Former Industry Leader Now Struggles to Catch Up

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CHICAGO ( -- The "radical" plan to reverse McDonald's Corp.'s sales decline turns out
Photo: Hoag Levins
But the new programs may lag behind those of Wendy's International and Burger King Corp.
to be, well, not so revolutionary.

Chairman-CEO Jack Greenberg, U.S. President Mike Roberts and Bill Lamar, the new senior vice president of U.S. marketing, met last week with 350 top franchisees in Las Vegas.

$1 billion plan
The purpose: To rally them around a turnaround plan that includes a $1 billion remodeling and rebuilding program to be completed by 2004, a national value menu to hit stores by next month and a $40 million increase in national franchisee advertising.

The plan is "bolder and more decisive compared to the normal McDonald's," said one attendee of the Vegas meeting.

But in the larger competitive landscape, the accelerated program lags behind Wendy's International and Burger King Corp.

'Playing catch-up'
"I don't think it's anything radical. They're still playing catch-up," admitted the attendee. "It's not taking the leadership role we need to take. It's parity at best."

After years of leading the industry in innovation as well as market share, McDonald's has recently been a me-too player as competitors set the pace.

Mr. Lamar made his debut as the U.S. marketing chief, outlining an under-a-buck menu to include eight permanent items offered systemwide, making it the chain's first such national discount program. Four local menu options will also be available beginning in January. By comparison, Wendy's

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has had a national value menu for a dozen years. McDonald's won't eliminate local discounting efforts like the 29- and 39-cent "Outrageous Value" or similar programs, but the national program is aimed at reducing the confusion created by multiple concurrent efforts where McDonald's has numerous stores, like on the coasts.

Ad money for franchisees
For its part, corporate is adding $40 million to the national franchisee advertising program, or OPNAD, to fund media and production costs for the national value program over the next six months. Omnicom Group's DDB Worldwide, Chicago, is said to be handling the value advertising.

To further induce franchisees skittish at buying into the value program for fear of losing money, McDonald's plans to reimburse up to 30% of franchisee decreases in gross profits as a form of "downside protection." For example, the Big 'N Tasty burger will be a centerpiece of the value menu; it costs 48 cents to make the 99-cent sandwich, making it a money loser, said one executive with knowledge of the plan, which would help defray those types of losses.

Remodling costs
McDonald's presented a $1 billion program to rebuild or remodel roughly 7,000 units over 15 years old using a less complex financing program than past efforts. McDonald's will contribute 30% of up to $150,000 in "cosmetic" remodeling costs. But there is a catch. For franchisees to get the corporate funding, they have to approve the program as a whole, including the discount menu.

A spokesman for the burger giant, however, said the new U.S. business plan, "with its key focus on value for the customer," includes "a case-by-case restaurant review process that can best determine what reinvestments could be made ... at a specific restaurant. Any potential corporate assistance, whether it is upgrading service, signage, technology, decor or anything else, will be made on this case-by-case basis. Therefore, it would be absolutely wrong to speculate about or invent a specific reinvestment number."

He said it was "inappropriate" to comment further.

"Nobody wants to discount, but when the company gets into a panic over same-store sales, they turn to discounting," said Dick Adams, a former McDonald's operator turned franchisee, after hearing the plan.

Power struggle
Therein lays the power struggle and the need for well-honed political skills. Franchisees don't measure success on same-store sales. Rather, they're more profit-oriented, while corporate relies on same-store sales to have topline increases to please shareholders.

McDonald's has been plagued by flat to declining store-over-store comparisons despite promises earlier this year to deliver more robust results.

In a report responding to news of the meeting, Janice Meyer, restaurant analyst for Credit Suisse First Boston, said if the company is giving back money to franchisees to reinvest, it would be a positive move.

Yet she questioned whether it would work because despite McDonald's size and strength, "it always looked for the easy answers, never making the hard choices." She added, "Improving operations, marketing, are critical to improving the U.S. And if the company is now putting some financial muscle behind those actions, it might hurt in the short run but help in the long run."

She retained a neutral rating on the stock because "one thing we do know is that business remains soft."

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