McDonald’s Rising
12 Feb 06
“We are clearly
living through the death of the mass market.”
Mats Lederhausen, McDonald’s Strategy Chief, Business Week, March
03
The
first months of 2003 were the worst period in the entire 52 year history
of McDonald’s. In the fourth quarter of 2002, the company reported its
first-ever quarterly loss. The company’s stock price hit a low
of $12 a share in mid-March of 2003. Its CEO, Jack Greenberg, was fired
by the board at the end of 2002. Operations were suffering and
franchisees were losing money. At the time, Business Week called
it “hamburger hell.”
Four years
later, McDonald’s is prospering again. Its sales have grown 40% from
the end of 2002 to the end of 2006. The company has quadrupled its
dividend over the past five years, and its net income has quadrupled as
well, to $3.5 billion in 2006. Its US market share is now three times
that of its nearest competitors, Wendy’s and Burger King. This stellar
performance has been reflected in its stock, which now trades at around
$45.
McDonald’s
Monthly Stock Price, Feb 03 – Feb 07
One of the major
factors behind McDonald’s resurgence has been a change in the sources
of the company’s growth – from external to internal. In 2002,
McDonald’s was looking outside of its core business for growth. At the
time, the company had invested in a range of other chain restaurants,
including Chipotle’s Mexican Grill, Donadio’s Pizza, and Pret a Manger
sandwich shops.
But these
external investments faced a “move the needle” problem – new ideas and
restaurant concepts, even if wildly successful, had little impact on the
company’s overall performance.
These new
concepts are no longer part of McDonald’s – the company either sold them
off or closed them down over the last three years.
“We had lost our focus. We had
taken our eyes off the fries."
McDonald’s CEO James Skinner, in Business Week, Feb 07
Corporate focus
has now shifted from growth via new stores to growing sales in existing
stores. In 2003, McDonald’s was opening up a new outlet somewhere in
the world at the rate of one every 4 ˝ hours. This meant that corporate
managers spent a lot of their time on real estate – for example, Ralph
Alvarez, McDonald’s COO, estimated that
he was spending six to seven days of the month on real estate. Now the
company is adding less than 100 sites a year in the US. And managers
are working hard to improve same-store sales.
McDonald’s is
doing this both by improving the quality and consistency of its service
and by innovating within all aspects of its operations. Consider the
range of change:
Ř
The company is pushing its franchisees to stay open 24 hours.
Currently, nearly 40% of McDonald’s restaurants are open 24 hours, up
from .5% in 2002;
Ř
Many kitchens are being modified with a portable electric unit that will
permit restaurants to serve breakfast all day long.
Imagine Egg McMuffins available
24 hours a day;
Ř
The product development process has been systematized and disciplined,
so that new concepts are tested both for their attractiveness to
customers and for their profitability and ease of preparation. It’s
hard to believe, but this wasn’t standard operating procedure before
2003, when McDonald’s new product introductions were much more haphazard.
The new
corporate focus on increasing same-store sales benefits McDonald’s
franchisees directly. This was not true for the previous geographic
expansion approach, in which new restaurants took sales away from
existing franchises.
"We've learned. We've evolved. We believe we've cracked the code in the
United States."
McDonald’s CEO James Skinner, in Business Week, Feb 07
The McDonald’s
renaissance came from a change in strategy – the company stopped adding
restaurants in the US and turned instead to increasing sales at existing
outlets. This led to new products, new layouts, and new approaches.
While it may be true that the mass market is dying, the new 24-hour
McDonald’s restaurants have been designed to serve a large number of the
newly hatched market segments.
This change in
strategy didn’t come easily, though.
It often seems
like big companies need to have near-death experiences before they
evolve and learn to do something different. The past twenty years have
provided a large number of well-publicized examples of companies that
had big stumbles, only to rebound. Think of IBM and Hewlett Packard.
Once companies
declare that they’ve “cracked the code,” however, they are setting
themselves up for a string of unpleasant surprises. In many industries,
the code for success keeps changing, and companies like McDonald’s
prosper when they can bring themselves to change along with it.
More Information:
1.
Business Week
reported on McDonald’s “Hamburger Hell” in March of 2003. Here’s
a
link to that article.
2.
Here’s a
link to the recent Business Week cover story on McDonald’s in its 5
February 2007 issue.
3.
Back in June of 2003, I wrote a piece for Cap Gemini’s Focus
e-zine entitled “How would you fix McDonald’s?” That’s reprinted
here.
4.
McDonald’s new strategy may have benefited from the insights of
author Chris Zook, who wrote Profit from the Core in 2001.
That’s available from Amazon
here.
