THE COMPANY founded in 1955 by R. Kroc, a salesman of milkshake machines and the symbol of the American way of life, was recently under difficulties. This is expressive if we remember that seven per cent of Americans work in McDonald’s as their first job and 96 per cent ate there at least once during the last year.
However, the sales per restaurant and earnings per share have decreased to such an extent that McDonald’s presented losses for the first time since it was created. What are the reasons for this? A mixture of self-inflicted wounds, changes in the environment and bad luck.
The first is diversification (for Donato’s pizza, Boston Market, Prêt à Manger and Mexican Drill) which led to dispersion: “We took the eyes away from the French fries,” said Cantalupo, the new Chairman.
Diversification was later burdened with excessively audacious expansion targets: between 10 and 15 per cent of annual sales growth, which implied the annual opening of 2,000 restaurants, 70 per cent of which would be franchises.
The result was a decrease in the quality of service – to the lowest standards among all the fast food restaurants (index of the University of Michigan) – meals and cleaning.
And then came the environment, with consumers exchanging fried food for healthier meals. The lawsuit filed by two girls from the Bronx, who charged McDonald’s with having made them put on weight, gave visibility to this issue.
Finally, and like Murphy’s law foresees, bad luck knocked on the door of problems. In the US, with the past slowdown of the economy, the dining out market decreased and, in Europe, there was mad cow disease. The new management team faced this problem with six actions:
1st – To slow down the objective of sales growth (from 10-15 per cent to 3-5 per cent) and to achieve growth mainly from the existing restaurants (and not open new ones). Therefore, it focuses on profits from productivity and rationalisation of costs.
2nd – The inspection and control system was reinforced.
3rd – New kitchen equipment and procedures were introduced. For example, pre-cooking the products with a larger demand (fried potatoes, hamburgers) and then keeping them warm under special lamps in order to minimise waiting time.
4th – Redecorating the shops.
5th – Innovation. New salads were introduced with a sauce developed by actor Paul Newman and a new breakfast, based on sausage sandwiches, was launched. All this intends to increase, from three to four per month, the number of times that each customer goes to a McDonald’s restaurant, rather than aiming at the restaurants.
6th – To target emerging markets outside the US. China and India together have 10 times the population of the US and, in the era of globalisation, who is better positioned than McDonald’s to take up this opportunity?