The sad state of the Happy Meal

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Happy Meals are giving McDonald's the blues.

"We are beginning to see a softening in our key drivers: drive-thru and kids," McDonald's Corp. warned in an internal memo sent by regional marketing executives to owner-operators in their area. "Happy Meals have declined in the drive-thru and front counter."

Economic worries, fickle customers and changing demographics are stunting growth in kids' meals-a category the burger behemoth single-handedly built and owned for decades. As a result, the chain-which two weeks ago issued its third-consecutive profit warning-is considering several strategic kids' initiatives to spark a growth spurt.

The June 1 internal memo, a copy of which was obtained by Advertising Age, was sent to local franchisees to update them on McDonald's 2002 plan that was presented to its national owner-operator group, known as OPNAD, in late May. The goal is to spur sales in a restaurant category slowdown at its worst level since the 1970s energy crisis.

"Customers want a better fast food experience and they are not recognizing any points of difference between the [quick-service restaurant] brands," the memo continued. Traffic has been a weak spot, with customer counts down 2.6%, "primarily the result of [quality, service and cleanliness] issues." One remedy the chain is planning is a midyear effort to "shift our focus from Adult QSR to branding of the Quick & Easy occasion," according to the memo. Executives close to the company interpret that declaration as a "full-on" push toward improving drive-thru vs. eat-in sales.

According to NPD Group, 37% of all kids' meals were ordered from a car in 2000, up from 31% in 1993. "Parents aren't going to stand in line with kids. It's a bad experience, especially when kids take off into the playground while mom is in line," said Dick Adams, a former McDonald's operator and franchisee consultant.

The fact that Happy Meal sales are growing at a slower rate than in the past is consistent with national trends. "On average the annual growth rate [of kids' meal consumption in restaurants] was running between 5% and 8% but last year it was 1% to 2%," said Harry Balzer, VP, NPD Group, which tracks sales patterns in numerous retail categories.

Competitors are also giving the chain a run for McTykes. Diageo's Burger King Corp. is aggressively targeting kids and will launch a new branding effort for its Big Kids meals later this summer; Wendy's International has been winning higher profile tie-ins such as "The Grinch Who Stole Christmas;" and Subway Restaurants has become more active in kids' meals. Earlier this year, McDonald's launched its own Mighty Kids Meal targeted at kids ages 8 to 10.

Brian Gies, director-youth and family marketing, Burger King, said, "Kids are a fickle bunch and we're trying to seed loyalty so we can avoid the `flavor of the month' behavior." He added that investment means more than money-it also means innovation in food and marketing partners. The chain introduced wild-colored food items to better appeal to kids and it will launch this week a summer tie-in called "Action Stunt All-Stars," including TV spots featuring Dave Mirra, the most-decorated BMX All-Star. The promotion will also include miniature bikes, skateboards and other toys. Interpublic Group of Cos.' Campbell Mithun, Minneapolis, is Burger King's kids' agency.

Undaunted, McDonald's has set a 2002 comparable-store sales growth goal of 4% to 5%, and the company intends to achieve this by focusing on what has been driving kids' meal and drive-thru sales: ethnic consumers and convenience. Hispanic consumers buy more Happy Meals than general-market or African American consumers, according to the memo. The memo says the chain will target these groups with Happy Meal advertising, the quarterly McMoms newsletter and new menu items.

Media spending will be boosted 5% in 2002 toward Happy Meals and Mighty Kids in both the general and multicultural market. Bcom3 Group's Leo Burnett USA, Chicago, is McDonald's general-market agency for kids; Del Rivero, Messianu, Miami, is the fast-feeder's Hispanic shop; and Publicis Groupe's Burrell Communications, Chicago, is McDonald's African-American agency.

"McDonald's is typically strong among Hispanic consumers because kids are an important member of the dining party, more so than in general-market consumers," said Bob Sandelman, president of restaurant researcher Sandelman & Associates. He said Hispanic families are also more likely to eat with others in the restaurant as a "dining occasion vs. a fuel stop," as general-market consumers do.

While McDonald's wouldn't comment on its specific tactics, a spokesman acknowledged the company is reacting to the changing kids' market. "When you're the leader in an area like we are you adapt with the change and you work hard at developing new ways to reach kids," he said.

Walt Disney Co. will continue to drive much of the marketing calendar for McDonald's, including tie-ins with "Lilo & Stitch" and "Treasure Planet." The relationship appears to be paying off. "Disney Happy Meals posted 3.5% percentage points [growth] better on average than non-Disney meals," said the memo.

But the magical lure of Beanie Babies has proved too powerful to ignore. After taking the tiny plush toys off this year's calendar, they will return in 2002. "When you hold the top slot in all-time Happy Meal performance, of course we're going to look at ways to utilize that property," said the McDonald's spokesman.

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