Charlie Bell Speaks for McDonald's
September 26, 2004
Focus: 'Fat, dumb and happy'
John Arlidge
McDonald's took its eye off the ball, according to its new boss, Charlie Bell, who is now thinking outside the burger box to restore its fortunes
‘Fat, dumb and happy!” shouts Charlie Bell, the boss of McDonald’s. Bell is not lampooning Morgan Spurlock, the man behind the anti-McDonald’s documentary, Super Size Me. He is describing McDonald’s recent business performance.
“Big companies get fat, dumb and happy. They take their eye off the ball and forget about customers.” Walt Riker, Bell’s PR minder, winces. Bell, who started his career flipping burgers in a McDonald’s in Sydney, smiles. “We Australians are blunt. Sometimes the words don’t come out as eloquently as my US colleagues would like, but I tell it how it is — the good, the bad and the ugly.”
Bell agreed to meet The Sunday Times at the company’s headquarters in Oak Brook, just outside Chicago, on a muggy, Mid-Western morning because he wanted “to tell the McDonald’s story up close and personal”.
The world’s biggest fast-food firm is renowned for its obsessive secrecy. For 50 years it has combined corporate paranoia with vigorous legal action to maintain its stranglehold on the $50 billion (£28 billion) global burger and fries market. But last week it decided to lift the lid on the Big Mac. Why?
After suffering an unprecedented assault from anti-fat campaigners, such as Eric Schlosser, author of Fast Food Nation, and film-maker Spurlock, who eats himself sick on a steady diet of McDonald’s in Super Size Me, the company’s bosses have — somewhat belatedly — concluded they are losing the PR battle for hearts and stomachs. It is time to go on the offensive to convince consumers that McDonald’s really has changed the habits of a lunchtime.
Bell launched the new policy of openness over breakfast at Hamburger University last week. “We are truly opening the doors to the Golden Arches, so that you can see McDonald’s from the inside,” he said. He went on, nervously:
“We’ve never done this before and, depending on how it goes, we might never do it again. We are prepared to listen and modify certain things at McDonald’s. We know we are not perfect, but we want to demonstrate that we are sincere about trying to do the right thing.”
BELL became the first non- American to head the US corporate icon in April after McDonald’s fabled boss, Jim Cantalupo — who ran the firm twice — died unexpectedly of a heart attack.
The 43-year-old has had the toughest possible start to one of the hardest jobs in business. McDonald’s has had a wretched 18 months. It has announced its first-ever loss, its share price has been falling, Fast Food Nation is still on the best-seller lists, Super Size Me is filling cinemas around the world, and New York lawyers for two obese teenagers suing fast-food firms for serving unhealthy food are claiming that “fat is the new tobacco”. To make matters worse, Bell was recently diagnosed with colorectal cancer and is undergoing chemotherapy.
But last week he was in combative mood. Over breakfast he insisted he felt fine. “The doctors tell me I’m not going to lose my hair, which is important because I’m determined to be the first chief executive of McDonald’s not to end up bald,” he joked. He said he wanted to tackle the company’s critics head on, and began by doing what no McDonald’s boss before him has done — confessing corporate sins.
“In recent years our customer experience was declining, the competition was getting stronger and customers were leaving our brand,” he said. Like many big firms, McDonald’s “got complacent — fat, dumb and happy”.
He said that the firm, which spent tens of millions of pounds trying to bankrupt two British environmentalists in the infamous McLibel trial in the High Court, actually owed such campaigners a vote of thanks.
Asked about Spurlock’s film and Schlosser’s hard-hitting exposé of the fast-food business — which revealed among other stomach-churning facts that the beef in McDonald’s patties can come from up to 100 different cows — he said: “These people have brought issues to the table around the world in varying ways. We don’t necessarily agree with the way that they have done it, but we do want to be part of the solution. We have nothing to hide. We welcome criticism. We are on a learning curve.”
Welcome criticism? Nothing to hide? Learning curve? It may not be “luvin’ it” but McDonald’s is certainly singing a new tune.
The new corporate transparency is more than simply a reaction to the recent wave of critical books, documentaries and Spurlock’s movie. The truth is Micky Dees is changing the way it does business because it has to. The supersized chain is confronting a supersized problem. As fat-fearing consumers turn to healthier food and consumer choice expands with new, cheap, tasty alternatives to burgers ‘n’ fries on our streets every week, its traditional market is shrinking.
The figures tell their own woeful story. Between 1997 and last year, McDonald’s share of the fast-food market fell more than 3%. In 2002 sales slumped more than 2% from over $3 billion a year to less than $2.9 billion. It might not seem much, but it marks a dramatic reversal of fortune for a company that since it was founded 50 years ago has generated double-digit growth from rapid expansion almost every year.
In the same period, McDonald’s earnings slumped by some $300m, and the firm went from being the darling of the Dow Jones share index and a core holding in the portfolios of such luminary investors as Warren Buffett, to a “hold” or “sell”.
As McDonald’s sales have declined, US fast-food chains selling healthy food — notably Baja Fresh, Chipotle Mexican Grill and Subway sandwiches — have been enjoying double-digit annual growth in a flat market. Analysts have declared that the future of fast food is healthy food. Health-conscious consumers, they say, are turning their backs on pre-cooked, additive-laced meals, leaving the world’s biggest fast-food firm facing patty meltdown.
To reverse the decline, Bell and his management team are dumping limp, fat-laden cheeseburgers and rushing upmarket faster than you can say “hold the fries”. Their aim is to turn McDonald’s into a combination of Pret A Manger and Starbucks, selling salads, barista cappuccinos and freshly made sandwiches.
HEALTH and freshness now dominate the firm’s menus. For the first time, food is being freshly made to order. Restaurants are being refitted with lounge-like furniture, soft lighting and free wireless internet access.
Separate McCafes “for discerning adults” will open inside existing McDonald’s next year. The firm is concentrating on new “meal occasions”, notably breakfast, where McGriddle pancakes are replacing old-style burgers and McMuffins. Breakfast now accounts for 25% of the firm’s US business.
The shift amounts to the biggest rebranding exercise in corporate history. With 30,000 restaurants in 120 countries serving 147m customers a day, it is a task that would make even the most skilful image-maker weep. With new menus, a new look and its upbeat I’m luvin’ it ad campaign featuring US pop star Justin Timberlake, can McDonald’s pull off the ultimate makeover?
Rita Clifton, chairman of the giant Interbrand consultancy, who has worked for Nestlé, Unilever and Marks & Spencer, says: “McDonald’s is one of the world’s most valuable brands and it has got there by virtue of being clear and utterly consistent about what it stands for. Changing what it stands for is the right thing to do, but it will not be a cheap or quick exercise. Hopefully, they’re doing it in the nick of time.”
McDonald’s knows the only way it can pull off the task is to open its doors, admit past mistakes and shout loud and long that it has changed.
Bell admitted that while McDonald’s had always provided nutritional information for diners, it was slow to recognise that public tastes were changing.
“But we are catching up fast. We are adding even more healthy choices and variety. We have salads in all markets, we have low-carb versions of our burgers and low-fat desserts, including fresh fruit. We have all-white meat Chicken McNuggets. We cook our fries in low-fat oil. We have better speciality coffees, iced tea and mineral water. We are spending millions of dollars remodelling our restaurants to suit local tastes and style. Customers are responding to our new menus and decor, which is good news, but we have got more work to do.”
To demonstrate what he has in store, Bell agreed to take me to “a place no-one usually gets to see”.
Half-an-hour from Oak Brook along Interstate 55 a giant, white hangar rises next to the Crazy Ranch lap-dancing bar in Crossroads Business Park.
There is no sign on the door — for a very good reason. Warehouse 1235 North Schmidt Road, Romeoville, Illinois, is the home of McDonald’s secret food-innovation laboratory, where chefs and scientists have invented everything from Big Mac special sauce to the Egg McMuffin.
Inside the 16,000 sq ft shed, chefs and scientists test products in three full-sized McDonald’s restaurants, set up just as they would be in three key markets — the US, Europe and Asia. Like members of a secret, international cult, they toil under Big Brother-like slogans exhorting them to Observe, Analyse, Benchmark, Stimulate, Brainstorm.
“Take a look around and taste everything. Our future is inside these four walls,” Bell said. In the Asian kitchen, sandwich-marketing chief Rich Yoo was working on a new product line codenamed Oven Selects. After 50 years of proclaiming that the burger is the world’s leading snack, McDonald’s is turning to the humble British sandwich to guarantee its future. “These are test sandwiches which will be made à la carte and will come to market later this year, ” he said. “We are doing New York Reuben pastrami-style sandwiches for North America and we are looking at curry sandwiches for the UK and McCroque Monsieur for France.”
In the US corner, McDonald’s head chef, Kurt Aebi, who moved from Switzerland to Chicago a year ago, was preparing new salads.
“We have half a dozen salads on the market and there will be more in the Salads Plus range next year. We sell more chicken salads in Europe than anyone else and more chicken than the chains which have the word chicken in the title,” he said proudly.
Don Thompson, head of the innovations unit and the firm’s restaurant solutions group, wanted to talk about coffee.
“We are going to introduce new McCafes — comfortable lounges away from the main floor in our restaurants where adults can go to relax and get a cup of fresh coffee made in front of them by a barista and maybe a sandwich or a pastry,” he said. “The McCafe concept is currently on test in Australia, Germany, Ireland, Hungary and Russia, and it is doing so well that we will roll them out everywhere.”
When all the new products are introduced next year, there will be more health drinks on the menu than fizzy drinks, and salads will outnumber the all-beef patties, special sauce, lettuce, cheese, pickles and onion all on a sesame-seed bun.
It’s a far cry from burgers ‘n’ fries, but Bell dismisses suggestions that McDonald’s is diluting its core appeal. “We have never said we would sell burgers and only burgers for ever,” he said. “What we have said is that whatever we sell, we’ll try to sell more of it than anyone else. Whether it’s burgers or salads or low-fat fruit and yoghurt parfaits, that’s exactly what we’re doing. We’re being true to our principles.”
He concedes that making new dishes, such as fresh sandwiches, means customers will have to wait longer for meals. New investment in ovens to cook and toast the bread for the new sandwich range will cost millions of dollars in each market. “But we are following what the customer wants. Our focus is squarely on them. They want this investment and we will give it to them.”
WILL new comfy chairs and posh(er) nosh be enough to save McDonald’s $34 billion reputation? The early signs are healthy. After announcing its first corporate loss 18 months ago, McDonald’s is now enjoying sales growth. Total global revenues for the second quarter of this year increased by 10% to $4.7 billion, up from $4.2 billion in the second quarter of 2003. McDonald’s reported earnings per share of $0.47, up 27% — a new record — for the second quarter. Last year the figure was $0.37.
Sales growth was driven by strong comparable sales across all business segments. In the six months to June 30, total global revenues increased 13% to $9.1 billion, up from $8 billion last year. Net income increased 38% to $1.1 billion from $798m in the same period. Sales at remodelled stores in the US are up 5% on average. Global sales growth for next year and beyond is projected to average 3%-5% per annum.
The share price has risen 10% this year from $24.79 to $27.14, and last month McDonald’s announced it would boost its dividend payout from 40 cents a share to 55 cents. The consensus rating of McDonald’s stock from analysts who track it is a “buy”, according to the Boston-based First Call research firm.
Bell said: “One year ago there were many people — some even in the press, I think — who did not believe McDonald’s was capable of delivering results like these. But we have. The good news at McDonald’s is that there is good news. We are building positive momentum round the world. We are revitalising our business with a renewed and relentless focus on our one true boss — the customer.”
Analysts agree. David Palmer, of UBS Securities, argues that by reducing the number of restaurants it opens by 50% a year and introducing new products and improving service, the Aussie burger boy is raising the fallen arches. Palmer cautioned that the fast-food industry still had an image problem, and that legal action over fat was unlikely to go away, but he said Ronald was on the rebound. “Bell has pulled off some great strokes,” he said.
On the wall in the lobby of McDonald’s Innovation Centre is a sign of the dramatic effect Bell’s strokes have had. A notice “celebrates McDonald’s success in becoming the number one salad seller in the world”.
Salad days? At McDonald’s? Ray Kroc, McDonald’s founder, would flip in his grave if he knew it, but Bell’s decision to think outside the burger box is putting the smile back on Ronald McDonald’s face. The clown may be fat and happy, but he is no longer looking quite so dumb.
McDONALD’S SEES ITS FUTURE BREAD AND BUTTER IN THE GREAT BRITISH SANDWICH
WILL the humble British bap save the all American burger from patty meltdown? It’s the multi-billion-dollar question that senior McDonald’s executives are asking themselves. After introducing salads earlier this year, McDonald’s is bringing sandwiches to the table.
Six made-to-order baps — including a New York-style pastrami sandwich, a beef and cheese, and a grilled vegetable on rye — are on trial in Canada and Australia and will go on sale in Europe next year. McDonald’s is spending £100m on installing bread ovens and developing the snacks, which will cost £2.50 in Britain.
Although McDonald’s bosses hate to admit it, the introduction of Oven Selects is a direct response to the success of the sandwich chain Subway. The Connecticut- based firm has used its healthy “no bread”, low-carb products to take a supersized bite out of the fast-food market.
It has transformed the US sandwich market from a niche to the fastest growing snack segment. The sector is now worth $16 billion a year in the US and is growing annually at double-digit rates.
Last year Subway overtook McDonald’s to become the biggest fast food chain in North America. It has more than 17,000 outlets, compared with the 13,000 of McDonald’s, and is expanding fast in Britain. By the end of this year there will be 500 Subways here, and that figure is expected to more than quadruple, to 2,010, by the end of the decade — outstripping McDonald’s, just the same as in the US.
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“Subway took sandwiches mainstream. They have confirmed the demand,” said Rich Yoo, McDonald’s sandwich-marketing chief. “Our recent success with Premium Salads and Chicken Premiere (chicken in a bun) gives us permission to stretch the menu in categories like sandwiches.
“We believe we can offer more than Subway. Customers will enjoy great-tasting sandwiches with all the speed, convenience and value that only McDonald’s can provide.”
Flogging sandwiches to American, Australian and Japanese consumers is one thing, but Britain is likely to be a hard sell. The £3.5 billion UK market is the most competitive in the world, with Marks & Spencer, Benjys, Ixxy’s and Pret A Manger all competing for our daily bread.
Bosses fear that since the sandwich is a British creation — invented by accident in 1762 by John Montagu, the fourth Earl of Sandwich — UK customers will reject an American version as a “McSandwich” or a “Sandwich Lite”.
“We know we’re going to be accused of bastardising the product and dismissed as uppity Yanks who have hijacked Britain’s unique contribution to world cuisine to make a fast buck,” said Yoo.
“But the products are so good, I don't think the Earl of Sandwich would disapprove. I think he would appreciate that he could just pull up in his carriage and get a great product at the drive-thru.”
McDonald’s made its first foray into the sandwich market in Britain three years ago when it bought a 33% stake in Pret A Manger. Its bosses say they have no plans to sell that stake.
“Our ‘ordinary Joe’ sandwiches will not cannibalise Pret’s sales. Both will be breadwinners,” Yoo said. Sandwiches will be tailored to local tastes when they are introduced next year.
Chicken-tikka rolls, bacon butties and roast-beef baps are likely to make it on to the menu here.
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