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Eric Parker and Kurt Illetschko - Franchising Plus

Setting the scene

McDonalds LogoThe first McDonald's outlet was established by brothers Dick and Mac McDonald in 1948. The brothers focussed on production rather than marketing; they built a highly efficient and profitable business but lacked the vision to protect the brand and unlock its true potential. In his book McDonald's – Behind the Arches, author John F Love relates that the McDonald's brothers were quite happy to allow just about anyone to copy their system and operate under the McDonald's brand as long as they could put up the princely sum of $1000. They had to spend a week at the original restaurant to observe how it's done and hey presto, they could go away and do their own thing indefinitely. Those flush enough to put up $2500 were even granted a territorial master licence.

The brothers never thought of charging ongoing fees, and there was no formal training or follow-up. Before long, McDonald's outlets operated all over the place but the brand was absolutely meaningless because there was no quality control. In hindsight, it is clear that this would have led to the early demise of the brand had it not been for Ray Kroc who acquired the franchise rights from the McDonald's brothers in 1955. He developed a proper business format franchise model and managed to persuade some of the original "franchisees" to enter into formal franchise agreements. However, it took him several years of persuasion and lots of money to regain full control over the brand.

A period of rapid expansion followed, much to the bemusement of the McDonalds brothers who were happy to bank their single outlet's daily takings. Truth be told, they were somewhat intimidated by the flurry of activity Kroc had unleashed and when Kroc offered them $2.7 million for the original outlet and all rights to the brand, they accepted. The year was 1959 and with the brothers out of the way, Kroc turbo-charged his expansion plans. His philosophy of creating win/win situations was encapsulated in 5 separate yet closely interlinked concepts namely:

1. QSCV

This acronym stands for quality, service, cleanliness, value. After Kroc introduced it in his restaurants, it was taken up by the fast food sector in general and has retained its relevance to this day and continues to be taught at the McDonald's Hamburger Academy.

2. Speed of service

Kroc firmly believed in the old adage that "the customer is king" and lived by it. He also knew that people hate to wait and designed all processes around speedy service.

3. Franchising

Kroc was convinced that enlisting the help of dedicated franchisees was the way to go. He built his network on the premise that franchisee support had to be unstinting, staying one step ahead of network expansion at all times. Kroc also granted his franchisees a high degree of autonomy within a very rigid framework. Indeed, most of the menu items that became blockbusters were developed by franchisees.

Ray Kroc believed strongly that a franchisor should not live off the sweat of its franchisees but should earn its keep by helping franchisees become more successful.

4. Team building

Careful selection and training of staff linked to a policy of "promoting from within" helped McDonald's to attract and retain top talent. To this day, over 40% of McDonald's senior managers (and many of the company's franchisees) started their working life in a McDonald's kitchen, or clearing tables.

5. Supplier relations

Kroc sought out suppliers that showed potential to grow with McDonald's, locally at first then internationally. He made them privy to his plans, offered them bankable supply contracts and showed them a degree of loyalty that resulted in win/win outcomes all-round.

In this rapidly changing world we live in, these concepts continue to serve McDonald's well. Ten years down the line, a public listing followed and McDonald's started to evolve into the international giant we know today. In 1984, coincidentally the year Kroc died, McDonald's sold its 50-billionth hamburger. Having conquered North America, Europe and Australia by now, McDonald's set its sights on the remaining continents next. This resulted in the opening of restaurants in Tokyo, Moscow and Peking.

Entry into South Africa was delayed because of the sanctions era but after the brand's arrival on our shores in 1995, the company was quick to make up for lost time. In keeping with a Head Office order that demanded rapid growth, they announced the opening of their 100th store a mere six years later. It was around that time that the company was forced to learn a painful lesson.

A combination of an emerging health fad in Western countries and unashamed opportunism impacted negatively on the brand's image and even exposed it to litigation. In our book, Franchising in South Africa – The Real Story which was published in 2007 and is now out of print, we told the story in its entirety. In a nutshell, obese people were looking for someone to blame for their lack of self-control but in the end, sanity prevailed. The courts saw this ploy for what it really was, namely an attempt to extort cash from a company that was vulnerable because of its sheer size, and absolved McDonald's of all responsibility.

A new era of growth

The career of Jim Skinner, McDonald's current CEO, evolved in typical McDonald's fashion. He joined McDonald's as a kitchen hand at age 16 in 1962. Following a stint in the US Navy, he rejoined the company and steadily moved up the ranks until he was appointed CEO in 2004. As we hinted earlier, the company had just recovered from a period in its history that is better forgotten. Bad publicity fuelled by opportunists who saw a chance to make a quick buck was just part of the problem. A slip in standards, caused by a drive to grow at all cost, constituted a more serious threat. At one stage, up to three McDonald's restaurants a day opened their doors for business somewhere in the world, and even a well-oiled machine like McDonald's could not cope with that. Standards slipped and the brand appeared to be headed in the wrong direction.

Even before becoming CEO, Skinner was instrumental in implementing a return to basics by stopping expansion and working on restoring standards. Following the tragic death of not one but two CEOs in relatively quick succession, Skinner was appointed to the post in November 2004. Imbued with none of the flamboyancy that was Kroc's hallmark, Skinner worked quietly on restoring McDonald's to its former glory before taking it to new heights. In this he has succeeded and how he did it forms the gist of our article. Let's be clear about one thing, though: Given McDonald's size, Skinner's success has obviously not been achieved single-handedly but he is the catalyst. We'll draw on ideas introduced by others as we go along but in the interest of brevity, won't provide individual biographies.

The status quo

We all know that economically speaking, times are hard. During the period when the world appeared to come out of recession ("green shoots without roots" as FNB's chief economists wryly put it), McDonald's managed to maintain an average annual growth rate of 5%. They currently operate over 33 000 restaurants dotted around the globe and controlled growth continues, with the emphasis having shifted to Asia.

World-wide sales topped $24 billion last year. Over the period since Skinner took the tiller, same-store sales have climbed from $1.6 million in 2004 to $2.4 million last year. Looking at financial performance from another angle, while Standard & Poor's famous S&P 500 showed growth of 16% over the past seven years, McDonald's returned over 250%. What's the secret? We have identified five points and list them below.

McDonald's success secrets

1. Leadership

Skinner is a hands-on manager. He has no fancy degrees or qualifications. Rather, having worked his way up through the ranks, he knows every job within the McDonald's organisation and understands its challenges. This earns him the respect of his staff who love the idea that the CEO is "one of them". He is also loyal to his team and backs them wherever he can. Disagreements are handled diplomatically and never in front of others. And, as several of those working closely with him pointed out, he has little time for red tape and political double-talk. One of them credited him with having "an excellent built-in crap detector".

2. Back to basics

After taking charge of McDonald's Skinner's first item on the agenda was a "back to basics" approach that he wanted to permeate every facet of the organisation. He reminded everyone that QSCV had lost none of its validity and insisted on strict adherence to its principles.

Many of our restaurants were looking tired, with old plastic furniture and cracked tiles. The service time in the drive-throughs was far too long – over five minutes on average. And we believed that the food wasn't as important to our customers as low prices, fast service and clean toilets. In fact, only 20% of our customers thought our food was good.

With criticism coming from all directions, McDonald's had to act. The company multiplied its research budget by ten to find out what customers wanted then set about delivering it."

Mark Hawthorne, MD of McDonald's Restaurants New Zealand quoted in Franchise New Zealand magazine

3. Listening to the market

Skinner was – and continues to be – obsessed with imbuing the McDonald's network with the ethos of customer satisfaction. He is convinced that if you listen to your customers and give them what they want they will support you. And while he respects traditional values like QSCV, he is not at all opposed to adapting the menu or changing other aspects of the business to keep up with changing customer demands. Some examples follow.

  • The introduction of McCafé simplifies access to good coffee for traditional McDonald's customers – and keeps them away from Starbucks. Interestingly, this is the brainchild of a McDonald's franchisee in Australia who found an ideal site for a new restaurant but needed something to utilise excess floor space.
  • Following the controlled introduction and subsequent success of McCafé in Australia in 1993, the concept was rolled out internationally and has become a mainstay of the brand's offering. It is also an excellent example of franchisees being given the freedom to develop new concepts to the benefit of the brand. (As an aside, the concept came to South Africa in 2008.)
  • Offering healthy low-calorie menu items. Responding to the vociferous health-brigade's criticism that McDonald's was "over-sizing" its customers, thereby slowly poisoning them, Skinner initiated the development of tasty alternatives. Anecdotal evidence suggests that most customers continue to prefer the traditional items but McDonald's can no longer be blamed for their choices.
  • The introduction of a breakfast offering. This makes it possible for McDonald's customers to have breakfast, lunch and dinner at their favourite restaurant. It also helps to spread basic overheads.
  • Snack-type items intended to fill gaps in sales which continued to be experienced throughout the day.
  • Lastly, the introduction of 24-hour service to cater for those who are working late or were out on the town enables everyone who so chooses to have breakfast, lunch and dinner at his/her favourite restaurant.

The importance of getting the timing right

When we tested salads in 3 or 4 restaurants in the late 1980s, nobody wanted them and the idea was scrapped. When we reintroduced them some years ago, it was a different story. So don't be too far ahead but at the same time, you have to be at the leading edge of giving customers what they want.

All Dunn, past CEO of McDonald's New Zealand quoted in Franchise New Zealand magazine

4. Platform strategy

Under Skinner's guidance, the McDonald's menu was divided into a limited number of "platforms". For example, chicken is a platform, McNuggets is a product that falls under this platform.

The introduction of new platforms requires a huge investment in infrastructure, not only for McDonald's but also for its franchisees. Understandably, Skinner is reluctant to authorise any such initiative, especially since the dismal failure of McPizza.

5. Marketing

Every day, 64 million people eat at a McDonald's outlet located in one of the 118 countries they operate in. Monthly sales figures have been up every month for the past 99 months, and this trend appears to continue for the foreseeable future. McDonald's ongoing success is driven by a formidable marketing machine which is incredibly successful. While a competitor may have surpassed McDonald's in the number of outlets, McDonald's sales figures remain so far ahead of the pack that it is simply no contest. The figures in the box below strip out the hype and tell the true story.