McDonald's strikes out with grownups

Kiddies And Teens May Still Love The Golden Arches. But Adults Are Proving To Be Much Tougher Customers

For reasons unclear, McDonald's chose to announce its new line of "adult" sandwiches a few weeks ago with one of the more bizarre corporate ceremonies in recent memory. Debbie Allen, a dancer and TV actress once briefly famous, showed up on-stage to wiggle her butt furiously. A formerly hip group called the Village People, all leather and feathers, came on to belt out a few of their campy tunes. Then the thousands of squealing employees in attendance, stacked like a Big Mac in a three-story atrium on the company's Oak Brook, Illinois, campus, were encouraged to break into a silly little dance in celebration of the new Deluxe line of beef, fish, and chicken delights. At least some of the workers had memorized the dance steps by studying instructional videos the company had supplied weeks before.

This festival of kitsch seemed more than a bit, well, desperate, and there are good reasons for that. The kickoff was just part of an estimated $200 million promotional blitz that McDonald's hopes will lure recalcitrant adults back to the golden arches. Until now, the Mac daddy of fast food has never put a lot of grease into targeting adults--kids and families were the point. That focus helped to turn Ray Kroc's dreams into the largest restaurant chain in the world, and it also helped make McDonald's delectable on Wall Street.

Now struggling in a slow-growth market, the chain is looking for baby-boomers-- the massive gang it grew up with--to rejuvenate its U.S. business. For the past five quarters, in part because older customers have been drifting away, McDonald's has posted negative domestic store sales (see chart); U.S. operating income and margins have fallen off as well, leading in October to the demotion of Edward Rensi, chief of U.S. operations.

Luring more baby-boomers, by far the meatiest segment of the grownup market, won't be easy. From 1989 to 1994, adults between ages 45 and 54 trimmed their dining-out budgets by 19%; boomers aged 35 to 44 sucked it in even more, paring their expenditures by 24.5%. Mainly, the cuts affected white- tablecloth, or fine, dining. But these folks have also curbed their takeout habits, becoming choosier about where to spend their fast-food dollars. "Huge numbers of baby- boomers now have sophisticated tastes," notes Cheryl Russell, a demographer and editor of The Boomer Report. "They want less of the cheap, fattening foods at places like McDonald's. As soon as their kids are old enough, they go elsewhere." Indeed, McDonald's own internal research shows that 78% of its customers feel the chain has the best food for kids, but just 18% say it offers the best fare for adults.

To restack the deck, McDonald's launched its first "grownup taste" sandwich, the Arch Deluxe burger, this past May 9. Company flacks predicted that the sandwich could become a $1 billion brand in its first year, but the PR jaws in Oak Brook have remained shut on Arch sales ever since--giving the term "mystery meat" a whole new meaning. Exasperated by rumors of doom, Rensi, president and CEO of U.S. operations, in mid- September fired off a memo to the chain's 2,700 franchisees. "The Arch Deluxe was never intended to be a silver bullet," he sniped. To date, the official word from the company is that the Arch has exceeded "internal sales projections" by 10%.

But such meaningless claims have led to speculation that a major McFlop is under way. "The facts on the surface are that they teed off one of the most expensive campaigns in history, and still we estimate that comparable store sales were down in the [third] quarter," says Allan Hickok, an analyst with Piper Jaffray. "We don't know whether the Arch Deluxe is creating incremental revenues, or cannibalizing sales of other products."

One clue came on October 8. Just 12 days after the Village People et al. had strutted their stuff in Oak Brook, McDonald's CEO Michael Quinlan flipped top U.S. executives. He moved vice chairman and CFO Jack Greenberg over Rensi, installing him as McDonald's USA chairman, a new position at the company. The demoted Rensi, 52, now reports to 54-year-old Greenberg, who will oversee a more focused domestic business. The change, interestingly, came not long before the company announced lower than expected third-quarter earnings of $441 million. "To some degree, they had to express their dissatisfaction with the trends," says Prudential analyst Janice Meyer. "This is just another effort to bring more leadership to the domestic business when it is clearly having a hard time."

Rensi, who started as a grill man back in 1966, didn't seem to click with the company's franchised operators. "He was an old-fashioned, top-down sort of manager," says Dick Adams, a San Diego franchise consultant and former McDonald's operator. "As the business became more difficult, Rensi's answer was to put more pressure on franchisees." In a huff over store sales last June, for instance, Rensi put the entire burden on operators, bullying them to lure 50 more customers per day.

Greenberg is apt to be less confrontational. Weeks before his ascension, he acknowledged, "If you have a no-growth business, its very hard to motivate [licensees]." In his new role, he has promised to build a dialogue with operators and to get fresher marketing input from the field. "You've got to look at [these changes] as a continuum," says the former accountant, who, unlike Rensi, is known for his candid style. "Investors want some comfort that we're watching the U.S. The smart ones will see this as evolutionary."

McDonald's domestic troubles aren't exactly new. Competitors, including Pizza Hut and Taco Bell, began nibbling at McDonald's market share in the late Eighties. And within the burger segment, where growth in the Nineties has slowed to about 5% annually, Arch rivals like Burger King have managed sales gains for three years running. There's even evidence that McDonald's has been slipping in areas it once dominated. A 1995 Restaurants and Institutions Choice in Chains survey of 2,849 adults gave McDonald's low marks on food quality, value, service, and cleanliness. Top honors instead went to Wendy's.

So why did McDonald's wait so long to attack its domestic problem head-on? Put simply, because it could. After all, as a company, and a stock, McDonald's is really an international story. Its global operations in 96 countries are the real attraction, feeding 47% of the company's $30 billion sales and 54% of profits. For the most part, McDonald's has those unsated foreign appetites to thank for its 126 consecutive quarters of record earnings.

Brisk overseas business, however, has only magnified the chain's U.S. blues. McDonald's found that discounting--a tactic the company tried reluctantly--failed to revive per-store sales. McDonald's started hawking Extra Value Meals in 1991, largely to keep up with Taco Bell's value pricing. But by mid-1995 the value concept had evolved to straight discounting, and "the super-low price promotions weren't driving customers into the store any longer," notes David Adelman, a Dean Witter Reynolds analyst.

So the new, adult-oriented Deluxe line is not only supposed to win back older chowhounds; it's also aimed at bumping prices back up. The chicken, fish, and beef sandwiches cost about 20% more than "classic menu" items. It's a lot of pressure to put on a bunch of burgers, especially given the problems McDonald's has had expanding its menu in recent years. (Remember the McDLT?) The low-fat McLean, a previous effort to bring in weight-conscious adults, was a thorough disaster. The company took five years to kill the burger off, even though sales of the beef and seaweed concoction were so anemic that some operators kept only a few frozen patties on hand, storing them in little plastic bags. Other franchisees, it was revealed in an embarrassing television expose, duped customers by selling fully fatted burgers in McLean boxes.

Part of the problem is that the creative process behind "grownup" fast food isn't simple--and it's certainly not fast. Whipping up the recipes for those towers of fat and cholesterol requires months of focus groups, endless hours in test kitchens, and, of course, an energetic chef. In this capacity McDonald's has Andrew Selvaggio (formerly a real chef working at Chicago's famous Pump Room). In the two years it took him to concoct the Arch Deluxe--yes, two years--Chef Andrew says he tried 52 different types of mustards before settling on a Dijon that has that certain middle-aged zing. For the Fish Filet Deluxe, he claims to have experimented with everything from albacore tuna to salmon. In the end--surprise, surprise--it was back to the cheap pollack the company has been using all along.

At least some industry experts question whether McDonald's may be making a fundamental marketing mistake with its new emphasis on adult customers. There is a chance, after all, that the "grownup" theme-- including commercials that show kids grimacing at the sight of an Arch Deluxe- -could backfire. "McDonald's stands for kids, and through kids, family," reminds Al Ries, chairman of consulting firm Ries & Ries in New York. "By literally saying, 'We don't want you to eat this sandwich,' it undermines their strength." Robert Shulman, co-author of The Marketing Revolution, agrees. "It's a huge risk," he says. "It takes them away from their core audience--kids--and potentially cannibalizes their original products."

Ries, a marketing purist and former Burger King consultant, has the following advice for a company that's long been noted for its considerable marketing muscle: "McDonald's has to have the courage to realize that people do grow up and move on. You have to abandon some customers who outgrow your concept. That's the mark of a successful company. Coca-Cola said they could get into new-age beverages, but for the most part they've kept the focus on colas."

Still, McDonald's top planners resist the notion of writing off such a huge chunk of potential customers. One big reason: U.S. franchisees, many of whom had hoped the new Deluxe line would boost their shrinking profits, are growing increasingly restive. For example, franchisee Hugh Schmidt, who operates a McDonald's in Vail, Colorado, laments that he has yet to see a surge in traffic or check amounts since the new burger made its debut. In June, the first full month of Arch Deluxe sales, his average ticket was $5.30; two months later the number was better, at $5.61; but in September average sales were down, at $5.06. "That's not great guns," he says. By late September his customers were back to eating Quarter Pounders and Big Macs, and twice as often, he calculates, as they gobbled the Arch Deluxe burger.

Many longtime franchisees are also upset with management's plans to continue systemwide expansion in the U.S. In 1996 the company added at least 900 new stores domestically. Next year that number is likely to approach 1,100. Problem is, McDonald's "total domination" in some oversaturated markets stands to pit operators against one another. They're especially worried about the impact of new company-owned stores, some of which will feature elaborate indoor playgrounds.

Harry Scalione, an operator in Virginia Beach, says the company should "stick to what they have and be more concerned with operators' bottom lines." The current aggressive expansion plan, he argues, is an indication that the company cares mainly about overall sales rather than operator profits. McDonald's may increase sales, and therefore the corporate take, where it expands, but profits for each store in those markets spread thinner.

Several hundred of the company's dissident franchisees have joined an independent group called the Consortium. Founded by franchise consultant and former McDonald's executive and operator Dick Adams, the group is extremely secretive about its membership in fear of some sort of retribution from headquarters. Communicating by E-mail, faxes, and backroom meetings, members trade notes on traffic and sales figures in an effort to stem what they perceive as systemwide propaganda. Says Adams: "Ed Rensi says the franchisees love [expansion], but that's totally untrue. Also, I suspect that the new stores aren't doing that great. They're encroaching on older stores substantially. It's a bloodbath."

Those fighting words are matched by some disturbing numbers. According to Nation's Restaurant News, the average domestic McDonald's took in $1.4 million in sales in 1986. A decade later the average store did sales of $1.5 million, for a gain of 7%. Meanwhile, the consumer price index over that same period chugged ahead by more than 40%.

For now, the folks in Oak Brook shrug off the Consortium and its concerns. "Our relationship with licensees is the absolute best in the business," says Greenberg. "People get into disputes, and with 2,700 of them, [there may be] a hundred that are unhappy." Top company officials talk up new growth strategies, like the recent ten- year deal to license Disney characters for kids' Happy Meal promotions. In the end, however, McDonald's must find a way to satisfy a changing and finicky clientele. The disappointing early returns on the Deluxe line make the search ever more urgent. That means more hunting for the perfect mustard, more tinkering with the menu to please adult tastes. Goodbye, breakfast burritos--hello, McBrie Burger.

PHOTO (COLOR): Demoted just days after launching the new Deluxe line of sandwiches, U.S. operations chief Edward Rensi took the hit for disappointing domestic sales.