What to make, then, of McDonald’s recent warning to Wall Street, when it announced that it will post its first quarterly loss in 37 years as a public company? Or its plans, disclosed a month earlier, to slow the pace of expansion, closing 175 stores (after shutting 163 in 2001), including 35 in Turkey alone–the first significant closings in its history? For much of the past decade, McDonald’s has been the quintessential high-growth multinational, vaulting from success to success and building a uniquely American empire. The number of its restaurants worldwide rose by a third in the past eight years alone–to 13,000, including some 17,000 outside the United States. Along the way, it has become a model for entrepreneurial success, a case study in how to “go international” and succeed.
Has the juggernaut maxed out? McDonald’s execs say not. “I don’t think that’s a fair view at all,” says Mike Love, a vice president for corporate affairs, noting, for example, the company’s plans to add 300 new restaurants next year to the 6,000 already in place in Europe. Still, there’s no question that the troubled financials represent a striking turnaround for a proud company that’s long been synonymous with Pax Americana. The secret of McDonald’s magic has always been an “aspirational” thing, says Angela Ling Bassage, a retired marketing director in Hong Kong who helped launch the company into China and Russia. “If you could eat hamburgers and drink Coke, you could taste part of the American dream.”
It’s tempting to suspect that the company’s problems might reflect a broader geopolitical backlash against the United States and its global culture. And there have been protests–from Mexico to France–even bomb attacks in India and Lebanon. But according to the experts, that’s not what’s hobbling McDonald’s today. To a surprising degree, the corporation has been tripped up by its own mistakes. “This is not about protesters,” says Alan Rugman, a professor of international business at Indiana University. “The company is in trouble because its business model is out of date.”
What a comeuppance for a firm that’s been counted among the savviest of them all. McDonald’s has been obsessed with rapid growth since its inception in 1955, when Ray Kroc first franchised a company that had originated in 1937 as a California burger stand run by the McDonald brothers. Earning steady rent and fat royalties from franchisees, while enforcing rigid standards for quality and cleanliness, the McDonald’s model produced stunning annual average revenue growth of 24 percent from 1965 to 1991. As competition grew stiffer at home, the company increasingly turned overseas in the 1990s, opening 2,000 restaurants globally in 1996, the peak year of expansion. But now the U.S. market seems saturated, and McDonald’s has expanded too fast in nations where too few people can afford a $1 hamburger. New store openings will fall this year to 600, and many analysts believe it should be opening none and closing hundreds more. “McDonald’s is suddenly reaching the boundaries of growth,” says David Upton, a Harvard business professor and author of an M.B.A. case study on the company.
These same analysts say the company is showing signs of losing its business touch. This fall, it introduced inexpensive Dollar Meals in the United States, aiming to bury the competition but instead triggering a price war that has depressed the entire fast-food industry. It has also been slow to respond to health complaints about the high fat content of its menu, and now some of the same lawyers who recently won a multibillion-dollar case against Big Tobacco on behalf of cancer victims are suing McDonald’s on behalf of the obese. Worse, efforts to appeal to healthy eaters by expanding beyond the burger have faltered. (Anyone remember McPizza?) Critics say the corporation has lost the vision and entrepreneurial flair of founder Kroc, who died in 1984. “They’re just not getting it,” laments Malcolm Knapp, a New York restaurant consultant. He adds that headquarters in the ’70s was filled with a buzz. Now “it’s like a tomb.”
Company earnings have fallen in seven of the past eight quarters, and its share price is down 39 percent this year, dipping below $16 for the first time in eight years. In a survey by Sandelman & Associates of nearly 50,000 regular fast-food customers last year, McDonald’s was rated dead last out of 70 chains. Analysts note that complaints center on long lines, dirty restaurants and unhealthy, uninteresting food. (McDonald’s last new blockbuster dish in the U.S. market, Chicken McNuggets, was unveiled in 1983.) The McFlurry of bad news culminated in December when CEO Jack Greenberg stepped down. His replacement is Jim Cantalupo, the former president who came out of retirement at 59, after a 28-year career at the company. “The Street would have liked an outsider, simply because this is a company that needs its culture shaken up,” says Citicorp analyst Mark Kalinowski.
McDonald’s has been more deft abroad. Yes, it’s stumbled here and there, becoming a laughingstock in Britain for the McLibel case in the mid-1990s when it sued two activists for distributing leaflets about the company’s environmental and business practices. But at least it’s not drawing such brutal consumer reviews. It has always been sensitive to local tastes, hiding its Golden Arches behind period facades in Paris, for instance, and opening a drive-through for snowmobiles in Sweden. There are meat-free veggie burgers in India, and kosher restaurants in Israel–not to mention grilled McLaks in Norway, sweet red-bean pies in Hong Kong and beer in Germany. In Asia, says Harvard anthropologist James Watson, editor of “Golden Arches East,” the company still appeals to consumers as a haven of safe, smoke-free hygiene.
But that’s the problem: the more local the company becomes, the less of a novelty it is. Tokyo got its first Golden Arches in 1971 and embraced the restaurant so completely that Japanese traveling to Hawaii were surprised to find “Makku” in America, too. Whatever McDonald’s is selling in Asia, whether Hello Kitty toys or veggie burgers, it’s no longer an “aspirational” vision of America.
A decade ago getting one’s first set of Golden Arches was like a rite of passage, marking a nation’s entry into the world of wealth. That may still be true in China, where there are 500 outlets and more than a hundred estimated to open (although prices are so high it’s not unusual to see a family of four sharing one ice cream). But in many markets, even in the developing world, the attitude these days is “been there, done that Happy Meal.” In South Africa, McDonald’s bought prime locations when it showed up just seven years ago. Now it’s closing 15 of 104 locations, beaten by local take-away joints like Spur and Steers, or more popular chicken chains. In Japan, the company is losing ground to hordes of other cafes and chains.
The company, in fact, may be running up against a once unthinkable possibility: the world may have enough McDonald’s outlets. In Paraguay, where McDonald’s just shut down five of its 11 restaurants, franchise director Miguel Brunotte admits he made a mistake opening up several in less urbanized parts of the country, where few people can afford the meal; local customers can fill up on empanadas–the street food of choice–for about a fifth the price of a Big Mac ($1.50). Over the past three years Brunotte saw sales in some towns plunge by nearly half, as Argentina’s economic troubles spread to the rest of the Southern Cone. Merrill Lynch calculates that because of the slumping regional economy, 1,581 units in Latin America with some $1.9 billion in assets will produce less than $50 million in income for McDonald’s this year.
The company’s fortunes may rise somewhat as developing countries grow richer, but no one talks about a McWorld anymore. It’s clear, for instance, that McDonald’s effort to enforce detailed standards can be costly overseas. It is harder and more expensive to find local suppliers who can keep those fries at nine thirty-seconds of an inch wide (cut from potatoes with 21 percent starch) in –Trinidad than it is in Texas. The grand opening in Poland in June 1992 was delayed because Polish potatoes didn’t meet the grade and Russian spuds had to be imported instead. And despite having more stores overseas, McDonald’s earns between 55 and 60 percent of its operating income in the United States.
At least anti-American sentiment has had a marginal impact on McDonald’s global business. The possible exception is the Middle East, where consumers have been waging a quasi-official boycott of McDonald’s as an apparent protest against U.S. policy. But consider the situation in Europe: France, a hotbed of anti-McDonald’s-cum-anti-American protest, is also a bright spot for McDonald’s sales. Merrill Lynch analyst Peter Oakes says flatly that political attacks are “irrelevant” to the company’s financial future.
McDonald’s, too, is not the only corporation that may be confronting its global limits. Many CEOs have been reassessing the pace of globalization since September 11 and the collapse of the tech bubble. In fact, McDonald’s status as a symbol of globalization exceeds its actual business; there are several multinationals bigger than Mickey D’s, which has annual system wide revenues of $40 billion. Some, like Coke, are more truly multinational, with sales spread evenly across North America, Asia and Europe. McDonald’s makes 80 percent of its sales in just four countries–the United States, Britain, France and Germany. To be sure, McDonald’s recent retreat “is a reality check on what globalization really means,” says Adrian Hodges, managing director of the International Business Leaders Forum in London. But “at the same time, the death of McDonald’s and the death of globalization are both greatly exaggerated.”
The question is whether McDonald’s can revise its global strategy fast enough to account for this new reality. Kroc’s original business model balanced tight standards of cleanliness, speed and uniformity with a decentralized structure that gave franchisees real power in their local markets. That’s not the way anymore, says Rodney Hackett of Melbourne, who runs a Web site to champion the cause of fellow McDonald’s franchisees. According to him, many of them are tired of being inflicted with shortsighted price wars, costly conversions to accommodate new menu items and the company’s habit of opening new restaurants close to existing ones.
Harvard professor Upton warns that the company risks responding as slowly to new competition as American carmakers responded to Japanese firms in the 1980s, with near-fatal results. Still, the new store closings show McDonald’s is rethinking its obsession with growth, just as Detroit was forced to relax its focus on costs in order to compete with Japanese quality. U.S. firms emerged stronger, and McDonald’s could, too. “We have issues that we’re addressing,” says company CFO Matt Paull. “But nobody has the marketing we have, the brand power we have, the franchises we have. That news gets lost.”
Many of McDonald’s ideas for reviving its global fortunes involve expanding beyond the hamburger. To try to get in on the “fast-casual” dining boom in the United States, it has snapped up chains such as Chipotle Mexican and Boston Market. Under its core brand it is promoting higher-margin food like the popular grilled-chicken flatbread sandwich, with new ads praising its fresh ingredients. In Taiwan, the company has opened a prototype McSnack outlet, offering coffee, drinks, cakes and bread–a menu that would appear to compete with Starbucks. In Indiana, the company is testing a McDiner concept: a 1950s-style sit-down diner serving made-to-order food such as steaks.
The company is also working hard on perfecting the old burger. In early December, McDonald’s board member and former CEO Fred Turner was seen flipping burgers at a McDonald’s restaurant in Illinois–and again later, at the company’s secret innovation center, also in Illinois. Professional menu developer J. Hugh McEvoy says that in recent weeks McDonald’s has brought in 30 top chefs to brainstorm ideas in a kind of “culinary think tank.” “There were 100 people running around. It looked like the inside of the Pentagon war room,” says McEvoy. That sense of urgency may be just what McDonald’s needs to stem its global retreat.
