As the quintessential fast-feeder, the biggest burger chain faced the brunt of criticism and legal battles for the worldwide obesity epidemic--and the strain showed in its stock price.
In 2000, McDonald's shares were priced at nearly $50. But by December 2002, when the company announced it would bring Jim Cantalupo, former international president, out of retirement to replace then Chairman-CEO Jack Greenberg, shares had fallen to just over $16. Observers began to whisper about who might try to take over the burger behemoth in search of a lucrative real estate play. At its lowest point, the chain's market value had dropped by nearly two-thirds.
Today, McDonald's is a changed company with a new relationship with its customers. Year-to-date through November, systemwide sales were up 7.9% worldwide and same-store sales were up 7.1% world- wide. For the first time in 30 years, in September McDonald's posted double-digit same-store sales gains for two consecutive year-over-year periods. Through September, company margins were up 15.4%, 100 basis points over the same period the year before.
Even more telling, the halo effect of its turnaround is now driving growth for the entire quick-service restaurant category--and competitors are struggling to match or best McDonald's gains.
Admittedly, the chain didn't climb out of its hole unaided. A strong economy helped, as well as the fact that archrival Burger King Corp. was mired in its own problems. But a substantial amount of credit must go to its revitalized menu, strategic "Plan to Win," and willingness to shatter its marketing tradition. Along the way, McDonald's has migrated from dependence on TV to a broad tapestry of media, from scores of potentially conflicting messages to a unified voice and from intrusion to engagement. The marketing follower has become a marketing leader.
"Clearly, the turnaround has been based on better marketing, better products and better operations, and obviously the products and marketing are somewhat linked and operations are a result of a lot of hard work and blocking and tackling," says Andy Barish, restaurant analyst for Banc of America Securities, which has an investment banking relationship with the fast-feeder. "I would say the old McDonald's would have had a very tough time highlighting a massive brand change with the `I'm Lovin' It' campaign."
`An amazing year'
"It's certainly been an amazing and gratifying year, seeing our entire McDonald's system mobilize very successfully behind a powerful, fun and relevant brand strategy," says former Chairman-CEO Charlie Bell. "We're lovin' it!"
What makes its feat all the more amazing is that McDonald's hasn't faltered in the face of adversity. Its key turnaround architect Mr. Cantalupo suffered a fatal heart attack at last April's worldwide franchisee convention. His successor and protege, Mr. Bell, learned he had colorectal cancer just weeks after being handed the corporate reins and resigned last month to battle his disease full time.
Externally, the chain suffered a massive public relations blow as independent filmmaker Morgan Spurlock released his docu-diary "Super Size Me," a 30-day journey in which he only ate McDonald's fare and encountered health problems. The film became something of a marketing juggernaut of its own.
"It could have been a disaster, all of those things," says Al Golin, chairman of Interpublic Group of Cos.' Golin/Harris International, McDonald's public relations agency for 40 years. "People really believe in McDonald's. They feel a kinship to the company. It's an interesting phenomenon."
In January 2003, as Mr. Cantalupo officially took the helm with Mr. Bell as his president-chief operating officer, McDonald's posted its first quarterly loss since going public in 1965. By the end of his first three months in charge, shares had fallen to $11.97. In about a year, more than $20 billion in market capitalization leached from the company's value. The Golden Arches remained at the bottom of the heap in the University of Michigan's fast-food customer satisfaction ratings.
Mr. Cantalupo set about to make change. Focused on the dual charge of operational excellence and marketing leadership, he undertook a top-to-bottom appraisal, shedding programs, businesses and even people who didn't fit into the mission of making the once-hip burger giant America's favorite place to eat.
Brass at the Oak Brook, Ill.-based company built the "Plan to Win" that adapted the fabled four P's of marketing (price, promotion, place, product) by adding a fifth P: "people." At the time, Mr. Cantalupo said "everything was on the table."
When Mr. Cantalupo met with Exec VP-Chief Global Marketing Officer Larry Light for the first time, the marketing executive told the CEO the chain had been losing customers at a rate of 1% to 2% per year. "I presented him with the simple fact that we had lost 10% of our customer base," Mr. Light says.
To stem the losses, Mr. Light suggested McDonald's focus on getting its loyal customers to come more often before attempting to win new customers. "Our No. 1 priority was to change `likers' into `lovers,' " says Mr. Light, adding, "We have 46 million customers, so Step 1 was to get them to favor us again." Mr. Cantalupo agreed and gave Mr. Light carte blanche organizationally and financially.
The "Plan to Win" stratagem laid out not only the direction for every step the company would take in the next three years, but also demanded a new creed from every employee, partner, vendor and franchisee: a winning attitude.
Mr. Light viewed his job as a brand evangelist as much as marketer. "I asked franchisees and store managers to help me write my job description, and the No. 1 task was to make us proud again," he says. "No. 2 was provide clear leadership ... that's why we called it `Leadership Marketing.' "
From there McDonald's set out to make what many considered a dubious shift. After decades of seeking to avoid becoming a teen hangout, the Golden Arches reset its target sweet spot on 18-to-24-year-olds. "Fred Turner [former senior chairman-CEO] told me [it] was the most radical change in the history of McDonald's," says Mr. Light.
The leaders agreed to target young adults and young moms and kids with the notion of making McDonald's "Forever Young," as spelled out in Mr. Light's address at a global McDonald summit in February 2003.
That splitting of the target fostered a new approach. "We decided one target audience was limiting our brand and you could have one brand with multiple target audiences," Mr. Light says, noting, "I had a lot of flexibility and support. Jim and Charlie [allowed] some changes that were radical, and we changed our marketing strategy to focus on these target audiences."
The new focus created an aspirational platform for change that cascaded through every aspect of the company including its training program, store designs and packaging.
This extended to synchronizing the operations and marketing teams as equal partners as the business drivers, executives say. The U.S. had already moved responsibility for its menu development into marketing, but the now-famous February 2003 summit was the moment of truth. Mr. Bell asserted that operations and marketing were going to work together. "That was a galvanizing moment," says Dick Rogers, president of DDB North America. "At the time, it was a small thing, but the stake was put into the ground."
Constant reinforcement from the top was the binding ingredient in McDonald's recipe for success. It percolated through the "Plan to Win" strategy, with "Forever Young" as the brand direction, "I'm Lovin' It" as the brand attitude and "Rolling Energy" as the embodiment of the three-year plan, executives say.
"A lot of it is more mundane things like work style," says Jackie Woodward, VP-global brand business. "Today we discuss and celebrate our commonalities; we used to discuss our differences."
"What [Mr. Cantalupo] did was focus and discipline," says Bill Lamar, senior VP-McDonald's U.S. marketing. "He helped us either frame ideas that we had been having and prioritized them, or helped us eliminate ones that didn't fit within the frameworks," he says. "I know he loved the idea we were going to focus on key customer groups. One of his geniuses was that focus could be inclusive as opposed to exclusive."
Management greenlighted Mr. Light's ambitious plan to centralize marketing around a single global voice that could be customized by country, region, customer and occasion.
"We had one common plan to win for all 119 countries with the same measures of success. To speak to customers in one voice in local markets and around the world would have been an insane thought [before]," says Dean Barrett, senior VP-global brand business.
McDonald's set a global competition among ad agencies guided by its "freedom within a framework" that allowed any agency partner to submit ideas from anywhere in the world.
What resulted was the "I'm Lovin' It" campaign from DDB Worldwide-aligned Heye & Partner, Unterhaching, Germany.
Regional agencies were then asked to develop campaigns from the "I'm Lovin' It" style template using the controversial "Brand Journalism" to tell brand stories from myriad customers' point of view.
"We believe this campaign is a modern expression of how to do advertising," says Marlena Peleo-Lazar, McDonald's chief creative officer. They changed creative briefs into "brand journals," written like a magazine article to incorporate a first-person perspective.
"We crafted them as though we're going to write the next chapter in McDonald's brand history," she says. "Instead of saying who the target is, we write it as though [the customer was] writing her own story about what she's looking for. ... It's made all of us think very differently in how we approach the work."
One of the mantras repeated by Mc-staffers in the last two years has been "alignment." Consumers once might have seen two very different McDonald's on TV between a local and national campaign, Mr. Lamar says. Today you won't know the difference between a message that's national or a message that comes from a local co-op.
Not that such alignment came easily. Bob Scarpelli, chairman of the Chicago office and U.S. chief creative officer of Omnicom's DDB Worldwide, recalls a June '03 agency summit where Mr. Bell issued an ultimatum for unity.
"`Lead or get out of the way' was sort of the message, and that was atypical for McDonald's," Mr. Scarpelli says. "Not everybody was sure what `freedom within a framework' meant. Once it started to be demonstrated ... that you can take the idea this way or that way, you started to see that there was freedom for what you thought was best in your market as long as it stayed in the parameters of the idea. It was a new way of thinking about it."
Cheryl Berman, chairman-chief creative officer at Publicis Groupe's Leo Burnett USA, describes one defining moment as Mr. Light presenting the "I'm Lovin' It" campaign and then saying, "We are going to do this and here's the framework, and figure it out and succeed," she says. "It was challenging but very refreshing and very empowering."
Mr. Light says that when Mr. Bell laid down the gauntlet, it "was a very carefully produced theatrical experience, and thank God it was successful." The upshot: Management wouldn't listen to arguments about whether "Plan to Win" would work; what it wanted to hear was how "Plan to Win" was going to work.
That included media planning and buying. McDonald's used its customer focus to embrace media fragmentation. More than a year ago, Mr. Lamar told American Association of Advertising Agencies' delegates that mass media would account for much less of the ad budget and digital media would gain.
Today, McDonald's non-traditional media spending has doubled to 20%-30% of the allocation, says Peter Sterling, VP-U.S. marketing in charge of media. "Clearly, we've taken our communications expenditures and balanced the need from broad appeal to much more targeted efforts," he says. "The dialogue we've been having is about relevance. The media environment is as important, if not more [important], than the message itself. "
For example, the Sony Connect music promotion used a large portion of McDonald's advertising in digital media to take advantage of where downloading consumers spend their time.
placement success spotty
Mr. Sterling says he's "a big fan" of product integration, despite the spotty success rates of reality programs and content/commerce ventures, and has been working with Omnicom media agency OMD and Creative Artists Agency to hunt for integration opportunities.
While he admits that reality shows are the easiest and quickest to negotiate, the best opportunities are a hybrid of scripted and reality content. Each effort was designed to build momentum over three years. So far, it's worked for McDonald's. Now, the chain is facing its toughest test as it endures yet another regime change, inheriting the game plan Messrs. Cantalupo and Bell set in motion.
Mr. Light and Matthew Paull, senior exec VP-chief financial officer, are confident, calling on top MBA schools to spread the word of their marketing-driven turnaround.
Despite its billions served and its $1.6 billion media budget, McDonald's hasn't been considered a world-class marketer, nor had it ever recruited talent from the graduate schools since McDonald's was a from-the-ground-up kind of business, says Mr. Light. But after helping engineer one of the most spectacular corporate turnarounds ever, Messrs. Light and Paull have begun a mission to pass along to future business leaders the story of McDonald's "Leadership Marketing efforts."
Yet, as Messrs. Light and Paull evangelize the good news of "Plan to Win," they can't expect instant awe from the experts, including those at business schools. "From a marketing perspective, there have been a lot of sensible initiatives, all of which put together make a good story, although it may be premature in assessing the long-term impact," says John A. Quelch, professor of global business at Harvard Business School.
"At some point the law of large numbers is going to catch up and they will slow down, but that doesn't mean they'll go negative," says Banc of America's Mr. Barish. "I still think they'll be positive, but a more normalized 2%-3% [comparative] increase is what I'd expect for the next year in the U.S."
Adds Mr. Quelch: "Even in the fast-paced world of modern marketing, two years of success does not make history. Two more years [of success] and that would be a serious achievement."
Still, Mickey D's eye is on the future. "We had a meeting last week about how to increase the energy and what is the next-generation execution of `I'm Lovin' It,' " says Mr. Light. "You always focus on how to accelerate momentum, not how to maintain it."
Recent Marketers of the Year:
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Note: Since Advertising Age began naming an annual Marketer of the Year in 1971, McDonald's has been honored once before in 1989, when it was named Marketer of the Decade. In choosing Marketer of the Year, Ad Age weighed a number of criteria, including a company's business performance, strong leadership, advertising creative and marketing effectiveness.