Can McDonald's Shape Up?

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A new McDonald's in Times Square will feature a Broadway-style marquee

McDonald's opens a new store somewhere around the globe every eight hours, but these days the fast-food giant is trying to attract attention to the demolition of one of its 30,000 outposts. In a Chicago suburb just a few miles down the road from corporate headquarters, the head of McDonald's USA hired a band and had balloons strewn about before a Caterpillar backhoe clawed down the walls of one of the company's older locations. After 24 years, the Hinsdale branch, like the rest of McDonald's, looks a bit tired and frayed at the edges. In a few months, it will be replaced by something that looks more like a historic New England bed-and-breakfast than your typical cookie-cutter Mickey D's.

In the next couple of years, more than 1,000 other aging McDonald's outlets may get the bulldozer treatment, and 6,000 others could be given a face-lift. But rebuilding the company's formerly sizzling burger business in the U.S., which accounts for half its $40 billion in global sales, will be much more difficult. In July and August, revenues at its U.S. stores open for at least 12 months shrank 2.7% from the year before. The company has suffered declining profits for six of the past seven quarters and just lowered its earnings expectations for 2002. Wall Street's indigestion over the news pushed McDonald's once dependable blue-chip stock down to a seven-year low, helping sink the Dow Jones average close to a four-year nadir of its own.

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The challenges facing McDonald's come supersized. Its home market is all but saturated, its sterling reputation for fast, friendly service and cleanliness is tarnished, and customers are putting a growing premium on freshness and taste, neither of which McDonald's is renowned for. It hasn't come up with a new blockbuster product since Chicken McNuggets in 1983, and its aging slogan, We Love to See You Smile, hasn't made many people happy on either side of the counter in quite a while.

Remodeling more than half its 13,099 U.S. restaurants, which could cost the company as much as $800 million over the next two years, is only part of CEO Jack Greenberg's latest plan to get bloated old Ronald McDonald back in shape. Greenberg is trying to lead a renewed commitment to fast and friendly service, to roll out a national "dollar value menu" and a fresh $20 million national ad campaign. To lay the foundation for future growth, Greenberg is experimenting with all kinds of new restaurant formats: an expanded McDonald's with a sit-down diner serving meat loaf or chicken-fried steak, a three-in-one outlet offering burgers and fries along with Boston Market chicken and Donatos pizza (both of which McDonald's owns), and small snack bars with limited menus inside a Home Depot or a Wal-Mart. He is even considering using McDonald's vast real estate to sell additional merchandise, which could mean everything from toys to videos.

While acknowledging the company's poor performance, Greenberg, an affable former accountant who has been CEO since 1998, told Wall Street analysts in a conference call last week, "We have a brand everybody would trade for." That brand, however, is not as powerful as it was, and Greenberg, who some critics say needs to go, may not have much time left to return it to its former glory. After expanding for much of the past decade, McDonald's market-leading share of the $46 billion fast-food burger industry in the U.S. has lately flattened out at around 43%. Wendy's, boasting a popular line of premium salads and a strong reputation for freshness, grew its share to 13.2% in 2001, up a point and a half since 1998, according to industry research group Technomic. (Perennial runner-up Burger King's share dropped to 18.5% from 20.4% during the same period.) Heightened competition from the likes of Subway, which has dethroned McDonald's as nationwide champ in total stores with 13,101, has added to the McWoes. Subs and other custom-made sandwiches are growing 12% a year as a fast-food category vs. a paltry 2% to 3% for burgers. Meanwhile, a range of upstart "fast casual" restaurants such as Panera Bread and Baja Fresh, which serve up a slightly more upscale dining experience, "have raised the bar for the fast-food industry," says Robert Sandelman, president of Sandelman & Associates, a market-research firm.

McDonald's is doing its best to cash in on changing tastes. Its Grilled Chicken Flatbread sandwich, introduced this summer on a limited basis, was more popular than the company anticipated, so it briefly had to stop promoting the sandwich because outlets were running out of, what else, flatbread. In response to an outcry, McDonald's has changed its cooking oil to cut down on cholesterol-raising trans-fatty acids. Always known more for convenience and kid-friendliness than for taste — except, many would argue, when it comes to its superior fries — McDonald's still has a food problem. Despite shelling out hundreds of millions of dollars to install a new made-to-order cooking system that banished heat lamps from the kitchen, McDonald's consistently gets low ratings for the quality of its food. In a 2001 consumer survey conducted by Sandelman & Associates, the company came in dead last out of 60 chains for taste and quality of ingredients.

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