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`French Fries With That Quart Of Oil?'


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`FRENCH FRIES WITH THAT QUART OF OIL?'

After 26 years as a McDonald's franchise owner-operator, Thomas R. Weber can put together a milk-shake machine blindfolded. He has bagged fries by the million and trained platoons of store managers in grilling burgers. Now, he's learning how to change the filter on a gasoline pump. "I was reluctant at first, but it's not that big a deal," he says.

Welcome to McDonald's Corp. of the 1990s. Weber's Amoco-McDonald's combo in Lombard, Ill., is one of a half-dozen new formats that are helping the giant chain get bigger still. While investors have focused on McDonald's growth overseas, the Oak Brook (Ill.) outfit has quietly launched the biggest-ever domestic building boom, putting Big Macs in places never imagined before. This year, it will open 1,000 U.S. locations--up fivefold from a few years ago (chart). "We think we can keep up this pace for many years," says Vice-Chairman Jack M. Greenburg. "It's frankly driving most of our growth."

ON IMPULSE. Behind the expansion is an epiphany about its customers. Most harried shoppers (75%) decide to eat Big Macs and Happy Meals just five minutes or less before their purchase. So the more Golden Arches they see--in Wal-Marts, Home Depots, gas stations, or airports--the more they buy. Quick service and good value keep them coming back, but convenience draws them in. True, the building boom carries some risks: It could cannibalize existing-stores sales. And until the new formats are perfected--and standardized--profits will suffer. But amid cutthroat competition, inaction is the greater risk. With his five other nearby stores vulnerable to encroaching chains, "doing nothing would have left me wide open," Weber says.

Today's construction fever is a switch from a decade ago. McDonald's used to focus on prime locations and big, free-standing stores. That worked fine--until choice sites got scarce. In 1991 and 1992, U.S. expansion slowed by one-third, and market share eroded as nimble rivals proliferated on lots McDonald's wouldn't touch. Hungry for growth, the burger giant began trying smaller stores.

McDonald's began with a handful of tiny counters in Hartford storefronts in late 1991. Within a few months, it opened an outlet in a California Wal-Mart. But along with the Big Macs, confused shoppers found snow cones and hot dogs, a legacy from a cafeteria that occupied the spot earlier. Through trial and error, McDonald's developed "satellites"--small stores with core menus of the best-selling standards. At the same time, it cut the development costs of its full-size restaurants by one-third by standardizing the equipment and designs. Now, it's finding that slots originally intended for smaller satellites can support those cheaper traditional stores. Gas-station sites such as Weber's are the same size--and produce the same volume--as full-size restaurants.

"TOUGH FOR US." With thousands of potential locations available, McDonald's tries to saturate entire markets systematically--by planning several sites at once instead of one store at a time. The chain discovered that even older stores in heavily built areas do better: Consumers respond to the greater convenience by buying McDonald's food more often, boosting the average sales per store. That's bad news for competitors such as Florida's Checkers Drive-In Restaurants Inc., which made hay in the early 1990s by plunking its double-drive-through burger stands on corners where a McDonald's outlet couldn't fit. "McDonald's has taken a page out of our book," moans Checkers CEO Albert J. DiMarco. "It's the right strategy for them. It's tough for us."

The strategy also takes McDonald's into unfamiliar territory. As a small tenant in big stores, McDonald's has had to negotiate with its joint-venture partners on everything from cost-sharing to signs. Cleanliness can be a problem: That's why Weber took over cleaning the gas pumps as well as the rest of the store in his newly opened Amoco, receiving a fee from the oil company in exchange for the service. And many of the new formats are smaller, leading some analysts to doubt that average sales per store will continue rising, as McDonald's expects they will. Mark R. Miller of CS First Boston Inc. believes smaller volumes will limit the potential at smaller stores.

Perhaps. But McDonald's is thinking big. It's already in 700 Wal-Marts, with hundreds more on tap. It has only 18 Home Depot sites open, but it's talking about 800 by 1998. Deals with Amoco Corp. and Chevron Corp. could translate into thousands of new stores. Additional co-branding ventures with supermarket and retail chains, such as Incredible Universe, are under way. And that's all in addition to stepped-up openings of traditional stores. Market dominance will make it tough for the competition, Weber predicts. "These other guys will not be able to stand the heat in the kitchen." And those kitchens will be everywhere.By Greg Burns in Oak Brook, Ill.


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