by Eric Schroeder
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A little more than 50 years after the framework for the traditional McDonald’s restaurant was put in place, the quick-service chain finds itself in the midst of significant transformation. While products and slogans have come and gone over the years, the core menu and appearance of the restaurants has remained remarkably consistent. A number of key decisions made during the past few years, though, could give the Oak Brook, Ill.-based corporation a different look in the future.

Significant moves have been and continue to be made to better the nutritional profile of what McDonald’s offers. Perhaps the most significant — and most anticipated — shift in this regard is the company’s transition to a new trans-fat-free oil for cooking its french fries. Highly protective of maintaining the taste profile of one of its signature items, McDonald’s has been on a start-and-stop course with the oil launch during the past few years, but the recent movement among some of the nation’s largest cities to eliminate trans fat from food products left the company little choice but to expedite its search for an alternative.

McDonald’s route to arriving at the new oil has been circuitous. In September 2002 the company said it would switch to a new oil that would cut in half the level of trans fatty acid in its fries, but the company delayed those plans in February 2003, citing product quality and customer satisfaction as its priorities.

Then, in early 2005 McDonald’s agreed to pay $8.5 million to settle a lawsuit with, Inc., a California-based nonprofit advocacy group that accused the company of misleading consumers by announcing plans to change its cooking oil but then delaying the switch. As part of the settlement, McDonald’s agreed to donate $7 million to the American Heart Association to be used for public education on partially hydrogenated oil. McDonald’s also agreed to spend up to $1.5 million on publishing notices to ensure the public knew the status of its trans fat initiative.

Finally, this past January McDonald’s announced it selected a canola-based blend that includes soy and corn oils for use in its french fries. McDonald’s spokesman Walt Riker said the new oil is currently in more than 1,200 U.S. locations, and will be in the company’s 250 New York stores ahead of that city’s July 1 ban on trans fat. Mr. Riker did not say when the oil, which is supplied by Minneapolis-based Cargill, would roll out nationwide.

In a recent interview with The Wall Street Journal, James Skinner, chief executive officer of McDonald’s, was asked why it has been so difficult for McDonald’s to take the trans fat out of its fries. He responded that the scale of McDonald’s, coupled with the need to do things right played a factor in the delay.

"We don’t want to have a knee-jerk reaction," Mr. Skinner said. "This is what happened in 2002. The United States division decided they had the problem solved and made an announcement, and yet our testing from our customers indicated the taste wasn’t right. It wasn’t ready. And so we couldn’t execute. And I think, to our benefit, we didn’t pull the trigger on something that wasn’t going to give us the best opportunity to give our customers the best-tasting french fry as well as the benefits of a reduced-trans-fat oil."

Still playing to win

Around the same time it was exploring the possibility of a new trans-fat oil, McDonald’s embarked on a new strategic course. In 2003, reflecting a fundamental change in its approach to growing the business, McDonald’s unveiled its "Plan to Win" strategy, a combination of customer-centric initiatives designed to deliver operational excellence and leadership marketing leveraged around five drivers of customer experiences — people, products, place, price and promotion.

A key component of the strategy was a shift from emphasizing adding new restaurants to a more dedicated focus on building sales at existing restaurants. The move was expected to reduce capital spending and allow the company to return a sizeable amount of cash to shareholders through dividends and share repurchases.

Results from the plan have been positive to date. Net income for the year ended Dec. 31, 2006, totaled $3,544,200,000, equal to $2.83 per share on the common stock, up 36% from $2,602,200,000, or $2.04, in 2005. Net revenues for the year were up 9%, totaling $21,586,400,000, a record high for the company. The company’s share price, meanwhile, climbed to $45.80 on Feb. 26, 2007, up from $12.81 on Feb. 26, 2003.

"We expect to invest another $1 billion in our existing restaurants to support Plan to Win initiatives designed to enhance relevance and capacity," Mr. Skinner said during a Jan. 24 conference call with financial analysts. "While our international markets will continue to focus on re-imaging in 2007, the U.S. will shift some reinvestment spending to rebuild a higher number of existing restaurants."

In the U.S., the company has enhanced the McDonald’s experience by providing new menu options, added conveniences and contemporary restaurant locations that are in touch with customers’ lifestyles.

For example, later this summer McDonald’s restaurants in the Louisville, Ky., area will begin offering movie rental kiosks. These changes come on top of a move made last December in which the area restaurants began offering free wireless Internet access, music via satellite radio and news headlines on flat-screen televisions.

McDonald’s has initiated a program to build R-Gyms, dedicated in-restaurant play areas featuring interactive game zones designed for children ages 4 to 12. The R-Gyms are equipped with stationary bicycles attached to video games, dance pads, basketball hoops, monkey bars, an obstacle course and other games.

The first R-Gym opened in March 2006 in Tulsa, Okla., and more than 20 are expected to be installed in McDonald’s restaurants throughout California by the end of this year.

"McDonald’s with its wide variety of menu choices at various nutritional profiles, now also offers a variety of activity for children that promotes exercise and physical fitness," said Bonnie Modguno, registered dietitian and McDonald’s consultant. "It’s important for kids to eat a well-balanced diet, but it is equally important for them to play. Now, parents can bring their kids to McDonald’s to accomplish both."

The changing designs at McDonald’s are being undertaken with a mindset of making the fast-food restaurant more of a destination and less of a place where customers just stop to grab a bite to eat.

"We are confident that our plan to be better, not just bigger, supported by the alignment of our unique system of franchisees and suppliers, will continue to drive enduring profitable growth," the company said in a Feb. 27 10-K filing with the Securities and Exchange Commission. "In 2007, we will continue to leverage our three-tier menu approach featuring premium selections, core menu favorites and everyday affordable offerings to appeal to a broad range of consumers. We will complement this three-tier strategy with permanent and limited time offerings on new products that enhance menu choice, variety and value."

On the health and wellness front, the company said its program to add nutrition labeling to the packaging of most of its branded core menu items reached 25,000 restaurants by the end of 2006. The effort will grow to cover even more restaurants and products in 2007, the company noted.

A focus on brand growth

In addition to cutting back on opening new restaurants, another tact taken by McDonald’s during the past year has been a shift away from ownership in other food interests. The company late last year severed ties in Chipotle Mexican Grill, its fastest growing segment, a clear sign the company’s focus would be squarely on its own brand.

Despite Chipotle’s growth from a 16-restaurant chain in Denver to a 500-store chain nationwide, McDonald’s believes its best opportunity for growth will come from attracting more customers to its own restaurants, Mr. Skinner said at the time of the divestment.

McDonald’s followed up the news of its break with Chipotle by announcing in January that it may be putting its Boston Market restaurant chain up for sale.

McDonald’s acquired Boston Market in May 2000 for $173.5 million in a bankruptcy auction. The move gave McDonald’s more than 700 Boston Market chains in 28 states. The company has since cut the number of stores in operation down to about 630.

The acquisition of Boston Market was part of a larger effort by McDonald’s to diversify its portfolio. In addition to Boston Market, the company acquired controlling interests in Chipotle and Donato’s Pizza, as well as stakes in Fazoli’s Italian fast-food restaurants and Pret a Manger, a sandwich chain in the United Kingdom — all during a two-year window.

Menu takes on new look

When it comes to menu selection, McDonald’s has stepped up the pace of change. While its Big Mac (introduced in 1968), Quarter Pounder (1972) and Egg McMuffin (1973) remain mainstays on the menu, the company has developed several items that could be equally as important going forward.

The McGriddle sandwich, which features griddle cakes that are similar to small pancakes filled with maple-flavored syrup, have been a boon for the company since their introduction in 1998.

More recently, the company introduced Snack Wraps. The tortilla-wrapped snacks retail for $1.29 and have been one of the most successful new product launches in McDonald’s history, exceeding company sales projections by 20%. In January, McDonald’s expanded the line by adding Honey Mustard Snack Wrap, a product made with either grilled or crispy chicken breast meat, cheddar jack cheese, lettuce and a honey mustard sauce, wrapped inside a flour tortilla. The company’s Ranch Snack Wrap has been on the market since August 2006.

The introduction of Snack Wraps followed a larger trend in which McDonald’s shifted its menu focus from hamburgers to more chicken, salads and other "fresh foods." But new products aren’t the only changes in menu selection. If the company’s franchisees are to be believed, McDonald’s may be making its breakfast menu available all day, joining other fast-food restaurants such as Jack in the Box, Sonic and Starbucks.

In a February memo to franchisees obtained by Crain’s, McDonald’s executives said the company is in the midst of launching a "breakfast optimization" program that would bring greater efficiency to the production of Egg McMuffins, McGriddles and other morning items. That efficiency apparently would include reconfiguring kitchens and installing new equipment.

While McDonald’s executives have been mum about any official move to extend the breakfast hours (in November Mr. Skinner said such a move was "a few years away"), the fact breakfast is the fastest-growing segment of the fast-food day has raised the company’s awareness that more must be done to capitalize on the day-part.

"We are the clear leader (in breakfast)," Mr. Skinner said in January. "We have a lot of equity in that space. We are very, very proud of our breakfast offerings and we think that we are unparalleled in our delivery of breakfast and we continue to work to protect that. There is some work going on in some markets across the country, in some co-ops, specifically our dollar menu. Our co-ops have an opportunity to add four different items to the dollar menu and some choose to do that through breakfast, although that’s not a national program. And I just think our delivery at breakfast will continue to improve and we are focused on it and excited about where we find ourselves."

The company also sees great promise outside of food products and within beverages. Mr. Skinner said coffee has done "very, very well" for the company, and plans are in place to test a specialty coffee later this year.

"Obviously we will continue to pursue the premium coffee and the great success we had with that in 2006," he said.


Skinner stays the course in aftermath of difficult times

OAK BROOK, ILL. — The ascension of James Skinner to chief executive officer at McDonald’s Corp. a little more than two years ago was neither planned nor expected, but the changes he has made at the company since the untimely deaths of his predecessors have helped steer McDonald’s toward one of its most successful periods in history. As of Feb. 23, the company’s stock price was at a 52-week high of $46.21, which compared with the $30 per share level maintained by the company when Mr. Skinner assumed the helm in November 2004.

A 35-year veteran of McDonald’s, Mr. Skinner took over as the company’s c.e.o. in November 2004 after Charles H. Bell stepped down. Mr. Bell, who died Jan. 17, 2005, of colorectal cancer in his hometown of Sydney, Australia, had been diagnosed with cancer in May 2004, less than a month after being elected McDonald’s president and c.e.o. He was 44.

Mr. Bell assumed the top post at McDonald’s after James Cantalupo, who guided a turnaround that reignited the company’s sales growth, died suddenly of a heart attack.

In a recent interview with The Wall Street Journal, Mr. Skinner credited the company’s board with managing a road map for the company following the deaths of Mr. Bell and Mr. Cantalupo. Now, Mr. Skinner said he sees one of his main tasks as locating "high-potential people who can accelerate our momentum."

"Some of it’s structural and some of it is by gut," Mr. Skinner said. "We created a leadership institute in the last 15 months, which really houses the spirit of everything we’re trying to get done around development of our people.

"We assess our talent twice a year. I ask all my senior people to do 40 hours of personal development annually, including myself. I ask all the senior people to have two ready-now candidates to succeed them. Every time I meet with them, we talk about what are you doing to develop them? We might even have a debate about the two they picked."


McDonald’s at a glance

(as of Dec. 31, 2006)

· 31,046 restaurants

· 18,685 franchisees owned and operated

· 4,195 affiliate-operated

· 8,166 company-operated

· 118 countries

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