The MacWorld, as we know it, is going through a massive revamp. It will either change the face of the controversial fast-food giant. Or lead to a slow, painful, and sureshot, death.
A few days ago, apparently bowing down to the demands of health activists that its junk food was responsible for obesity among children, McDonald's announced it plans to phase out supersize french fries and soft drinks from the US outlets by the end of this year. Everyone liked the idea. The company said the supersize products doesn't contribute much to the revenues either. And, since 2002, it has been moving on to a new menu that offers health-foods such as salads, fruits, yogurt and milk. It's part of its new campaign - "Eat healthy, Be active" - that seeks to change the company's image among health freaks and critics.
Health activists hailed the decision as their victory, and the stock punters pushed up Mac's scrip price. It seemed that everything was under control.
Therein lies the problem. The complacency, the myopic vision of managers who only worry about crisis during their tenure, the feeling that one can stop a deluge with a make-shift dam.
When it comes to health-related controversies, especially those that afflict the masses, going onto the backfoot could be the first step towards companies getting hit-wicket. Some lessons can be learnt from the bitter after-taste left behind in the tussle between the health activists and the cigarette industry. The end-result: cigarette sales have stagnated, the governments are aggressively curtailing the freedom of the manufacturers, and the cigarette companies had to pay billions of dollars as compensation. Will the Malboro story be repeated in the case of McDonald's?
Such controversies generally go through four phases. The first, as usual, is the denial phase. All allegations are rejected outright. The cigarette firms have been doing it since the 1950s. Mac and other fast-food chains have done it since the 1990s. Each study that claimed cigarettes or fast-food are bad was countered by several that said the opposite. There was no clear-cut evidence, no correlation between health and smoking or eating. It's around the end of this phase that critics, frustrated by the corporates, file lawsuits.
As the anger grows, the criticism refuses to fade away, the tussle enters the give-in phase. The corporates, in a bid to assuage their critics, begin to take steps in the seemingly-right direction. The cigarette companies, although they were forced by governments to a great extent, agreed to a warning on the packet itself. Mac, on its part, introduced the so-called health foods and agreed to phase-out certain slow-moving fast-food items. But usually, this step signals the death-knell for managements.
First, it's a public acceptance that the charges against them were correct. That there's a health angle to their products. If Mac says it's now offering health foods, by logic it implies it wasn't earlier. If cigarette firms agree to a warning, it implies there's some truth to the health hazards of smoking. Second, it encourages the critics to clamour for more. It's a sign of victory and enthused by it, they aim for other similar ones.
So, the battle immediately intensifies, instead of losing its steam as hoped by managements.
It's around this time that the original lawsuits filed by activists begin to near their judgment days. This is Phase III, the legal one. It's obvious that corporates are likely to lose some of these legal battles. For one, because the issues are so sensitive - about your health, your kids' health - that judges normally are biased against predatory managements. Two, by this time, the shreds of evidence against corporates has turned into a mountain of information.
As companies lose a few cases, the public outcry begins to get deafening. Then, new evidence is produced in courts that's hyped and repeated by the mass media. There's a PR crisis, there are monetary compensation implications, the future is bleak. In the end, companies do pay huge compensations; in the case of the cigarette industry, it was nearly $100 billion. But more than that, various governments feel forced to take action against the "guilty" corporates. New laws are enforced that make life hell for business. Sales stagnate, profits start declining, and companies are under pressure to scout for newer markets.
When the fourth phase approaches, business is as good as dead; it's there, but there's no potential in it. Companies just want to continue for as long as they can. Some diversify, seek new markets for old products, or cut costs in a bid to improve profitability. But the sheen is gone. Also by now investigators start poring through the millions of documents filed in the various courts and begin to unearth new facts. Those that paralyse managements. Those that prove conclusively that corporates knew about all the negative health hazards. Those that show how managements lied, manipulated and lobbied aggressively to protect their commercial interests.
McDonald's hasn't reached this stage yet. It hasn't even reached Stage III. But it could. Because it's somehow following the footsteps of the cigarette companies. And the pressure against Mac is the same as that against Malboro. It seems that MacWorld is in for a shock. Whether it emerges stronger out of it by changing its business model, menu card and image, or becomes a faded glory depends on its future strategy. But phasing out the supersize french fries and Coke should definitely not be a part of that.
So what can McDonald's do? Or for that matter, what could the cigarette companies have done?
Well, the drastic step is to realise the reality and formulate steps to get out of the business within the next few years. Global cigarette firms never tried it because they were hopeful, and arrogant, that their businesses would somehow be saved. But look at what the Indian firm, ITC, is doing in India. Although it's hanging on to the cigarette business, it has a blueprint to make sure that cigarettes contributes a minor percentage of its turnover over the next few years. It's using the Wills (a cigarette) brand to get into retail, e-chopaals and what not. In the past too, the has company tried to diversify into new areas, but with little success. But at least it's trying.
The other thing is to change your business model completely. For instance, the cigarette companies could have easily decided that their core competence is distribution, and not making cigarettes. Fast-food giants can think along the lines of logistics and agri-related areas being their core. Or they could think in terms of leveraging their brand equity in some safer areas. One needs to put more thought into it. But fighting the ongoing crisis with half-hearted attempts is likely to turn into a losing battle.
Alam Srinivas is Business editor, Outlook