McDonald's to Accelerate Growth Rate

CHICAGO - McDonald's Corp. wants to run over its competition with a Mack truck.

Richard Gibson

Wall St. Journal, 22nd January 1996

In a bold effort to crush smaller domestic rivals and to be the first to develop new markets abroad, the US Hamburger giant said it will sharply accelerate its global growth rate.

The number of likely new McDonald's restaurants this year alone could approach 3,200, or nine a day. That compares with what seemed to be aggressive expansion targets announced only last fall, but which now pale compared with the newest goals.

McDonald's coupled that news with word that it intends to spend 2 billion dollars buying back shares in the next three years. That represents a doubling of its previous repurchasing authorisation and points to extraordinary financial strength.

'Mind-Boggling' News

the double-barrelled announcement cheered investors and left analysts slack-jawed., "Mind-boggling" is how R. Revell Horsey of Alex, Brown & Sons Inc. in Baltimore, put it. 'A year ago, we were talking about 1,300 to 1,500 (new) units a year." Accordingly, Mr Horsey raised his earnings estimate for McDonald's to 2.27 dollars a share this year from what he now admits was a conservative 2.19 dollars.

Prudential Securities Inc.'s Janice L.Meyer said she wouldn't be surprised if the company beat 2.27 dollars, her continuing estimate. Before last week's announcement, Wall Street's consensus was for 2.23 dollars a share.

Calling the latest expansion goals 'stunning' Piper Jaffray restaurant analysts Allan F. Hickok said: 'McDonald's has just recognised a wide-open opportunity to do two things: gain first-move advantage in a lot of new markets, and grab market share from the other operators out there who are no match.'

Despite the initial euphoria, the plan to add restaurants rapidly, particularly domestically, carries a potential downside for current McDonald's franchisees. Sales at stores open more than a year already were down in the US. in the latest reported quarter, which ended Sep 30. and the prospect of more Golden Arches popping up down the street means that could become a trend.

'This puts added pressure' on current McDonald's restaurants, Alex Brown's Mr Horsey said. But he added that 'there;s an opportunity here to capture (market) share from weaker performers. it's a market-share game, and McDonald's is taking a 'take-no-prisoners' approach.'

A McDonald's spokesman replied that the company has 'a long history of recapturing sales over a relatively short periods as we develop market places... We believe our franchisees appreciate the power and importance of dominating a marketplace.'

The company's rapid expansion comes as smaller competitors, such as Hardee's Food Systems Inc., a unit of Imasco Ltd., struggle to retain traffic, and the US's second largest hamburger chain, Burger King Corp., becomes more aggressive in marketing, particularly to children.

Types of New Stores

McDonald's latest expansion targets call for between 2,500 and 3,200 new restaurants world-wide both this ear and the next. Continuing a trend, McDonald's will build two-thirds of these units outside the US.

Domestically, as many as 600 of the new outlets will be so-called satellite units - mini-McDonald's found in Wal-Marts and other nationwide retailers, as well as restaurants developed in tandem with gas stations. McDonald's has alliances with Amoco Oil Co. and Chevron Corp. in the US in an effort to nail down more choice sites through co-branding arrangements.

But Wall Street was struck with the emphasis on full-size restaurants implicit in last week's announcement. Between 1,800 and 2,200 of the planned units will be traditional restaurants. 'That's very exciting,' said Prudential's Ms Meyer, interpreting the ratio as indicating increased management confidence that it can keep down development costs domestically and expand into locations previously thought to be uneconomical for full-sized restaurants. Moreover, she said, 'this signals they feel comfortable with their international infrastructure.'

Back to Media Page