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Increased franchising, popular menu choices produce steady profits
By Reshma Kapadia
Smart Money Magazine
Published on Sunday, Aug 17, 2008
Though iconic for its burgers, McDonald's Corp. buys about as much chicken as beef these days. It also buys 39 million pounds of apples a year — more than anyone else in the United States. That's very different from 35 years ago, when Chief Executive James Skinner graduated second in his class from the company's Hamburger University.
There have been a lot of changes at McDonald's, especially since Skinner stepped in as chief executive in 2004. Even so, the world's largest fast-food chain is still vilified for its high-calorie menu and not doing more to fight obesity. Having worked at McDonald's for more than half his life (his first job was in high school), Skinner, 63, bristles at some of the attacks. But even though nutritionists aren't all that thrilled with McDonald's, investors certainly are: The stock has doubled in the four years since Skinner took over.
Skinner discussed in an interview what investors should expect and whether it's his responsibility to get kids to eat their vegetables.
Q: What was at the heart of the problem before the turnaround?
A: McDonald's was built on the idea of getting bigger and bigger. We had four years of spending on new stores that didn't really produce much of an increase in profits. . . . Our shift away from company-owned stores and toward franchises, as well as a major licensing agreement in Latin America, creates much less volatility and more-stable cash flow, giving us more-predictable profits. We get a steady stream of income without incurring the expenses related to running the restaurants.
Q: Even in difficult economic times?
A: Yes. It's a little misunderstood how strongly positioned we are. Every one of our markets has some form of daily affordable item on the menu. If you look at convenience, we're not all 24/7 yet and still have a huge opportunity there. And then there is breakfast. We own breakfast.
Q: McDonald's is making a big push into specialty coffee. Is this a bid to woo away customers from Starbucks while it's down?
A: This is not a Starbucks-McDonald's story. The coffee market is enormous. We've already improved our drip coffee, and we already sell coffee elsewhere around the world, so we are not head-to-head with those guys there.
Q: So this isn't an effort to change the mix of your customers?
A: I don't think so.
Q: McDonald's is facing pressure from higher food costs. How do you deal with that while still offering affordable prices?
A: We don't pass it on. Last year in the U.S., we raised prices just 3.4 percent in spite of very heavy cost increases. We absorbed some of those costs, and we mitigated the impact through our long-term relationships with our suppliers. We also engage in long-term contracts to lock in prices.
Q: How worried are you about food safety? Have the problems intensified versus 20 years ago?
A: Anytime you are in the beef business and you have someone that has violated consumer trust, it's a bad thing. But I'm proud of the fact we're not involved in it and have processes that preclude that from happening. I don't think problems have intensified. There is just more scrutiny.
Q: What responsibility does McDonald's have to combat the obesity epidemic?
A: We are not going to solve society's problems. People have to do that on their own. But we have to be part of the solution.
Q: Yet you're fighting the New York City mandate to put nutritional information on menus.
A: Yes, because it's onerous, ridiculous and not going to communicate to customers what they need to know.
Q: What do you think they need to know?
A: They need to know what they want to know, and more important, it's on the package and on the Web site.
Q: Some would argue that if you wanted to be part of the solution, McDonald's, as an institution that changed the way Americans get their food,could . . .
A: We are the biggest purchaser of apples. Just think about that. We went to Apple Dippers for kids and have Fruit & Walnut salads.
Q: If you wanted to shift eating habits more, you probably could.
A: We can sell anything we want, but people have to buy it. We've done more than anybody in the industry. But if you can't get your kids to eat vegetables, why is it my job? Having said that, if you want to choose apples or carrots with your Happy Meal, it's there, and there will be more of that down the road. But the truth is, it's not my job to take away; it's my job to add and say, here are some choices. You have to make the decisions.
Though iconic for its burgers, McDonald's Corp. buys about as much chicken as beef these days. It also buys 39 million pounds of apples a year — more than anyone else in the United States. That's very different from 35 years ago, when Chief Executive James Skinner graduated second in his class from the company's Hamburger University.
Get the full article here.
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