honoluluadvertiser.com

Sponsored by:

Comment, blog & share photos

Log in | Become a member
The Honolulu Advertiser
Posted on: Sunday, July 15, 2001

Aging McDonald's bets future on partner brands

 •  Chart: McDonald's new menu

USA Today

OAK BROOK, Ill. — Ronald McDonald, is that cilantro on your breath? Pizza topped with fresh veggies? A gourmet burrito? Some savory sushi? Natural foods made without additives or preservatives?

McDonald's namesake restaurants aren't selling this stuff — yet. But McDonald's Corp. owns or controls a growing stable of small restaurant chains that do. Executives at the world's largest fast-food chain have begun to face this harsh reality: It's not just about cheeseburgers anymore.

It's about survival. And, yes, about growing up.

That's why McDonald's is undertaking the most fundamental change in direction in the company's nearly 50-year history. Never mind that McDonald's serves 45 million people daily.

Or that it has 29,000 McDonald's restaurants in 121 countries. Or that the $40 billion it amassed in revenue last year could build 20 space shuttles.

One of the best-known brands on earth is reinventing itself. It has to. The stock price is in the toilet. Slow same-store sales growth has spooked investors. Europe's mad-cow scares and weak currencies have battered revenue growth. New U.S. menu items failed to light a spark. Facing an aging and increasingly health-conscious consumer base, MickeyD's executives have conceded that burgers and fries, alone, no longer cut the mustard.

"Americans are not clamoring for more McDonald's," says Damon Brundage, an industry analyst.

New frontiers

So, how to continue to grow? By expanding into a very un-McDonald's-like world of slightly-slowed-down food that doesn't look, smell or taste like it came off an assembly line.

Of its newly purchased brands, only Boston Market is a household name. The rest are regional players known for being among the best at what they do.

There's Chipotle Mexican Grill, which specializes in lime-flavored rice laced with cilantro and speed-bump-size burritos. There's Donatos Pizza, whose pizza recipes — featuring naturally aged provolone cheese instead of cheaper mozzarella — are the envy of the industry.

There's Aroma Cafe, whose chi-chi coffees and desserts are a hit in London. And there's Pret a Manger (French for "ready to eat"), a London chain that prides itself on making cold sandwiches from fresh ingredients delivered daily. It even sells sushi.

"There are pieces of the business we can't do under the arches," CEO Jack Greenberg says. "When you're out with friends on a Saturday night for pizza and wine, you don't go to McDonald's."

Such words may sound like heresy at McDonald's. But Greenberg is a realist. He knows all too well that McDonald's restaurants tried selling pizza years ago. It was an utter flop. So, why not rely on Donatos to do it right? That way, McDonald's, the company, still can capture the pizza customer. And snatch new business when many traditional McDonald's sit empty: in the evening.

Right now, McDonald's sister brands seem smaller than a pickle lost in a Big Mac: about 1,200 units with expected revenue this year of $1 billion. While each brand is individually making money, McDonald's says it lost $41 million last year in development costs.

Boosting rate of growth

But wait. Within a few years, the brands together could add 2 percent to McDonald's growth rate, Greenberg predicts. And over time, Greenberg says, more than one of these brands could explode "into the thousands" of units.

Consider: Chipotle had just 14 units — all in Colorado. But in three years under McDonald's ownership, it grew tenfold to more than 140 in 11 states.

Consider this, too. Within a few years, McDonald's five partner brands together could be adding up to 500 units a year worldwide, estimates Jeffrey Kindler, who was just named to the newly created position of McDonald's president of partner brands.

Among his duties: to help figure out what the next partner brand will be. Folks keep asking him if it will be some sort of Chinese restaurant chain. He won't say.

At the same time, McDonald's is trying to rejigger its McDonald's brand restaurants in the United States.

Two months ago, McDonald's put Starbucks in its sights by opening its first domestic McCafe, a gourmet coffee shop, adjacent to a McDonald's restaurant in downtown Chicago.

Owner Marilyn Wright says business is terrific at the shop decorated with lace curtains. But customers can't get used to the crystal vases filled with fresh flowers on each table. They've broken 40 already. So she's going to replace them with brass.

Trying out diners

McDonald's also is testing diners. McDonald's with the Diner Inside is packing them in near Kokomo, Ind.

It has 122 menu items, from meat loaf to chicken-fried steak, and ranks as one of the busiest McDonald's units. Next month, McDonald's will open an ice-cream-dessert-focused McTreat alongside a Houston McDonald's.

Already, there are plans for more of all of these concepts, says Alan Feldman, president of McDonald's Americas. Several more McCafes are on tap this year, he says. Meanwhile, McDonald's continues to test unconventional menu items for the fast-food restaurants. Among them: Grilled McVeggie Sandwiches.

Skeptics say McDonald's shouldn't pretend it's anything but a burger kingpin.

"It's tough for juggernauts like McDonald's to reinvent themselves," says Barry Gibbons, former CEO of Burger King. "They don't think about it until it's too late."

Critics say McDonald's is trying to convince Wall Street that it's a growth company. "It's all McSpin," says Dick Adams, who consults for McDonald's franchisees.

But some say the new concepts are right on trend. "The McDonald's logo is a red flag to many people that warns: Don't eat here," futurist Gerald Celente says. But the sister brands, he says, "can give McDonald's an improved brand image without a clown as a centerpiece."

Folks who eat at any of the sister brands receive no hint that McDonald's runs them. No Golden Arch logos anywhere. That's intentional. Why promote the very thing you're trying to get away from?

The race so far

Each brand competes for the attention — if not affection — of executives at McDonald's headquarters. Here's how the race among the five brands is shaping up:

• The early leader: Chipotle.

This appears to be the concept with the most promise. The Denver chain's formula has not been rejiggered by McDonald's. And with a check average north of $8, what's not to like? So what if its tortilla chips are doused in citrus juice before they're fried — then seasoned with kosher salt? Who cares if the pork in its carnitas is free-range? Bottom line: The food's good. Chipotle's next goal: to amass 1,400 locations from the current 140, founder Steve Ells says.

• The dark horse: Donatos.

Donatos has grown more slowly. McDonald's was hesitant to expand a chain nationally whose only pizza was thin crust. So, founder Jim Grote took a full year to develop a thick-crust pizza. Sure, he took some razzing when he sold to McDonald's. But most Donatos customers don't give a hoot who owns the company, he says. All they really care about is that their pizza is served hot — and fast.

• The wild hare: Pret a Manger. This one might seem like the farthest stretch for McDonald's. Its eclectic menu of all-natural foods includes everything from smoked salmon sandwiches to vegetarian sushi.

Prets are about as common on London streets as McDonald's are in Manhattan. One Pret opened in Manhattan this year, and 15 more will open there within the next year, CEO Andrew Rolfe says. Eventually, he says, there could be more than 100 in Manhattan. Not bad for a chain that sells 25,000 pounds of sushi a week.

• The comeback kid: Boston Market. McDonald's bought a bankrupt Boston Market for its valuable real estate, with plans to close all the stores. But executives have since found the concept viable. McDonald's has even begun to expand it — recently opening the first international Boston Market in Australia.

• The laggard: Aroma Cafe. The chi-chi coffee chain might ultimately compete with the McCafe concept and could be the first of the sister brands that McDonald's drops, analysts say. But Greenberg insists that Aroma is a keeper.

For Greenberg, all of this is an attempt to lure more customers by getting their business even when they want a burrito and a beer.

Industry analysts are humored by the fact that it's Greenberg, an accountant with little behind-the-counter background, who is driving McDonald's into this new world.

What would McDonald's founder Ray Kroc have to say about all the McChanges? Well, Kroc was a fan of diversification. He almost bought Taco Bell. He considered buying Baskin-Robbins. Kroc once said he had no idea what McDonald's would be selling by the year 2000. But he knew this: McDonald's would be selling more of it than anyone. Even if it's sushi.