the increasing customer need for intimacy and sociability?
Yes, we have changed designs to encourage sociability. For instance, we have introduced communal tables where ten people can sit and communicate with each other.

How can you marry the conflicting demands of personalised and friendly service with systemic efficiency?
This is one of the questions we asked ourselves at a recent board meeting. We need to improve on staff friendliness, especially in the crisis. We have no issue with our quality, cleanliness or speed of service, but McCafé does better on friendliness than McDonald’s which needs to improve.

How can it be improved?
It comes down to the time spent with the consumer. We and many of today's retailers need to go out more and view our service from the customer's point of view. All too often, customers are greeted with little more human interaction than: “Customer card, yes or no?" We really must avoid this type of automated service and strive to make personal contact with the customer.

But how personal can you be, really?
We need to train everybody to the same high level of service. It is also a question of staff body language and how staff read customer body language. We once firmly believed in job rotation, where we had people work for our franchisees, then at the grill, and then in the lobby etc. However, we have since found that not everybody is made for service.

So, in today’s world we need to acknowledge that there are introverts and extroverts and that some people are more service-oriented and others less so. Therefore, we need to change our philosophy on job rotation and employ people where they are best-suited.

Some really like to chat with customers, and they should be up front. There are others who don't like customer contact so much, and they should be used elsewhere. We must accept this difference and encourage sociable, extravert people to go up front and more introverted people to work, for instance, in the kitchen.

There are also people who love working with computers, so we need these to work on our IT and not up front. Thus we must get away from the old job rotation idea and give people the freedom to choose where they believe they can add value to our company.

Why not introduce loyalty cards?
We haven’t focused on this in the past. We have tested a loyalty program in Germany, but there is a huge inflation in loyalty schemes at the moment. Also, we have around 2.6 million guests a day which would require the installation of an awful lot of hardware and software.

Every third McDonald's in Germany now has a separate McCafé. Do you really believe that you will be able to take market share from Starbucks, Tchibo and other major coffee shop operators? 
We have already taken market share from them, and are continuing to do so as we build more McCafés. We have democratized coffee throughout Germany and penetrated the market quickly. Originally, we never saw McCafé as a competitor to Starbucks etc., but now it is a reality. Suddenly, one year ago, McCafé popped up among the statistics on coffee shops.

Do you have any systemic advantages over the coffee shop operators?
Yes, because we offer a shop-in-shop concept. We already have customers, so we never have to build a McCafé to get new ones. The concept aims at giving the customer an extra offer.

The beauty of our business model is that we don’t have to invest in new sites, but can capitalize on the ones we already have. We also have the real estate and don’t have to invest much in décor, seating, utilities etc. because they are already part of McDonald’s.

We only need to invest in the McCafé counter and equipment which cost €70,000 to €80,000 per unit. This business model is obviously cheaper than that of our competitors. Also, there are synergies with our existing offer because the coffee business blends well with our burgers and coke.

Has McCafé attracted new customers?
Yes, although we hadn’t originally planned for them. We are very proud to have grown two customer segments: primarily teenagers and, surprisingly for us, customers over 50 and 60.

Surely those two segments don’t mix well?
In fact, they are very complimentary because the over-60's come during the morning between 10 and 12 a.m. as well as around 4 p.m. when there isn’t a big rush. The teenagers tend to come at lunch time and in the evening. This unexpected, but interesting development helps us to utilise our space better

Seen from your vantage point in the fast-food industry, why do you think it is that most major German retailers have not been successful at gastronomy?
I agree that the gastronomic food offer at some retailers is poor. It’s a question of competency. McDonald’s has 50 years of know-how as well as the leverage, scale and drive-through.

By the same logic, we would never try to run supermarkets from the back of our sites. Theoretically, with 1,300 locations in Germany, we could do so, but we know we don’t have the competency. Everyone should stick to their game.

McDonald’s has also made this mistake. We acquired brands such as Donato’s Pizza, Boston Market offering chicken, and a Mexican bottler, but they just weren’t our game. Once we realized this, we closed them and refocused on McDonald’s.

As German hypermarkets downsize, they are increasingly looking for concessionaires to utilise vacant sales space. Could this be a chance for McDonald’s to expand?
We already have small satellite restaurants in shopping malls, train stations and in around 170 retail outlets. It’s a small part of our business and not our prime target or strategic aim.

Many German retailers want to become retail brands. As one of the world’s leading consumer brands, how good a job do you think they are doing?
That’s a provocative question. McDonald’s is first and foremost a restaurant where we market products and only secondarily a retail brand. The retailer must first ask himself what is the specific competency of a Tesco, Rewe, real,- or a Rossmann?

Will we ever see McDonald’s brands on supermarket shelves?
You can find McDonald’s ketchup pretty well everywhere, but I don’t see the same chance for any of our other products at the current time. It isn’t that we couldn’t make it, but we wouldn’t be unique. Let me be honest, if we sold our pâté in frozen form, maybe some of our competitors would do the same. People would be able to take them home, but it wouldn’t taste as good.

We would also damage our brand long-term as it would kill our uniqueness and the experience of eating in our restaurants. Also, you have to cook hamburgers for the right time and at the right temperature. We want people to come to McDonald’s and not to barbecue hamburgers at home on their terraces.

Why do you cooperate with suppliers and where could this cooperation be extended?
Suppliers have the technology to develop products better than we can. We are also innovating with Coca-Cola, and Jacobs have also helped us with our coffee. We used to offer a Robusta-Arabica mix for our roasted coffee in Germany, where the water has a lot of lime-scale. We didn’t understand that Arabica is far better suited to German water than in Italy where the water is softer.

So, thanks to their advice, we have now changed to Arabica, which is why our McCafé coffee and an espresso we have exclusively developed taste even better than only three of four years ago. This type of exclusive cooperation will increase in all product areas. We will work with suppliers like FSB, Clemen and Lieken in bread and with Bonduelle for salads etc.

How are you adapting to consumer trends towards vegetarianism and healthier food?
Obviously, we respect a vegetarian customer’s decision and are increasing consumer choice. However, do not forget that meat is an important source of protein and iron. The body needs water, salt, calcium and protein.

Today, we don’t only offer burgers, chips and coke. For example, we offer a wide variety of drinks from organic milk to full milk, juices, and different coffee specialities etc. For those who won’t drink cow’s milk in coffee, they can order soy milk coffee at McCafé, for example.

McDonald’s is also increasing variety in a different way. It now offers fruit and vegetable salads, bagels, baps, chicken wraps with lighter products and different chicken burgers. We have also reformulated core recipes.

We have reduced the fat in our Chicken McNuggets eaten by kids and now only use 100 per cent breast, i.e., white meat. We have also reduced salt and fat. We have removed skin from our Chicken McNuggets. We have halved the fat in our French Fries from 5 to 2.5 grams and only cook with 100 per cent vegetable oil.

We have reduced transfat acids, saturated fats etc. and changed salad dressings in order to reduce calories.

The only trouble is that salt and fat are great taste enhancers...
Absolutely. We tested French Fries without salt, but it was totally rejected by our customers because they had no taste. Then we tested a different cheese with only 20 per cent fat, and again it failed on taste with our customers.

We don’t offer veggie-burgers yet because we first need to ensure that we have the necessary competency in vegetables. So we are working with two new companies who do. When we do something, we want to do it well.

Lebensmittel Zeitung with its online sisters (photo: LZ)
Lebensmittel Zeitung with its online sisters
Read in German: 'Getrennte Welten' by international editor Mike Dawson on page 25 of Lebensmittel Zeitung, no. 21, 22.05.2009

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