McDonald's Thinks Globally and Acts Locally -- NYTimes
Increased Diversity Spurs McDonald's Comeback
By DAVID BARBOZA -- February 12, 1999
OAK BROOK, Ill. -- In Austria, Indonesia and South
Korea, McDonald's sells Big Macs and Happy Meals.
But its Vienna franchises also contain "McCafes," which
offer coffee blended for local tastes. In Jakarta, the
McDonald's menu includes rice as well as french fries.
In Seoul, the burger chain sells roast pork on a bun
with a garlicky soy sauce.
That combination of a globally recognized brand with a
flexible menu that caters to local palates has helped
McDonald's navigate the global economic turbulence that
has knocked most of the other big corporations
operating around the world way off course.
For the 15th consecutive year, McDonald's Corp. has
achieved solid growth in its international division,
which now accounts for nearly 60 percent of corporate
profits. No other American multinational has enjoyed
such consistent success abroad, particularly lately
amid the dizzying plunges in local currencies and
economic activity in much of Asia and Latin America.
McDonald's says a large part of the reason it has done
so well is that its operations overseas are run by
local residents who are attuned to changing economic
conditions and consumer tastes.
Now, McDonald's is testing a variation on the theme
that "all business is local" in the United States,
where since the mid-1990s the fast-food giant has been
wrestling with a dramatic and widely publicized fall
from grace. After a period of growing concerns over
declining food quality, shrinking market share and a
generally falling stock price, profits at McDonald's
appear to be on their way up at home as well as abroad.
After a few years of fumbles, Wall Street analysts say
there are signs that McDonald's is climbing back -- in
large part following the course charted abroad -- by
decentralizing marketing and decision making.
Senior executives now say they are committed to more
local control, and what Jack M. Greenberg, the new
chief executive, calls a "shared vision" of the future.
"You can't manage 25,000 restaurants in a centralized
way," Greenberg said in an interview at the company
headquarters here in this Chicago suburb. "Many
decisions need to be decided closer to the marketplace;
you have faster decisions that way."
Two weeks ago, when McDonald's reported its
fourth-quarter and year-end results, foreign sales and
profits were strong, up about 10 percent, despite
widespread weakness overseas. In the United States, the
improvement was even more striking. Operating profits
were up 13 percent, more than double what they were in
1997 and the best yearly gain since 1985.
While McDonald's has plenty of problems, investors have
become increasingly optimistic. Shares have soared 63
percent the last year, closing at $82 Thursday, up
$2.125.
"I think they've turned a corner," said Mitchell
Speiser, who covers the fast-food business for Lehman
Brothers. "They have culturally, operationally and
strategically turned the corner."
Yet the new approach carries its own set of quandaries.
For instance, some analysts say that in reinventing the
company, McDonald's runs the risk of scrambling the
formula dreamed up by the late Ray Kroc. That formula
gave McDonald's uniform quality and unified marketing
themes, like "You Deserve a Break Today," and a
consistent and distinctly American batch of winning
products that came to be symbolized by the Golden
Arches.
McDonald's officials also may face an uphill battle as
they try to meet their goals of improving profits by 10
to 15 percent a year the next five years, analysts say.
After all, McDonald's is already a $35 billion company
with more than 12,400 restaurants in the United States
alone, and stiff competition is coming from Wendy's,
Burger King and even unlikely competitors like the
Carl's Jr. hamburger chain in California and a reviving
Jack-in-the-Box.
What Greenberg, the 56-year-old former accountant who
took over as chief executive in August, would most like
to reverse is a lengthy series of corporate miscues
that began in the mid-1990s, when McDonald's was trying
aggressively to expand its operations with big
promotions.
New products, like the Arch Deluxe, flopped. New
promotions, like "Campaign 55," a deep-discount program
that was supposed to hark back to the Eisenhower era by
offering 55-cent burgers fizzled. Burger King and
Wendy's began to gain market share. McDonald's food was
widely seen as subpar, ranking in one food quality
taste test not that long ago just below Hooters, and,
in one customer satisfaction survey, just ahead of the
Internal Revenue Service.
In mid-1997, the company dropped its lead advertising
agency, Leo Burnett & Co., in favor of Omnicom Group's
DDB Needham unit, which created the "Did Somebody say
McDonald's?" campaign. Last year, the company elevated
Greenberg from the head of United States operations to
chief executive.
Since then, sales at restaurants open at least a year
have improved substantially, the company said. After
slipping in 1996 and 1997, McDonald's share of the
fast-food market has reached its highest level in a
decade, 43 percent of the market, according to
Technomics, a market research firm in Chicago.
A new McDonald's is emerging, analyst say, that helps
explain its improved standing in Wall Street circles.
Since Greenberg took over, the more flexible cooking
system is generating somewhat higher customer
satisfaction. Strained relations with franchise
operators have improved.
"This is a different management style," said Paul
Saber, chairman of the National Leadership Council, a
group that represents franchise operators. "Jack's
attitude is to get to know owner operators and their
issues; he's brought a spirit of working together."
A sense of denial about McDonald's failings appears to
have been replaced in recent months by an almost
ritualistic desire to confess past sins. "In
retrospect, we lost our way back in mid-1994." Michael
Conley, the company's chief financial officer, said in
an interview last week. "We were trying to drive the
company almost exclusively with national advertising."
Greenberg reorganized the company's domestic operations
into five divisions. He gave owners of McDonald's
independent franchises a more collaborative role in
marketing and advertising and a say in the menu. The
company also has agreed to pay half the cost of what
McDonald's calls its "Made For You" food preparation
system. The new system, which is not available at all
outlets, is arranged to keep bread, lettuce, onions and
other ingredients fresh and allow McDonald's assembly
line process to accommodate new menu items.
The company also slowed its growth in the United
States, where rapid expansion led to concerns about
cannibalizing existing McDonald's outlets.
Unprofitable, low-volume satellite operations in places
like Wal-Mart stores were closed; faster
drive-throughs, cleaner stores and better food quality
are high priorities, executives say. And it is all in
the spirit of inclusiveness and decentralization, the
backbone of foreign operations.
In McDonald's international division, local managers
and franchise operators have long had substantial
control over how they do business. The locals create a
supply infrastructure within each country or region;
everything is financed in the local currency. A great
deal of attention is paid to local customs, like food
tastes.
"Our strategy is to be as much a local business as
possible," said Jim Cantalupo, head of international
operations. "We don't run Spain out of Portugal."
That decentralization allowed local managers in
Indonesia to add rice quickly after the currency
collapsed in 1997, which made french fries -- its main
imported product -- much too expensive. And it has paid
off in other places hit hard by global market forces.
"We've got a lot of experience dealing with down
markets," Cantalupo said. "We've dealt with six
government economic plans in Brazil."
While other multinational companies like Coca-Cola and
Procter & Gamble suffered sharp earnings declines in
1998, McDonald's -- despite a dip in Asia -- still
posted operating profit gains of 9 percent overseas.
"International is the locomotive here," said Dean T.
Haskell, an analyst at Everen Securities in Chicago.
Though pleased with 1998 results, Greenberg knows that
one strong year is just one strong year. He says the
company is hardly complacent.
"We've got a lot of hard work ahead," he said.
At the same time, the company has become more attuned
to Wall Street, buying back a big chunk of its own
stock and announcing a two-for-one stock split last
month, which investors applauded.
Still, one advertising executive, who agreed to speak
only if he was not named, said that while McDonald's
has righted itself financially, it may have lost some
of its marketing bravado. The company has pinned its
hopes on Teanie Beanie Baby promotions and Disney movie
tie-ins. "The market's only as loyal as the next Beanie
Baby promotion or the next Disney movie," he said.
"What happens when the movies flop? Does everyone run
to Burger King for Rugrats cups?"
Some analysts also question whether McDonald's brand
loyalty among older customers has begun to wane and
whether the recent rise in profits was simply a minor
tuneup on a motor that may have passed its prime.
"They certainly have more outlets and more distribution
with the lowest price points," said Haskell of Everen.
"But more and more people are looking for variety and
quality. The quick drive-through is becoming less of a
factor."
Haskell and others cite the success of Starbuck's
coffee, Einstein Bagels and other more specialized food
chains.
But Greenberg and other executives say they are
responding to such concerns. In tune with its
decentralized foreign operations, McDonald's is
experimenting more actively with new sandwiches and
foods in regional tests in hopes of recreating the
success of the Egg McMuffin, which was born in San
Diego, and the Big Mac, which took root in Pittsburgh.
The Big Extra, which some say is like a Burger King
Whopper, was tested in the Northeast and is being
offered nationwide. The McFlurry, a soft ice cream with
candy, spread across the country last year. A salad
that comes in a plastic container that customers use to
shake up their dressing is in tests as McSalad. There
are additional products in the works.
"We have more things in test now than at any time in my
24 years here," said Conley, the chief financial
officer.
The company will experiment and innovate, officials
say. But while decentralized operations are the new
mantra, McDonald's, executives say, will still be
McDonald's.
"Decentralization doesn't mean chaos or anarchy,"
Greenberg said. "The things that make McDonald's
distinct are going to be there. Those things aren't
negotiable."
Copyright 1999 The New York Times Company
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