Hold onto your french fries. No question, the world’s biggest burgermaker has stumbled–repeatedly. But when you deconstruct the McDonald’s-bashing, it turns out to be as much about the critics as it is about the company. Much of the noise is coming from a small cadre of disgruntled franchisees and a few Wall Street types with notoriously short attention spans. Then there’s us–the media. It’s fun to forecast doom and gloom for an icon, especially one so familiar to every reader. We also suffer from editorial Eureka! syndrome: if a reporter goes to McDonald’s and finds a dirty bathroom, it’s stop the presses.
But we’ve been down this road before, says a more stalwart fan, Patrick Schumann of the brokerage firm Edward Jones. The Street and the media have often predicted the demise of McDonald’s, he says, ““and they’ve been wrong every time.’’ You don’t even need the history lesson. Just sample these McNuggets. McDonald’s has:
Forty-two percent of the U.S. burger market; Burger King, 19 percent.
Happy hunting abroad. McDonald’s didn’t get its reputation as a cultural imperialist for nothing. It has 10,000 stores in 105 countries overseas. But each day, less than 1 percent of the people on the planet eat McDonald’s. That’s a lot of mouths yet to feed.
A bodacious brand name. Last year McDonald’s trumped Coke as the best known worldwide.
A lock on the hearts and tummies of American kids–and exclusive rights to Disney promotions through 2006. By then, the population of school-age kids could hit record highs–with record allowances.
All this adds up to a Super Size beverage that’s more than half full. So why have we heard otherwise? The biggest blow to the McDonald’s image has been the success at Burger King. It was big news when Technomic, a Chicago research firm, revealed that last year, for the first time since 1972, Burger King had a bigger jump in sales than McDonald’s.
But this statistical triumph is just the kind that obscures the facts. For one thing, McDonald’s simply dwarfs the competition. In another famous brand rivalry, for example, Hertz has 26 percent of the rental-car market to Avis’s 21 percent. Pretty close. But McDonald’s has more than 12,000 U.S. stores; Burger King, 7,400.
Ironically, it’s the dominance of McDonald’s that scares some retail veterans. The numbers conjure up specters of a ““saturated’’ market and ““cannibalization.’’ In layman’s terms, we have all the McDonald’s outlets we can handle, and each one is eating into the other’s business. Certainly the industry seems to have covered every inch of available space. The best years of domestic growth for McDonald’s are past. But ubiquity has its virtues. Most McDonald’s customers need travel less than four minutes to reach a golden arch, according to the company. You’re hungry? You’re there. A mature market does mean a shakeout. But in a shakeout, bigger can be better. Deep pockets help you ride the roller coaster.
The size of McDonald’s also puts into perspective those shifting market shares. True enough: the company’s portion of the U.S. burger market slipped–to 41.9 percent in 1996 from 42.3 percent in 1995. And Burger King’s rose, to 19.2 percent from 18.2 percent. But that’s small potatoes–and doesn’t prove, as some have reported, that McDonald’s customers are switching to Burger King. Other companies, too, were gaining and losing. Boston Market is up, Pizza Hut down. Moreover, all these downbeat numbers were for just one year. So far in 1997, it’s pretty much a standoff.
More telling is McDonald’s record over the long haul. Its share of the U.S. fast-food market has held steady over the last five years, despite explosive new competition. Growth rates for some newcomers are stunning, but McDonald’s–again–is on another scale entirely. Starbucks, for example, plans to have 2,000 stores worldwide by the year 2000; McDonald’s will open 2,100 around the world this year alone.
Granted, not many of the domestic restaurants will be the cash cows of years past. McDonald’s U.S. strategy relies in part on squeezing ministores into McDonald’s-free niches, like hospitals and zoos. As the number of stores goes up and the size of new stores goes down, some business is siphoned off to the McDonald’s downwind. The sales average per store drops. But it’s still the industry’s highest. And overall, sales keep growing.
When it comes to growth, many critics have missed the point. ““Too many people see McDonald’s not as a global company, but as a U.S. corporation with some overseas operations,’’ says James Cantalupo, CEO of McDonald’s International. The company is now building a stunning 85 percent of its new stores overseas. About half of McDonald’s business already is done abroad–and these stores give a better bang for the drachma. The 45 percent of McDonald’s stores that are overseas yield 63 percent of the company’s profits.
Those figures will probably get even rosier. Now that the company has established its beachheads abroad, costs for adding stores have plummeted. And many are in hot markets; the Pushkin Square store in Moscow has sold more than any other McDonald’s since the day it opened in 1990. Poland and South Korea are just kicking in. Sure, economic turmoil–like that in Asia–can hit hard. But unless you’re feeling apocalyptic, that’s no reason to stay home.
One group may remain unmoved by all this good news: franchisees. If a restaurant opens across the street from yours–unless you own that one, too–it can mean lower sales. Booming business in Moscow is cold comfort to the guy in Dubuque. Dick Adams, head of a dissident group called the Consortium, says his group has 300 franchisees fighting what he calls management’s ““dictatorship . . . Telling [our] stories publicly,’’ he says, is key to ““our guerrilla campaign.’’ Even management admits it must listen more to the guys on the front line. Still, Adams’s campaign has won the group more ink than the silent–but happier–majority.
Wall Street’s complaints have also been exaggerated. No analysts have rated McDonald’s a ““sell.’’ Howard Penney of Morgan Stanley just moved it from ““hold’’ to ““strong buy . . . I’d rather be early than late coming to the big party at McDonald’s,’’ he says. Nor are some investors as damning as they’ve been portrayed. More than one story cited Howard Ward, manager of the Gabelli Growth Fund, who dumped $6 million into McDonald’s stock this spring. Ward was fed up with McDonald’s marketing mistakes, but he’ll tell you he still sees a lot to like. Fund managers like him, he says, just can’t afford the long-term horizon of a Warren Buffett. Buffett, who has one of the best records on Wall Street, isn’t talking. But he jacked up his holdings last year, to about 4 percent of the company.
McDonald’s clearly has work to do. Executives admit that the company built too fast in the early 1990s, and sometimes in the wrong places. Chairman Michael Quinlan ticks off a list of needed improvements that includes just about every component of the company’s vaunted consistency, from burger taste to the ““drive-through experience.’’ Its ads need to recapture the energy of earlier campaigns. The saving grace is that management knows how to say mea culpa. It pulled the 55-cent burger promotion after only six weeks and has since admitted that competing on price isn’t the best way to go. This summer McDonald’s shook up and decentralized management to get closer to franchisees.
Some critics would like to see more radical changes. But plenty of burger watchers are enjoying the ride. ““Our investors,’’ says Schumann, ““don’t mind viewing this year as a speed bump.’’ Even as they head for the drive-through window.
Sales of top five fast-food chains: in Billions, 1996 Domestic Overseas McDonald’s $16.4 $15.4 Burger King 7.5 1.8 Pizza Hut # 4.9 2.5 Taco Bell 4.4 .1 Wendy’s 4.3 .5 Current number of stores Number of countries Domestic Overseas Overseas Presence McDonald’s 12,249 9,997 105 Burger King 7,414 1,986 56 Pizza Hut 7,400+ 3,000+ 86 Taco Bell 4,900 246 17 Wendy’s 4,593 633 34 # Technomic, INC., Estimates. Sources: Technomic, INC.; Company Reports
