Getting Off Their Mc Butts
One year ago, McDonald's Corp. was serving a menu that consumers ranked among the worst-tasting of any restaurant chain. The Golden Arches had not launched a successful new product since Chicken McNuggets in 1983. And the company's stock was performing worse than cash sitting in a bureau drawer. Today, the food still trails the competition's, and there is still no new blockbuster on the menu--but McDonald's shares have risen 67% in the past 12 months, to $80 each, about triple the growth rate of the Standard & Poor's 500-stock index.
What do investors see? It may not be obvious at your local Mickey D's, but a behind-the-scenes transformation is under way. New Chief Executive Jack M. Greenberg is leading an overhaul of the long-insular restaurant company that has made both franchisees and investors more optimistic than they have been in years. In a break with tradition, Greenberg has turned to outsiders to fill key posts. He is cutting 23% of headquarters staff, the first layoff in company history. And franchisees and corporate managers stationed in the field now make more of the decisions about when to discount and what food to test.
The result: McDonald's has found modest success with new products, including a bagel breakfast sandwich and the McFlurry sundae, and with regional discounts. Those were big reasons why average store sales climbed last year and overall company revenues rose 9%, to $12.4 billion. "We're doing better," Greenberg said late last year, "and sales are the best test of all." Operating profits, excluding charges for the layoffs and investments in new kitchens, climbed 10%, to $3.1 billion. "This was a company coming to a crisis," says Chris Davis, a portfolio manager at Davis Selected Advisers, which owns more than 9 million shares. "Greenberg's done a fantastic job bringing a new sense of urgency and getting rid of their corporate arrogance."
Still, much of the lift came from a one-time drop in advertising costs and last spring's wildly successful Teenie Beanie Babies promotion. McDonald's is looking for another home run with its upcoming promotion featuring miniature Furby dolls. But the success will be hard to maintain long-term without better food, says Everen Securities analyst Dean T. Haskell. Indeed, consumers ranked McDonald's food 87th out of 91 chains in a poll last year by Restaurants and Institutions--and its score will be slightly lower in a new poll out later this month. Says Alan D. Feldman, a former Pizza Hut Inc. exec who was named president of McDonald's USA last year: "We've got to improve our menu."
BIG RETROFIT. Enter "Made for You," a $500 million upgrade of virtually every U.S. McDonald's kitchen. Instead of keeping food in taste-killing warming bins, the system uses computers to project customer traffic and an assembly line to keep lettuce cold and burgers hot--while making custom orders as simple as they are at Burger King Corp. McDonald's says the retrofit will be almost complete by the end of 1999.
Early response to the new system is promising. Frank Schley, a 42-year-old software company president, is impressed with the change at a McDonald's in Columbus, Ga., where he dines with his son, 8, of the same name. The restaurant is one of the 25% of U.S. McDonald's with Made for You already installed. "In the past, it was obviously an imposition to make a special order," Schley says. Adds little Frank: "I used to get some cold meals."
The improved performance is in stark contrast with recent years. McDonald's spent much of the '90s building hundreds of new U.S. restaurants, only to see its share of the fast-food pie shrink. Franchisees were unhappy, and domestic operating income wasn't even keeping pace with inflation. The situation came to a head last April, when Michael R. Quinlan abruptly announced his resignation as CEO. The board promoted Greenberg, who had come from Arthur Young & Co. in 1982 and risen to chief financial officer and then vice-chairman.
Greenberg has moved McDonald's away from big-bang initiatives--such as pizza, the Arch Deluxe, and the confusing "Campaign 55" discount--that flopped. Instead, he has focused on getting little things right. "They're being more conservative and more thoughtful," says Irwin S. Kruger, who owns six stores in Manhattan. McDonald's, with 24,800 restaurants worldwide, has closed almost 200 poorly performing U.S. units. It kept net U.S. expansion to less than 1% last year, compared with 9% a year from 1993 to 1996.
With new executives lured from companies ranging from Taco Bell Corp. to General Electric Co., the company is also starting to break from a past in which managers with a decade at McDonald's were considered new. Franchisees say there's also a new respect for consumer research. The company is using the data to help figure out when to discount. Starting in Florida and then on the West Coast, for example, store owners have responded to vigorous competition by selling burgers for less than the price of a candy bar on selected days. Says Tom Thompson, president of CKE Restaurants Inc. in Anaheim, Calif., which owns the Hardee's and Carl's Jr. chains: The "29 cents and 39 cents burgers have been wonderful for them."
GLOBAL SUCCESS. The chain is also experimenting with regional products. One, the bagel sandwich, will be available in about half of U.S. stores by midsummer. Containing meat, egg, and cheese, the bagel is an attempt to improve the Arches' appeal with adults. At almost $3 each, it's costlier than other breakfast options--but it has the potential to "change the whole mix," Greenberg says.
Investors like what they see so far: lower costs, higher earnings, and a buoyant new management team. They also are pleased with a powerhouse international division that is benefiting from the strong European economy while holding its own in Asia. If the Made for You system lives up to its billing, investors might even be willing to take some of their profits and spend more cash at their local McDonald's.