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McDonald's: When the Passion is Gone, the Profits are Over

In a 2001 consumer survey conducted by Sandelman & Associates, McDonald's came in dead last out of 60 chains for taste and quality of ingredients. If there was a survey of investor satisfaction, McDonald's would probably do as well.

For years McDonald's was considered one of the great American businesses. One reason was that it seemed to exemplify the American entrepreneurial spirit.

In 1948 two brothers, Richard and Maurice McDonald opened a burger and fry place in San Bernardino, California. They kept things simple and used an assembly line to help sell a lot of those burgers and fries and a lot or milkshakes, too.

In fact they sold so many milkshakes that they attracted the attention of Ray Kroc, the sales rep for a company that made a mixer that could crank out five milkshakes at a time. The McDonald brothers had ordered eight of them.

Kroc visited the McDonald's in 1954 and he liked what he saw. He liked it so much that he opened a McDonald's in Des Plaines, Illinois in 1955. Kroc's plan was to open McDonald's stores all over the country. He figured that way he could sell eight of his mixers to every store.

By 1961 he'd set up 228 McDonald's restaurants. He knew he was on a roll. But the McDonald brothers weren't as excited as he was. Kroc talked them into selling out for $2.7 million dollars.

This was about the time I saw my first McDonald's. It was in Pensacola, Florida. Hamburgers were fifteen cents and there wasn't any inside seating.

There was more to the McDonald's saga, though. This was also a company that gave great value to customers and great value to shareholders. The company went public in 1965 at $22.50 per share. By 2000 it had split twelve times.

The growth and the innovations kept coming. In 1967 the company opened its first store outside the United States. In 1968 the Big Mac was introduced. It was the first product beyond basic burgers. It was followed in 1973 by the Egg McMuffin and a breakfast menu.

By 1974 Kroc had stepped aside as CEO. He was 72 and suffering from a variety of ailments, including diabetes, arthritis and thyroid conditions. But he remained as Chairman of the Board until 1977 and as Senior Chairman from then until he died in 1984.

During his final years he was still active, visiting two or three restaurants a week and inspecting them. He still showed up at Hamburger University. He participated in decisions about new foods to offer, including Chicken McNuggets, introduced in 1983. And the company kept growing, up to 7500 restaurants in 1984.

Parents like me developed a special love for McDonalds. We took road trips with our kids and we knew that we could count on McDonalds for a few things. There would be food that the kids would not only eat, but love. There might be a place where the kids could play and burn off some energy before we got back in the car. And there were clean restrooms. Always and everywhere.

When a company has been growing rapidly, especially under a hard-driving CEO, it's often hard to tell when the growth energy is starting to peter out. There was still momentum at McDonald's but things were different after Ray Kroc died.

There seemed to be fewer good product ideas. In 1979 McDonald's introduced the Happy Meal but that may be the last blockbuster product to hit the menu.

The growth seemed to continue, though, so things didn't look bad at all. Restaurants opened all across the world. In 1990 a McDonald's opened in Russia. This was seen as the ultimate proof that the West had won the Cold War. McDonald's was lauded as the prime example of the kind of company that American capitalism could produce.

The company kept growing to 30,000 restaurants worldwide by the end of the 1990s but the innovation seemed to have lost its zip. In 1991 McDonalds introduced the McLean Deluxe, designed to appeal to more health conscious consumers. It didn't appeal to anyone and was withdrawn.

That's not all. The company also introduced a host of new menu options. There was spaghetti and lasagna and pizza and even carrot sticks. They all went the way of the McLean Deluxe.

By 1996 the company seemed to forget just what a disaster the McLean Deluxe had been. Either that or they figured they could re-label it and make points with adults. The company introduced the Arch Deluxe which was described as a "grownup" burger. It tasted strange and it bombed.

This was also the time when company ads featured Ronald McDonald in adult scenes like playing pool or hanging out with the Rockettes. This was a far cry from the great and still-remembered ads like, "You Deserve a Break Today."

Ok, the company seemed to say, if we can't come up with new products or great ads anymore, let's come up with new prices. By now McDonald's was losing market share. So in 1997 the company rolled out Campaign 55. The price of a Big Mac was slashed to fifty-five cents. Sales fell for four straight months and the price cutting strategy was abandoned.

When price cutting didn't work McDonald's figured they should fix the system in their restaurant. So, in 1998 CEO Jack Greenberg introduced a new cooking system called "Made for You." The idea was that this would give McDonald's a way to compete with Burger King and Wendy's. Instead it increased the average waiting time for an order and cost franchisees thousands of dollars each.

Things seemed to go from bad to worse. In 2000, average restaurant revenue peaked at $1.6 million. Franchisees were unhappy with the renovations they had to make and unhappy with price cutting schemes that ate away their profits.

There was a time when getting a McDonald's franchise was like getting a license to print money. No more. Last year 126 franchisees left the system.

In 2001 Subway Sandwiches passed McDonald's as the chain with the most restaurants. 2002 brought the first-ever quarterly loss and the exit of CEO Jack Greenberg.

In 2003 the company brought back a retired CEO of the international operations to run the whole show. Like all good CEOs he's projecting fifteen percent earnings growth. That's going to be tough to do. The stock is trading around twelve now and has been falling for some time.

Today it seems that everyone has an idea of what McDonald's should do. Business Week suggested four things: improve the basics; rekindle the flame with franchisees; whip up something new; and stop eating your own lunch.

In an excellent article in the October 20, 2002 New York Times, writer Claudia Deutsch asked seven restaurant and management experts what advice they would give McDonald's. The experts ranged from Wolfgang Puck to Michael Hammer and included an academic, a trade magazine editor, a manager of an investment firm, a restaurant consultant and the Chairman of the Morton Restaurant Group.

The advice was pretty wide ranging. Improve the product. Add new brands. Run institutional food service operations. Close some restaurants. Take items off the menu. Refurbish the brand. Market themselves better. Put greeters at the door. Get rid of weak franchisees and keep the good ones.

All of those ideas are fine, but they don't address the real issue. All of those ideas are tactical. They don't address purpose. And purpose is the problem.

Ray Kroc was a great entrepreneur to be sure. That would have been enough for the early years. But most entrepreneurs fade as the newness fades. What kept Kroc going was that he was a zealot.

Ray Kroc thought four things were absolutely essential for his restaurants. They were Quality, Service, Cleanliness and Value, abbreviated QSCV. He believed that if a McDonald's provided those things, the profits would follow. When he was around that's exactly what happened.

It was QSCV and constant inspections that assured that those restrooms were clean and that the cheeseburgers tasted the same in Portland, Oregon as in Portland, Maine, the same in Baton Rouge as in Boulder. Not only is McDonald's not chanting the QSCV slogan anymore, they quit grading franchises on cleanliness, speed and service during the manic 1990s expansion.

Ray Kroc wouldn't have tolerated that. He knew that good ideas were important, but that executing well, day after day, was what made the cash registers ring.

Kroc said that he stayed around after he left the active presidency so that he could be the "marketing conscience" of the company. He was the conscience of the company, period.

In their excellent book, Built to Last, James Collins and Jerry Porras say that great visionary companies have a purpose beyond profit. When Ray Kroc was alive, he was the conscience of that purpose and of everything that mattered.

Porras and Collins also say that great companies have home-grown management and cult-like cultures and that "good is never enough." Talk to anyone who worked at a McDonald's during the Kroc era and you're likely to hear stories about constant attention to Quality, Service, Cleanliness and Value.

Sometimes success doesn't come from sophisticated strategies or penetrating market research. Sometimes success comes from simple things done well over and over, day after day. Quality, Service, Cleanliness and Value. They were enough to build an empire on.

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RESOURCES

The official McDonald's corporation Web site.
McDonald's most recent 10K report.

Sandelman and Associates is a consulting firm that publishes Awards of Excellence for Fast Food Chains.

Another consultant who's had a lot to say about McDonald's is Michael Seid who is also co-author of Franchising for Dummies. You'll find lots of articles on franchising on this site.

Technomic, Inc. is a firm of food service consultant and food industry researchers.

There are also several books that will give you some insight into McDonald's situation and history.

Grinding It Out is Ray Kroc's autobiography. This book still makes great reading even though it's been out for decades.

McDonald's: Behind the Arches by John F. Love seems to have been written at the height of McDonald's Mania. It's the whole gushing story, but missing a crucial pinch of salt. It's worth buying if you want lots of detail on the history of McDonald's and how it all used to be. If you're trying to sort out why McDonald's is in its current situation, this book won't help you much.

For a polemical look at McDonald's, the fast food industry and how we all eat, read Fast Food Nation: The Dark Side of the All-American Meal by Eric Schlosser.

Finally consider a look (or re-look) at Porras and Collins' excellent book, Built to Last for a review of the characteristics of long-lived profitable companies.

Got a favorite site we should tell folks about? Email Wally and tell him why you think it's a great one.

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