In Lean Times, McDonald's Only Gets Fatter

Let's face it — there are lots of reasons to hate McDonald's: calories, cholesterol and, for me at least, that queasy feeling after munching on McNuggets. Then there's always that kid at the drive-through who forgets the ketchup.
Well, add one more reason to spite Ronald: as the global economy spirals downward, McDonald's is minting money. The company addicts us to its food, and now it's making out on our misery? But maybe it's time to change our attitudes about the Golden Arches. What may be bad for the waistline may be good for the wallet. In these tough times, those $3.50 Big Macs never tasted so good. (See the evolution of McDonald's fine-food chain Chipotle.)

"In the worst of times for the restaurant industry, it's the best of times for McDonald's," says Burt Flickinger III, managing director of the Strategic Resources Group, a retail-consulting company. McDonald's reported global same-store-sales growth throughout 2008 — and in November, global sales rose 7.7% over 2007 (sales jumped 4.5% in the U.S.). In fact, the company's sales have increased for 55 straight months. Profits grew 11%, to $1.2 billion, in the third quarter of 2008 (the company will report its fourth-quarter results on Jan. 26). McDonald's and Walmart were the only two companies in the Dow Jones industrial average whose share prices rose during 2008. Merrill Lynch, which rates McDonald's a "buy," said in a research report that the stock is "in a world of its own.

The pricing of McDonald's, highlighted by dollar-menu items like apple pies, side salads and yogurt, plus cheap combo meals — burger or sandwich, fries and a drink — is a key strength during the recession. In particular, consumers are fleeing casual, family chain restaurants for the convenience and savings of fast food. (Yum! Brands, which owns KFC, Taco Bell and Pizza Hut, and Burger King have also seen sales growth, though at smaller levels than McDonald's.) Casual-dining joints are reeling: P.F. Chang's and the Cheesecake Factory, for example, saw their third-quarter 2008 profits fall 43% and 36%, respectively. Bennigan's went bankrupt, Ruby Tuesday will shutter 40 locations by the end of February, and more than a dozen regional chains have filed for bankruptcy. "Any time people can trade down, they're doing that," says Britt Beemer, chairman of America's Research Group, which studies consumer behavior. "If you can't afford to eat at Chili's, you'll snap up McDonald's." (Third-quarter sales for Chili's dropped 3%.)

The economy is not the only reason people are drawn to McDonald's. The company's management also deserves credit for its success. Back in 2003, America's obesity epidemic was a hot topic, and McDonald's suffered from the backlash. For the first time in its 47-year history, the company saw a quarterly loss. Its stock was down to $12 a share. You couldn't just blame bad p.r. for the company's woes. Stale food and tired stores also kept people away. "McDonald's was actively dissuading customers from coming back," says John Glass, a Morgan Stanley analyst.

Since that time, McDonald's and its franchises have remodeled 11,000 stores (there are now 31,000 locations around the globe). At a spruced-up restaurant in the Bronx one weekday evening, Brian Waters, a mailman, sat with his 9-year-old son in a booth. The bright dining area featured abstract paintings of New York City's bridges and the Statue of Liberty. "It used to be dark and drab in here," Waters says. "Now it's nice and clean. I don't mind sitting here anymore." Stores have also extended hours: 34% of the company's 14,000 U.S. restaurants are now open 24/7.

The menu got an upgrade too. Obscene "super-size" choices were phased out (tub of soda, anyone?), and healthier options like apples and salads were added. The company changed its coffee blend; coffee sales have soared 70% over the past two years. Chicken McNuggets now consist solely of white meat, which has less fat and fewer calories than the darker-meat mix of old. When she first started taking her son to McDonald's, Angelica Orzco, a security guard in New York City, wouldn't touch the stuff herself. But these days she's a regular burger eater. "The beef was very greasy," she says. "Now it's much better."

Like any other business in this environment, McDonald's faces some potential roadblocks. It's rolling out a specialty coffee menu, called McCafe, which will include vanilla lattes and mochas. "It's not the best time to roll out a premium beverage product," Glass notes. As the recession wears on, fast-food-service growth may flatten out; plus, McDonald's can expect more price competition. For example, Steak 'n Shake, the diner-style burger chain in 21 states throughout the Midwest and South, is promoting four different meal combos for less than $4. "In Los Angeles, every other billboard is a 99-cent food price," says Glass. The battle for bargain-hunting eaters is on. But given its recent winning ways, McDonald's might just add a few more billion served.