CASE STUDIES

McDonald's case study

Beefing up the image of a giant
Reference Code: CSCM0106
Publication Date: October 2006

DATAMONITOR VIEW

CATALYST

This case study focuses on the strategy McDonald's has undertaken to improve its performance following its loss making
period, including improving the marketing of its healthier menu and related activities, refocusing on its core burger and fast
food offerings, and modernizing the restaurant layout with the introduction of the McCafe format and store zones.

SUMMARY

! While McDonald's has attempted to address critics of the fast food format by providing a healthier menu,
the company is still openly criticised for its alleged part in increasing obesity levels. In response, the
company has implemented a strategy to enhance the publicity of its healthier menu, while at the same
time funding research into kids' obesity and forming the Moms' Panel to gain the opinion of mothers from
around the world;

! McDonald's has gone back to basics in promoting its core food offering, burgers, creating a larger Big
Mac in defiance of critics on junk food. This, along with the potential to offer all day breakfasts, shows the
company is no longer ashamed to promote its basic fast food menu;

! McDonald's is updating many of its restaurants in a bid to appeal to modern consumer tastes. This
includes creating different eating zones in it outlets which are designed around the needs of different
consumer groups, and attaching McCafes to existing locations in a bid to attract more affluent consumers.

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ANALYSIS

Introduction

After spending many successful years building up its restaurant empire around the world, operating by a formula little
changed for decades, McDonald's recorded its first ever quarterly loss back in 2002. Analysts blamed the loss on
enhanced consumer concern over the link between obesity and junk food, bought to the forefront by the documentary
Supersize Me, as well as anti-US sentiment around the globe. However, since executing the Plan to Win recovery strategy
in 2003, the company has been back on track, recording revenue growth of 9% in the second quarter of 2006 to reach
$5.57 billion.

The turnaround was aided by improving the restaurant menu to appeal to the modern customer, in particular by focusing
on health education, while at the same time going back to basics in terms of its core offerings. In addition, the company
has undertaken a modernization strategy of its restaurant environment, with an increased number of stores fitted with
McCafes and a policy of introducing store 'zones'.

Focusing on health issues

McDonald's addresses critics with renewed emphasis on healthier food

McDonald's introduced its healthier menu in 2003, ditching super size portions in favor of new offering such as salads,
fruit, and juices. It also and added deli sandwiches to its menu in 2004 in order to compete with the growing popularity of
sandwich chains like Subway.

In addition, the company released new food packaging in late 2005 which featured new nutritional labeling showing a
standard nutrition information label and a new icon and bar chart; this provides information on a menu item’s nutrition
value and how it relates to daily nutrient guidelines. The company said it plans to have nutrition information featured on
packaging in more than 20,000 of its restaurants by the end of 2006, commenting that: "This initiative makes it easier than
ever to understand the quality that goes into our food. We're very confident that the more information people have, the
more they will like what they see at McDonald's," (Press Release, 2005).

While such initiatives have improved the image of the company to some extent, and helped it achieve growth again,
McDonald's is still being criticized for providing unhealthy food by the likes of Eric Schlosser in his 2006 sequel to the best
selling book Fast Food Nation, called Chew on This. This has led the company to state in 2006 that it is to enhance the
publicity of its healthier offerings; CEO Jim Skinner commented on this strategy: "I wouldn't call it a campaign. It is a
continuous improvement relative to the communication of our story regarding our high-quality food in McDonald's,"
(Associate Press, 2006).

In response to the impending release of Chew on This, in April 2006 McDonald's issued a statement, saying that: "While
we don't agree with some of his conclusions, it is clear he shares McDonald's passion for food safety, good jobs and
quality food." This contrasts with its stance after the 2002 release of the book Fast Food Nation and the 2004 film Super

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Size Me when it remained staunchly quiet, and didn't give an opinion on the book and film's view of the fast food chain.
McDonald's has therefore changed its strategy, believing now that it is in its interest to defend its business when faced
with such high profile criticisms.

Kids' obesity tops list of issues for research funding and moms' panel

As well as providing a healthier menu, McDonald's has also begun to research funding into preventing childhood obesity.
In September 2006, the company announced it was donating $2 million to the La Jolla, California-based Scripps Institute -
the first time it has ever directly funded scientific research, according to its North American President and Chief Operating
Officer, Ralph Alvarez.

The company commented that, despite criticisms that it was ironic for a fast food company to be involved in such
research, the initiative was part of a long term plan to combat obesity: "Ironic or not we're going to make a difference,"
Alvarez said. "You won't see those benefits short-term, in one to three years, because habits change over time. But as a
major restaurant company, we need to be on the cutting edge of what's happening," (Reuters News, 2006).

Earlier in the year, McDonald's also announced the creation of Global Moms Panel, which it describes as a group of
mothers from diverse backgrounds and perspectives, who would provide input and guidance on a broad range of topics.
The group, made up of mothers from Argentina, China, Germany, Italy, the United Kingdom and the United States, formed
in May 2006 for a one year period.

"McDonald’s recognizes and appreciates the important role moms play in the well-being of their families. We intend to
listen and learn from our Global Moms Panel with the goal of providing the best possible experience for families in our
restaurants around the world. We want to become the best ally we can for moms and a true partner in the well-being of
families everywhere," Mary Dillon, Global Chief Marketing Officer (Press Release, 2006)

The formation of the panel highlights the fact that the company relies heavily on families for a significant part of its
revenues, and is attempting to placate the concerns of mothers over criticisms of the fast food format by gaining a
representation of their views.

Going back to basics

While healthier food has been aggressively promoted, burgers remain McDonald's' priority

Somewhat contradicting the company's new health initiatives are reports that the UK division is to refocus on enhancing
its burger offerings, in a move that will see the company go back to its basics. This refocus was begun in summer 2006
when McDonald's introduced the Bigger Big Mac in the run up to the 2006 World Cup, a giant burger 40% larger than the
regular Big Mac.

The introduction came at a time when the president of the UK division, Steve Easterbrook, commented that McDonald's
salads and other healthier options only accounted for under 10% of its sales in the UK, and were therefore not a priority
offering for the company. Easterbrook was quoted by the Sunday Times as saying: "Everybody loves a burger and there
is nothing wrong with that. It's time to be proud, to go out and say: 'We're a good burger company'." This highlights the

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company's new strategy of promoting its basic format, showing that it believes it is not something it should be ashamed of;
the healthier menu is also available for consumers, and fast food critics, who demand it.

All day breakfasts offer an opportunity to exploit the success of its morning menu

In another move to get back to basics, McDonald's head office said it was considering the possibility of rolling-out an all-
day breakfast service following the implementation of a new restaurant operating system. This would see such food high
fat foods such as the sausage, egg and bacon McGriddle breakfast sandwich being offered in-store all-day. While this
would enable it to compete better with Starbucks, which has been diversifying its early morning offerings from coffees and
cakes to cold sandwiches and hot breakfast rolls, the move would not improve the company's relations with critics of its
high-fat food.

Nevertheless, breakfast has become a key sales area for McDonald's and one that is more profitable than its lunch and
dinner offerings - partly because it rarely discounts items off the breakfast menu. The breakfast menu also shares a key
attribute with the introduction of the healthier menu - they were both essential elements in McDonald's achieving its
turnaround effort, helping it escape from the loss-making period.

Providing a more modern eating environment

McDonald's introduces store zones to attract different consumer types

As part of its recovery strategy, McDonald's undertook an evaluation of its stores, pledging to refurbish them to appeal
more to modern tastes. By the end of 2005, the company had revamped around 15% of its restaurants worldwide since
2003, with plans to update a further 2,000 in 2006.

This refurbishment included dividing the stores into zones to appeal to different types of consumer groups:

- The Linger Zone is designed for socializing young adults and includes comfortable chairs, flat-screen
TVs and wireless Internet access;

- The Grab and Go Zone is for customers who want to dine alone, featuring bar stools, and plasma TVs
offering news and weather reports;

- The Flexible Zone is designed for families, featuring a variety of seating areas and booths for different
group sizes.

The revamp includes removing the starkly lit, plastic-heavy look of many of McDonald's' restaurants and putting in place
softer lighting and more comfortable chairs, mimicking the successful design format of Starbucks.

The refurbish has concerned some McDonald's franchises who were worried that it would cost too much and remove the
familiarity of the restaurant chain, whose design has remained more or less the same for decades. In the US, 160
franchisees from the Carolinas, Virginia and Tennessee sent a letter to the corporate office expressing concerns, mainly
over the plans to remove the red and white roof and replace it with a yellow and white color scheme. However, the
company head office is convinced the revamp is the way forward and will appeal to a large sector of society.

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McCafes provide upmarket appeal

As part of its store makeovers, McDonald's has introduced the McCafe format to some of its locations. The format,
developed in Australia in 1993, has recently been launched in the US as part of its strategy to have broader consumer
appeal.

"McCafe isn't a new concept, but it's being revitalized around the globe. It plays beautifully to our revitalization plan, it's
strategic and relevant to consumers." Jeff Stratton, McDonald's chief restaurant officer (FT, 2005)

McCafes are designed around the conventional coffee shop concept, selling premium coffees alongside cakes and
muffins, and including a comfortable seating area that encourages customers to linger. The cafes, which have a
standardized layout, are attached to conventional McDonald's restaurants and encourage higher spending restaurant
goers to visit McDonald's with their more premium offerings - in Australia where the format started, restaurants with a
McCafe attached are said to generate 15% more revenue than a standard outlet. The format therefore could enhance the
appeal of the chain towards more affluent consumers who are attracted to an upscale café setting, and could provide a
key way of improving the company's performance over the long term.

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APPENDIX

Case study series

This report forms part of Datamonitor's case studies series, which explores business practices across a variety of
disciplines and business sectors. The series covers a range of markets including food and drink, retail, banking and
insurance, pharmaceuticals and software.

Each case study provides a concise evaluation of a company that stands out in some area of its strategic operations,
highlighting the ways in which the company has become one of the best in its field or how it deals with different problems
encountered within that sector.

Methodology

A variety of primary and secondary research was carried out for this case study. This included researching the on-the-go
food market on Datamonitor's Interactive Consumer Database and on the Productscan Online Database of new products,
alongside an extensive review of secondary literature and other in-house sources of information.

Secondary sources

- McDonald's throws weight behind obesity research; Reuters News (September 2006)

- Big Mac bites back as salad drive wilts; Sunday Times (May 2006)

- McDonald's To Tout Healthier Menu Choices; Associated Press (April 2006)

- McDonald's develops a taste for cappuccino; Financial Times (October 2005)

Further reading

How To Exploit New Wellness Trends in Food: resolving the conflict between healthy desires and unhealthy
lifestyles (Datamonitor, DMCM2470, September 2006)

New Opportunities In Out-of Home Food and Drinks Consumption (Datamonitor, DMCM2406, March 2006)

The Future of Eating Meals On-The-Go (Datamonitor, DMCM2377, September 2005)

Ask the analyst

The Consumer Knowledge Center Writing team

askcm@datamonitor.com

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