McDonald's Restaurants (US)

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The McDonald's brand is almost as universal as Coke. The group's 36,000th restaurant opened in 2014, and those golden arches now spread across 119 countries, welcoming some 69m customers every day. Not enough, the company still says. On any day McDonald's still only serves less than 1% of the world population, leaving plenty of room for growth. However profits fell dramatically in 2002 and the group took unprecedented steps to close under-performing outlets, even pulling out of a few markets altogether. That move appeared to have paid off by 2004, and the group reported strong growth for much of the following decade, even in the face of an economic downturn. A key factor was the broadening of the McDonald's menu with an enhanced range of breakfast items, healthier chicken and salad meals and premium beverages. It also pushed aggressively into the coffee shop sector, in several key international markets as well as the US. However the reviving US economy brought fresh challenges from 2013 onwards. Domestic sales suddenly stalled, despite a frenetic burst of menu innovation, as customers moved away to less established rivals, while international performance was dented by a variety of different challenges in regional markets. Even after several changes of management, those troubles have yet to be resolved.

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Adbrands Weekly Update 22nd Jun 2017: McDonald's pulled the plug on its sponsorship of the Olympics three years earlier than planned. The current arrangement was set to run until 2020 but will now end early next year after the Seoul Winter Games. Though a fast-food chain has always seemed an unlikely sponsor of sport, McDonald's has been associated with the games for almost 50 years. The first such appearance was at the 1968 Winter Olympics in Grenoble in France, when it airlifted burgers to homesick US competitors. It became an official sponsor of the US Olympic Association in 1976, and has been a top tier global sponsor since 1996. It is also a separate sponsor of the Australian national team. In a joint statement, the IOC and McDonald's said the decision to part ways was a mutual one, although it is clearly led by the fast-feeder, which said it wishes "to focus on different priorities". McDonald's is the latest of several major US companies to call time on the Olympics, following in the footsteps of Citigroup, Hilton, TD Ameritrade, AT&T and Budweiser. One contributing factor could be unfriendly timezones. The next three Winter or Summer Games all take place in Asia: Seoul in 2018, followed by Tokyo and Beijing. That severely limits the effectiveness of TV coverage aimed at US audiences. The IOC highlighted in the statement its ongoing partnership with several Asian-based companies such as Bridgestone, Panasonic, Toyota and Alibaba.

Adbrands Weekly Update 27th Apr 2017: McDonald's demonstrated a welcome and much-needed upswing. US same-store sales rose 1.7%, helped by another push for All-Day Breakfast and new Big Mac size variants. Major international markets were up almost 3% following the launch of All-Day Breakfast in the UK and Canada, and combined global same-store sales by 4%. Net income was up by 8%, well above expectations, partly helped by the sell-off of weaker company stores to franchisees. That resulted in a 4% decline in reported group revenues, but that fall too was less serious than analysts had anticipated. CEO Steve Easterbrook said the chain was "regaining lapsed customers and converting casual customers to committed customers... When value is customer focused and locally relevant, it drives guest counts. Period."

Adbrands Weekly Update 20th Apr 2017: Signs are that Burger King's marketing department is getting a little too cocky ahead of this summer's Cannes Lions ad festival, when it will be awarded the prize for Creative Marketer of the Year. Late last week the fast feeder attempted to hijack US Google Home devices and Android phones across the US when its new ad featured a Burger King staffer leaning into camera and asking "OK Google...." - the wake-up phrase used by Android devices - "what is the Whopper burger?" That was designed to trigger all listening Android devices into reading out the first line from Burger King's Wikipedia entry. This was itself changed last week (apparently by BK's chief marketer personally, in strict contravention of Wikipedia rules) to feature a mouth-watering description rather than the old descriptive copy with which it has started for the past ten years. The stunt seems to have backfired: within a few hours of the ad's first airing, Google had blocked Android devices from responding and Wikipedia editors had reverted to the old copy and blocked further changes to the entry. They also demanded a formal apology. But that hasn't prevented the stunt from earning acres of media coverage. The Burger King stunt coincided with an odd viral campaign for McDonald's, also interacting with digital technology, but in a rather less sneaky fashion. There's no branding at all for McDonald's in any of the four new creative executions from Omnicom's We Are Unlimited unit. Instead, comic actress Mindy Kaling talks to camera, telling viewers simply to search Google for "the place where Coke tastes so good". We guess that's supposed to take US searchers to a specific dedicated page on the McDonald's USA website, but actually we UK searchers couldn't access it and found ourselves instead on a similar page on Thrillist.

Adbrands Weekly Update 6th Apr 2017: In another attempt to reinvigorate flagging performance in the key US market, McDonald's will convert its US supply chain by mid-2018 to serve only fresh beef patties cooked individually to order for its Quarter Pounder burgers. Logistically, that's a much more significant challenge than might appear. Currently, those burgers are delivered by processors frozen, and not defrosted until the morning of service, when they are reheated by each restaurant and kept in a warming tray awaiting orders. This is the latest move by McDonald's to compete with so-called "better burger" restaurants and other fast-feeders who have poached the chain's traditional customers. McDonald's recently said it has lost more than 500m customer visits to competitors since 2012. Yet a string of initiatives, including All-Day Breakfast and customised orders has failed to provide a lasting upturn. At the same time, the Golden Arches announced a shake-up of its US management team. Regional CMO Deborah Wahl is out after three years in that role, and is being replaced by PepsiCo marketer Morgan Flatley, best known as former CMO for Gatorade and Propel. Linda VanGosen is joining from Starbucks as head of US menu, and Farhan Siddiqui is promoted to VP, US digital.

Adbrands Weekly Update 26th Jan 2017: Despite an encouraging turnaround mid-year last year, McDonald's US recovery appeared to stall in the final quarter, with same-store domestic sales slipping by 1.3% in the final three months, the first decline in 18 months. That's partially an unflattering comparison against the launch of all-day breakfast at the end of 2015. This proved very popular with customers, but after the initial surge of interest it has resulted in lower total spending per visit, since breakfast options are generally cheaper than traditional all-day fare. At the same time, the strong dollar impacted on international revenues - this will be a recurrent theme for US companies - as did the group's decision to begin selling off company-owned stores to franchisees. For the full year global comparable sales were up 3.8%, but reported revenues slipped 3% as a result of currencies and refranchising to $24.62bn. Net income rose 3% to $4.69bn.

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Background

Free for all users | see full profile for current activities: Burgers were already an American favourite by the time brothers Dick and "Mo" McDonald turned their barbecue drive-in in San Bernardino, California into a self-service burger stand in 1948. The precise derivation of the term hamburger is unclear. There are many stories surrounding its creation, but it is unquestionably an American invention. Primarily it was an adaptation by German immigrants newly arrived in America of a recipe from the German city of Hamburg for chopped beef meatloaf, broiled but left raw inside. In the US this became known as Hamburg steak, and it was first mentioned in print in 1884 in the Boston Evening Journal. Later it became a delicacy served in the town of Hamburg, New York. Another contributor to the modern hamburger was John Montagu, the 18th century Earl of Sandwich, who had given his name to the archetypal quick meal over 100 years earlier when he demanded a steak served between two slices of bread so that he didn't need to get up from the gambling tables to eat.

A number of American entrepreneurs later took credit for serving the first Hamburg steak in a sandwich, but the most widely accepted appears to be Fletcher Davis, a lunch counter owner from Athens, Georgia, who reportedly caused a sensation at the World's Fair Exhibition in St Louis in 1904 with pan-fried chopped beef patty served between two slices of bread. The popularity of this "Hamburg sandwich" spread rapidly across the US during the first half of the 20th century, and was fixed in its modern form by another entrepreneur, former fry-cook Walter Anderson, who in 1916 replaced the bread slices with a specially designed bun. Five years later he opened the first dedicated hamburger restaurant, the White Castle, in Wichita, Kansas.

Certainly the concept seemed to work well enough for the McDonald brothers, who saw sales at their drive-in soar after they shifted to burgers. But it was entrepreneur Ray Kroc who turned the concept into a household name. A distributor of milkshake mixers, Kroc was one of Dick and Mo McDonald's suppliers. In 1954 he acquired exclusive franchising rights for the McDonald brothers' burger stand concept, acting as their agent for new franchisees and opening his own restaurant in Des Plaines, Illinois the following year. Kroc's business grew rapidly, and he bought out the McDonald brothers in 1962 for $2.7m, a large sum at the time but just a fraction of what the business would go on to generate.

Kroc took the company public in 1965 and began a policy of international expansion two years later. First destinations were Canada and Puerto Rico. Over the next 20 years the group colonized, on average, two countries a year. A key year was 1971, in which the company opened its first restaurants in Japan, in Europe (in The Netherlands) and Australia. The UK got its first McDonald's in 1974. During the 1960s, the company also experimented with secondary brands including more upmarket burger joints Hottinger's and Ramon's, but these were quietly shelved after poor performance.

Ray Kroc died in 1984, but the pace of expansion continued to accelerate after his death. In 1996 alone, McDonald's made its first appearance in 12 new markets. A year later, McDonald's signed a 10-year exclusive deal with Disney to cross-promote each other's brands. However, the US also became the source of increasing tension between the company and its franchisees. Most of the company's best-known trademarks had been invented by owner-manager franchisees. The Filet-O-Fish, for example, was invented in 1963 in a predominantly Catholic neighbourhood by a Cincinnati franchisee who noticed sales dropped regularly on Fridays, the day Catholics traditionally abstain from red meat. Other innovations from franchisees include core brand the Big Mac (invented in 1968 by Pittsburgh franchisee Jim Delligatti), the Egg McMuffin (introduced in 1973) and Chicken McNuggets (1983). Head office introduced the Arch Deluxe burger in the US in 1997, but it generated disappointing sales, made even worse by the disastrous and confusing Campaign 55, in which Big Mac prices were reduced to 55 cents, provided buyers also made additional purchases. Franchisees also claimed that the company was too keen to undermine their business by opening new stores indiscriminately and lacked a cohesive nationwide marketing strategy.

With limited opportunities for opening new stores in the US, McDonald's began teaming up with other retailers including Amoco petrol stations and Wal-Mart stores to open in-store franchises. In 1998 the group announced plans to buy into Mexican food chain Chipotle Mexican Grill, its first move towards a secondary brand. In 1999, the group took a further step towards "partner brands" when it acquired UK coffee shop chain Aroma. The group also quietly rolled out a chain of McCafe sandwich bars and coffee shops in 15 countries including Australia, Italy, Japan and Portugal. In 1999, the group purchased US-based pizza chain Donatos, with 140 restaurants. Later that year it agreed to pay $173m to acquire the Boston Market chain of restaurants, then sheltering from creditors under Chapter 11 protection.

Looking for new ways to extend its brand beyond restaurants and cafes, McDonald's began testing own-brand ketchup through retail outlets in Germany, Austria and Poland in early 2000, and launched a range of children's clothing through Wal-Mart. In late 2000 and early 2001, McDonald's began to come under severe pressure in Europe when the discovery of the first cases of BSE, so-called "Mad Cow Disease" led consumers to stop buying beef products. The group confirmed that it expected a "challenging" time, and attempted to counter the sudden fall in sales with the introduction of alternative meals, such as Germany's McFarmer, a burger made entirely out of pork. Later that year, the group announced the acquisition of a 33% stake in the enormously successful UK-based sandwich shop chain Pret a Manger [see McDonald's UK profile for more]. In the US the group began testing a new Diner Inside format in selected restaurants, expanding the menu to include a range of other diner-style meals.

BSE concerns later spread to other countries in Asia and Latin America, although the domestic market remained largely immune. Instead US sales came under a different sort of pressure. In 2001 the group was inadvertently touched by a scandal not of its own making, when it was revealed that an employee of the company's promotions agency, Cyrk-Simon, had been "fixing" McDonald's consumer promotions. The so-called McScandal was rapidly followed by a slowdown in financial performance, as the restaurant chain began showing signs of reaching saturation in its global markets. Following a drop in net income for fiscal 2001, and equally disappointing results for the first three quarters of 2002, chairman & CEO Jack Greenberg announced his retirement. He was replaced by former group president Jim Cantalupo.

Cantalupo, at 59 only a year younger than Greenberg, was regarded by some as an interim candidate while Australian-born Charlie Bell, a long-time McDonald's staffer then still aged in his forties was groomed for the top job. Soon afterwards, the group's Japanese joint venture issued a dramatic warning that its profits for 2002 would be almost wiped out after a failure to boost sales with cut-price deals. In the US also McDonald's was drawn into a brutal price-cutting war with Wendy's and Burger King, as each of the chains cut the prices of its entry-level meals to just 99 cents. The group reported its first ever quarterly loss as a public company at the end of 2002 as it allowed for the cost of closing more than 700 outlets around the world, but primarily in the US and Japan. The group also pulled out of several countries altogether as a result of economic uncertainty. Net income for the year fell 45% to $893m, the group's poorest performance for more than a decade.

This was followed by a new challenge in the US over healthy diets and America's growing obesity problem. As the biggest and best-known of the country's high-calorie food retailers, McDonald's was singled out by several commentators for negative criticism. The company responded by introducing a more health-conscious range of foods, including reduced-fat burgers, salads and fruit and yogurt desserts. This led to a complete overhaul of McDonald's corporate strategy, and primarily a shift away from growing by being bigger to growing by being better. The group also introduced its first ever unified global marketing campaign, rolling out a series of commercials worldwide based around new campaign slogan I'm Lovin' It. The debut ad, produced in Germany by Heye & Partner but used worldwide, was slated by many critics, but appeared to strike a chord with consumers. Sadly, the company's return to form was marred by the sudden and unexpected death of CEO Cantalupo from a heart attack in April 2004.

Later that year, the group declared another significant change in marketing strategy. Chief marketing officer Larry Light said at a conference that the company had abandoned the concept of delivering a single universal marketing message through television advertising. Instead the company would, he said, market itself worldwide via the four "cultural languages" of sports, fashion, music and entertainment. First up was sports, led by the group's position as one of the lead sponsors of the 2004 Olympics. Although the group continued to demonstrate a steady improvement in sales and profitability, while also making a clear commitment to low-fat meal alternatives, it remained the most high-profile target for anti-obesity protests. Documentary Super Size Me was an unexpected hit with movie audiences around the world over the summer and autumn of 2004, recounting the alarming effects on the health of film-maker Morgan Spurlock over the course of a month spent eating only McDonald's Happy Meals. The group appeared to shrug off the effects of that negative publicity also, with continuing strong performance.

However the role of McDonald's CEO began to appear tragically fated. Following the death of Jim Cantalupo, former COO Charlie Bell was appointed as his successor. Yet within just weeks of the appointment, Bell was diagnosed with cancer. Prompt treatment appeared not to have cured the illness, and he stepped down as CEO in November 2004 to fight the disease. Tragically, he died less than two months later, at the age of just 44. See full profile for current activities


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