From supersize to downsize
By Steve Matthews
Bloomberg News Service
OAK BROOK, Ill. — McDonald's Corp., the world's biggest restaurant chain, said it will close 175 stores in 10 countries and eliminate as many as 600 jobs, reducing 2002 earnings. The company's shares fell 7.9 percent.
Associated Press library photo • Aug. 10, 2002
McDonald's also will exit three Middle Eastern and Latin American nations. Overall, the moves will cost $350 million to $425 million before taxes in the current quarter, the company said in a statement. McDonald's, which didn't give a specific profit forecast, had predicted annual earnings of $1.31 a share.
It's unknown if this McDonald's restaurant in Hong Kong is among the 175 stores in 10 countries targeted for closure. The world's biggest restaurant chain announced yesterday that it will cease operating in three countries where it has restaurants and eliminate up to 600 jobs to control costs and reallocate resources.
This is the second time in eight weeks that Chief Executive Jack Greenberg brought down estimates. Some investors question whether Greenberg, a 20-year McDonald's veteran who took charge in 1998, can retain customers amid complaints about the service and the food. Sales at stores open at least a year fell 1.3 percent last month, following three quarters of declines.
"Is four years long enough?" said James McGlynn of Summit Investment Partners, whose $5 billion in assets includes about 140,000 shares.
"They are not moving in the right direction."
McDonald's has been losing customers to rivals such as Burger King and Wendy's, which has a 99-cent value menu and a new line of salads.
McDonald's introduction last month of a $1 menu, designed to draw more price-conscious U.S. consumers, helped increase customer traffic though it produced smaller checks, according to analysts.
Moreover, lower prices don't address complaints about service. More than a quarter of customers who don't go to McDonald's regularly cited long waits as their top reason, according to surveys of 1,400 people since July, said Britt Beemer, chairman of America's Research Group. The second-biggest complaint was that the food has too many calories, he said.
McDonald's shares fell $1.52 to $17.79 at 4:17 p.m. in New York Stock Exchange composite trading, making the stock the biggest decliner among the 30 members of the Dow Jones industrial average. The shares had fallen 27 percent this year, compared with a 14 percent decline in the Dow.
McDonald's, with more than 30,000 restaurants in 121 countries, earned $1.64 billion, or $1.25 a share, on revenue of $14.9 billion last year.
McDonald's is retrenching to try to improve sales at its existing stores, Greenberg said.
The chain will hand over ownership of restaurants in four markets in the Middle East and Latin America to licensees. McDonald's didn't identify the countries it's exiting or the 10 nations where 175 restaurants will be closed.
The employment cuts represent less than 1 percent of McDonald's approximately 400,000 workers. As many as 250 of the cuts will be made in the United States. The reduction follows the elimination of at least 500 jobs, announced a year ago.
U.S. sales at stores open at least a year dropped 0.6 percent in October, while European sales declined 2.2 percent.
Net income has increased less than 1 percent a year in the past five years, even as sales have risen 6.8 percent a year.
"McDonald's used to be the gold standard, with the cleanest restaurants and best locations," said Peter Sorrentino, of Bartlett & Co., which owns about 570,000 shares. "Service quality has dropped, and some locations aren't clean. Current management hasn't acted decisively."
