What is McDonald selling?

AUGUSTA, Ga.—More than 100 items crowd the menus at Dee and Christine Crawford's five McDonald's restaurants, ranging from familiar Egg McMuffins to newfangled fruit smoothies. The family franchisees recently added oatmeal and caramel-mocha beverages. Next up for consideration: frozen strawberry lemonade.
In certain restaurants around the country, McDonald's Corp. is testing flatbread sandwiches and "garden" snack wraps—chicken and vegetables wrapped in a tortilla.

"Change is a part of our business, to keep up with customer demands, and there have been a lot of changes," says Dee Crawford.
Though McDonald's is practically synonymous with burgers, the chain's appetite for change has helped make it the nation's best-performing restaurant company during the economic downturn. Since early 2003, the company has posted 30 straight quarters of same-store sales increases. During the worst trenches of recession, in mid-2008, global same-store sales at McDonald's rose by 6.1%.
An increasingly diverse menu, with some items priced at a dollar and others as high as almost $5, has lured more cost-conscious customers while preserving profit margins. That's a departure from the days when McDonald's largely catered to so-called heavy users—customers who queue up to eat fast-food several times in a week. Today, many of those 18-34 year-olds, hit by the economic slump, can no longer afford to binge on Big Macs.
To help boost traffic, the company is keeping more restaurants open 24 hours, has spiffed up thousands of stores, created double-lane drive-throughs and now offers free Wi-Fi in most locations. The new menu choices are so plentiful that the Oak Brook, Ill., company has been running ads to remind customers that it still sells Big Macs and Quarter Pounders.

But as the changes mount, some franchisees and analysts are cautious about the chain's ability to sustain growth.
The chain's peak lunch-hour business has been flat for five years, according to a company email reviewed by The Wall Street Journal. A McDonald's spokeswoman declined to comment on the content of the memo, but said in an email response, "it's important to note that our entire business has continued to grow."
Pushing sales higher is a constant battle. "You may be leading the industry," says Jeffrey Bernstein, restaurant analyst at Barclays Capital. "But if you have a deceleration from where you were...investors might rather pursue a greater risk/reward scenario" with the potential for "more meaningful upside."
One reason for all the menu tweaks: the shifting landscape of fast-food, and food purchased by consumers on the go. Just a decade ago, chains like McDonald's and Burger King were a natural choice for people wanting a quick bite. Today, with more types of chains serving more types of fare, the big franchises are chasing market share from competitors such as 7-Eleven, coffee shops like Starbucks, smoothie outlets like Jamba Juice, and even gas stations that carry prepared food.

As business evolves, the franchisees who operate about 90% of the company's 14,000 U.S. stores bear the brunt of upgrade and expansion costs. With multiplying new demands in the kitchen, operations are more complex than ever, threatening slower service and mistakes in orders.
Several franchisees interviewed for this story declined to comment. Some worry that their investments will never pay off, according to an October franchisee survey by Janney Montgomery Scott analyst Mark Kalinowski. One franchisee polled said new McCafé coffee drinks are selling so poorly that, "we are not even paying for the electricity to run the machine."
"Our business is driven by keeping things simple and being able to deliver in a fast and efficient manner," says a McDonald's franchisee in the Southwest interviewed by the Journal. "So the more complexity you bring into the system, the more challenges you'll have," he says.
The introduction of snack wraps, for example, represented such a change in food assembly that one Augusta franchisee sponsored a snack-wrap making contest to give crew members extra practice. The winners received gift cards to retail stores.
With musts like a new $13,000 frozen-drinks machine, "the question always is, 'is the next dollar worth the next amount of investment and hassle?'" says the Southwest franchisee. "In most cases, so far, yes it has been, but not in every single store."

The company says the coffee drinks are a success. And McDonald's USA President Jan Fields says it's taking care not to repeat past mistakes. "I don't want it to feel burdensome to add new menu items, but we have to stay relevant."
Now that consumers are starting to open their wallets again, it's more tempting to be everything to everybody. "If McDonald's sticks to one thing, consumers will go somewhere else," says John Glass, restaurant industry analyst for Morgan Stanley. "It's a delicate balance between being simple and not responding to what consumers want."
The Golden Arches have been down this road before. In the late 1990s and early 2000s, the chain got into trouble opening new restaurants at a breakneck pace. Some offerings, like the Arch Deluxe, famously flopped. Service suffered, sales slumped and McDonald's then-CEO, the late Jim Cantalupo, vowed in 2003 that the company would "do fewer things and do them better."
Over the last three years, the company discovered that items consumed between traditional meal times, such as snack wraps, have become the fastest-growing part of McDonald's business. To capture more grazers, McDonald's began keeping its doors open longer. Today, about 37% of U.S. McDonald's operate around the clock and nearly all open earlier and close later than in previous years.
For customers who wanted an early morning coffee or a late-night snack, "It used to be that convenience stores were the only option," Ms. Fields says.
Being open 24/7, though, means higher staffing costs—and doesn't make sense for every store. The Crawfords learned this the hard way. They tried the all-hours approach at one location in a depressed area of Augusta, but "the labor was killing us," Dee Crawford says. "The business just wasn't there."
Mother Dee, 67 years old, bought her first McDonald's in Beaufort, S.C., in 1987, before adding four more to her empire. She's in the process of handing them all over to Christine, 38, who joined the family business in 2003. Since then, the Crawfords, like other franchisees, have needed to adapt considerably.
When Dee Crawford bought her second McDonald's, on Walton Way in downtown Augusta, Ga., in 1990, it offered so few products that she tallied inventory by hand. She had a one-lane drive-through and chicken sandwiches hadn't yet hit the menu. When she needed to restock, she ran out back to an outdoor freezer.
At the company's urging, she rebuilt the restaurant in 2007. Now, a two-lane drive-through funnels cars from a busy street past a menu board splashed with photos of salads, coffee drinks topped with whipped cream and snack wraps. The old exterior, with its red mansard roof and white walls, was replaced with a modern flat roof and stucco facade.
Sleek flat-screen televisions now hang from the walls and people linger with laptops, thanks to free Wi-Fi. Unlike the old days, a corporate distribution center handles inventory and two or three truckloads of food are delivered to each of the Crawfords' stores weekly.
With extra chores and more customers to serve, some of the Crawfords' restaurants now have as many as 18 staffers during peak hours—almost double the work force of a few years ago.
The Walton Way store was rebuilt specifically with the McCafé drink station in mind—one of the biggest and most expensive changes McDonald's franchisees have had to make in recent years. Located between the pick-up window of the drive-through and the inside counter, the space is equipped with a coffee brewer, a blended-ice machine, a specialty coffee machine and a tea brewer.
"There was a time when McDonald's coffee was considered the best, but somewhere along the way we lost our way on it," Ms. Fields says. "We didn't pay attention to details like temperature, packaging and freshness. We noticed a significant decline in our coffee sales while customer demand for coffee was going up."
Once McDonald's improved its drip coffee and saw sales react, it decided to branch out into specialty coffee drinks. Some franchisees balked, partly because of the price tag. The stations cost roughly $100,000 to install, with McDonald's covering only about $30,000 of the total expense.
The Crawfords placed McCafés in each of their five restaurants and figure it will take two to three years before they recoup their investment. In the mornings, a dedicated staffer mans the McCafé station.
Initially, Dee Crawford worried that fancy coffee drinks wouldn't go over well with her clientele. "Just the pronunciation of frappes and lattes was new," she says. "I thought customers might be intimidated."
She was encouraged by a visit to a McDonald's in Columbia, S.C., with similar demographics—lower-income and predominantly African-American—where customers were embracing the new drinks. When her own stores began selling them, she introduced them by offering free samples at community events.
This past summer, when McDonald's told franchisees to start selling berry smoothies, the Crawfords and other local franchisees paid the city of Augusta to have downtown water fountains churn out fuschia-hued water to coincide with the introduction of the new products.
Ms. Fields says the company tries not to stray too far afield with new items. In 2005, McDonald's halted testing of Oven Selects submarine sandwiches, partly because they took too long to make, partly because "market data told us that it's not a product customers recognize McDonald's for," Ms. Fields says. "We tried pizza at one time but people didn't recognize us for pizza, either."
Company executives decide how to alter menus based on changing consumer desires and areas where it suspects it may be missing opportunities, Ms. Fields says. Several years ago, the company noticed that a lot of drive-through customers already had drinks when they arrived. Limited choices and outdated packaging were among the reasons people weren't purchasing McDonald's beverages with their meals, McDonald's discovered.
"We said, 'We need to get more contemporary with our beverages and not just have Coke, Diet Coke and Sprite,"' Ms. Fields says.
A franchisee in the South saw how customers were going to a competing chain offering sweet tea. So McDonald's began testing its own version regionally. It became so popular that it's now offered nationwide.
Rising demand for healthier products prompted McDonald's to create fruit smoothies. Consumers' busy work schedules, longer commute times and a craving for convenience persuaded the chain to create more products that can easily be consumed on the go and at nontraditional meal times.
Some new items are made by re-purposing existing ingredients. Chicken snack wraps feature the same chicken tenders that make up a Chicken Selects meal of white meat chicken pieces. The chicken is then wrapped in the same tortillas used to make breakfast burritos. The multi-use strategy makes preparation simpler and reduces costs, McDonald's says.
To keep up with all the menu iterations, the Crawfords have still needed to increase staffing and open hours: one of their locations is still open around the clock, seven days a week.
Sometimes, all the changes—from the food to the imagery—can leave customers befuddled. The Crawfords recently removed window posters that touted a national Monopoly promotion and a sweet potato pie offered only in the South. The two messages, says Christine Crawford, seemed to clash and came off as confusing. " At a certain point it becomes white noise," she says.
Write to Julie Jargon at julie.jargon@wsj.com


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