Ronald Gets Back in Shape
By Michael V. Copeland

(Business 2.0) – McDonald's built its business selling burgers and fries and more burgers and fries. While there were occasional nods to changing tastes—the Filet-O-Fish and Chicken McNuggets among them—for most of its five decades, McDonald's stuck to its "one-menu-fits-all" business model and feasted on the profits.

By 2001, though, McDonald's had gone flabby. Bad service and boring food were driving customers to Burger King, Subway, and Wendy's. Making matters worse, the best-selling book Fast Food Nation cast Ronald McDonald as the leading culprit behind America's obesity epidemic. Comparable-store sales dipped 1.3 percent in 2001 and 2.1 percent in 2002. In January 2003, the company's CEO announced its first quarterly loss since 1955. "The world has changed," Jim Cantalupo declared. "Our customers have changed, and we have to change too."

Cantalupo laid out what became known as the Plan to Win—an effort to woo back the chain's core customers: moms, 20- somethings, and kids. Analysts were skeptical; the plan required close cooperation from thousands of franchisees, as well as a nimbleness rarely found at $38 billion firms. Last year, however, despite Cantalupo's unexpected death and the illness that forced his chosen successor, Charlie Bell, to hand the reins to current CEO Jim Skinner, it became clear that the Plan to Win is a winner. By any measure—same-store sales, customer satisfaction, profits, share price—McDonald's has successfully reinvented its fast-food recipe.

As at many corporations raised on a diet of rapid expansion, top managers at McDonald's had been reluctant to acknowledge that it was no longer a growth company. "We became too focused on building the next restaurant and missed some important customer trends," CFO Matt Paull says. "The brand was losing relevance because we were way too internally focused." So McDonald's slammed on the brakes, opening just 450 outlets worldwide last year, 80 percent fewer than in 2000. And it turned to a new obsession: boosting sales at existing restaurants.

At the core of the Plan to Win are menu changes designed to lure health-conscious customers. New items include salads, all-white-meat chicken strips, and apple slices for dessert. The salads haven't been huge sellers, but they've effectively broadened McDonald's appeal. One independent analyst found that some moms who in pre-salad days wouldn't have set foot inside a Mickey D's now order half the greens McDonald's sells while their kids scarf cheeseburgers.

Even better, the new menu additions are pricey—about $4 for a salad or the five-strip Chicken Selects. McDonald's continues to promote its Dollar Menu fare, but the new items have helped boost the average customer check in the United States by as much as 6 percent in the last 20 months. "Driving traffic with the Dollar Menu and profits with premium items has paid off handsomely," says Mark Kalinowski of Citigroup Smith Barney.

Service is improving too. Some 8,000 stores now take credit cards, and most outlets have added employees, so drive-through and counter wait times have declined by 8.5 and 12.4 percent, respectively, since 2001. Many restaurants have added lounges and replaced the nursery-school decor with blond wood. Finally, the hugely successful "I'm Lovin' It" advertising campaign, featuring Destiny's Child, Justin Timberlake, and Yao Ming, has helped reposition McDonald's as an energetic lifestyle brand.

The results have been impressive. Same-store sales for 2004 are up 10 percent in the United States and 7 percent worldwide. In the first half of 2004, the complaint rate on McDonald's toll-free customer-contact line dropped 11 percent, while compliments rose 18 percent. Wall Street is also happier, as earnings per share have doubled, and McDonald's stock is up a mind-blowing 167 percent since early 2003.

It'll be a challenge to keep up the pace. But for now, McDonald's has put the magic back in its secret sauce. — MICHAEL V. COPELAND