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Mcdonalds decline { September 18 2002 }

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At McDonald's, Supersize Problems
With Sales Flat, Chain Revises Menu, Marketing

By Dina ElBoghdady
Washington Post Staff Writer
Wednesday, September 18, 2002; Page E01

America's iconic fast-food restaurant has long lived by the numbers -- of hamburgers served, of restaurants opened here and abroad. But now McDonald's Corp. sees its numbers going the wrong way and yesterday vowed, yet again, to fix what's broken.

But first the world's largest restaurant chain had to lower its profit forecast for the year, which sent its stock tumbling to a seven-year low, down $2.78 to close at $18.91.

To fight weak sales in the United States and Europe, McDonald's promised lower prices, faster service and its first national ad campaign in five years.

To jump-start sales next year, McDonald's said, it will invest $300 million to $400 million in refreshing some restaurants and expand its menu to include popular flatbreads and more desserts.

Fast-food rivals such as Wendy's and "fast casual" alternatives such as Panera Bread are chowing down on Americans' eating-out dollars at the expense of McDonald's, analysts point out. And investors, they say, are growing impatient with the Oak Brook, Ill.-based company, which has pledged a turnaround for more than year without much in the way of positive results.

Yesterday, McDonald's projected annual earnings of $1.31 a share, after forecasting $1.35 to $1.41 a share earlier this year. Third-quarter profit should be 38 cents a share, the company said, compared with 42 cents a year ago.

Europe has presented problems for McDonald's. Sales at stores open more than a year there declined 0.7 percent as unemployment climbed in Germany and retail sales slumped in the United Kingdom. In this "pessimistic consumer environment," McDonald's marketing message fell flat, company officials said.

But the domestic market, with its 13,000 stores, is where McDonald's faces its largest challenges. In this country, sales for the first two months of the third quarter were flat, and they grew only 1 percent this year through August throughout the entire chain, company officials said.

Sales at stores open more than a year declined 2.7 percent in July and August.

Douglas Christopher, an analyst with Crowell Weedon & Co., said McDonald's troubles took root in the mid-1990s, when it began opening stores at breakneck speed.

In the five years leading up to 1994, the last year the company posted solid results, McDonald's was opening about 700 stores a year on average -- about two a day, Christopher said. Store openings peaked in 1996 at about 2,585 -- about seven a day.

The company continued opening stores despite a slip in sales per store, Christopher said. It has since cut back on openings, though it remains on an aggressive growth plan.

Carl Sibilski, an analyst with Morningstar Inc., said that years of aggressive growth hurt the company's control over its stores, particularly among franchisees. Everything from the cleanliness of the store to the way hamburgers are placed on the grill for efficiency has been compromised.

"They have not been able to enforce the franchise agreements as well as they should have," Sibilski said. "That's why you have slow service and you wait four minutes for a hamburger."

A more fundamental problem may be evolving customers and their tastes asmore high-quality options emerge, said Lynne Collier, a senior restaurant analyst at Stephens Inc.

"You've got a base that's aging and increasingly looking for higher-quality food," Collier said. "They want the convenience of fast food, but they want a premium brand" offered by fast-casual dining places such as Panera Bread, Quizno's and Cosi.

It's not clear whether McDonald's sees things the same way. The fix, company officials said, is to improve its operations as well as its marketing efforts.

In October, McDonald's will launch a $20 million advertising campaign on television, radio and in print featuring the Big 'N Tasty and McChicken sandwiches. They will sell for $1 each next month.

"The amount of media and the promotional activity will allow McDonald's to elevate its value message beyond the clutter," Mike Roberts, president of McDonald's USA, said in a phone call with analysts.

In November there will be more promotions with a dollar menu featuring soft drinks, fries, side salads and other popular items, Roberts said.

Next year, McDonald's will boost its advertising effort, refurbish some of its older stores and increase its staff during the lunch crush from 11 a.m. to 1 p.m.

And the company will keep close watch on underperformers in its chain.

"When an owner-operator is not meeting minimum standards, we must and will act swiftly to remove them from the system," Roberts said.

To fund some of its capital expenditures in this country, McDonald's will moderate share repurchases to about $500 million in 2003 and cut back on store openings abroad, said Jack Greenberg, the company's chairman and chief operating officer.

The company did not specify how many stores it will open next year, except to say the number will be less than the 1,300 to 1,400 it expects to open this year.

2002 The Washington Post Company

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