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McDonald’s Turnaround

October 25th, 2004 · No Comments

We have all eaten at McDonald’s in our lives – and continue to do. So, it is interesting to read this story in The Economist on how the company is bouncing back:

The company reached a low point in 2001, when customer-satisfaction surveys showed McDonald’s was falling well behind its direct rivals, Wendy’s and Burger King. Customers were also switching to healthier offerings, such as Subway’s freshly filled sandwiches. Lots of money was spent opening yet more stores, but margins were shrinking and complaints about dirty restaurants and indifferent staff were growing. The firm’s philosophy of QSC&Vquality, service, cleanliness and valuejust was not working any more. McDonald’s ended 2002 with its first quarterly loss since 1954, the year Mr Kroc persuaded the McDonald brothers to let him franchise their new Speedee self-service restaurant system.

Instead of opening lots of new restaurants, McDonald’s has switched to generating more sales from its existing ones. This year, some 90% of McDonald’s growth is likely to come from incremental sales at its existing restaurants, compared with around half last year.

McDonald’s insists that its businesses will remain, in effect, lots of local restaurants, although ones expected to operate within clearly defined parameters. That still allows for plenty of variation. In some Latin American cities, McDonald’s is even experimenting with differential pricing: charging different prices for meals according to the relative wealth of their neighbourhoods. If you are looking for a command centre with one push button that operates our restaurants in every corner of the world, you won’t find it, says Jim Skinner, McDonald’s vice-chairman.

And like any local restaurant, it is what is on the menu that is really important. The average sale in a McDonald’s is just under $5. Typically what might happen is a mother comes in, buys her children a Happy Meal, and herself just a coffee. Now that salads and other lighter options have been added to the menu, many of those mothers now buy themselves a meal too, lifting the order value to around $12. The lighter options also encourage existing customers to come back more often because there is a greater variety of things to eat. Nevertheless, for now, the Big Mac remains the most popular item worldwide.

McDonald’s does not publicly break down sales and profits of its individual items. But anything that involves fresh, perishable produce that does not come in a standardised and easily storable form (ie, a lettuce compared with a frozen hamburger patty), increases complexity and cost. McDonald’s officials insist their salads are priced to be profitable, arguing that if they were not its franchisees would not want to sell them. But then, by some measures, supermarket loss-leaders are also profitable because they bring in customers who buy other products. Nevertheless, salads are sending a message to millions of customers: that it is now acceptable to eat at McDonald’s again because the menu is healthiereven though the vast majority still order a burger and fries.

Tags: Management

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