McDonald’s
has issued a second warning on Q2 profits. The world’s largest burger chain
is blaming lingering consumer concerns in Europe over mad cow disease, but that
isn’t the whole story. McDonald’s is too reliant on the core hamburger restaurant
business. To boost its growth rate, the company really needs to turn some of
its experimental new ventures into money-spinners.

McDonald’s has announced that sales for the first five months of 2001 rose
2% in Europe, 3% in the US and an encouraging 7% in Asia, excluding the impact
of currency conversions. But much of this growth was achieved through promotional
linkups, including Beanie Babies and BBC children’s series Tweenies. The cost
of these promotions is one of the reasons why the company has downgraded its
earnings projections from 38 cents per share to 34-35 cents per share and slowed
down its restaurant opening program.

The company blames BSE (mad cow disease) for hitting sales in Europe, but the
underlying problem is its heavy dependence on the original fast food restaurant
business. McDonald’s has been successful by producing a quintessentially American
product, with highly efficient service and a uniform quality standard in a model
that has been copied by many chains, from Pizza Hut to Starbucks.

Its core strength now should be to leverage its brand values into new markets,
but the association with burgers and fries makes it difficult to win customer
acceptance for new concepts. Despite these pitfalls McDonald’s is pressing ahead
with the American rollout of coffee bar chain McCafe and new restaurant formats,
while also trialing a hotel offering in Switzerland.

The alternative is to run companies at arm’s length so that customers are
unaware of the McDonald’s connection, as with Aroma coffee bars in the UK and
at Pret A Manger, the sandwich bar business that McDonald’s bought into earlier
this year. But this makes it much harder to create a global chain and build
up the low-cost infrastructure and standardized menu that has been essential
to the company’s success.

For the moment, McDonald’s is set to continue its quest for the burger alternative,
perhaps funding acquisitions through an $8 billion sell off of its property
and equipment. But investors may begin to lose patience if recent ventures repeat
the failures of now forgotten concepts such as Arch De Luxe, Big Xtra and McPizza.

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