Restaurant Closings Expected; Chain to Keep Dollar Menu

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CHICAGO ( -- McDonald's today posted its first quarterly loss since going public in 1965 and said double-digit earnings growth was "no longer realistic."

The Oak Brook, Ill.-based fast-food giant reported a 45% drop in net income to $893.5 million, or a 27 cent per share loss for the quarter ended Dec. 31. Built into the loss was $810.2 million in restructuring charges, store closings and a technology write-off. For the same quarter in 2001, McDonald's posted earnings of $1.6 billion, or 21 cents per share.

In a call with analysts, the company said it would close 719 restaurants, of which 202 have already closed, mostly in the U.S. and Japan, including 68 "underperforming" franchisees, who owned 160 restaurants in the U.S., executives said.

Expand fresh-Mex chain
The executives said the burger

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chain would look to focus expanding its Chipotle chain of fresh-Mexican restaurants under its Partner Brands division, which also includes Donato's and Boston Market.

Despite McDonald's admission that its new Dollar Menu -- particularly the Big 'n Tasty lettuce and tomato burger -- has cannibalized sales of its signature items, executives said they believe the discounted menu still is a good strategy.

"One of our issues is that the [value] difference in the Big 'n Tasty and signature sandwiches is not as great as the price difference [between them]," said Matthew Paull, McDonald's chief financial officer. "We're not excited about that, but some segments of the customer population are driven by value."

Happy Meal revival?
Meanwhile, the company is planning to push full-priced entree salads in March and McGriddle meat-stuffed pancakes in June. Although executives offered no specifics about how the chain will revive domestic Happy Meal sales, they said they would watch how new children's menu programs were working in the U.K. and Germany.

Earlier this week, McDonald's said it would try to renegotiate its 10-year Walt Disney Co. alliance, of which it still has four years to go. Many of its Happy Meals are tied to Disney properties.

Chairman-CEO Jim Cantalupo again defended the existing "meal occasion" business model and his resistance to join the bandwagon of restaurants using co-branding. Co-branding, or combining multiple concepts under one roof, has been embraced by rivals Yum Brands, Allied Domecq Restaurants and Jack in the Box.

"I am not a big fan of co-branding in terms of diluting a great brand like McDonald's," Mr. Cantalupo said. "It blurs the consumer offering." He said McDonald's may sell products that "evolve out of the" Partner Brand concepts, which he said the company would bring to light in the near future.

"I think you'll see us keep our brands separate for much longer time with respect to other partner brands," echoed Mr. Paull. "We haven't seen consistent, uniform unit economics."

Broader strategy
"We are part of a much broader meal occasion strategy," Mr. Cantalupo said. "Besides making acquisitions, there are very few things that make a difference by themselves. The intent was to add a few points to growth rate, but the majority of growth is going to come from McDonald's." He added that of the $400 billion food service industry, McDonald's only captures $20 billion.

"There's a lot of meal occasions that I think fit under the Arches, and we're organizing ourselves to go after that," he said.

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