McDonald's U.S. strategy needs new focus -- say analysts

By Patricia Commins

Reuters; 20th May 1997

McDonald's Corp may have to change the recipe for its U.S. fast-food business.

After pursuing dramatic expansion over the past several years, McDonald's must sharpen its focus on product quality and speed up its decision-making to improve sales and profits in the United States, industry analysts said.

"(McDonald's) marketing has to be taken up a notch. They have got to find one or more new products or go back to promoting the Big Mac on some basis that the consumer can understand," said Ron Paul, president of Technomic Inc, a Chicago-based restaurant consulting firm.

McDonald's will likely face questions at its annual meeting scheduled for Thursday on how it plans to boost its U.S. business.

U.S. same store sales for all of 1996 declined in the face of intense competition. For the first four months of 1997, U.S. same store sales increased due in part to promotions.

A spokeswoman declined to give specific topics to be discussed at the meeting other than to say McDonald's plans to give a review of its global operations.

"What McDonald's needs to do is consistently drive same-store sales. The only way in which they can do that is take a long, hard look at their product line," said Natwest Securities analyst Damon Brundage.

One sign of a change in McDonald's strategy is the expected shift in U.S. management, which franchisees have said would trim layers between the restaurants and top executives. McDonald's has declined to comment on the expected changes.

"It's not surprising that a firm that has grown at the rate that McDonald's has must make these kinds of changes," said Duncan Simester, assistant professor of marketing at the University of Chicago Graduate School of Business.

McDonald's worldwide network of restaurants grew to 21,022 in 1996 from 12,418 in 1991. In the United States alone, its eateries increased to 12,094 in 1996 from 8,764 in 1991.

McDonald's, which has previously called 1997 "a year of transition for our U.S. business," continues to face challenges from Burger King, a unit of Grand Metropolitan Plc, and Wendy's International Inc.

"McDonald's has been the dominant player so they are the one that everyone is shooting far," Simester said.

The challenge for McDonald's, analysts said, is to better differentiate its fast-food products. They cited Wendy's which recently made its menu more unique with stuffed pita bread sandwiches.

In 1996, McDonald's launched its Arch Deluxe hamburger, which it said would draw more adult customers. While the company said the sandwich met its expectations, analysts said it did not reverse the decline in U.S. same store sales last year.

For this year, McDonald's is focused on price promotions to draw customers into its stores, including its Campaign 55 that offers featured sandwiches for 55 cents when customers also buy a drink and french fries or hash browns.

Campaign 55 has driven good increases in McDonald's breakfast sales, said Everen Securities analyst Dean Haskell, but added that success could hurt sales later in the day.

"When you go to a fast-food (restaurant) for breakfast, you are unlikely to go back there for lunch," Haskell said.

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