Unhappy meals?
There was a time when it appeared that the might of McDonald's, which seemed hell-bent on opening a burger joint on every street corner, was unstoppable. But last week, the company's announcement that it was to "dramatically" reduce the number of new openings might be enough to wipe the permanent grin from the face of its cheerful mascot, Ronald.
McDonald's expects to open some 600 restaurants across the globe in 2003, compared with 1,050 openings this year. Given that there were 2,000 openings in 1996, it is little wonder that questions are starting to be asked about market saturation.
The latest cutback in openings comes in the wake of sluggish sales and the company's seventh earnings decline in eight quarters. Worldwide profits of $487m (£314m) for the third quarter (ending 30 September) were down from the $545m (£352m) posted a year earlier.
"This year certainly has proven to be even more challenging than we had anticipated," said Jack Greenberg, chairman and chief executive officer.
But while Greenberg "firmly believes" that there are untapped growth opportunities for the company, the focus, he said, will be on existing restaurants rather than new ventures.
This seems rather at odds with the behaviour of the company of late, as it has been dipping its corporate toe in a number of new ventures, but pressure from the shareholders could be taking its toll.
"Instead of investing in things that could lose money, they could return a higher dividend to their shareholders," said analyst Ian Berry of Evolution Beeson Gregory. "It would just mean the company wouldn't get any bigger."
McDonald's has been out of favour with Wall Street for some months, but last week's news of a slowdown in new restaurant openings certainly had a positive effect on its share price, which rose by 3.5%. In the long term, however, the group appears to recognise the need to diversify, and it certainly cannot be accused of shying away from exploring new markets.
One example was the acquisition of 36 Aroma coffee bars two years ago for £10m. But what must have seemed like a good idea at the time turned out to be a pricey piece of research when McDonald's sold them almost two years later at a loss.
"The coffee market was picking up and we looked at it," said a spokesman for McDonald's in the UK. "We can still achieve a good return on coffee but we decided to introduce coffee bars into existing restaurants."
A further diversification was the decision last year to take a 33% stake in sandwich bar chain Pret A Manger.
The fastest growing brand McDonald's owns other than its main hamburger chain is Chipotle, a Mexican grill restaurant chain with outlets across the USA which it bought three years ago. Plans for 2003 involve doubling the number of restaurants in the USA to around 400. Many of these will be franchises, so investment should be minimal.
Perhaps its most interesting diversification to date is a new concept being trialled in Indiana, offering good old-fashioned table service of items such as pancakes, meatloaf and mashed potatoes. So far, it has opened four Diner Insides in the state and plans four more in Kentucky this year. The company will advertise on local TV before deciding whether to expand the brand elsewhere.
It is ironic, perhaps, that what is potentially the most promising new revenue stream for McDonald's to date is based on the 1950s diner, a popular concept that burger bars and fast-food joints in effect replaced.
