What Wall Street Needs to Know about McDonald's US Expansion


McDonald's Corporation is ramping up the growth rate of new restaurants in the USA.

We can understand the challenge management faces - they must keep total sales growing to increase corporate income. If same store sales are slowing they have to try to increase sales with new stores. Stores that open below projections still produce incremental income for the corporation.

We've been here before.

Let's review the history of the "Convenience Strategy"

During the 1970s and most of the 1980s McDonald's USA opened 300 to 350 restaurants per year in the USA. In the early 1990s the pace fell to less than 200 per year. Apparently management did not feel this adequately presented McDonald's as a "growth company" to investors.

In 1995 management announced the"Convenience Strategy", a plan to increase new store development. That year they opened 597 free standing restaurants and 533 "satellites" in the USA. The year 1996 saw 542 new stores and 184 satellites in the USA.

The results? Massive cannibalization of existing stores. Not only were sales of existing stores severely impacted but the new stores were missing their projected opening volumes by 30% to 50%. Hundreds of domestic Operators were driven into insolvency and forced out of the system.

You may have seen some of these former Operators holding hand made cardboard signs at busy intersections.

The most important thing to remember about the disastrous Convenience Strategy is at the beginning Operators were thrilled with the prospects and eagerly lined up for the new stores. Who could blame them? They'd just been through a period where new stores were a rarity. How were the Operators to know that McDonald's would be building new stores in all the wrong places?

Fast forward to today, could McDonald's be oversaturating the USA again? Keep in mind that when the Convenience Strategy was announced the USA had less than 10,000 McDonald's locations vs. over 14,000 today. Is there room in the USA for a large number of additional McDonald's stores?

I think most veteran McDonald's Operators would respond in the negative. Low volume stores with high rent factors? No thanks.

So instead of getting excited about new McDonald's stores in their area Operators should be wary about the likely negative impact on existing sales and cash flow.

What should an Operator do if new locations threaten their patch of stores? It's becoming more common for Operators to turn down new stores or not pitch for them in the first place.

In the process of doing so they might attempt to educate the regional decision makers on why the site doesn't make sense.

Yes, there are downsides to turning down new stores, but the risks to your business are much higher today than when McDonald's USA actually was a growth company.

Preemptively Operators might involve their RLC in monitoring new store growth. Individually this might be an opportunity to ask for a review by the Ombudsman before a store opens, not after the damage is done (there is still an Ombudsman isn't there?).

Another avenue is to work with local politicos and keep the location from being permitted in the first place. It's been done before though few of us talk about the back story.

We can't expect McDonald's management to remember, or fear repeating, the biggest blunder in the history of the McDonald's system. I think it's been expunged from corporate memory. There are few people left in McDonald's management who were in positions of influence at the time of the Convenience Strategy.

Since this insane growth was never recognized as a mistake by Oak Brook - history can repeat itself. In fact, the rhetoric is the same, "We need to build there before a competitor builds there". That's the same thing Mike Quinlain said in 1995.

Proposed new McDonald's store near your patch of stores? Be afraid, Be very afraid.

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