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McDonald's Turns Up the Heat


Despite the recession, the mammoth fast-food chain is investing aggressively in expansion and advertising

Even in a recession, people have to eat, but they don't have to eat out. U.S. restaurant sales have been sinking since the tail end of 2007, forcing Starbucks to close hundreds of sites and other chains such as Bennigan's to declare bankruptcy. Then there's McDonald's (MCD). The fast-food company plans to rebuild one of every 20 restaurants this year and add more locations than since 2002.

The bucks don't stop there. McDonald's and its franchisees are installing 1,000 premium-coffee McCafés a month in its U.S. outlets, at an average of $75,000 a pop, and should have them in all 13,900 by midyear. The hamburger giant is updating its menu with new products like the $3.99 one-third-pound Angus burger. And while not apparent to customers, the company says it will spend $3.5 billion to $5.5 billion on dividends and stock buybacks in 2009.

"We have the attitude, as most people would have if they have the wherewithal, that you need to come out of the other end stronger than when you went in," says Chief Executive James A. Skinner. Unlike many rivals, McDonald's can afford that perspective. It generated a record $5.92 billion in cash from operations last year on revenues of $23.52 billion.

Upping the Ad Impressions

The supersize investments also speak to the all-out way Big Mac competes—company founder Ray Kroc once said that if he saw a competitor drowning, he'd ram a fire hose down his throat. Thus, McDonald's is spending more than twice as much on U.S. advertising than any other fast-food chain. UBS Securities projects that "impressions," or the number of people who see or hear an ad, will rise 15% in 2009, as McDonald's takes advantage of declining rates to buy more spots.

It is pouring more than $100 million alone into a national ad campaign for McCafés this spring. "Are we competitive? Yes we are," says Donald Thompson, president of McDonald's U.S. operations. "Are we aggressive? Very."

While many other restaurant operators are cutting capital expenditures, McDonald's plans to invest $2.1 billion in its restaurants in 2009, roughly the same amount as last year. With the McCafé buildout largely completed, it will shift more money into new construction to hike locations by 650 this year, to 32,600 worldwide. The previous two years, McDonald's expanded by an average of 460 sites a year.

So far, the Oak Brook (Ill.) company has been getting its money's worth. Even as the recession has deepened, same-store sales have been increasing both in the U.S. and worldwide, extending a string that goes back, with two one-month lapses, to mid-2003. May's rose 5.1% globally, the company said on June 8. McDonald's market share is growing as well. It accounts for 15.5% of all quick-serve sales in the U.S., up 0.6 points since 2003, and controls nearly half the hamburger sector, according to market trackers Technomic.

Strong Push

The steady course doesn't mean McDonald's runs on autopilot, however. In early 2003, under a new leadership, the company cut way back on expansion—it had added 1,015 outlets in 2002—and turned instead to boosting sales and earnings from existing units. And when McDonald's began its McCafé push in early 2008, some franchisees balked over putting up so much of their own money. But the company won them over by subsidizing the projects and helping them get loans.

"Everyone's in the game," says Thompson. "Everyone has a risk to take. Everyone has a chance for a gain, too. Now is the perfect time to make investments."

Arndt is editor of BusinessWeek's innovation and design coverage, overseeing its Innovation channel as well as the magazine's quarterly IN: Inside Innovation section.

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