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What Went Wrong?

Many things contributed to the decline of the McDonald’s brand between 1997 and 2002. It was not a precipitous fall: The brand had been declining slowly, painfully, and publicly for some time. The simplest analysis of what went wrong is that McDonald’s violated the three brand-building basics for enduring profitable growth:

  • Renovation
  • Innovation
  • Marketing

Reckitt Benckiser is the world’s biggest maker of household cleaning products. Up to 40% of its sales are generated by products that are less than three years old. Bart Becht, the CEO, says that the company’s success is due to a culture that is innovative and entrepreneurial.4

McDonald’s failed to continuously improve its brand experience by ignoring these three criticalities: renovation, innovation, and marketing, Instead, McDonald’s focused on cost reduction instead of quality growth of the top line.

When the image of the brand was deteriorating, instead of investing in brand experience renovations and innovations, McDonald’s focused on monthly promotions rather than on brand building. Instead of brand building marketing communications, the focus was on monthly promotional tactics designed to drive short-term sales at the expense of brand equity.5 One member of my global team called this the “fireworks” approach to marketing: big bursts of activities that dissipated quickly.

As a result, between 1997 and 2002, we witnessed the sad decline of a mismanaged and mismarketed brand. The brand misery was played out in the press.6 One analyst saw a faltering brand that was lacking in food quality, pleasant service, and helpful employees.7 Mark Kalinowski at Salomon Smith Barney was highly critical of the management of the McDonald’s brand, and in response to management’s briefing on revamping the exteriors of the restaurants, he said, “Having a better looking building does nothing to fix rude service, slow service, or inaccurate order fulfillment.”8

There were some bright spots, such as France. Under the leadership of Denis Hennequin, menu modifications and redesigned interiors brought customers into the restaurants. In Australia, Charlie Bell’s idea of McCafé offered quality coffee, tea, and pastries in a quieter, more attractive atmosphere. Whether a complete McCafé, or a more limited coffee offering, the Australian experience proved that improving McDonald’s coffee quality and variety has a positive effect on sales. It takes effort to revitalize a big, mature brand like McDonald’s. It also took a lot of effort to sabotage this great brand. To set the context for the massive revitalization, here are some of the strategies and activities and the thinking behind those initiatives that helped to send the brand on its downward spin.

Ready, Set, Open

As same-store sales declined, McDonald’s focused on building new stores as the primary growth strategy. Instead of increasing the number of customers visiting existing stores, McDonald’s focused on increasing the number of stores. The major strategic road to growth was to open new restaurants, open new countries, and generate traffic with the fireworks of monthly tactical promotions and price deals. At an analysts briefing, Michael Quinlan, then chairman and CEO, said in January 1998, “You can look for about 2,200 worldwide and maybe 350 net new restaurants in the US...” as restaurant expansion plans for 1998 are likely to replicate last year’s.9 This projected rate of expansion is approximately equivalent to a new store opening every four hours.

Even as the company increased the number of restaurants by about 50% over ten years, market share declined.10 Yet, CEO Jack Greenberg continued the growth strategy based on the rapid opening of new stores. Due to this focus on expansion over organic growth, franchisees reported that revenues and profits per existing store were cannibalized. For every new McDonald’s that opened, franchisees reported that nearby stores lost between 6% and 20% of their revenues. McDonald’s reported six quarters of earnings decline in 2001 and 2002.

There are consequences to overzealous expansion as a growth strategy. It was not possible to properly staff and train people to provide a quality McDonald’s experience at this rate of store openings. Service suffered because people had to be trained too quickly. The focus changes to efficiency at the expense of effectiveness. You lose your connection to your core promise as you race to ribbon-cuttings.

McDonald’s was at the bottom of the fast food industry on the University of Michigan survey of customer satisfaction.11 In a 2001 survey conducted by Sandelman and Associates, McDonald’s came last among 60 fast food brands in terms of food quality ratings.12

Not surprisingly, the declining performance of McDonald’s demoralized the franchisees. According to Reggie Webb, who operated 11 McDonald’s restaurants in Los Angeles, “From my perspective, I am working harder than ever and making less than I ever had on an average-store basis.”13 Regular evaluations showed that the quality of the brand experience declined. The declining measures of these factors demoralized the system. So, McDonald’s decided to discontinue the practice of regular store evaluations. Mike Roberts, head of McDonald’s USA, revived the measurement program in the United States in 2002. Later, McDonald’s expanded this measurement program around the world.14

Starbucks is a good example of what can happen when you lose that connection to your brand experience. As an unintended consequence of growing too fast, the distinctive experience of the Starbuck’s brand became diluted. Howard Schultz returned as CEO of Starbucks.15 He committed himself and the organization to restoring the unique customer experience of Starbucks.

As McDonald’s focused on building more stores, consumers were demanding better food, better choices, better service, and better restaurant ambiance. McDonald’s took its eye off the goal of making the brand better and focused on merely making the brand bigger.

Buying and Modifying

Inside the hallways at Oak Brook, Illinois, some members of the leadership team lost faith in the inherent profitable growth potential of the McDonald’s brand. They questioned the continued relevance of the brand.

The prevailing view was that significant profitable growth could not be achieved organically. A consultant advising top management stated that to be a growth stock, it was necessary to satisfy Wall Street’s desire for 10% to 15 % annual growth.

So, instead of focusing on the organic growth of the McDonald’s brand, McDonald’s diverted its investment dollars to focus on growth by opening new stores and growth by acquisition of other brands. McDonald’s seemed to adopt the concept, “BOB...Believe in Other Brands.”

McDonald’s acquired new brands through a series of acquisitions: Chipotle, Donato’s, Pret-a-Manger, and Boston Market. This strategy only added to the depressed feelings among McDonald’s franchisees.

In addition, new brand development efforts were given “green lights.” There were investments in new concepts such as “McDonald’s with a Diner Inside,” and the development of a “3-in-1” McDonald’s including not only a diner, but also a bakery and an ice-cream shop all under one roof. Whether it was the investment in new stores, acquisitions, or new concepts, the return on incremental investment was poor.

Flops, Fads, and Failures

McDonald’s engaged in a frenzy of high-profile failures originally initiated to jump-start the brand. Here are a few of the more highly publicized ones:

  • The high-priced Arch Deluxe was designed to bring adults into the franchise. Advertising featured kids turning up their noses at the mere mention of the Arch Deluxe, thereby sending a message that McDonald’s was not for them. Alienating kids was certainly not a basis for profitable growth at McDonald’s, the home of Ronald McDonald.
  • The extraordinary Teeny Beanie Baby promotion had kids dragging parents in for the toys while tossing the food into trash bins. But, this had the unintended consequence of reinforcing the image of Happy Meals as a toy with food as an incidental attachment rather than as great-tasting food with a toy promotion attached.
  • The unfortunate Campaign 55 confused people. It was nearly impossible to distinguish between the Campaign 55 “My Size Meal” and the still existing “Extra Value Meal” promotions.
  • As profit pressure increased, McDonald’s focused on cost management rather than on brand management. Costs were reduced by cutting product quality, no longer toasting the buns, modifying recipes, changing operations, and reducing staff in the stores. The belief was that the consumer would not notice—or, would not care. They did notice. They did care.

Love It or Leave It

At McDonald’s, with a decline in food quality, poor service, inadequate product offerings, and order mistakes, it was not surprising that tactical, opportunistic monthly promotions became the dominant marketing focus. Happy Meals had become a promotion of a desirable toy, rather than a promotion for desirable food. This is not a way to build an enduring brand. Overemphasis on the deal rather than on the brand results in customers becoming deal loyal rather than brand loyal.

For brands to live forever, they must be loved forever. McDonald’s leadership fell out of love with the McDonald’s brand. And, consumers, franchisees, employees, and the financial community also fell out of love with the McDonald’s brand.

The various tactics, strategies, and initiatives diverted attention from focusing on the number-one priority of revitalizing the McDonald’s brand. Instead of being brand believers, McDonald’s management became brand batterers. So it was no wonder that the beleaguered McDonald’s brand posted its first-ever quarterly loss at the end of 2002.

The Times Are Changing

As if the loss of faith in the brand, and all these mistaken strategies were not enough, McDonald’s ignored challenging developments in the marketing environment. Consumers were more informed, more skeptical, and more demanding. They were becoming more environmentally conscious and more health conscious. The issue of childhood obesity, which previously had only bubbled below the surface, became a major problem.16 Issues such as these were subjects that few people at McDonald’s even wanted to acknowledge, let alone discuss and prepare for. Instead of brand leadership, McDonald’s resisted the developments in the changing world. This resistance to change is best captured in a BusinessWeek article in which Michael Quinlan, then chairman and CEO, said, “Do we have to change? No, we don’t have to change. We have the most successful brand in the world.”17

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