Keep your eyes on your latte: forget Burger King, McDonald’s is now taking aim at Starbucks

When Jim Cantalupo took over as CEO of McDonald’s in 2003, he was looked to as the man to save the world’s largest restaurant chain. McDonald’s had just recorded its first-ever quarterly loss and sales were slipping badly. Cantalupo set to orchestrating a crucial turnaround. Then, just a year later, at a convention for franchisees in Orlando, Fla., the 60-year-old dropped dead of a heart attack. Things would only get worse. In 2004, the movie Super Size Me dropped like a nuclear bomb of bad press on McDonald’s. The war against obesity and trans fats was on. There was a rash of “fat lawsuits” that had obese people suing restaurants like McDonald’s. All in all, the chain looked about as healthy as a greasy hamburger withering under a heat lamp.

Which makes what’s happening today all the more amazing. McDonald’s is suddenly the darling of Wall Street. Last Friday, the Oak Brook, Ill., company said third-quarter profit was up 27 per cent and sales were up 6.9 per cent–the seventh straight quarterly jump. In three years, McDonald’s stock has gone up from around $27 a share to $57. Business is booming. Fast food, with McDonald’s leading the charge, has not only weathered the health food storm, but it has done so with remarkably little tweaking of its menus. While the public insists its tastes are leaning toward healthy eating, the numbers suggest McDonald’s has rediscovered how to lure the consumer back to fast food like never before.

McDonald Restaurant
McDonald Restaurant

The introduction of healthy foods, from snack wraps to apple slices, has played a significant role in McDonald’s resurgence. They blunted public criticism, and gave diners the kind of choice they didn’t have before, says Ron Paul, president of Technomic Inc., a Chicago-based restaurant consulting firm. But the Big Mac and fries are still king. Healthy options are “a small part of sales,” says Paul. “You’d basically say it’s not justified?’ But food was never really the problem. Where McDonald’s badly stumbled was in execution. Its restaurants were unclean and service had become horribly slow as the chain became overly focused on expansion. “Some people have said that four years ago we took our eyes off of our fries,” says Louie Mele, the president of McDonald’s Restaurants of Canada.

Much of the credit for reversing the downslide goes to Cantalupo, say industry watchers. During his brief stint as CEO, he brought in adult offerings, like salads, and did away with the “super size” portions. More importantly, he closed hundreds of underperforming stores, and put the focus back on the basics: good, speedy service. When asked about the turnaround in 2004, Cantalupo told the Wall Street Journal, “Everyone wants to make it about the salads. But it isn’t.”

Nowadays, McDonald’s seems to have developed a near infatuation with service, and avoiding those past blunders. It recently announced plans to renovate its restaurants. They’re still unmistakably McDonald’s, but with some upmarket additions: fireplaces with leather club chairs, flat-panel TVs and soon wireless Internet. The process has already begun at a handful of Canadian outlets. “We want people to be comfortable” says Mele. “It’s about being relevant.” For a company that makes most of its sales–65 per cent in Canada, and even more in the U.S.-at the drive-through window, it’s no small project.

If the new restaurants sound anything like Starbucks, it’s also no accident. Next on the McDonald’s agenda is specialty coffees (some stores in the U.S. are already experimenting with lattes). “They apparently intend to fully compete more aggressively with Starbucks,” says Bob Sandelman, CEO of the restaurant consulting firm Sandelman & Associates. The breakfast market is a highly competitive one and Starbucks draws the kind of mature demographic that McDonald’s clearly wants, says restaurant consultant Marvin Greenberg. “They’re going to be spending billions to go into that business. They’re not going to give it away to Starbucks,” he says.

Even looming economic troubles in the U.S. and the anticipated slowdown in consumer spending are unlikely to slow the McDonald’s juggernaut. As the economy weakens, cash-strapped families tend to shift away from casual restaurants toward cheaper fare. In fact, it’s happening already, says Paul. “I don’t like to say that we’re recession-proof, but we almost are,” says Mele.

McDonald’s clearly has a winning recipe–cheap food, done fast. All they have to do is stick to it. Or, as Mele says, “keep our eyes on our fries,” even if customers have theirs on the fireplace and flat-panel TVs.

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