Story talks about McD's revival from the low point of 2002.
McDonald's went 24/7 in Garner in April, 2005, after a push by corporate headquarters to boost profits by extending store hours. Franchisee Fred Huebner had doubts at first. He doesn't anymore. By catering to the area's night owls and early birds on U.S. Highway 70, Huebner, who put on his first McDonald's uniform almost 35 years ago, figures he has increased his restaurant's revenue by 4.5%, or $90,000, over a year. "There are so many customers out there all times of the day," he says. "We have to be out there, too."
The all-hours offensive reflects a strategic shift at McDonald's. For most of its history, growth meant one thing: more locations. And until the late 1990s it worked. Like a juggernaut, McDonald's rolled over the competition and across the nation, opening hundreds of outlets each year and cranking out a run of hit products. Then the company reached a saturation point. While overall revenue kept climbing, the new sites stole customers from existing locations. Margins and same-store sales slid into 2002, reflecting diminishing returns on the $1.2 billion a year that the company was plowing into new restaurants during this period. By spending so much time on real estate, recalls James Skinner, a 35-year veteran who was promoted to chief executive in late 2004, "we had lost our focus. We had taken our eyes off the fries."
Today the mantra is "better, not just bigger." Instead of building more restaurants, McDonald's is increasing its financial results by squeezing more from the ones it has. The new focus has forced it to rethink every element of its business, from product development and marketing to restaurant design and technology. In the process, McDonald's, which seemed out of touch with consumers just a few years ago, has attempted to realign itself with contemporary tastes.
Despite the competition, McDonald's is, at the moment, triumphant. After posting its first-ever quarterly loss in 2002, it has logged 45 consecutive months of U.S. sales increases, including a 6.9% pop in December. It now commands nearly half the U.S. hamburger market—three times more than either Wendy's or Burger King—and has such a lead that even its fastest-growing rivals may never catch up. McDonald's share price, up 25% in the last year, is trading at a seven-year high of nearly $45. John Glass, a restaurant analyst with CIBC Worldwide, sees only further gains from McDonald's new strategy. "People's days are longer," he notes. "So are McDonald's restaurant hours. This is a natural evolution to capture more business."
Thanks to icons like the McMuffin and the McGriddle — a pork patty between two syrup-infused pancakes introduced in 2003 — McDonald's dominates mornings. It owns a quarter of the $25 billion market for fast-food breakfast. In fact, morning is now the most important part of the day for McDonald's in the U.S., accounting for a quarter of domestic revenue and nearly half of profits. Those numbers roughly approximate the breakdown in Garner, a fairly typical store, where breakfast accounts for 30% of the store's $2.5 million in annual sales. Lunch is 24%, afternoon 15%, dinner 15%, and overnight 16%. The single hour that generates the most revenue annually at the store, about $200,000, is the traditional lunch period, from noon to 1 p.m.
For all of its success at breakfast, management is confident that there's still plenty of room to grow in the morning. Why? Because it is still the meal that people in the U.S. are least likely to eat away from home. For every restaurant breakfast, the typical American orders 2.5 lunches and nearly 2 dinners, according to NPD Group. And new products attract new business. Since McDonald's rolled out a darker and stronger coffee last March, same-store sales at breakfast have increased 7.5% in the U.S., on a pace with Starbucks. To build on this momentum, the company is testing two more breakfast items: a Southern-style fried chicken biscuit and Newman's Own iced coffee.
A bigger breakthrough may come out of the company's experimental restaurant in Romeoville, Ill. Today the standard McDonald's kitchen has room for one built-in grill. As a result, restaurants have to stop serving breakfast in the late morning so crews can begin sizzling up burgers for the rest of the day. The company is working on a potential solution to this conundrum: a portable electric unit that would permit kitchens to serve breakfast all day long.
One reason McDonald's is creating crowd-pleasers again is that it has become much more rigorous in product development. New ideas are generated in the company's food studio in Oak Brook by a staff of three dozen chefs, food technicians, and market researchers. Potential new products get tried out first in one market for six weeks. The company doesn't just assess sales. It also monitors costs and margins and judges how easy a new product is to prepare by a crew that is constantly changing. (The annual turnover among cooking crews companywide exceeds 100%, although it is about 70% for the Huebners.) If the concept passes muster, McDonald's expands its test cell to 800 to 1,000 restaurants in four to six markets.
Skinner and others say this wasn't standard operating procedure before the company embarked on its comeback in 2003. Back then the company was in all-out expansion mode, opening outlets somewhere in the world at the rate of one every 4 1/2 hours. Ralph Alvarez, 51, McDonald's president and chief operating officer, recalls spending six to seven days of his 20-workday month on real estate. That left scant time for things like consumer research. Little surprise that many new products bombed. Case in point: the McShaker salad. Introduced in 1999, it came in a large plastic cup designed to fit a car's cupholder. Problem: Nobody could figure out how to eat a salad while driving. "We were more willy-nilly then," says Skinner. "The attitude was, we'll make it and they'll buy it."
Today the company is adding just 50 to 100 sites a year in the U.S. The shift has freed up billions of dollars in capital, which has enabled McDonald's to quadruple its dividend to $1.2 billion over the past four years, ramp up its share buybacks, and hand out generous subsidies to its 2,400 franchisees to refurbish their stores. Since 2003 the chain has remodeled more than 3,000 sites. Now it plans to convert every location over the next 20 years from its 1980s mansard roof design to a more upscale exterior of earth-red brick and glass accented by a yellow swoosh at the roofline. These new stores could cost up to $1.5 million apiece to build. To help franchisees, the company has agreed to chip in as much as $600,000 per site.