Despite its stature as a global mega-brand, with 30,000 restaurants and 46 million customers a day, McDonald’s can’t seem to supersize its earnings.
Sales and profit growth at the pioneering global fast-food business with its signature golden arches has stalled and the company’s shares are trading at seven-year lows. On Dec. 17, 2002, McDonald’s announced it would record its first quarterly loss ever, following a disastrous price war with U.S. burger rivals.
Overseas, the company is a target for anti-Americanism; in the last month alone, bombs have been thrown at restaurants in Paris, Mumbai (formerly Bombay) and Indonesia. McDonald’s has even been blamed for making Americans fat in a class-action suit modeled after the tobacco litigation.
With little room to grow in its saturated markets, the company is struggling to find ways to build on the formula that made McDonald’s, of Oak Brook, Ill., ruler of its market for more than 40 years. “That’s the Achilles heel of success,” says Wharton marketing professor Stephen Hoch. “Over time, the trick is to figure out how to shed the bad stuff and keep what is good.”
McDonald’s has tried to expand its brand with new menu items, including pancakes, ham and cheese sandwiches and mango shakes. But the new items slowed McDonald’s hallmark speedy service and created quality problems. “They have gone down the road of trying to expand their sales through broadening their menu and I think have recognized – correctly – that this is a slippery slope,” Hoch adds. They end up hurting operations “when they veer too far away from a core set of items.”
Wharton marketing professor David Reibstein is worried that the same underlying issues currently bedeviling McDonald’s will take a toll on Starbucks, which is also trying to grow sales by expanding the kinds of products it sells. “It used to be you could say Starbucks is coffee. You could envision Starbucks selling coffee-related items such as mugs, beans or coffee pots,” says Reibstein. “But now they sell greeting cards, music, sandwiches and mango juice. My concern is that Starbucks is losing what Starbucks is … That’s a risky thing to do.”
Many examples exist of companies with mature brands being able to develop new brands that did not diminish the original franchise, points out Reibstein, noting that Coke has been successful in adding second and third brands to its powerful core product. Automakers and hotel chains are others that have been able to expand with new brands.
Hoch and Reibstein endorse McDonald’s strategy of buying all or part of other chains to add growth. In the past four years it has acquired Boston Chicken, which was under bankruptcy court protection, Donatos Pizzerias, Chipotle Mexican Grill and Aroma Cafe, a London-based coffeehouse chain. “Going in and buying or creating new brands without trying to spread themselves too thin on the core product is smart,” says Hoch.
Still, non-burger sales are tiny, amounting to only $1.2 billion of the company’s annual sales of $40 billion, according to Carl Sibilski, who follows McDonald’s for Morningstar Inc. in Chicago. He says the new acquisitions will be less important for sales than as a source of new ideas for products and business operations.
The Golden Arches Go Abroad
International growth is crucial to McDonald’s, which already holds a huge lead in the American burger market abroad. “There are a lot of fast food restaurants out there and they have a lot of competition,” points out Hoch. “It’s not going to be that easy to grow domestically, and yet every time they enter into a new market internationally they have a different set of issues to deal with. Sometimes they get it right, and sometimes they don’t.”
Sibilski suggests that the mad-cow disease scare in Europe is behind the company now but is still a problem in Japan. Even though beef served in Japan is raised in the United States, “the Japanese people have not bought into that.” The company also has been hurt by unfavorable currency exchange rates and floods in Central Europe this summer, he adds.
Culturally, the chain has become a bulls-eye for anti-American sentiment around the world. In many foreign countries, says Hoch, “there is a love-hate relationship with the United States. People have a love-hate relationship with McDonald’s. It’s partly the price of success.”
In England, a determined group of anti-McDonald’s campaigners has launched a global effort against the company, painting it as an exploitive arm of capitalism. “The corporation is desperately trying to prop up their pathetic but expensively-manufactured image and the attraction of their mediocre and largely useless products,” says David Morris, one of two defendants McDonald’s sued for libel in a celebrated British case.
“Whatever the marketing strategy, the corporation’s only interest (like all corporations) is making as much money as possible for their elite group of powerful shareholders, and increasing their profits and power at the expense of consumers, workers, animals, society and the environment,” adds Morris. According to Sibilski, however, the protesters have had little impact on McDonald’s bottom line; moreover, bombings hurt local franchisees and employees more than the corporation.
Meanwhile, the company’s top echelons have a more international tone these days, following the abrupt retirement of McDonald’s chief executive Jack Greenberg on Dec. 5, 2002. (Earlier this year Greenberg had said he planned to stay on until 2005.) McDonald’s named Jim Cantalupo, 59, a former vice chairman and chief executive of McDonald’s International, to step in as chief executive. Charlie Bell, 42, an Australian who ran operations in Europe, was named president and chief operating officer and is viewed as an heir apparent.
Losing Ground with Baby Boomers
Back home, the company also faces cultural issues, notes Jon Lansner, a Wharton graduate who follows the fast-food industry as a business columnist for the Orange County Register. “McDonald’s led the revolution to standardization. Seemingly there was a McDonald’s in every mall and every corner of America. And perhaps that was a comfort when you were going into a strange town or another country ten years ago.”
Since then, he says, Americans appear to have grown bored with the brand and more willing to experiment with smaller local restaurants. “I think culturally, all of a sudden, we are more comfortable with the new and exciting.”
McDonald’s still dominates the kiddie market with its elaborate playgrounds, Happy Meals and so forth, Lansner adds, but it is losing ground with baby boomers who have grown tired of the golden arches. Teens and young adults, he said, resist McDonald’s as “their fathers’ fast food.” McDonald’s has become “the big behemoth, which on one hand is laudable. On the other hand, in today’s age, that’s not all that attractive … The cultural issue is going to be a tough challenge.”
McDonald’s is not the only fast-food chain struggling. On Dec. 13, Diageo, the London-based owner of Burger King, announced it will sell the hamburger chain to an investment group made up of Texas Pacific Group, Bain Capital Partners and Goldman Sachs Capital Partners, for $1.5 billion. But that price is down from $2.26 billion announced in July after Burger King failed to meet price and performance targets.
According to Sibilski, the new, lower price will help McDonald’s. He argues that if Burger King’s new owners had invested more in the business they would be under greater pressure to pump even more capital in to compete more effectively with McDonald’s.
Meanwhile, there is a bulge of McDonald’s franchisees nearing retirement who have been reluctant to reinvest in their stores, Sibilski adds. The company is about to inaugurate a new program to invest up to $400 million renovating or rebuilding every McDonald’s in the United States that is more than 15 years old. The company will loan franchisees money to make the improvements; if sales do not increase franchisees do not have to pay back the loan. A similar program in Southern California and France, he says, resulted in sales growth of one to three percentage points at individual stores.
But no company, no matter how great its brand, can afford to sit back, says Reibstein, noting that all companies must grow to attract financial and human capital in the form of dedicated and innovative workers. If companies don’t provide growth, investors will shift their capital to another investment that provides better returns. McDonald’s, he states, “has a growth imperative.”