Golden Arches under a cloud
By Dina ElBoghdady
Washington Post
America's iconic fast-food restaurant has long lived by the numbers — of burgers served, of new locations nationally and abroad. But McDonald's Corp. sees its numbers going the wrong way and it vowed yesterday, yet again, to fix what's broken.
Associated Press
The world's largest restaurant chain had to lower its profit forecast for the year, which sent its stock tumbling to a seven-year low, down $2.78 to close at $18.91.
While hoisting signs for new hires in San Francisco, McDonald's Corp. lowered its earnings projections yesterday because of lower-than-expected sales in the United States and Europe. McDonald's stock tumbled to nearly a seven-year low.
To fight weak sales in the United States and Europe, McDonald's promised lower prices, faster service, a more enticing menu, remodeling of stores and its first national ad campaign in five years.
To jump-start sales next year, McDonald's will cut back on openings, invest up to $400 million in renovating some restaurants, and expand its menu to include flatbreads and more desserts.
Fast-food rivals such as Wendy's and "fast casual" alternatives such as Panera Bread are chowing down on Americans' eating-out dollars, analysts point out. And investors, they say, are growing impatient with the Oak Brook, Ill.-based McDonald's, which pledged a turnaround for more than year.
Yesterday, McDonald's issued projections of $1.31 a share in annual earnings, down from forecasts of $1.35 to $1.41. Third-quarter profit should be 38 cents a share, the company said, compared with 42 cents a year ago.
Europe has presented problems for McDonald's. Sales at stores operating more than a year there declined 0.7 percent as unemployment climbed in Germany and retail sales slumped in the United Kingdom.
But the U.S. market, with its 13,000 stores, is where McDonald's faces its largest challenges. U.S. sales for the first two months of the third quarter were flat and they grew only 1 percent this year through August throughout the chain, company officials said.
When new or closed stores are not included, sales at stores open more than a year fell 2.7 percent in July and August.
Douglas Christopher, an analyst with Crowell Weedon & Co., said McDonald's troubles started in the mid-1990s, when it began opening stores at breakneck speed. In the five years leading up to 1994, the last year the company posted solid results, McDonald's was opening about 700 stores a year on average — about two a day, Christopher said. Openings peaked at about 2,585 in 1996 — about seven a day.
The company continued opening stores despite a slip in sales per store, Christopher said. It has since cut back on openings, though it remains on an aggressive growth plan.
Carl Sibilski, an analyst with Morningstar Inc., said years of aggressive growth hurt the company's control over its stores, particularly among franchisees. Everything from the cleanliness of the store to the way hamburgers are placed on the grill for efficiency has been compromised.
A more fundamental problem may be changes in clientele and tastes as more high-quality options emerge, said Lynne Collier, a senior restaurant analyst at Stephens Inc.
"You've got a base that's aging and increasingly looking for higher-quality food. They want the convenience of fast food, but they want a premium brand," Collier said, citing fast-casual dining places such as Panera Bread, Quizno's and Cosi.
It's not clear whether McDonald's sees things the same way. The fix, company officials said, is to improve its operations as well as its marketing efforts.
In October, McDonald's will launch a $20 million multimedia ad campaign for the Big 'N Tasty and McChicken sandwiches selling for $1 each. In November there will be more promotions of $1 items, Roberts said.
Next year, McDonald's will expand its advertising effort, refurbish older stores and increase its staff during the lunch crush. The chain will keep close watch on its underperformers.
For some of its capital expenditures in this country, McDonald's will moderate share repurchases to about $500 million in 2003, said chairman Jack Greenberg. The company also will cut back on openings abroad.
