Pierce Hollingsworth

Seasonal winds are blowing like the Santa Ana’s for the world’s largest restaurant chain and one of its most recognized brands. The big question is: Will the Golden Arches be able to maintain its overreaching dominance in the new millennium?

McDonald’s Corp., based in Oak Brook, Ill., is an American icon, with restaurants girdling the globe. More than 30,000 units in 121 countries serve 46 million customers every day. It is a component of the venerable Dow Jones Industrial Average, with annual sales in excess of $40 billion, and it’s the hub of a vibrant network of supplier companies producing everything from billions and billions of hamburgers and French fries to vinaigrette dressing and soft-serve ice cream mix.

An average of 50 employees per restaurant make McDonald’s the top private employer in the world, with more than 1.3 million on its payroll. Between 55 and 60% of its operating income is from operations in the United States, and 80% of its sales are from the U.S., Britain, France, and Germany. For 47 years, 37 as a publicly traded company, it has never failed to resolutely show a quarterly profit. Until now.

In December, Micky D’s share price hit an eight-year low on news that the company would report its first-ever quarterly loss. Surprising, but not shocking, the news followed the early departure of Chairman and CEO Jack Greenberg, a 21-year company veteran who couldn’t re-purpose a company that has consistently failed to recapture the innovative, risk-taking, entrepreneurial spirit of its early years under the direction of founder Ray Kroc.

Home runs such as the Big Mac, introduced in 1968, the Egg McMuffin in 1973, and the Happy Meal, not really a food innovation but an industry-leading marketing ploy, in 1979 defined the company and propelled its growth. But more recent efforts, like the McDLT, McLean Deluxe, seasonal McRib, hot dogs, pizza, and a myriad of other expensive introductions haven’t knocked the ball past first base. Nor has the company’s investment in theme restaurants such as Chipotle Mexican Grill, Boston Market, Donatos Pizza, and British-based sandwich chain Pret a Manger.

Meanwhile, McDonald’s unique non-food attributes—drive through ordering and pickup, clean restrooms, fast and friendly service—now are industry standards. Direct competitors such as Burger King, Wendy’s International, and Taco Bell have helped to create a market in which traditional fast food has become commoditized. The result is fierce price-cutting that has hit everybody’s bottom line. The fast-food landscape is replete with dollar value specials.

The definition of fast food has also expanded. Sandwich shops, led by Subway, Quiznos, Panera Bread, Au Bon Pain, and others, offer innovative sandwiches with fresh ingredients, made to order. Casual-dining restaurants, such as TGI Friday’s, Applebee’s, Chili’s, Denny’s, and Bennigan’s, are all expanding take-out, and some are introducing drive-through service. Convenience stores are expanding meal options, too, with hot sandwiches and microwave ovens.

For years, McDonald’s has expanded in global markets as a strategic end-run around this foodservice glut in the U.S., where its same-store sales slid by approximately 1.5% last year. Global expansion is a means to boost revenue and profits while it struggles to rediscover itself. But here, too, the company is running into a stiff head wind. Same-store sales dropped more than 8.5% in the Asia-Pacific market, and rose only a modest 1.3% in Europe.

Across the globe, McDonald’s faces problems strikingly similar to those of its U.S. business—market saturation in prime locations, stiff competition, and a dearth of consumer-inspiring innovation. In the Philippines, upstart local chain Jollibee outsells McDonald’s with a sweet burger tailored to local taste buds. In Japan, a growing number of quick-serve food shops, some not much bigger than kiosks, are eating into McDonald’s sales.

About the only bright spot is France, where the typical customer spends $9 per visit compared to only $4 in the U.S. “We are upgrading the experience, making McDonald’s a destination restaurant,” asserts the French unit’s CEO, Denis Hennequin. This includes heavy spending on lavish restaurant interiors and unique foods like a hot ham and cheese sandwich called Croque McDo.

McDonald’s’ new CEO Jim Cantalupo has already scrapped an overpriced intranet system designed to unify and coordinate individual store data globally. Under review are further cuts in expansion, closing units, shutting down unprofitable test concepts, and more aggressive product development.

“We have issues that we’re addressing,” says CFO Matt Paull. “But nobody has the marketing we have, the brand power we have, the franchises we have. That news gets lost.” When product innovation returns to the list, maybe McDonald’s will once again find its purpose.

Contributing Editor
President, The Hollingsworth Group, Inc.
Wheaton, Ill.