FOOD, FOLKS AND FORECASTINGBy Larry Barrett | Posted 2003-07-02 Email Print
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.
"We didn't want to add another distraction to sites that weren't performing as well as the ones we did choose," he says.
Still, the McDonald's information technology team forged ahead. With the second quarter of 2003 targeted as the date for the first rollout of Innovate, there was little time to second-guess the project's operational merit. A McDonald's information technology manager familiar with Innovate who didn't want to be identified says the sites in Canada and France were restaurants owned and operated by McDonald's. Roughly 70% of all McDonald's restaurants are owned and operated by independent franchisees.
"They wanted to roll out Innovate to the McDonald's-owned stores first because they knew there would be strong resistance from the franchise community," the McDonald's source says. "Most of the stores abroad, especially in Europe, are McDonald's restaurants. It was a natural place to start and then, eventually, bring it into the U.S."
McDonald's executives said that had the first live versions of Innovate met expectations, U.S. stores wouldn't be linked for at least another two years.
Peter Abell, an analyst at AMR Research, says a real-time global network would tax even the most ambitious information technology organization. Configuring and integrating the software necessary to communicate back to Oak Brook from 30,000-plus locations-including some in third-world locations where broadband connectivity is still just a dream-was more fantasy than reality.
"Doing it over the Internet does create some security issues but you could secure it pretty well," he says. Virtual private networks and data encryption would have guarded against prying eyes. The main technical hurdle would have been ensuring there was enough network bandwidth available for every restaurant to be visible at all times.
"The real challenge is determining whether or not there are enough cost benefits to make it worthwhile in the first place," says Abell.
He says Wal-Mart managed to create a real-time network by using satellite dishes at its different locations. The satellites allowed the stores to instantly approve credit-card and debit-card transactions. All the company's credit card authorizations are handled by the network and all the sales and supply-chain data, such as orders received and placed with vendors, are transmitted back to headquarters.
"The biggest problem a company like McDonald's would have is getting high-speed bandwidth in every location," Abell says. "Some parts of the U.S. still don't have reliable high-speed connectivity. And they're international. So that could definitely be problematic."
But even if Innovate had taken flight in Canada and France, it might not have ever materialized in the U.S., because many franchisees are still furious about how another McDonald's system they had to implement slowed service.
In 1998, McDonald's unveiled a new cooking system called "Made For You" that required individual franchisees to overhaul their kitchens and install McDonald's-approved computer systems in order to produce a fresher, warmer product.
Competitors such as Burger King, Wendy's and Jack in the Box were spending millions to advertise the fact that their burgers were cooked to order and that customers wouldn't be served burgers that had been cooked and left under heating lamps for several minutes before they were sold.
"We know people don't like the idea of eating a burger that's been sitting around for five minutes," says Richard Steinig, who owns and operates four McDonald's in the greater Miami area. "But what we don't know is how that translates into better sales. I'm not so sure it does."
Made For You cost franchisees between $30,000 and $60,000 per restaurant, according to former CIO Dill. In addition to implementing the new PC point-of-sale (POS) system, most kitchens had to be expanded or reconfigured, at the franchisee's expense, to accommodate the new kitchen equipment and layout. Franchisees paid the expense with McDonald's reimbursing them up to $12,500 per store. In the past, McDonald's would cook up batches of Big Macs or Quarter Pounders or regular cheeseburgers based on anticipated demand. Metal placards were used to track the amount of time each order of, for example, a dozen Big Macs had been under the heating lamps.
This system worked for years and was especially efficient during peak rush periods at lunch and dinner. So when McDonald's corporate rolled out the Made For You campaign, many franchisees resisted. Considering the average McDonald's restaurant recorded sales of $1.5 million in 2002 and owner-operators typically earn between 5% and 7% of the total sales, an additional expense of $30,000 or $40,000 to overhaul the kitchen could consume about one-third of a year's profits.
McDonald's executives contend the average cost to install the Made For You system was roughly $25,000 per store.
Franchisees such as Steinig claim that before Made For You was implemented, it would take between 60 seconds and 90 seconds to serve most customer orders. Now, it takes between two minutes and three minutes per customer, or longer.
"Made For You has been terrible," Steinig says. "I want to do what's good for the system and what's good for business. But if I'm spending a load of money I expect some return for my money. Show me where it's increasing sales. I know we're selling a hotter product, but it's not helping sales." The average McDonald's in 2002 reported sales of $1.5 million compared with $1.03 million for the average Burger King, meaning McDonald's filled 46% more orders than Burger King. "That adds up over time, especially during the rush hours," Dill says. "We just had too many customers to make it work the way the smaller competitors could."
The PC POS system replaced proprietary computer registers that delivered information to in-store processors. These computers are a McDonald's restaurant's black box, recording information on operations such as an individual store's total sales for the day, and the number of patties, buns, cups and other products used, and delivering it back to the McDonald's mainframe systems in Oak Brook each night over a modem connection. It also is used by managers to place orders from distributors for replacement patties, buns, chicken breasts, napkins, etc., as well as for setting up staff work schedules. However, a former McDonald's manager now working as a restaurant consultant says the data that is batch-dumped to the McDonald's mainframe system in Oak Brook every night doesn't offer the detail McDonald's executives needed and, worse, took as long as a week to be compiled, analyzed and distributed to managers who would then order more patties, buns, etc. from McDonald's vendors.
"For example," the manager says, "they might know how many patties were sold but not how many specific sandwiches were sold at a particular location. It would provide only very general sales information. Not enough to efficiently replenish orders from suppliers to management's satisfaction and certainly not fast enough."
And as McDonald's attempts to make its menu more "relevant" to the tastes of today's consumers, this timely data becomes all the more critical. Hence the need for a project like Innovate.
But instead of investing in Innovate over the next five years, Cantalupo says McDonald's will invest in itself through the share repurchases and dividends. These measures might provide temporary relief for the beleaguered stock price but will do little to improve the quality of the food or the speed of service at its locations.
During the May shareholder meeting, Cantalupo and the executive management team unveiled its "Plan to Win," a strategy focused on improving sales at its existing stores rather than opening new stores. A big part of this plan is creating a menu that's more relevant to consumers. Long lambasted for a menu high in fat and cholesterol, McDonald's is pinning hopes on a new salad line.
"The salads are great," Hickok says. "The only problem is that everyone already has them. At least they're trying, but there's no reason to think that these salads are going to be the savior."
Ironically, McDonald's reversal on Innovate has been accompanied by continued attempts to use technology to improve the speed and convenience of its fast-food transactions- such as its plans to use electronic payment systems and kiosks. It has announced a series of other high-tech gambits that seem completely out of character. For instance, it launched a wireless Internet access trial in 10 New York restaurants-a free 60-minute Net access with the purchase of an Extra Value Meal-which doesn't seem to be fully in line with Cantalupo's quest to improve the quality of McDonald's existing-store products and service.
But then technology has never fit easily on McDonald's menu. "Culturally, it was always a fight at McDonald's," Dill says. "My first day on the job I remember meeting with then-CEO Fred Turner and he said 'Carl, I never want to fail to sell a hamburger because a computer is down.' McDonald's just wasn't comfortable with technology."
-with additional reporting by Charles Babcock