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Monday, August 27, 2007

Key ingredients of McDonald's success

It's part of the American landscape and a global icon and it has been 50 years in the making. McDonald's attracts 15 million customers a day, and has 31,000 stores in over 118 countries. So, how did McDonald's get this big and how profitable can a franchise be?

A visionary named Ray Kroc made a few hamburger stands into a food empire. Back then hamburgers were sold for 15 cents and French fries for 10 cents. Today, this giant makes $41 million in revenue.

Ray Kroc tapped into the drive and ambition of the individual store owners. But his success started when he realised what a rage drive-in restaurants were in Southern California in the 1950s, especially those run by the McDonald brothers. But Dick McDonald knew that customers were looking for even faster service. After all this was a country that was entering the jet propulsion age.

They sped up the process by dropping most of the things from the menu like root beer and orangeade and copying a factory assembly line. So, they retained the big moneymakers and these were the fries, cheeseburgers and milkshakes, which were then put on an effiicient production line. They reopened after this revamp and they began to get sales clerks, cab drivers and construction workers, who wanted their food fast and here they got that.

At that time, Ray Kroc was selling multi-mixers that could make five milkshakes at once and he got an order from the McDonald brothers for eight such machines. Kroc had never received such a large order from one place before, so, he went to check out the place and that was when history was made. He signed a contract with them to be an exclusive franchise representative.

In 1960, Kroc bought out the McDonald brothers and it first went public in 1965. The very next day, Ray Kroc became a millionaire.

Back in the 1950s, you could open a McDonald's with $30,000. Today, ofcourse, it could cost a million dollars or more to buy a McDonald's franchise. But working at McDonald's can be thought of as a low paying 'Mcjob' with a staggering turnover. A McDonald's manager can earn $100,000 or more and soon they can move on to having their own store and becoming a millionaire - just like the store owner they first began working for.

Tyron Davis is one such manager and he's all set to own his own franchise and he knows how to work the ropes to keep them happy and coming back for more. He cheerfully oversees the other employees, offers a refund because a customer waited for his food and ofcourse, just knows that the restrooms have got to be clean - or the customers won't come back again.

It's this efficiency which has made McDonald's bigger and more efficient than any of its competitors. Financially, McDonald's is soaring with annual revenues of more than $21 billion but that's a major turnaround from where the company was a couple of years ago.

Chief Executive Officer, McDonald's, Jim Skinner told CNBC, "I call the year 2002 the 'year of the perfect storm', where all of ths strategies I was pursuing - we hit the wall with our growth strategy in 2002." This strategy included opening more than 2,000 restaurants a year. It was unsustainable. Skinner recalls, "We invested $4 billion in new store growth over the last 3-4 years. There was no incremental growth. So, that was a formula for failure."

Customers were not finding happy meals, but instead they found dirty stores, cold food and a detached staff. On Main Street, McDonald's was out of favour and on Wall Street, McDonald's stock was getting hammered. So, executives woke up to pull up their socks and clean up their act in their existing facilities. They knew they had to concentrate on cleanliness and better quality service. The kitchens were revamped and sandwiches were no longer stockpiled but were instead made-to-order.

They added more chicken and salads to reflect the evolving taste. They spent less time building more stores and more time focusing on the ones they had. But in the middle of this turnaround, McDonald's weathered a double blow - in a span of seven months - the company went through two CEOs because one keeled over and died of a heart attack at a McDonald's convention and his successor died a few months later due to cancer. Skinner was the third one to step up to bat.

But change was in the air and work on bringing customers back was on in full force. So, McDonald's added a line of premium coffees which lured people back from Starbucks. People started coming back for breakfast as well, which is huge for McDonald's as it brings in almost a quarter of a dollar.

Culinary journey
Getting back on track has been good news for the company. And some franchise owners have also been the reason for this success in the past. Just like the clown, Ronald McDonald is now the ubquitous mascot of the golden arches - it was also the idea of a Washington-based franchise owner.

Sometimes, even menus have been tweaked to suit local tastes as Lou Grone did. His store was in a Catholic neighbourhood in Cincinatti and there was nothing for them to eat on meatless Fridays. So, he got the idea to introduce fish sandwiches, which Kroc opposed because he said it would stink up the restaurant.

Instead he suggested a hula sandwich - an exotic sandwich made up of a slice of pineapple grilled in butter, placed in between slices of cheddar cheese in a toasted bun or bread. Then the crowds of Cincinatti were allowed to judge which they wanted. Guess which won? Filet-o-fish was the first new addition to the menu.

But today, the reason McDonald's is such a success is because of the great new additions made by McDonald's 'Culinary Innovation' department which introduced the scrumptious Fruit-n-Yoghurt Parfait or the healthier Southwest salad. All of this has been under the direction of Chef Dan Coudreaut, who graduated at the top of his class from the Culinary Institute of America and has worked for many top notch restaurants, including the Four Seasons Resorts.

Coudreaut knows that people think of McDonald's as being synoymous with burgers and fries, so, they have been slow to notice the parfait, the salads and the triple thick milkshakes in different flavours. But he admits to being looked up to as a big hero by five and seven year olds!

Every item goes through intense scrutiny and an exquisitely detailed development process. Each year, some 1,800 menu ideas are tossed around in Coudreaut's kitchen. Only 3-4 make to the store and by the time a product reaches the menu, it has gone through more than 200 tests and has been years in the making.

Even their coffees undergo this scrutiny. McDonald's sells more than two million cups of hot coffee each day in the US. They have recently added gourmet coffee to their lineup. In the test kitchen, each new flavour is analysed and deconstructed by refined palates.

Fast food or fatty food?
All this is well and good but their portions have just got bigger and critics are blaming McDonald's for the increasing number of obese children in the US. A big mac, big fries and a large Coke equals 1,430 calories and 59 grammes of fat. Their double quarter pound burger has 500% more hamburger meat and their largest size fries has increased 250%. McDonald's products are easily available, cheap and tasty and that has led to obesity. Since the 1960s, obesity in adolescents, children and adults has more than tripled. Today, more than nine million children in the US are obese.

Skinner, though, says that people don't eat often enough at a McDonald's, for it to be blamed and there are lot of healthy options to chose from.

But Professor of nutrition, food studies and public health at New York University, Mary Ann Nestle says this kind of food can lead to a rise in blood pressure, blood sugar, cholestrol and weight gain.

There is a growing movement fuelled by scientists and city and state governments that requires McDonald's and other fast food chains to state the number of calories right up on the menu board. But McDonald's is fighting back hard and joined a lawsuit to block the regulation (that New York restaurants should list calories). Now with the issue of transfats being in the news, it will most likely keep the spotlight on fast food chains like McDonald's.

Thought Skinner does say that he wants to be part of the solution and will put McDonald's power behind any solution that comes up. With more that half of its stores in foreign countries, McDonald's has long since given up counting how many burgers it has sold. But it is counting on the golden arches spreading across the globe, generating more fries, visibility, income.. and possibly more controversy as well.

Written for www.moneycontrol.com


Anonymous said...

very good article. nice work.

Anonymous said...

Your blog keeps getting better and better! Your older articles are not as good as newer ones you have a lot more creativity and originality now keep it up!