(FORTUNE Magazine) – Chances are, if you hear of a "Big Mac Attack" these days, it comes with chest pains. At least at McDonald's headquarters in Oak Brook, Ill., where the bad news tends to be super-sized. When the fast-food giant issues first-quarter earnings this month, it will report disappointing profits for the sixth consecutive quarter. Earnings actually fell in four of the past six quarters--as well as in the full year 2001--as management repeatedly failed to meet its own projections. Major institutional investors such as Fidelity Investments have been selling, and even top analysts are abandoning the kid-glove treatment to downgrade the stock.

But it is the context of the collapse that makes it all the more remarkable. During this tense, choppy, post-bubble market, many franchise restaurants--from drive-thrus to family-style--have offered a comfortable escape for investors. The S&P Restaurant index (even with its heavy McDonald's weighting) is up 18% in the past year. Sizzling-hot Wendy's, which recently upped its earnings guidance for the rest of the year, has soared 57%. Tricon Global, which owns KFC, Pizza Hut, and Taco Bell, just hit a new 52-week high, with the stock up 65% for the year. Shares of McDonald's, meanwhile, have inched up less than 4% from last April. And at $28, the stock is off 42% from its 1999 high.

In the most striking example of how fed up the investment community has gotten, analyst Marie Driscoll of Argus Research not only slapped a sell on the stock in January--she announced that she was dropping coverage this month. Why? Because clients are no longer interested.

No longer interested? This is McDonald's! One of the bluest of blue chips, a stock that has been a component of the Dow Jones industrial average since 1985. MCD was, for years, a core holding in the portfolios of such luminary investors as Peter Lynch and Warren Buffett (who sold most of his stake in 1997). With 30,000 worldwide restaurants serving 46 million customers a day, the burger chain is the largest in the world. And with that universality, it seemed, came a universal truth: Just as you could count on a Big Mac tasting the same in Connecticut as in Colombia, so could you rely on the company to deliver 12% to 15% earnings growth year after year. Says an institutional investor: "McDonald's was the quintessential growth stock."

Now that good feeling has been Hamburglared in a big way. Chief Executive Jack Greenberg's costly new food-preparation system--a program that was supposed to address the worst of McDonald's woes--has backfired. Sales are flat, with customers complaining about slow service, rude employees, and cardboard-tasting food. Rumors even swirled that Greenberg, the chain's chief since 1998, was the target of a failed coup earlier this year.

McDonald's management responds confidently that the chain's troubles can be fixed and that sales will pick up soon. But a growing number of investors and analysts have concluded otherwise. Argus' Driscoll puts it plainly: "McDonald's is not a growth company anymore."

What in the world happened?

Two things, actually. First, McDonald's expanded so far and fast that it ran out of room to grow. This year the company plans to open between 300 and 350 new restaurants in the U.S., a fraction of the 1,130 restaurants it added in 1995. The chain has been expanding at a faster pace overseas--but even internationally, where growth rates tend to be more pronounced, the business has failed to emerge as a consistent moneymaking operation. Everything from mad cow and hoof-and-mouth disease to weak foreign currencies and high commodity costs has chewed up profits. McDonald's took $101.5 million in charges primarily related to the closing of 154 underperforming international restaurants last year and expects to take a noncash charge of $45 million in this year's first quarter, in part to shutter 32 lagging outposts in Turkey.

The second development is that competitors such as Burger King and Wendy's have emerged to offer hotter and tastier fare, according to many. With 43% of the burger market, McDonald's isn't disappearing from America's intersections. But Burger King and Wendy's, which have long scored higher in customer satisfaction surveys, have taken new business at Mickey D's expense. On the University of Michigan's American Customer Satisfaction index, a respected barometer of public opinion, McDonald's has finished dead last among fast-food restaurants every year since the survey began in 1992. Among the gripes: Pictures in advertisements don't resemble the real food. Its overall satisfaction score of 62 in the 2001 survey puts it ten points below Wendy's and three below Burger King. In terms of approval ratings, that's not far ahead of the IRS.

The tipping point seems to have come in 1996, when McDonald's had four consecutive quarters of declining same-store sales and actually lost market share to Burger King and Wendy's. Heads rolled at Oak Brook, and management began making big operational changes. Jack Greenberg, then head of McDonald's USA, quietly began testing a food-preparation system designed to improve quality. The result: Made for You, a company-wide kitchen overhaul project, which began officially in March 1998.

The new thinking was to do away with those precooked slabs of meat. McDonald's was going to custom-prepare its sandwiches to order--with freshly toasted buns too. The strategy required the installation of an array of fancy equipment: Pentium III computers to coordinate the orders, "rapid toasters," and temperature-controlled "launching zones" to replace the old heat lamps and holding bins. It sounded ambitious, but in reality the chain was simply playing catch-up with the competition.

Greenberg, who was named CEO a month after unveiling the makeover plan, promised to boost profits 10% to 15% a year, and Wall Street and big-league investors believed him. BT Alex. Brown analyst David Trossman argued that McDonald's stock deserved to trade at the high end of its historical relative valuation, or at about 25 times its 1999 earnings. Fidelity Investments quintupled its stake in the first half of 1998, making it the largest shareholder, with 31 million shares. Before long, shares had jumped from a split-adjusted $32 to a high of $49 in November 1999.

But things got ugly in the kitchens. "Made for You crippled the service times," complains Bruce Fleming, a longtime McDonald's operator who now works as a franchisee consultant. Fleming, who is also a board member of the 10,000-member American Franchisee Association, says McDonald's typically doubled the average service time to two to three minutes per order--a snail's pace in the cutthroat fast-food business. But 15-minute waits were not unusual. "When the factory across the street blows the whistle and 100 people walk in, you've got to have some food ready," says a McDonald's franchisee. "Made for You doesn't allow that."

Still, Greenberg preached the campaign's virtues with a missionary zeal. Told by two mutual fund managers that the new system was slowing service, the CEO arranged for the skeptics--Eli Salzmann and Stan Dinsky of the top-notch Lord Abbett Affiliated fund--to work behind the counter in hopes of converting them. But flipping burgers for a few hours at an Edgewater, N.J., restaurant in January 2001 had an unintended effect. "We ran way behind in the lunch rush and found ourselves crunched," says Salzmann. They passed on the stock.

Now, three years after Made for You was introduced, there are few believers to be found. McDonald's quarterly same-store sales, a key industry measure, rose just 1.5% on average in the past three years, compared with 2.3% growth for the restaurant industry as a whole. Wendy's sales for the same period climbed 4.4%. A more alarming stat, some say, is foot traffic. Credit Suisse analyst Janice Meyer estimates that "customer counts," or the average number of diners who enter each restaurant, declined up to 3% in each of the past three years.

Mike Roberts, head of McDonald's USA, says he isn't worried. "I'm very bullish about the transaction increases we're going to achieve this year," he says.

To do that, naturally, the parent company and its 2,600 franchisees are going to have to work together. That brings up another problem. If there's one thing Made for You did accomplish, it was to to infuriate many franchisees. They were told the kitchen overhaul would cost $25,000 per store, with corporate picking up half the cost. But many say the actual costs ran much higher--$50,000 to $60,000 per store, according to Dick Adams, a San Diego-based franchisee consultant and former McDonald's restaurant owner who got feedback from several hundred franchisees. The individual store owners had to pick up the slack.

Bill Whitman, a McDonald's spokesman, contests that assessment, saying that the average cost to retrofit each restaurant was only $23,957.

While Greenberg & Co. have been slow to admit mistakes, some recognition of the gravity of the problem seems at hand. In a conference call last month, Roberts admitted for the first time that slow service is the biggest complaint from U.S. customers. Executives said the company is taking aggressive steps to give faster and more personalized service. McDonald's is even sending out undercover "mystery shoppers" to evaluate service, cleanliness, and food quality at its 13,000 domestic restaurants, including the 10,400 run by owner-operators. Says Roberts: "We're going to deliver the results that you're expecting."

Unfortunately, few McDonald's restaurant owners or investors are expecting much. Greenberg has reorganized his executive team twice in the past year, causing many franchisees to lose faith in his ability to run the organization. A big grumble is what one calls "panic-driven discounting," referring to "value meals" that have been priced far too low. "The relationship between corporate and the franchisees is worse than it has ever been," Fleming says.

In an apparent attempt to rally his troops for an April franchisee convention, Greenberg sent an e-mail to the chain's franchisees. "As I talk to people around the system, I can sense some feelings of uncertainty," he wrote in his message, which was addressed to "McFamily." Greenberg continued, "I want to assure you, this management team has the full support of the board of directors." [Greenberg declined to talk to FORTUNE for this story.]

Even if the CEO can convince his McFamily to stand by him--and Jack Earle, a franchisee and officer in McDonald's leadership council of owner-operators, is confident it will--Greenberg may have a tough time wooing back Wall Street. Respected analysts at J.P. Morgan Chase, Lehman Brothers, and Salomon Smith Barney have all downgraded the stock to hold in the past six months. U.S. Bancorp Piper Jaffray's Allan Hickok, a top restaurant analyst, contends the numbers say it all. Earnings per share grew just 4% and revenues 7%, on average, in each of the past five years. "That's hardly representative of a growth company," he says.

Institutional investors seem to agree. Fidelity, the company's largest shareholder, sold 60% of its stake, or 75 million shares, in the past two years. During that same period, major shareholders such as Janus and Neuberger & Berman also cashed out the bulk of their stock. The bad reviews are affecting more than just the stock price. According to the consulting firm Interbrand, the value of the McDonald's name fell by $2.5 billion last year.

So are the days of shakes and roses over for good? Marie Driscoll of Argus Research isn't very optimistic. "Nothing seems to turn around a company of McDonald's size unless there's a good secular trend or it's capturing share from competitors," she says. In the case of McDonald's, neither applies.

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