Are big American chains losing their edge in Canada?

Walmart, McDonald's and others are struggling. Can they return to dominance?

The pinnacle of Walmart’s grip on North American consumers may have come on Nov. 28, 2008. That was the day a stampede of eager Black Friday shoppers bowled over Jdimytai Damour, 34, an employee at one of the big-box chain’s stores in Long Island, N.Y., and trampled him to death under their impatient boots. “They took the doors off the hinges,” one shaken co-worker told a local newspaper reporter.

Seven years later, it’s difficult to imagine Wal-Mart’s legendary “everyday low prices” could still be a prelude to manslaughter. The world’s biggest retailer, with some 11,500 stores worldwide, has seen growth stall as consumers grow weary of staggering through its blindingly lit airplane hangars in search of cheap toilet paper and oversized boxes of cereal bars. Meanwhile, the chain is under intense pressure to hike wages for its vast army of blue-vested workers. In turn, Wal-Mart executives recently warned investors that earnings will be six to 12 per cent lower this year, prompting the biggest plunge in the company’s stock price in a quarter-century, wiping out nearly US$20 billion in market capitalization.

Wal-Mart isn’t the only iconic American corporation that finds itself struggling. McDonald’s has furiously reworked its menu in recent years, adding specialty coffees, wraps and salads, as diners steer clear of greasy burgers and fries. Similarly, Coca-Cola and PepsiCo have been forced to diversify into bottled water, energy drinks and, if recent rumours are true, Greek yogourt, as soda sales endure a decade-long slump.

Their vulnerability is a startling reversal of fortunes for firms that, not long ago, were held up by critics as being hell-bent on imposing American corporate values on the world—hence, the McWorld and Coca-colonization monikers. The change also calls into question a uniquely American approach to business: Pile it high, sell it cheap, and focus ruthlessly on efficiency. In its place: companies like Apple and Google that have ridden a wave of disruptive innovation to huge success.

But has anything really changed? Experts say many of today’s rising corporate stars have merely tweaked the models popularized by their predecessors, giving their products a higher-end aura and more global feel—which is precisely what McDonald’s, Wal-Mart and others must accomplish if they are to stay relevant. “This is a model that spits out money—huge profits,” says George Ritzer, a professor at the University of Maryland who coined the term McDonaldization back in the 1990s to refer to the way in which society has been shaped by the ideals of a fast-food restaurant—namely, convenience and affordability. “And since we live in a world where there’s no alternative to capitalism, it remains extremely popular.”

(Stephen Wilkes/Gallery Stock)

(Stephen Wilkes/Gallery Stock)

There’s no question consumer tastes have profoundly changed in recent years. As Baby Boomers age, they’re more focused on living healthier lifestyles, while a growing general awareness of social and environmental issues has spurred a push for more sustainable business practices. A recent global study by Nielsen found that one out of every two people in the world believes he or she is overweight, and a similar number intend to do something about it. (Whether they follow through is another question.) Meanwhile, consumer groups have pressured employers to pay workers a “living wage,” and to ensure they’re not pumping toxins into the environment.

In response, several of America’s best-known companies have been forced to dramatically rethink their offerings. In addition to overhauling its menu, McDonald’s has promised to curb the use of antibiotics in its chicken and swap out margarine for butter in its Egg McMuffin. It has also tried to ape the more upscale look of competitors like Chipotle Mexican Grill by adopting a less garish colour scheme and installing free WiFi. In Canada, McDonald’s is even promising to tinker with its famous one-size-fits-most formula by rolling out new self-serve kiosks in its restaurants that allow diners to customize their burgers with dozens of different toppings, ranging from guacamole to Sriracha sauce, and have staff deliver the final product to their table.

Similarly, Wal-Mart is spending millions to overhaul its stores to make them more pleasant to shop in, stripping thousands of items from shelves and ditching the towering racks of candy and chocolate bars by the checkout wicket. And despite the hit on earnings, Wal-Mart has also promised to raise wages for some of its 1.3 million U.S. workers while it invests heavily in e-commerce, as it seeks to protect market share from online retail giant “We have got to get the company positioned to serve the customer in the long term,” Wal-Mart CEO Doug McMillon recently told Bloomberg.

(Photograph by Andrew Tolson)

(Photograph by Andrew Tolson)

But how far can these companies be reshaped without breaking them? In the case of McDonald’s, some observers liken the business to an elegant mathematical equation. “As long as you don’t make it too complex, you can provide a moderately okay product”—a Big Mac or McChicken—“at a reasonable price,” says Alan Middleton, a marketing professor at York University’s Schulich School of Business. “But as soon as you change that basic formula—if you try to make the product a little more healthy, or offer a bit more diversity—the costs go way up.” Presumably, the same goes for Wal-Mart. It built its low-price, high-volume business on the back of cheap labour—famously, it closed a Quebec store after workers voted to unionize—and by leaning heavily on suppliers to cut costs.

One potential solution to the conundrum is to adopt a more “premium” position in the marketplace. If Apple has taught us anything, it’s that consumers will shell out vast sums for sleek, well-designed products. But Middleton, for one, isn’t convinced Apple’s business is really all that different from McDonald’s, once you strip away the marketing. Sure, the price of a new iPhone seems high, but it’s a relative bargain when you consider the device eliminates the need to own a personal computer, phone, digital camera and TV set. And while it receives less scrutiny than McDonald’s and Wal-Mart for its treatment of workers, Apple can be just as cutthroat when it comes to keeping the costs of its Chinese manufacturing operations in check, judging by the reports of workers jumping off the roofs of its suppliers’ factories. “They got ahead on a system—innovation turned quickly into consumer benefits on a mass scale—which is exactly what McDonald’s did with franchising back in the 1960s,” Middleton says. “It’s just a new version of it that carries much less of the American cultural imprimatur, but that’s okay, because [America] doesn’t sell internationally—at least, not anymore.”

Middleton adds yet another reason why McDonald’s would be foolhardy to abandon its current approach: Its best growth prospects now come from countries such as India and China, home to consumers who are even more price-sensitive than North Americans. (The same goes for Wal-Mart, although it has struggled to grow overseas.)

Ritzer, similarly, sees a need for McDonald’s to strike a delicate balancing act between fine-tuning its image and sticking to the winning formula that made it successful in the first place. He points to Starbucks, which opened 1,677 new stores last year, and notes it’s basically a McDonald’s with a dash of coffeehouse theatre sprinkled on top. “You’ve got these people who sit around working and drinking coffee,” he says. “But Starbucks would go out of business if the only people they served were the ones actually sitting in the store, playing with their computers and phones.”

If Ritzer is right that his McDonaldization thesis of the ’90s still stands, the burger chain needn’t make fundamental changes to its business to silence critics. A little polishing around the edges could suffice. And, as if on cue, McDonald’s stock price recently soared to a record US$110 a share, as investors saw better-than-expected earnings as evidence of the success of the chain’s latest turnaround effort. “We’ve become accustomed to dirt-cheap food,” says Ritzer, a remark that could just as easily be applied to the broader product offerings of discounters such as Wal-Mart and others. “And, given the tremendous bifurcation of wages in the United States, people clearly have a need for it.”

It may not feel as though we’re living in McWorld anymore, but our behaviour suggests otherwise.

This article first appeared in Maclean’s.

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