Fast Food Fails Digital Networking TestBy Larry Barrett, Sean Gallagher | Posted 2003-07-02 Email Print
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McDonald's planned to spend $1 billion over five years to tie all its operations in to a real-time digital network, but the project failed before it even got off the ground.
The most important shareholders' meeting in McDonald's history was about to start. It was early May 2003 and several hundred stockholders and analysts were wedged into the Hyatt Lodge ballroom on the sprawling McDonald's Oak Brook, Ill., campus. Chief Executive Officer Jim Cantalupo looked on as Ronald McDonald bounded around the room in full makeup and oversized red shoes. The "Chief Happiness Officer" was shaking hands, smiling and doing something called "the Ronald dance" to a compilation of feel-good, McDonald's-themed songs.
Just six months into his tenure, Cantalupo surely knew he was going to have to do some pretty fast dancing of his own to restore investors' faith in an American icon.
Shares had tumbled in March to $12.38, a nine-year low, after the company registered its first unprofitable quarter ever, losing $343.8 million in the final three month period of 2002. It said it would absorb $810 million in charges for the quarter and confirmed it would close 719 restaurants worldwide. Included in the $810 million charges was a $170 million write-off related to the discontinuation in December of a global, real-time digital network called Innovate, which represented the most expensive and extensive information technology project in the company's history.
That $170 million was just part of the $1 billion that McDonald's expected to spend on Innovate when it conceived the project in January 2001, according to executives and consultants involved in the project. Innovate was designed to allow McDonald's management, at some point in the near future, to see just how many billions of burger patties, buns and chicken nuggets were being consumed at any or all stores at any time of the day. For instance, they could see if the restaurant at South Cooper Street in Arlington, Texas, was handling customer orders at its cash registers within the three-minute service goal, and even if drive-through service was faltering as a result.
Further out, Cantalupo's successors would be able to see if the oil in the fryer at a restaurant in Leicester Square, London, was turning out sticks of potato at the proper temperature and time. Anyone authorized to know could even connect from anywhere in the world to see if the carbon dioxide in a soda tower in any store in the network had fizzled out.
Such was the ambition of McDonald's in trying to use technology to return to its roots: the speediest, most consistent service in the fast-food industry.
But the fact the billion-dollar project failed before it even got off the ground shows the difficulty of turning even a simple business such as flipping burgers into a "real-time enterprise." In fact, to date, McDonald's attempts to use technology to put its products in the hands of hungry consumers faster have been largely unsuccessful.
The company's failure to find a way to improve customer service is compounded by a lack of creativity: the company hasn't introduced a home-run menu item since it rolled out Chicken McNuggets in 1983. The Big Mac, McDonald's signature sandwich, is 35 years old.
Cantalupo told shareholders that McDonald's top priority now was not Innovate, but to improve the quality of the products and service it provides in existing stores. No longer can it expect growth from the breakneck pace of expansion that defined its business in the 1990s.
If anything, McDonald's past success created a sense of arrogance and ambivalence that enabled it to operate in a vacuum, unencumbered by the realities of evolving consumer taste and the realities of the digital economy.
Yet it was that fast growth that led headquarters to want to create a means of controlling the key quality that makes a fast-food chain successful: consistency. But how could top executives really know what was going on in the stores? McDonald's opened more than 1,700 new restaurants a year in the past 10 years, taxing its outdated data collection systems and making enemies of franchisees who complained that McDonald's was cannibalizing its older stores for the sake of top-line growth.
To improve its existing restaurants, McDonald's now thinks it needs a more "relevant" menu featuring more healthy options. But it also knows it must improve the sluggish service that has sent many customers elsewhere during their lunch breaks.
A Web-based network that shipped information instantly around the world might have done that. It would at least have given executives the ability to monitor, and possibly affect on a minute-by-minute basis, the company's ability to get a consistent product to customers as fast as possible. Founders Richard and Maurice McDonald, and Ray Kroc, the distributor of a five-spindled milk shake maker called the Multimixer, who built McDonald's into a global powerhouse, would have understood. If connected to every key piece of equipment in every store, the real-time digital network would have allowed McDonald's to better serve customers by using information and communications technologies to monitor the quality of the oil used to make french fries, or ensure that each bun was toasted to the proper level of crispiness.
Moreover, it would have given McDonald's executives a bird's-eye view of the entire system at any minute of the day. Identifying which locations were selling the most McGriddles breakfast sandwiches or premium salads would have been as simple as logging onto a browser at the corporate headquarters, according to staff inside McDonald's information systems organization. Sales, service time, staffing, supply-chain data, vendor locations, equipment repair orders and every other data item that McDonald's currently tracks—using an aging homegrown system that often delivered the data to decision-makers in a week or more—would be had in seconds through a Web browser.
To make this system work through the public Internet or even a Web-based private network, McDonald's was looking at a huge cost—and it may not have been practical. After all, if $1 billion was to have been spent in the first five years just designing and implementing Innovate, the company would have spent hundreds of thousands or millions of dollars more maintaining the network each year as more and more functions and application were added. From a pure financial standpoint, there's little wonder that Cantalupo canned Innovate almost as soon as he got on the job.
"There's no question the $1 billion would have only been a starting point," says Andrew McAfee, an assistant professor at Harvard Business School and a specialist in large-scale corporate information systems implementations. "These projects are hard to break into bite-sized chunks. Over and over again, companies take a monolithic approach to these implementations, telling themselves that they're going to spend a lot of money without seeing any real returns until that magical day when they flip the switch and go live five years down the road."
Though the company had shown little to no excitement or expertise in large-scale information systems implementations when Innovate was initiated, its executives thought they could do a Wal-Mart-like makeover of their core technology infrastructure.
What they found out was that their expertise in developing and mass-producing cheeseburgers and french fries had little relevance to the world of software integration and implementation.