Restaurant Kings, or just Silly Burgers?

It looks like ketchup on the boardroom carpet, but it may be blood. Last week, McDonald's, the world's biggest restaurant chain, was forced to abandon a year-long brand promotion after customers and franchises failed to greet it with the enthusiasm the company had anticipated.

In a humiliating reversal of strategy, the fast-food chain pulled the plug prematurely on its 55-cent sandwich promotion. This was the noisily promoted centerpiece of Campaign 55, so called to echo 1955, the year the current incarnation of the company was founded by Ray Kroc.

Under the promotion, which began in early April, customers could buy a 'featured sandwich', such as a Big Mac, for 55 cents when purchased with French fries and a drink. But McDonald's found that customers just weren't biting and the company was losing credibility with its US franchisees.

Richard Starmann, McDonald's senior vice-president, said: 'Customer response over the first six weeks was not up to our expectations.'

The sudden retreat has caused industry analysts to cut earnings estimates and question the future of the company's management, which has now stumbled with three successive marketing initiatives and product launches. Sales in the US have been sluggish since last year. On Wall Street, Lehman Brothers has cut 1997 earnings estimates from $2.52 to $2.45 and McDonald's share price has dipped three points to 47 in the past week.

Analysts suggest that this latest strategic failure is more than just the collapse of a single promotion and reveals a company in chaos.

Analyst Jeffrey Omohundro says: 'They were pinning their domestic strategy on Campaign 55.' His firm, Wheat First Butcher Singer, of Richmond, Virginia, estimates that McDonald's May results will show a significant 4-6% drop in sales. 'It was more than just a promotion, it was going to reach down to many levels of the company and its operations.'

With 2,500 outlets and almost 34% of the $116bn business, McDonald's is by far the largest fast-food sandwich retailer, a classification that excludes pizza and chicken restaurants. But in recent years it has seen its US market share erode as rival Burger King, which has 18% of the market, Wendys with 9%, and a host of smaller, local chains, have grown.

WHAT most alarms some analysts is that as McDonald's has lurched from strategy to strategy, franchisees have grown unhappy with the company's rapid expansion program; in some cases restaurants have opened within a mile of existing outlets. This led to more and more complaints that the competition was not only wiping out profits but ruining franchise resale values.

Though the company continues to report record profits year on year - last year it posted net income of $1.6bn on sales of $16.4bn - growth has depended on an aggressive expansion program rather than on a policy of attracting new customers with tastier products.

In 1996 the number of McDonald's outlets grew by 6.4%, but sales increased by only 2.9%, which means sales per restaurant have dropped. Moreover, domestic US expansion has now slowed and though the number of outlets is still growing strongly in international markets, the strong dollar has contributed to disappointing forecasts for international operating growth.

Much of the recent criticism has been levelled at senior management. Chief executive Michael Quinlan is likely to have to choose between chief operating officer Jack Greenberg and company president Edward Rensi in any purge. The two executives are said to be quarreling and blaming each other's camp for the problems.

Omohundro says: 'Some streamlining of the company is likely to occur. It wouldn't surprise me to see some kind of significant restructuring of senior management.' The company has already announced new divisions, reporting to divisional presidents. The change will, the company says, enable managers to get closer to the market.

In the past, legendary McDonald's successes such as the Big Mac (1967), the Egg McMuffin (1971) and Chicken McNuggets (1982), were all invented by enterprising franchise owners. But in recent years a reliance on home-grown managers has isolated the company from the market. This, say analysts, may have led to the recent mishaps.

In 1992 the company launched McLean burgers, but these failed to tempt customers through the golden arches. Last year $100m was spent on marketing support for the introduction of the adult-oriented Arch Deluxe, but even that could not lift same-store sales nor the company's rating in food surveys.

Though franchisees, who own 85% of McDonald's outlets, overwhelming approved the Campaign 55 strategy, it was soon clear that some features, such as offering customers coupons for free sandwiches if orders failed to arrive within 55 seconds of being placed, were misguided.

If the disaster of Campaign 55 was merely a failure of marketing strategy, the substantive problem at McDonald's is that it has drifted from its core business of selling hamburgers. The real fear is that it is facing a problem that good marketing cannot overcome: that McDonald's products are simply not as good as the competition's.

While other fast-food outlets have concentrated on invoking perceptions of quality - by flame-grilling their burgers, for instance - McDonald's, wounded by the failure of Arch Deluxe, has resorted to discount pricing, fast service and feelgood advertising.

Some problems at McDonald's extend beyond the food itself. It allowed profitable movie tie-ins with Disney films The Lion King and Toy Story to go to Burger King in April a wildly popular Happy Meals promotion backfired: customers were throwing the food away and keeping the Teenie Beanie Baby toys that came with it.

It is not obvious how McDonald's can recapture its pre-eminence. With the collapse of Campaign 55, and the apparent lack of a strategy to replace it, the fast food giant with a brand recognition that has overtaken Coca-Cola is in need of some McMagic.