McDonald’s Rising
“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 ½ 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:
Ø 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;
Ø 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;
Ø 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.