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McDomination

From under the golden arches, McDonald's new ventures are in pursuit of market share

Diners who drive down El Camino Real in the heart of Encinitas have probably noticed that a quick service restaurant is getting a facelift. What used to be a Boston Market outlet is being remodeled and will soon reopen as a Chipotle Mexican Grill. What they may not realize is that this change is part of the plan by McDonald's to achieve dominance in the competitive food industry.

The company started by Ray Kroc in 1955 has grown into the world's largest foodservice retailer with 30,000 restaurants in 121 countries. However, not all of their stores are located under the golden arches. Two years ago it picked up the assets of Boston Market, the popular but unprofitable chain of restaurants best known for its chicken menu. The company had dropped into bankruptcy and McDonald's was able to buy the operation for less than $250 million.

The opening of the new Chipotle Mexican Grill is the latest move by McDonald's to diversify its line of food products. It has invested in the burrito business that was started in 1993 by Steve Ellis, who continues to serve as the CEO. In addition, McDonald's has acquired the Donatos Pizza chain.

But, all is not well in the quick service business, which used to be referred to as fast food. McDonald's stock dropped last week to its lowest level in seven years and Tuesday the company will announce an aggressive plan to boost sales. Other companies find themselves in the same position.

"This set of initiatives will enable us to improve the customer experience and ultimately increase the sales and profitability of all our restaurants across the system," said Mike Roberts, president of McDonald's USA (NYSE: MCD). Seventy-five percent of the company's restaurants are franchise operations that must give their approval to the plan, which includes, "Economic incentives for physical improvements that enhance the customer service experience."

Will these changes make a difference? Analyst Mark Kalinowski of Salomon Smith Barney recently lowered his earnings estimates and price target for the third quarter saying, "We believe that the approach McDonald's is taking does not do enough to fix what customers complain about most: rude service, slow service, unprofessional employees and inaccurate service."

Another player in the quick service business will also announce a new strategic plan this week. On Wednesday, San Diego-based Jack in the Box (NYSE: JBX) will explain what steps it will take to deal with softer sales. Last week the company lowered its earnings guidance for the current quarter.

"Sales in the fourth quarter were softer than anticipated due to continuing weak economic conditions," said Robert Nugent, CEO of Jack in the Box. "We remain committed to improving quality, and believe that product quality enhancement programs will take longer to gain customer acceptance in this competitive market."

Total restaurant sales in 2002 are expected to reach nearly $408 billion, an increase of 3.9 percent over the previous year. Providing customers with quality and a wide selection of products is key to future growth, especially in the quick service segment.

"Most of today's consumers say that they are so busy that convenience is critical," said Robert Ebbin, director of research for the National Restaurant Association, which recently released the finding of a survey on quick service restaurant trends. "More than half of the consumer survey participants said they are usually in a hurry and want speedy service. One-third of the respondents said they believe using restaurants allows them to be more productive individuals."

There is also another thing these customers want: cheap food. Part of the new McDonald's campaign to build up business is the introduction of an eight item "Dollar Menu" that includes the Big 'N' Tasty and McChicken sandwiches.

Burger King, the nation's second largest quick service chain, last week announced a new "BK Value Menu" with 11 items priced at 99 cents each. And Wendy's "Super Value Menu" of 10 items priced at 99 cents has been around since 1989.

And Jack in the Box has just launched a promotion to give customers more for their money with the "Big Meal Deal." This allows people to adjust their combo meals to their hunger level for an additional 39 or 60 cents. The 1,850 Jack in the Box restaurants also have 99 cents selections, including the popular Jumbo Jack hamburger.

The restaurant industry employs 11.6 million people across the country and generates an overall economic impact of more than $1 trillion. However, the biggest challenge for these companies is to see how much beef makes it to the bottom line.

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Chamberlin's financial analysis column appears each Monday in the San Diego Daily Transcript. Chamberlin also reports daily on stocks and local business on NBC 7/39 and on "Money In The Morning" on KOGO 600 AM.

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