McDonald’s CEO & Phil Kotler on Global Consumer Demand

I attended this event organized by the Chicago Council on Global Affairs NEW PATTERNS IN GLOBAL CONSUMER DEMAND featuring Jim Skinner, (JS) CEO of McDonald’s & Philip Kotler, (PK) Professor of International Marketing @ Kellogg, Northwestern’s business school.  These 2 provided a nice contrast between the theoretical academic world & practical real world of business.

Skinner led off by saying earlier McDonalds built their restaurants & their customers simply came, but that doesn’t work any more.  They’ve created robust consumer insight & are using it to create diversified & localized menus, such as shrimp in Japan, beer in Germany, & spam in Hawaii.  He emphasized 5 points:

1. US consumers are spending less than in December, 2007, saving more (6%), & spending differently.
2. Consumers seek excitement, so you have to keep innovating to keep them interested.
3. Emerging markets are the future;  2B people control 1/3 of consumer spending ($7TR of $20TR).  The rising middle classes of China & India represent 40% of the population growth of the world.
4. Entering these new markets requires work & persistence.  There is lots for even McDonald’s to learn, for example, when they 1st opened drive-through restaurants in China, the Chinese would drive through to get their meals, then park their cars, walk in the restaurant, & sit down to eat their meals.
5. You have to do what it takes to fit in locally, such as by recruiting locally.  Brands always have to identify locally.

Philip Kotler was actually educated as an economist under Milton Friedman @ the University of Chicago, but became a Keynesian when he studied marketing under Paul Samuelson while getting his graduate degree @ MIT.  He converted to marketing because economics was all related to price & ignored distribution, wholesalers, etc.  That said, our problem now is insufficient demand, & bringing back easy credit would only bring back the problems that got us into this mess.  Consumers are commoditizing by buying store brands for 20-30% less than name brands.  A Young & Rubicam study found that LOHAS (41M who live a lifestyle of health & sustainability) 62% are happier with just the basics of life & 72% value their time more than money.  Excess supply & overcapacity have driven down prices, which has prevented us from moving the recession into a growth economy again.  Technology & infrastructure investment can create jobs.  But as manufacturing declines, so does innovation.

Alternatively, as poverty has been reduced, China & India are booming, to become the world’s largest consumers of everything. India is bringing down costs by putting things in smaller packages, such as a $100 computer powered by a hand crank & a $2500 car from Tata.

The environment is a growing issue.  Unilever’s CEO wants to double his business without increasing its environmental impact.  Walmart is forcing its suppliers to profit from saving energy.  But as the world’s poor earn more money, pollution & congestion increase as they spend it.

The stature of the US is falling in the world.  A Newsweek study ranked the US #11th best country in the world based on 4 criteria.  We were only #9 in GDP/per capita.  We may be moving from the age of marketing to de-marketing.  Our current system encourages unhealthy behaviors such as wasting energy & water, so maybe we need to be more concerned about the King of Bhutan’s happiness metrics & pose John Kenneth Galbreath’s question, “What makes the good life?”

Panel discussion

• What will be the future savings rate?  JS-we’re not savers, so that will subside.  PK-some segments will continue to save.
• What are the trends in technology?  PK-automobiles are getting smaller & more fuel efficient.  Students are spurning big companies & becoming entrepreneurs.
• What other trends do you see for the next 5 years?  PK-social media doesn’t allow companies to be bad anymore, but we’re still trying to figure out how to measure both old & new media.  We are at risk of disintermediating salespeople.  JS-20% of McDonald’s media is devoted to the internet today.
• Is deflation a risk?  PK-Cheap imports contribute to deflation.  Japan is the best example.  JS-McDonald’s has 4000 restaurants in Japan where sales are flat but not declining.

Q&A

• Is government spending the only way out of recession?  PK-the Keynsian in him says there is a positive role for government.  Scandinavian countries set good examples.
• Can China’s & India’s growth offset declines in the US?  PK-As those countries mature, growth slows, but for now they are making all of Asia energetic.  US companies are going there to benefit from that growth, but that is not creating jobs in America.  IMF #’s indicate while the US economy shrunk 3% last year & will grow 2.6% this year, the emerging markets grew 2 1/2% last year & will grow 6.8% this year.
• Should Africa be brought in closer to the world economy?  PK-Botswana & South Africa are doing well.  As costs rise elsewhere, Africa will become the next sourcing region.  JS-McDonald’s is in the north & south, but elsewhere is risky.
• Should the US government prevent American manufacturers from manufacturing abroad?  PK-no, that would make American manufacturers uncompetitive & create perverse consequences.  JS-McDonald’s sources locally everywhere the operate.
• Do consumers world-wide want healthier menus? JS-McDonald’s tested pizza in Germany & the Germans liked it, but wouldn’t buy pizza @ McDonald’s regularly because it’s not a pizza house.  Lower class customers want the full experience in Indonesia.  McDonald’s can sell whatever they want, but it has to be what people actually buy & it’s not organic yet.  McDonald’s sells as much chicken as beef & is the world’s largest buyer of apples.  McDonald’s most frequent customers visit their restaurants once/week, & 85% of meals are still eaten at home, so you can’t blame McDonald’s for America’s obesity problems.