Tuesday, May 10, 2011

McDonald's Goes Upmarket. Analysts Get It Wrong.

McDonald's is at it again, with a multi-billion dollar renovation of locations, with new furniture, colors, and amenities. Analysts see this as McDonald's trying to move into Starbucks' territory, or differentiate themselves from the other fast food stand-by's. Both of these perspectives are only partly true. The underlying motivation is much grander and has been on McDonald's mind for two decades.

In my review of Five Guys Burger and Fries, I discussed something that I've been mulling for time. Namely, the stratification of dietary classes in America. As time goes on, and scale drives the price and quality of certain foods ever lower, we'll have the lower class eating total garbage that costs almost nothing, and anyone who can afford it will be eating better and better.

As with the Arch Deluxe so many years ago, this is McDonald's trying to prevent that future from becoming reality. Because in this economic mechanism, anyone who competes on price will be actively pushed downmarket, resulting in ever-thinner profits, and lower-SES customers. When fast food was simply fast food, something everyone ate now and then, this future wasn't a threat. But now, with fast food being further segmented into high and low-quality, it's a game of musical chairs to see who can get away from the low-end more quickly.

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