Sales of its Happy Meals have fallen three years in a row. McDonald's won't specify the rate of decline but suggests it was in the low single digits in 2002. People familiar with the Happy Meal business say the decline has been 6% to 7% over the past two years combined, and some McDonald's franchisees say that that is consistent with their experience. The Happy Meal -- which consists of an entree (hamburger, cheeseburger or chicken nuggets), fries, small drink and free toy -- is crucial to McDonald's. It accounts for more than 20% of U.S. transactions, or approximately $3.5 billion in annual revenue, according to McDonald's. It also generates sales from the adult who buys a child a Happy Meal. Some restaurants report that average orders with Happy Meals -- whose prices vary according to market but start at $ 1.99 -- are 50% higher than those without Happy Meals.

No other restaurant chain that primarily serves adults has been so successful at wooing children. The 1976 introduction of the Happy Meal and subsequent arrival of in-restaurant playgrounds gave McDonald's a dominant share of the fast-food market for kids, which remains an insignificant business for competitors like Wendy's International Inc. and Yum Brands Inc., parent of Pizza Hut, KFC and Taco Bell. Even Burger King Corp. is a relative newcomer to the children's market, having launched its Kids Meal in 1990.

But the McDonald's hold on children is weakening. "We can do better with Happy Meals," says Bill Lamar, McDonald's U.S. marketing chief. "We continue to be the leader, but the gap we had with our competitors is not as wide as it was a few years ago. We want to return to a wide gap."

To that end, McDonald's is exploring a novel concept. A key attraction of the Happy Meal is the toy that comes with it. What if Mom -- a primary purchaser of Happy Meals -- got a gift of her own? "A Mom's Meal with a lip gloss or a chance to go to the spa -- these are all ideas we're looking at," says Mr. Lamar. "Mom is a very, very important customer for us."

Indeed, McDonald's has created a new marketing team focused on attracting women 18 to 34 years old. And some of the chain's new products, such as the chicken flatbread sandwich and Cobb salad, are aimed at women.  
 
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