No retreat for Greenberg

Though McDonald's risk-taking CEO has handily survived a problem-plagued tenure, his future is riding on his drive to restore the fast-food giant to its past profitability.

The Chicago Tribune
August 26, 2001

No retreat for Greenberg
Though McDonald's risk-taking CEO has handily survived a problem-plagued tenure, his future is riding on his drive to restore the fast-food giant to its past profitability.

McDonald's Corp. Chairman Jack Greenberg won plaudits from the FBI last week for his help cracking a case of alleged fraud involving the hamburger chain's popular Monopoly game and other promotions.

The Feds praised Greenberg's determination to keep running a rigged game, putting his customers' faith to the test, until the evidence was in and the arrests were made.

The incident showed a penchant for risk-taking that has marked Greenberg's three-year tenure at the top of the Oak Brook-based giant.

Trouble is, most of the initiatives ushered in under Greenberg have yet to result in the corporate equivalent of a raid. And no one on Wall Street is nominating him for Corporate Citizen of the Year.

Sales in the U.S. and overseas, which exceed $40 billion, have stagnated, testing the patience of its famously loyal franchisees as well as investors. Three consecutive quarters of year-over-year profit declines - a first in its 36-year history as a public company - has left McDonald's stock as popular as the now-withdrawn Arch Deluxe burger. Since January 2000, shares are off 24 percent.

Although shareholders are restless, McDonald's board of directors says it stands behind Greenberg. Members said many of the company's woes, including slumping economies at home and abroad and the European panic over mad cow disease, not to mention last week's promotion scandal, are out of his hands.

"No question, the board has tremendous confidence in Jack. I think he's an outstanding leader," said director Donald Lubin.

Yet the spotlight is shining hot on Greenberg as he tries to navigate McDonald's. Sources say that naming a second-in-command to help Greenberg steady the ship is not out of the question, though the company says it has no plans to hire a chief operating officer.

Greenberg has not been afraid to make changes in the insular world of McDonald's since he became the fourth chief executive in its history.

He led the overhaul of McDonald's restaurant kitchens to address complaints about the taste of its food. He pressed forward with acquisitions of such restaurant chains as Boston Market and Donatos Pizza to appeal to consumers tired of burgers and fries. After decentralizing the organization three years ago and bringing in outsiders, he reorganized management ranks again last spring.

Still, Greenberg readily admits the company is not living up to expectations.

"We've got a great business model that's going through some difficulties right now," he says. "Mad cow and its effect on the business is dissipating. We're going to catch a break here somewhere, and things will start to improve. I'm very optimistic about our long-term future."

His candor under tough circumstances sets him apart from his predecessor, Michael Quinlan, who critics contend was aloof and uncommunicative.

That quality helped Greenberg, 58, soothe disenchanted U.S. franchisees who in the mid 1990s had objected to a new-store construction program that was eroding their profits.

Greenberg won more praise as McDonald's domestic same-store sales grew more than 3 percent in 1999, up from 1 percent the year before.

The enthusiasm was short-lived. U.S. same-store sales growth slowed last year to between 1 percent and 2 percent and is expected to be flat in 2001. Even restaurants in McDonald's west division, one of its bright spots operationally, are struggling. Franchisees there discussed a decline in sales and transaction counts during a recent meeting, according to an internal memo.

McDonald's isn't the only restaurant chain feeling the pinch. Layoffs and rising energy costs have forced families to curb their dining out, squeezing everyone from upscale restaurants like Morton's steakhouse to other fast-food outlets.

"We all have similar problems," said Larry Jaro, chairman and CEO of suburban Westchester-based AmeriKing Inc., the largest owner of Burger King franchises in the nation. "I don't think as many people have as much discretionary income."

Mad cow scare
International consumers also have lost their appetite for McDonald's hamburgers, but not just because of less money in their pockets. Europeans have avoided beef since last fall after some cattle in France were infected with mad cow disease.

The sharp decline in McDonald's European sales, which account for one-fourth of total sales, has been the primary reason behind the quarterly profit shortfalls and stock slide.

The European problems have renewed calls from investors to slow down international expansion. Several analysts would like the company to cut the number of new overseas units by one-third, to 800 to 900 restaurants a year, but McDonald's has not backed off its plans.

The disappointing sales trend at McDonald's, though, comes two years after U.S. franchisees each spent tens of thousands of dollars installing new kitchen equipment to make sandwiches in a radical new way. The new system, tagged "Made for You," delivers sandwiches to order, compared with the old way of building burger inventories in holding bins.

The goal? To offer consumers fresher food and variety while establishing a better springboard for new products—two major initiatives to grow same-store sales.

The new kitchens, according to McDonald's customer surveys and rival accounts, have delivered on their promise of fresher, better-tasting food. But they have taken the "quick" out of quick service by making customers wait longer.

"‘Made for You’ hasn't moved the needle that much," said Damon Brundage, an analyst at Raymond James & Associates Inc. "U.S. comparable-store sales and margins remain a bit weaker than management had perhaps hoped."

To fix the problems at the front end, individual units are moving toward a system where one employee takes the order and cash, while a second fills the order. That has forced some franchisees to add labor at a time when the supply of workers is tight and costs are escalating.

"Instead of having three people take cash and drawing drinks, now I have four," said Steven Ramirez, a franchisee who owns three stores in Southern California.

Menu expansion
Meanwhile, McDonald's still is trying to find the right mix when it comes to offering variety. This spring, in one of its biggest menu expansions ever, McDonald's launched its "New Tastes Menu"—a dedicated chunk of its menu board devoted to 40 new products that rotate in four at a time.

One of the latest innovations is a McGriddle breakfast sandwich, which layers a sausage patty in between two pancakes that are stuffed with syrup and butter chunks. It sells for $1.49 in selected markets.

New product development has become such a priority that the company, in a top-level marketing shake-up this year, gave its menu guru Tom Ryan oversight of U.S. marketing as well.

At the same time, however, the company is concerned that its menu is too big and has suggested, according to an internal report, eliminating some menu items and reducing the number of sizes of its fries and drinks.

But some franchisees are concerned that these moves won't go far enough to make restaurants easier to manage.

"There is a need to simplify things," said Fred del Barrio, a franchisee with seven stores in south Texas. "We can't keep our stockroom filled with things that don't sell."

Signaling a need to reinvigorate the domestic business, which accounts for half of all sales, Greenberg in May elevated the president of the west division, Michael Roberts, 50, to head the entire U.S. operation. Former McDonald's USA President Alan Feldman became co-president in charge of North America and
Latin America.

Roberts is well liked by franchisees and considered a strong leader and a risk-taker. Many of McDonald's bolder initiatives originated in his territory.

Pushing other brands
Among other management changes, Greenberg promoted general counsel Jeff Kindler to the newly created position of president of new brands, bringing new focus to the restaurant chains McDonald's has acquired since 1998.

Wall Street has paid little attention to the other five brands because they have had no meaningful impact on earnings. The brands combined to lose $41.5 million, or 2 cents a share, last year. Operating losses are expected to widen to more than $47 million in 2001, analysts said.

Still, proponents of the expansion strategy would like to see McDonald's aggressively open more of the other restaurants because they offer alternatives that the company can't offer under the Golden Arches. Most of the acquired chains, such as Boston Market and Chipotle, are in the fast-growing "quick casual" segment that provide limited service like the typical fast-food outlet, but the quality of the food and prices are more like sit-down restaurants.

Yet McDonald's has opened only about 100 Chipotle restaurants since acquiring a majority interest in the Mexican grills in 1999. Meanwhile, the company added 175 McDonald's in the crowded U.S. hamburger market last year alone.

"It tells you that any sort of acquisition-driven growth strategy is not likely to have an impact for the next several years," Brundage said.

McDonald's board contends it is satisfied with the pace of the growth of the other concepts.

"We've seen companies that have a little idea and small concept significantly increase in size quickly and then find that it didn't work," Lubin said. "He's doing the right thing being cautious."

Kindler has started road shows with groups of franchisees to update the status of the other brands. Franchisees want to know more, del Barrio said.

Franchisees are asking, "How's it going to affect me?" he said. "Are they going to get more attention? Are they going to be loved more?"

But Greenberg says he is not moving away from the McDonald's brand. He has set the ambitious goal to double McDonald's U.S. sales within 10 years. One of his ideas is to add concepts like a cafe or a diner to existing restaurants—formats in test. He also has hooked up with outside consultants, including Chicago-based restaurant firm Lettuce Entertain You, to explore other opportunities.

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