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A Little McSoul Searching May Be in Order

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From Bloomberg News

McDonald’s Corp. is going back to the drawing board after admitting that its cut-rate 55-cent hamburgers aren’t going to put the sizzle back into its U.S. sales.

A growing number of analysts and other critics--including consumers--say the world’s largest fast-food company should head back to the kitchen instead. As some strategists might put it, the real message behind the failed Campaign 55 is clear: It’s the food, stupid.

The company took the right step in gutting its 2-month-old campaign by scrapping 55-cent lunch and dinner sandwiches on Tuesday, said Dean Haskell, an Everen Securities analyst in Chicago.

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Now, he said, “they need to improve the quality of the food and communicate that to consumers with a coherent marketing strategy.” Some critics say it may take new management to pull that off.

McDonald’s rolled out its Campaign 55, keyed to the 1955 founding of the company, with great fanfare in early April, saying it would last a year or more and give the company’s sluggish U.S. sales a much-needed lift.

But the campaign ran into almost immediate criticism from analysts and franchisees for being unfocused and confusing to consumers. Analysts and franchisees say McDonald’s U.S. sales declined by 4% to 7% in May from May 1996.

Meanwhile, competitors, including Wendy’s International Inc. and Grant Metropolitan’s Burger King, have been increasing sales at McDonald’s expense, analysts say.

At least two analysts cut their earnings estimates for McDonald’s following its announcement. Lehman Bros. analyst Mitchell Speiser reduced his 1997 earnings estimate for McDonald’s to $2.45 a share from $2.52 and downgraded the stock to “outperform” from “buy.”

Merrill Lynch analyst Peter Oakes lowered his 1997 estimate to $2.48 a share from $2.50. Both analysts also lowered their 1998 estimates. The company earned $1.57 billion, or $2.23 a share, last year.

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McDonald’s shares closed down 75 cents at $47.875 on the New York Stock Exchange in trading of 3.4 million shares, more than the three-month average of 2.4 million.

Analysts and marketing experts say they can’t recall when McDonald’s beat such a hasty retreat from a major marketing campaign. At the company’s annual meeting two weeks ago, Chairman and Chief Executive Michael Quinlan insisted that “those who say the campaign is a flop don’t know what they are talking about.”

George Rosenbaum, chief executive for Chicago-based consumer market research firm Leo J. Shapiro & Associates, said McDonald’s “made a big bet” that it could educate consumers to Campaign 55’s rather complicated rules, which required a purchase of any size soft drink and side order to get the 55-cent sandwich.

They lost the bet, Rosenbaum said.

“I think consumers realized there was no deal there,” he added.

McDonald’s will continue offering 55-cent breakfast sandwiches and may be considering other promotions, but that’s not going to solve its basic problem, analysts say.

“At some point they are going to have to realize they are not in the toy business or the video-distribution business or the discounting business,” said Damon Brundage, a NatWest Securities Ltd. analyst. “They sell food, and they need to make big changes in that area.”

Surveys support the critics. For example, McDonald’s came in last among the three major hamburger chains when consumers were asked to name their favorite fast-food restaurant, according to a study by Market Facts Inc. for Marketing News. Of the 1,004 consumers polled, 37% chose Wendy’s, 31% chose Burger King and 23% named McDonald’s.

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