McDonald's: We're lovin' it!

Times may be tough, but there’s been no McCrunch under the golden arches. In fact, McDonald's will today announce 4,000 new jobs in the UK as sales here soar. James Thompson says the fast food giant went back to basics just as consumers were crying out for cheap and cheerful comfort food

British consumers have had a steady diet of healthy eating and regular exercise rammed down their throats for the past decade. They have gorged on documentary films, such as Morgan Spurlock's Super Size Me, and devoured books, including Eric Schlosser's Fast Food Nation, which both slammedMcDonald's.

But it has had little, if any, lasting impact on McDonald's, the king of the UK fast food industry.

Today, McDonald's revealed that it is to create 4,000 new jobs in the UK in response to buoyant sales growth and a record extra two million customers a month compared with last year. It is also continuing to ramp up the amount it invests in its store refurbishment programme, which has transformed the look of many outlets to a softer, warmer feel.

What's more, the credit crunch is driving increasing numbers of cash-strapped customers into the arms of Ronald McDonald and a fix of one of his burgers.

So what has changed at McDonald's, why is it performing strongly, and what are the challenges it is likely to face over the coming years?

Its recent stellar performance represents a remarkable turnaround for McDonald's, which in 2006 caused foodies and pressure groups to salivate at the prospect of its decline when it said it would close about 25 UK stores. Since then, McDonald's UK has fought back by altering its menu, responded to lobby groups with ethically sourced coffee and healthier food, extended its opening hours, refurbished stores and introduced free wireless (Wi-Fi) access at its restaurants.

Steve Easterbrook, who was promoted to McDonald's UK chief executive from chief operating officer in April 2006, says the business had been underperforming for several years. "I think the business had been flatlining. It had very modest growth or declining [growth] across the previous four to five years."

Over that period, its UK sales were about 1 per cent down in total, he adds.

"The reality was that the pace of change outside of McDonald's had been quicker than the pace of change within the business – and we were getting left behind," said Mr Easterbrook, who joined the chain in 1993.

Of the changes introduced, Mr Easterbrook said those made to its food menu are the most significant, such as the launch of freshly ground Rainforest Alliance coffee and tea, semi-skimmed organic milk and the Chicken Legend, a nugget made from 100 per cent chicken breast, in 2007.

With such products, McDonald's has been clever in responding not only to the changing tastebuds of consumers, but also helping to spike the guns of its opponents. Martin Caraher, a reader in food and health policy at City University, says: "They are ticking all the right boxes in terms of sourcing, such as locally sourced Irish and British beef, and fair trade."

Jeanette Longfield, a co-ordinator at Sustain, a pressure group committed to improving food for children, says McDonald's has done more than its fast-food rivals, such as Burger King and Kentucky Fried Chicken. "They have at least bothered with free-range eggs and organic milk."

Mr Easterbrook is keen to stress that McDonald's has made substantial progress in improving the quality of its food. He says: "We have reduced the salt on fries and ketchup. We want to maintain the taste but improve the nutritional profile." He adds that a third of the Happy Meals, designed for children, it sells contain a healthier non-carbonated drink, such as a fruit drink or water.

"We will not keep all of our customers happy all the time. The changes we have made are widely recognised and customers are responding to them," says Mr Easterbrook.

He stresses that while McDonald's remains committed to salads, its sales of salads are about the same as they were two years ago. "We are still looking to improve the salad we offer. We are still committed to making them relevant and tasty for the customers who want them." However, he is honest enough to admit that McDonald's does not envisage substantial sales growth of its salads.

While McDonald's has won plaudits among some for its image overhaul, it has not been entirely successful. Stephen Cheliotis, chief executive of the Centre for Brand Analysis, points out that McDonald's and Burger King have both plummeted down its Superbrands list of the UK's top 500 consumer brands, published last month. He said: "The reality is that the sustained campaign in the media, the Government and health bodies' message to eat more healthily has affected those brands."

However, Mr Easterbrook says the reality is that McDonald's is a burger company first and foremost. In these straitened times, it would appear that British consumers are not prepared to give up on their cheap burgers as they get hit in the pocket by soaring petrol, utility bills, inflation and stagnating house prices.

Burger King says it is also performing strongly. David Kisilevsky, Burger King's vice-president of marketing for north-west Europe, says: "Our [UK] business has not been as buoyant as it is now for four years." He says that Burger King delivered comparable sales growth of 10.2 per cent for the three months to 31 March. "We are not recession resistant, but we are recession resilient," says Mr Kisilevsky.

During the credit crunch, Mr Caraher has noticed a discernible trend in middle-income groups eating out less while lower socio-economic groups are eating out more in fast-food restaurants. He says this may be partly driven by lower-income groups trying to save on heating and fuel bills at home, while those who live in city centres may try to save on petrol costs by going to the local McDonald's or Burger King.

Mr Easterbrook says: "People are searching out value for money and they are more demanding of what they want from their money."

Despite the efforts made byMcDonald's over recent years, its critics have not gone away.Ms Longfield says: "I am not aware of them dramatically changing their marketing in the way they target children, who have always been attracted to them." She adds that McDonald's still sponsors football in the UK, which is influential among children.

As McDonald's ratchets up its growth programme, Mr Caraher says that the Government needs to consider the impact of all fast-food outlets on the local community, particularly in residential areas. This is not only because of the impact on people's diet, but also because fast-food outlets, which are often located on street corners, can become hotspots for crime and gangs congregating.

Mr Caraher says: "We need some regulation of fast-food outlets and their opening close to residential areas. Anyone can open a fast-food outlet anywhere without planning restriction as long as they meet [food] hygiene regulations." He also wants to see a food labelling system, such as the traffic light system used by some supermarkets, introduced for fast-food outlets and other restaurants.

While McDonald's has come a long way since 2006 and its sales and profits look set to get fatter during the credit crunch, its critics are not going away and will be waiting if it takes its eye off the ball.

Double cheeseburger for a dollar under threat

There have been plenty of clues about rising inflation, but if any US citizens are unaware that sky-high commodities prices are pushing up prices throughout the economy, then this surely is the moment their bliss was interrupted. The McDonald's dollar menu is under threat.

The ubiquitous fast-food chain's $1 double cheeseburger is up there in the pantheon of American consumer staples alongside the cold Budweiser and the pretzel. But some McDonald's outlets have quietly begun charging $1.19 for it. Others have dropped the second layer of processed cheese, rebranding the slimmed-down version a "double hamburger with cheese".

These are tough times in the food industry, for sure. The dollar menu – whose 10 items also includes the McChicken sandwich, fries, two slices of pie and the hot fudge sundae – has been a staple at the 14,000 US McDonald's outlets for five years, luring cash-conscious customers through the door and accounting for14 per cent of thecompany's annual sales. But something had to give.

The reason is thatMcDonald's expects the price it pays for cheese to rise 21 per cent this year and its beef costs to rise up to 9 per cent. The double cheeseburger is suddenly a luxury, not a budget item.

Last month, RalphAlvarez, chief operating officer, warned customers to expect a much leaner dollar menu. "What fits on that menu will look different than now because it has to be profitable," he said. "We've got to make sure we're pricing smart, not just pricing low."

Stephen Foley