McDonald's sees bright future in less growth, more $1 meals

CEO says he's optimistic about ending 2-year slide

October 27, 2002|By BLOOMBERG NEWS

NEW YORK - McDonald's Corp. Chief Executive Officer Jack Greenberg says he knows how to halt a two-year profit slide at the world's largest hamburger chain: curb expansion, spruce up restaurants and sell more $1 sandwiches.

"We are very confident in the future," Greenberg said recently at the opening of a Times Square outlet that featured dancers from the Broadway show 42nd Street and mascot Ronald McDonald as master of ceremonies.

Investors are less optimistic about Greenberg's plan to bolster sales and profit by spending as much as $400 million on renovations and including celebrities such as Donald Trump in advertisements.

McDonald's shares tumbled to a seven-year low when the proposals were announced last month, and investors are saying Greenberg has to show results soon or risk being replaced.

`Give him a year'

"We give him a year, and then we'd hope there would be enough people like us who would be so disappointed that the board would feel the pressure," said Jean-Marie Eveillard, who helps manage $3.5 billion at Arnhold & S. Bleichroeder Inc., including 1.4 million McDonald's shares.

McDonald's third-quarter profit fell 11 percent to $486.7 million, or 38 cents a share, from $545.5 million, or 42 cents a share, a year earlier, McDonald's reported last week. It was the seventh decline in the last eight quarters.

Greenberg's plan to invest in U.S. restaurants is his latest step that doesn't go far enough to address concerns about food quality and poor customer service at McDonald's 13,000 restaurants in the U.S., investors said.

"I don't know what will turn it around," said William Cottrell of the Ohio State Teachers Retirement System, which owns 2.5 million McDonald's shares and manages about $46 billion. "Clearly, he doesn't seem to be the guy to do it."

McDonald's customized "Made for You" cooking system lengthened lines, new salads failed to boost sales the way rival Wendy's International Inc.'s Garden Sensations line did, and the planned switch to more-healthful cooking oils received more ridicule than applause.

The Standard & Poor's 500 Restaurants Index, which includes McDonald's, fell 26 percent in the quarter. McDonald's shares are near their lowest level since September 1995.

McDonald's might need to go outside the company for someone who will generate more-extensive changes while capitalizing better on its worldwide brand identity, investors said.

Greenberg, 60, a former accountant who has been with the company for 20 years, is McDonald's fifth chief executive since its founding in 1955. Greenberg declined to be interviewed.

In a filing with the Securities and Exchange Commission in March, McDonald's said Greenberg had been asked by the board to commit to at least three more years. His salary and bonus fell 5.2 percent to $2.83 million last year, though he received options for shares valued at about $21 million.

The mad-cow effect

McDonald's has been hurt by challenges that are out of Greenberg's control, such as fear of mad-cow disease in Europe. The market share of hamburger chains among fast-food restaurants has fallen to 35.3 percent last year from 37.1 percent in 1997, according to Technomic Inc., a Chicago-based research company.

Casual-dining chains such as Panera Bread Co. have eroded McDonald's sales as aging baby boomers become more health-conscious and turn away from fast food while eating out.

"Having a lynching of Jack Greenberg might make people feel better but won't necessarily solve their problems," said Lawrence Creatura, a money manager at Clover Capital Management who helps oversee about $1.8 billion in assets, including 14,000 McDonald's shares.

McDonald's, which has more than 30,000 restaurants in 121 countries, also said it would slow expansion. The company plans to open 600 traditional McDonald's restaurants worldwide next year, down from 1,050 this year.

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