BIG MAC UNDER ATTACK

It may have won the McLibel trial but the case has exposed an arrogance which threatens to shake McDonald’s from its pole position. With rival chains eating into its market share and a poor new product development record, can it get back on co

McDonald’s may have won the McLibel case, but what a lot it lost besides.

The criticisms of a small and insignificant group of anarchists – an irritating pinprick on McDonald’s big toe – became a weeping sore all over the body corporate as McDonald’s found itself having to fight a labyrinthine legal case estimated to have cost 10m.

Hindsight, as they say, is an exact science. Even in their worst nightmares McDonald’s management could never have imagined the incredible tenacity of the two defendants and the resulting public relations disaster and sky-high costs of the McLibel trial.

Yet it is tempting to see the corporate paranoia evident in McDonald’s original decision to take Helen Steel and Dave Morris to court as symptomatic of an insularity and arrogance that threatens to undermine McDonald’s long-term future in key Western markets, crucially the US.

For 40 years the world’s appetite for Big Macs has been insatiable. Still the McDonald’s formula rolls relentlessly on into more and more markets, with 2,600 new stores expected to open this year (three-quarters of them outside the US) and more than 100 countries already blessed with the Golden Arches.

But in the US, signs of desperation, some might say panic, are setting in. The world’s biggest restaurant chain continues to grow, but only through aggressive expansion. Like-for-like store sales, the barometer of a fast-food chain’s underlying health, were down between four and six per cent in May, according to US analysts.

Marketing strategies keep going as soggy as an old cheeseburger. New products have repeatedly flopped; the last major pricing strategy – launched on April 25 and designed to run well into 1998 – has all but foundered in a the most humiliating of circumstances.

Mitchell Speiser, analyst at Lehman Brothers in New York, says: “In the US its business is weak. McDonald’s has not put together an effective message. Its strategic direction is unclear.”

The corporation’s overreaction to a couple of penniless environmental activists handing out libellous leaflets in the UK is perhaps symptomatic of a company so insular and so rigid it has lost its perspective.

Everywhere else in the world McDonald’s continues to grow. International expansion is good for the bottom line because international sales are more profitable than sales in the domestic market. Competition is much less intense outside the US, so McDonald’s gets more people flocking to its stores and can charge higher prices.

The power of the brand sweeps everything before it. The arches are a potent symbol of democracy and freedom of choice, as witnessed so poignantly in Moscow when McDonald’s opened its first restaurant and citizens queued for hours to buy the luxury of a burger and fries.

But in the US, where that symbolism is largely meaningless, selling cheap burgers fast is not enough to keep attracting new customers.

There is unprecedented domestic competition for “share of mouth”, from big rivals Burger King and Wendy’s and new chains of quick-service restaurants offering everything from tacos to pizza to sushi. McDonald’s wins the war of convenience hands down, with 12,000 US restaurants compared with its nearest rival Burger King with 7,000, but some observers argue the corporation has become a victim of its own success.

As McDonald’s opens more units in this saturated market, so it cannibalises existing restaurant sales and squeezes franchisees’ profits.

According to research from Technomic, a Chicago-based restaurant consultancy firm, the number of McDonald’s units grew in 1996 by 6.4 per cent but sales increased by only 2.9 per cent, which means sales per restaurant have dropped. In contrast, Burger King outlets increased by 6.9 per cent, and its sales grew by 9.2 per cent.

Meanwhile, in McDonald’s international division – where 80 per cent of profits come from the UK, France, Germany, Canada, Japan, Brazil and Australia – the company is having to open smaller, lower volume stores because prime sites in the big cities are already established.

It is also a victim of demographics. America’s population is ageing and the teenagers who grazed on hamburgers in their teens are now middle-aged and more health-conscious.

Last year the company launched the Arch Deluxe, a “sophisticated” adult burger with a secret sauce of mayonnaise and two mustards, and an optional slice of bacon, in a bid to appeal to this “baby boomer” generation, who are supposedly more interested in taste.

But the Arch Deluxe has not proved to be the saviour McDonald’s hoped it would. It is high in fat, high in calories and expensive – baby boomers decided that if they were going to be unhealthy and eat a burger, they would rather eat a “vulgar” one at 99 cents than a “sophisticated” one at $1.79. And of course the Arch Deluxe, in trying to be the perfect junk food for adults, failed to appeal to McDonald’s core market – children.

Ron Paul, president of Technomic, says the hype surrounding the launch of the Arch Deluxe put too much consumer expectation on the product. “The Arch Deluxe was less than industry observers expected. It was not good enough or different enough to move anyone away from their favourite sandwiches elsewhere,” he adds.

Earlier this year, in a dramatic shift in direction, McDonald’s moved away from concentrating on upmarket, added-value burgers to a discount strategy: Campaign 55 (1955 was the year of the chain’s inception).

Under Campaign 55, the company slashed the price of a sandwich, such as an Egg McMuffin or a Big Mac, down to the very appealing 55 cents (30p). Sort of. What many customers failed to understand was that they could only get their 55-cent sandwich if they bought a drink and French fries as well, and if the particular sandwich they wanted was on offer that month.

Campaign 55 confused and annoyed consumers, and importantly, it failed to deliver on what it promised. After six weeks the company pulled the promotion, except for a variant on the breakfast menu. It is a humiliating climbdown for a company not used to reverses.

McDonald’s is also suffering from a quality perception problem – observers just do not rate the taste of its burgers.

Damon Brundage, an analyst at NatWest Securities in New York, says: “Frankly the future isn’t very good. There has been deterioration in the quality of McDonald’s products where Burger King and Wendy’s have got better.”

He adds: “McDonald’s stock in 1995 had a terrific year. It convinced management that there is nothing wrong with McDonald’s product, and that there is nothing wrong with marketing strategy.”

Campaign 55 was interpreted as a means of buying time for McDonald’s, while the company worked on upgrading its products in the long term. But this has not worked, and with no replacement for Campaign 55 on the horizon, it is not easy to see how McDonald’s can add lustre to the Golden Arches.

Brundage says: “There is only one way out at this point. It must improve product quality, for example by increasing the size of the patty (the meat in the burger) or enhancing flavours, and it must bring out two, three or five new products.”

He forecasts more aggressive pricing activity in the short-term, for example on brands such as the Big Mac, but with no strings attached to the promotion.

Pressure is growing on McDonald’s from its 2,700 US franchisees. They are increasingly confused and perturbed by the company’s strategic U-turns and angry at the apparently unaccountable marketing and management executives. Plans and schemes are launched, they don’t work, and the same people are still in place to dream up the next strategy.

There has been much speculation that senior heads would roll after the failure of Campaign 55, but as one analyst says: “They’ll just hunker down in Oak Brook [company headquarters in Illinois].”

McDonald’s vice-chairman Jack Greenberg and senior vice-president of US marketing Brad Ball are being held responsible for Campaign 55. But as one observer says: “Both these men were promoted by Mike Quinlan, the chairman and chief executive. They are his boys. He is not going to take one of them outside and shoot him.”

Brundage adds: “McDonald’s is an extremely insular organisation and perhaps there is a fair amount of arrogance. The top executives feel they know their business better than anyone and therefore there is no need to listen to anyone outside Oak Brook. That attitude hasn’t shown many signs of changing.”

McDonald’s has for years confounded its critics and continues to post record global growth and profits. But with such sluggish growth in its domestic market, the corporation faces the rockiest patch in its 40-year history. The company is imprisoned by its need to stay cheap, and is under intensifying pressure to compensate by finding a quick fix to move product and fill cash tills. Suddenly Ronald McDonald’s carefree youth has been replaced by a mid-life crisis.

Speiser says: “McDonald’s is a big machine, so when there is negative momentum, it takes time to turn it around. But on the positive side, once you get it rolling, don’t ever underestimate the power of brand McDonald’s.”

Judgement rocks Ronald

Ray Kroc, the testy founder of the mighty McDonald’s empire, will be cussing in his grave. A senior English judge has just found that the corporation which spends $2bn (1.3bn) a year promoting itself and advertising its products “exploits children”.

Mr Justice Bell didn’t mince words at the end of the epic McLibel trial: “In my judgment”, he said, “McDonald’s advertising and marketing makes considerable use of susceptible young children to bring in custom, both their own and that of their parents who must accompany them, by pestering their parents.”

Ouch.

Precisely focused marketing and advertising is the core of the McDonald’s empire. The business is nothing without it. The whole $30bn (19bn) a year enterprise depends on building brand loyalty and attracting impressionable children, as young as two years old.

For a judge to even question the ethics of the company’s relationship with little people is bad enough; to spend weeks listening to the best arguments of its top US executives, and the defence given by some of Britain’s leading marketing people, and then to reject them and conclude that it is frequently exploitative should scare the daylights out of the industry. This was not a judgment on one isolated campaign but on a great plank of McDonald’s day-to-day business.

It’s a miserable judgment for the corporation that spends 55m promoting itself in Britain each year. What happens now to McDonald’s fabled code of conduct? Did not David Green, senior vice-president of marketing, spend four days in the witness box and say that McDonald’s had this code precisely to prevent the exploitation of children? Has not the company always painted itself as ethical and socially responsible? Is it time for Ronald to change his message?

McDonald’s has said it will have an internal inquiry, but it’s hard to see what can be done. It could sit tight and hope the fuss will go away and, indeed, it is not bound to change because nothing it does in this area is illegal. But if it wants to avoid being branded cynical by an increasingly ethically-aware public, it has a duty to respond fully and clear its name.

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