It grew into America's biggest restaurant chain - and one of the world's best-known brands - by serving up quick, consistent food at low prices.
But once indomitable McDonald's Corp., home of the Happy Meal, the Hamburglar and Special Sauce, is limping these days amid an onslaught of competition, changing consumer trends and missteps. Now it's betting on an end-of-year management shake-up to help reverse a two-year slump.
Some analysts wonder whether the Golden Arches' luster can be restored.
At McDonald's, analysts complain, the fast food is too slow, the menu too complicated and the low prices not a strong enough lure to keep customers from a growing array of culinary rivals. The results are reflected in the bottom line - profit has fallen in seven of the past eight quarters - and the stock price, which tumbled to a seven-year low this fall.
The problem, analysts say, is that McDonald's has strayed too far from what it does best: burgers, fries and sodas.
"They've been too busy tweaking the menu and changing the cooking system and rolling out products. It's no longer fast, and that's a concern," said Ann Gurkin, a vice president and restaurant analyst with Richmond, Va.-based Davenport & Co. "They need to focus on the core business, on the essence of the business: the quality of the product, speediness, cleanliness - focus on the basics."
Analysts question whether McDonald's president, Jim Cantalupo, 59, will be up to the challenge when he takes over as chairman and chief executive officer Jan 1. Cantalupo, who will replace 21-year McDonald's veteran Jack M. Greenberg, joined McDonald's in 1974 as a controller and earned a reputation as the force behind the company's international growth.
"We have reservations about Mr. Cantalupo," Gurkin said. "He's been in the system. He has operated during an era when McDonald's strategy was growth worldwide. We need a new approach, and I'm not sure he can break out of the old mold and bring a fresh opinion. We have a wait-and-see attitude."
Other fast-food chains are struggling too, facing a tight economy that has restaurant-goers watching their wallets. Now a price war has inflicted more damage.
"It's become very competitive, and competitive at a time when the economy is not great," said Jerry McVety, of McVety & Associates, a Farmington Hills, Mich.-based restaurant consultant.
Burger King, the nation's second-largest burger chain, has been losing customers to rivals. In early December, the second-largest U.S. owner of Burger King restaurants, AmeriKing Inc., filed for Chapter 11 bankruptcy protection after reporting a $22.9 million loss in the first half of this year on $177 million in sales. Just Friday, Burger King owner Diageo PLC agreed to sell the chain to a buyout team for $1.5 billion, knocked down from an initial deal of $2.26 billion.
No. 3 Wendy's International Inc., considered the gold standard of fast-food chains, slightly lowered its 2002 earnings forecast this month, blaming the weak economy and the price war.
"There seems to be a growing ... trend away from" fast food, said John Glass, an equity analyst and executive director with CIBC World Markets in Boston. "It's not accurate to say no one likes fast food; it has a permanent place in the American restaurant landscape, but the industry has grown rapidly for decades and is now showing its age and overcapacity.
"People are eating better and have more choices, and they're more experimental with foods, certainly more so than the generation before this generation," Glass said. "People are going for a better experience and a better taste. They're looking for variety and better quality."
New categories of fast food - the so-called "quick casual" chains such as Panera Bread, Baha Fresh Mexican Grill and McDonald's own Chipotle Mexican Grill - are giving budget- and time-conscious diners choices well beyond cheeseburgers and chicken sandwiches.
"It's like the Starbucks-izing of Subway," said Harry Balzer, vice president of NPD Group's Foodworld, a consumer market research firm in Chicago. "It's a little more atmosphere, more cozy, the food clearly is the focus. Right now, Americans are trying it. It is new and growing. If it's not in your neighborhood, it's coming to your neighborhood."
The higher-priced casual dining segment, with players such as Applebee's, Chili's Grill and Bar and Outback Steakhouse, is growing more quickly than the entire fast-food category.
"People have realized that for a couple more dollars, they can sit down and be served and have a wider selection on the menu," McVety said.
As the economy has faltered, the restaurant industry has been less able to absorb the new players, as it has more or less done over the past two decades, Balzer said. That's because Americans are merely maintaining, if not cutting back on, their restaurant outings, he said.
"It becomes a market-share battle," Balzer said. "If you're going to somebody new, you're not going to somebody old. It's difficult to say whether the burger places are in trouble [over the long term] or not. They're the largest and the ones taking the hit in the market-share battle."
For all its difficulties, Oak Brook, Ill.-based McDonald's remains the industry giant, dwarfing other fast-food chains in sales and number of restaurants and boasting the healthiest per-restaurant sales in the industry. It reported $20 billion in systemwide U.S. sales, which include both company-owned and franchised stores, in 2001, to Burger King's $8.5 billion and Wendy's $6.8 billion, and posted a $1.6 billion profit.
But Wendy's is opening more restaurants and gaining market share. Wendy's also is moving to get in on emerging trends with the Mexican Baja Fresh, which it acquired in June, and Tim Hortons, a Canadian chain of coffee and baked goods restaurants.
McDonald's has 30,000 restaurants worldwide, with 13,000 mostly franchised sites in the United States. And now it is retrenching.
In October, it announced that it would cut the number of new McDonald's stores next year in half, to 600. In November, as the company lowered its earnings forecast for the year, it also announced that it was pulling out of three countries, closing restaurants or reorganizing operations in about 14 others and cutting 600 jobs.
Less than a month later, Greenberg's retirement, effective the end of the year, was announced.
"In every company's history, there is a time when it is appropriate to pass the baton and give a new management team the opportunity to lead, and that time has come at McDonald's," retiring CEO Greenberg, 60, said at the time.
The restructuring is expected to help restaurant sales and cut costs, McDonald's said. The management changes, which also included electing Charlie Bell, president of McDonald's Europe, as president and chief operating officer, were designed to appease stockholders and franchisees, analysts said. McDonald's has not commented on the management changes since making the announcement, and did not return repeated phone calls last week.
"Mr. Greenberg has made a number of initiatives that have not been successful," the costly made-for-you kitchen system to infuse freshness, and several new products that failed, such as soy burgers, salads, pizza, breakfast burritos and the McRib sandwich, said Gurkin, the Davenport analyst. "So we consider a change in management a positive; it should have happened before it did."
Several analysts agree with Gurkin's assessment that Cantalupo needs to get back to basics, speeding up service time and notching up friendliness.
"It's not McDonald's anymore; they're trying to be somebody else," McVety said. "They expanded the menu, trying to compete with Wendy's expanded menu. But they should drop back to their original shell of burgers, fries and drinks. The stores would be smaller, lowering costs, and they could focus on fast food."
In the United States, McDonald's has nearly reached a saturation point, analysts said.
"They should take a harder look at how many they need and look at the franchise base and take a hard look at consolidating some of those," Glass said.
Analyst also say the fast-food chains need to declare a truce in the price wars that started several years ago and heated up this year. McDonald's 99-cents menu has hurt margins, analysts said.
"Discounting is probably proving to be counterproductive," Glass said. "I would hope they would cease or slow down. It's hurting the franchisees."
If McDonald's can correct past mistakes and find its focus, analysts say, it will be better positioned in a category it still owns and one that's not going away.
"When this country wants food from a restaurant, it goes for fast food," Balzer said.