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26/08/01 . Deborah Cohen . Reuters . CHICAGO, USA
McDonald's Faces Host of Profit Pressures
The hamburgers are supposed to be served quickly at McDonald's Corp., but change itself may be coming too slowly at the company that launched the fast-food industry.
The McDonald's concept, including staples such as its Big Mac hamburgers and popular Happy Meal children's promotions, has helped build the company into a global icon. But that one-size-fits all strategy has also been criticized by Wall Street for hampering innovation in an increasingly competitive industry.
The company, which now has nearly 29,000 restaurants worldwide and some $40 billion in annual systemwide sales, is facing a spate of woes, including the worsening global economy, mad cow disease in Europe, a strong U.S. dollar, increasingly poor marks in service and most recently -- fraud.
McDonald's fortunes began to worsen late last year, just as Chief Executive Jack Greenberg was beginning to shake things up with the promise of a new U.S. production system, recently purchased hamburger alternatives such as home-style food chain Boston Market, and shifts toward more responsive, decentralized management.
In the three most recent quarters, McDonald's, a steady earnings performer among large-cap stocks, saw its profits fall below year-earlier levels. Full-year earnings for 2001 are expected to come in at $1.39 a share, down from $1.46 in 2000, according to market research firm Thomson Financial/First Call. The question on everyone's mind, from Wall Street analysts to long-time operators, is how the company will execute a turn-around.
"McDonald's has received the biggest wake-up call of its life," said Irwin Kruger, a Manhattan franchisee who has run McDonald's restaurants for more than 30 years. "Management is under extreme pressure to demonstrate they can effectively lead the company."
This week, the U.S. government disclosed that the company, based in Oak Brook, Illinois, was an unwitting participant in a scam that bilked millions of dollars in prize winnings from customers. The scandal comes on the heels of another controversy that led to lawsuits against McDonald's over the use of beef fat in its famous french fries in the United States.
While news of the scam may shock the public, investors have been expressing doubts for some time now. By late March, they had pushed McDonald's shares down to $24.75, their lowest level in more than three years. The stock, which closed Friday at $30.49 on the New York Stock Exchange, has fallen more than 10 percent this year, and trails the Dow Jones industrial average, of which it is a member, by about 7 percent.
"They've established a very powerful brand, but I think getting to the next level is going to be hard," said Robert Goldin, executive vice president of Chicago-based food and restaurant consulting firm Technomic Inc. "The hamburger segment is slow. I don't know what I would do if I were in Greenberg's shoes."
The company's share of the U.S. fast-food market, which includes everything from local mom-and-pop hamburger stands to major competitors such as Wendy's International Inc. and Burger King, fell to 15.5 percent last year from 16.2 percent in 1995, Technomic said. The United States remains McDonald's largest market, with 2000 sales of $19.6 billion and operating profits of $1.6 billion.
A FOCUS ON OPERATIONS
To keep itself vital, McDonald's has of late put a renewed emphasis on its operations, experimenting with everything from cashless payments to dessert cafes as methods to drive up sales.
In addition to expanding the roles of long-term senior managers in the U.S and abroad, the company created a task force designed to get to the bottom of U.S. service problems, which were highlighted by a recent University of Michigan study that ranked McDonald's service last among fast-food chains.
Eager to reap the benefits of Made for You, a new North American production system designed to provide menu flexibility along with fresher food, McDonald's also recently rolled out a so-called New Tastes menu, which lets operators offer more menu alternatives on a regular basis. In the U.S., McDonald's also boosted hourly wages, pressured by one of the tightest labor markets in years.
"In the U.S., it's operations, operations, operations," said Lehman Bros. restaurant analyst Mitchell Speiser. "They've got the system under their belt a year and a half; now it's time to steepen the learning curve."
Speiser, who expects full-year earnings of $1.38 a share from the company, said he is heartened by the fact that sales at U.S. restaurants open at least one year, have been up for six of the eight most recent quarters.
Abroad, McDonald's appears to be pulling back from the heady expansion that has been its rallying cry of recent years. When it reported its second-quarter earnings, it announced plans to close some 250 underperforming stores in unnamed emerging markets. It plans to open about 1,600 new McDonald's this year, mostly outside the United States, down from more than 2,400 in 1995.
The company has also shifted to more non-beef items in markets that had suffered from the recent beef scare.
"I think I would probably revisit (growth) in international markets, and they're doing just that," said Bear Stearns analyst Joe Buckley. "You still have world economies getting soft, which will make it tougher for them to execute a significant turn-around."
McDonald's company watchers said it's too early to tell whether recent moves will be enough to reinvigorate the company's financial outlook. Some encouraging signs, however, include the strengthening of overseas currencies and improved sales in major international markets such as Germany and France.
Said CEO Greenberg in McDonald's most recent earnings statement: "We remain
confident in our business fundamentals and expect to post significantly stronger results in
the second half."