Tarnish on those golden arches McDonald's gets taste of grown-up reality: a U.S. sales slump

February 23, 1997|By Rick Nichols | Rick Nichols,KNIGHT-RIDDER NEWS SERVICE

When Mickey D's grew up -- it was pushing 50 last year -- it put away childish things.

Big mistake.

The mighty Arch Deluxe, "the burger with the grown-up taste," didn't alter an embarrassing new reality for McDonald's -- the sales slump.

Children had long driven the which-burger-stand-tonight decision.

The Arch Deluxe, behind $200 million in promotion, was supposed to get baby boomers deciding for themselves -- and heading in droves toward the golden arches.

But for the past six quarters, sales in U.S. stores have stayed unbudgingly flat -- or dropped.

Now 115 smaller, low-volume satellite outlets -- 9 percent of the total -- in Chevron stations and Wal-Marts and on campuses are being shuttered.

And all the while, Wendy's and Burger King have been sitting pretty, experiencing good sales growth with "their" core audience: adults.

"Arch Deluxe was a good try, but a lousy sandwich," said Mitchell Pinheiro, who follows restaurants for Janny, Montgomery, Scott, the investment broker.

"I hate to say this, but is this the best McDonald's can do?"

John Stanton, a food-marketing professor at St. Joseph's University, ventures a different thesis.

"They broke their own rule," he said: " 'Don't worry about %J product.' "

Not about food

Food, Stanton says, was never the draw: It was convenience, consistency, marketing magic -- a spokes-clown, for goodness' sake.

Some franchisees have reported that the Arch Deluxe -- priced at $2.49 to pick up the losses the chain suffered from discounting the Big Mac -- has upped the average check.

Some report that it has done so, but only by eating into the sales of other menu items.

Some say expectations were too high. "I don't know that it was ever going to drive us into the 23rd century," said Jeff Weinberg, who owns eight Philadelphia-area McDonald's restaurants, where he says the Arch Deluxe -- and business in general -- is just fine.

Profits over there

Whatever the case, today the humbled emblem of American marketing know-how is leaning heavily on overseas sales to keep the bottom line healthy.

Current profit from "outside" the United States? Fifty-nine percent.

Fact: 70 percent of its new-store openings this year will be not here, but over there.

"They went away from the kids," said one industry-watcher. "They owned the kids lock, stock and barrel."

McDonald's concedes it's distressed by the slump in U.S. sales -- while emphasizing that global business is going gangbusters -- "on auto pilot," according to one broker.

It blames tough domestic competition, a crowded market, missteps in trying to expand too fast and a lack of marketing focus for the downturn.

Last fall, former board vice chairman Jack Greenburg was appointed to head a U.S. turnaround, giving heart to the investment community.

Disney to the rescue

But an even bigger name has been called to the rescue -- Walt Disney.

McDonald's was stung when Burger King made a grab for its youngsters with "Lion King" and "Toy Story" Disney tie-ins, giveaway toys tied to big-release movies.

Now McDonald's has done a $1 billion deal to reclaim exclusive rights to Disney toys (to give away with Happy Meals), theme-park outlets and other promotions.

For the next 10 years.

Just seven months after the potato-bun, adults-only Arch Deluxe was heralded as "the start of a whole new era," the same corporate voices declared the Disney deal the new marketing "centerpiece" of Mickey D's.

It was a new era, indeed.

The kids were back in the driver's seat.

Shifting landscape

Things didn't deteriorate for McDonald's in a snap. "These guys didn't become dummies overnight," said Jeff Omohundro, an analyst bullish on the company's long-term prospects.

But the landscape shifted quickly and dangerously a few years ago in the hamburger world.

When the upstart burger chains promised quicker and cheaper and double drive-throughs, McDonald's found itself having to slash prices, even on the signature Big Mac.

Then last April it went on a tear for market share. The pace was brutal: nine new store openings a day. (Say good night, Hardee's.)

Finally, it rolled out the hammer: the Arch Deluxe, the Big Bertha that would halt inroads in the adult market that Burger King and Wendy's were continuing to make with tastier burgers.

But the discounting, building binge and adult-targeting had costs of their own. And the suburban Chicago-based corporation hasn't denied it.

"No, we're not satisfied with U.S. sales," said McDonald's senior vice president Dick Starmann. "We're going to target better, get smarter."

That means slow down the pace of U.S. openings, for one thing; focus on getting sales up at existing restaurants, for another.

New pricing strategies -- aimed at getting average checks up -- are in the works, as well as food-taste gimmicks. Maybe the return, even, of the toasted bun.

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