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Is McDonald's still lovin' it?

01 June 2006

Despite the recent hype over low-fat menus, salads and fresh fruit, McDonald's has pledged to get back to what it does best: burgers. In what is being seen as a counterattack on healthy-eating campaigners everywhere, the fast-food giant is to launch a giant burger that is 40% bigger than a Big Mac.

The arrival of the new burger coincides with an admittance from Steve Easterbrook, McDonald's UK's new chief executive, that healthier menus accounted for less than 10% of the company's sales. However, it also flies in the face of media, government and market support for healthier food.

By contrast, McDonald's recent announcement that it will spend £140m trialling eight new formats to revamp 200 of its 1,200 British outlets surprised nobody. The fast-food giant needs to recover the high ground now held by coffee shops and to meet competition from Pret A Manger, Nando's, Subway and even Wagamama. It certainly needs to attract new customers if it wants to remain the country's largest restaurateur.

Franchisees
Equally unsurprising is the announcement that it will increase its number of franchised restaurants by 10%. Franchisees have the entrepreneurial drive to perform better, and as more than 50% of its UK restaurants are company-owned, any sales downturn directly affects company profits.

In recent years, McDonald's performance in the UK has been distinctly disappointing. The company has been slated for everything from being responsible for the nation's growing obesity problem to being a poor employer. In response, it launched a string of high-profile incentives, including family job-share schemes, a campaign to shake off the shabby "McJob" tag, and healthier menu options, such as salads, toasted deli sandwiches and fries with less salt.

But it wasn't enough. This year falling sales here and in Germany accounted for a 0.5% drop in like-for-like sales across Europe, compared with a 5.7% global rise in revenue.

Now in its fifth year of declining UK sales, McDonald's has been forced to relocate 76 UK restaurants and close 25 poor performers, incurring £23m in cancelled leases and other costs.

"They have been buying leases on the high street, but the high street has gone limp, so they've lost out," says Stefan Breg, of consultancy Tribe.

Breg says McDonald's is also performing poorly in out-of-town centres - with the possible exception of drive-thrus. Whereas once it would have been the undisputed anchor at most foodcourts, developers now look for a different mix, or else fear that McDonald's will swamp the other outlets.

Competition is coming from all sides. It's no longer a battle with Burger King, Wimpy or KFC; it's a battle with coffee shops, sandwich bars, casual dining, pub-restaurants and even supermarkets, all of which are feeding the grab-and-go demand from office workers, students, shoppers and travellers.

It's not so much that McDonald's is underperforming; it's more that the UK market has become more sophisticated. Stephen Minall, director of consultancy Moving Food, points out that food prices in restaurants haven't risen more than 2% in the past two years, which has made casual-dining options more popular with parents and, in turn, influenced children. As a result, McDonald's core market of 13- to 19-year-olds has now moved on to perceived "cooler" venues such as Starbucks, Pret A Manger or even Pizza Express.

Similarly, the 50-plus brigade is taking the new generation of experimentalist grandchildren out to family-friendly pubs, leaving a loyal following among mums and toddlers.

Young market

With a brand that has traditionally appealed to a young market, one of McDonald's inherent problems is the ageing population. Other issues include the 24/7 culture that is slowly eroding its market. With pubs now open later, revellers can no longer pile into McDonald's at kicking-out time.

All this leaves industry observers puzzled about McDonald's "back to burgers" relaunch. Food service consultant Jonathan Knight says the company is too clever to perish, but hints that by sticking with burgers and fries it is backing a dwindling market.

"The market has said no to unhealthy food but they are going back to their core principles. It doesn't sound like a recipe for a growth strategy in a sophisticated UK market," says Knight. "I think it will mean they go back into their shell and become a smaller activity."

However, Tom Fender, director at HIM retail consultants, argues that the company is perhaps right to get back to its core speciality.

"Some 92% of the population say they now watch what they eat, but is that bad news for McDonald's? Maybe having a burger once a week will be seen as an indulgence."

Fender also points to the growth of upmarket burger restaurants and the fact that burgers remain one of the best-selling items on any pub menu.

"McDonald's is associated with fast food, which is seen as bad, but they could still offer their core product. I wonder why they don't make it more premium?" he asks.

Nobody knows how the McDonald's story will pan out. Most agree, however, that it must attract new diners to keep its head above water in the UK. Its decision to come out fighting with a 40% bigger burger is, if nothing else, a bold one.

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