Wall St loses taste for McDonald's

Jonathan Prynn on the woes of the biggest fast-food chain

The Times; 11 November 96

There are few more potent emblems of the relentless global march of American culture than the golden arches of McDonald's. Since it's birth in in early 1950s the company has opened restuarants In 96 countries, changing tile eating habits of generations of children.

Last month saw branches in Delhl and Lima. Others in even more exotic locations are sure to follow. One day, there will probably be McDonald's on the moon.

And yet there is one place on Earth where Ronald McDonald with his ubiquitous menu of Big Macs and Quarter Pounders Is failing to satisfy Street For McDonald's, one of the most disciplined and well organised companies in the history of capitalism, is under fierce attack in its own backyard.

Last month the company reported a decline in domestic sales (excluding new restaurants) for the fifth quarter in a row. The worrying slump comes at a time when the US economy is booming and its main rivals, Burger King and Wendy's, are showinig solid, steady growth grabbinig market share from the world's biggest fast-food chain.

In part the company is a victim of its own success. With nearly 20,000 restaurants in the US, there are even fewer opportunities for more openings Each new branch increases the problem of "cannibalisation" - taking business from other McDonald's restaurants rather than growing overall sales.

The number of branch openings has slowed dramaticaliv this year but the company still plans to open about 2,500 in the US alone next year. Some analysts suspect halting or paring down the opening program makes financial sense but will not he considered by a company unused to admissions of failure or downgrading of profit forecasts.

The second challenge facing McDonald's is the ageing of thc customer base that fuelled growth in the 1970)s and 1980s. The suburban teenagers who grazed on Quarter Pounders 20 or more years ago are now wealthy middle-aged professionals who try to wean their children off such a diet as fast as possible. At the same time competitors such as Wendy's have been launching their own lines of highly successful upmarket burgers that have scored well both with American kids and their parents.

In a recent quality survey McDonald's burgers were rated twelth out of 13, with Wendy's second and Burger King eighth. To tempt back the baby-boomers, McDonald's launched in May the Arch Deluxe, its "sophisticated" adult burger. Then last month came Crispy Chicken Deluxe Grilled Chicken Deluxe and Fish Fillet Deluxe.

McDonald's two-year search for a new upmarket image at an estimated cost-of $200 million on marketing alone is already the stuff of corporate legend. To develop the new lines, the company hired Andrew Selbaggio, one of Chicago's best known chefs who proclaimed "I want people to realise we are not a factory, we are a restaurant'.

Hundreds of new mustards and mayonnaises were tested and dozens of types of fish for the Fish Fillet Deluxe. At the glitzy launch of the Arch Deluxe, employees performed special dance steps to mark the occasion. And yet by McDonald's exacting standards the new range has been a monumentul flop. Sales from US restaurants, exclucling new openings, have not risen in a single month since May and customers seem reluctant to pay $2 49 for a "sophisticated" burger when they can have a vulgur one for 99 cents.

McDonald's says that sales have exceeded internal (and undisclosed) expectations and that the new range was never meant to be a magic formula.

Perhaps so, but at the very least the episode has confirmed impressions that the company's high command has begun to lose its once unquestioned touch. Particular scorn is reserved for the advertisements for the adult burgers which show a child with a grumpy face - an image of unhappiness that would have heen regarded as heresy until recently.

Although international sales have shown far healthier growth, many of McDonald's main overseas markets Japan, Germany, and Britain for example - are not as strong as they could be for a variety of reasons.

As Ronald McDonald enters middle age the future for the company looks less certain than for years. It has had rocky patches before and recovered, often by cutting prices. However, with the launch of the Deluxe range, that option is less tenable.

Michael Quinlan, chairman and chief executive, told investors last month that the recent run of disappointing results had ''fallen short of our goals". For analysts used to being "treated as a branch of their investor-relations operation" as one put it, this was amazing. "There was a feeling that it couldn't happen to a nicer bunch," said another Wall Street follower bruised by the treatment meted out by the company to critics in the past.

A management shake-up last month in which Jack Greenberg. chief financial officer, replaced Edward Rensi, former burger flipper and veteran McDonald's careerman, as head of the US operations has failed to dispel the growing sense of unease on Wall Street. And shares have continued to slide.

Damon Brundage, an analyst at NatWest Securities, said the current problems have left McDonald's stuck in a "strategic no-mans land" with no easy route back to financial safety. He added: "The question remains - is the US over for McDonald's?"


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