Makeover Boosts Sales For French Franchisees - American Independent Business Alliance AMIBA

September 25, 2003

Franchising Focus
Makeover Boosts Sales For French Franchisees

By Shirley Leung

For 50 years, a primary ingredient of the recipe for expansion at McDonald's had been consistency. Learn how a dramatic departure from that formula is helping its restaurants succeed overseas.

PARIS -- Missing from many McDonald's restaurants around here is an iconic piece of signage: the neon Golden Arches. Gone, too, are many of the utilitarian chairs and tables and other plastic fixtures of the fast-food giant. The restaurants have hardwood floors, exposed brick and even armchairs. Some have TVs blinking with music videos.

Walking past the faux-marble walls of one Parisian franchise, the chain's 41-year-old European president, Charlie Bell, proclaims, "If you took a picture of this, you wouldn't think it was a McDonald's."

For 50 years, a primary ingredient of the recipe for expansion at McDonald's -- and the entire fast-food industry -- had been consistency. A Pittsburgh McDonald's looked like a Paris McDonald's, which in turn looked like a McDonald's in Prague. Menus might vary to reflect local tastes, but the essential offering was universal: cheap food served fast in a bright, clean and, above all, familiar-looking setting.

A dramatic departure from that formula is taking place here in France, where franchisees face increasing competition from fast baguettes. Half of this nation's 932 McDonald's outlets have been upgraded to a level that would make them almost unrecognizable to an American. Far from being cookie-cutter copies, each of the remodeled restaurants features one of at least eight different themes -- such as "Mountain," complete with a wood-beam ceiling reminiscent of a ski chalet. The company has even begun to replace its traditional red-and-yellow signs with signs in muted tones of maroon and mustard. And while the basic burger offerings remain the same, there is espresso and brioche.

It's a radical vision for the archetype of fast food -- and a possible glimpse into its future and that of the industry as a whole. The 1990s explosion of Starbucks Corp. and gourmet food taught that consumers today want more than just quick service in a utilitarian setting. Rather, they want tastier options in comfortable surroundings. Over the past few years, McDonald's and other burger giants have tried to take advantage of this trend through acquisitions of smaller, somewhat more upscale food chains. For example, McDonald's bought a 33% stake in Pret A Manger, a coffee-and-sandwich chain with stores in New York, London and Hong Kong. Wendy's International Inc. bought Tim Hortons, a chain of coffee shops in Canada and the U.S.

But until now, the fast-food chains haven't brought the Starbucks style to their core brands. While McDonald's in France has embraced the concept most fully, fried-chicken giant KFC and Subway Restaurants also are adding upmarket touches, such as stucco walls and softer lighting.

Attention-Getter
McDonald's Chief Executive Jack Greenberg says it's too early to tell if the French strategy would work in the U.S., but "everyone [at the company] is paying attention." This spring a team of French executives made a presentation to Mike Roberts, who as president of McDonald's USA would be responsible for introducing such a program. Mr. Roberts is considering decor options but hasn't made any decisions, a company spokeswoman said.

Some franchisees question whether the approach makes sense beyond trend-conscious markets such as Paris or New York. Ken Clement, a franchisee of nine restaurants in Phoenix and a former McDonald's vice president, says fancy interiors aren't necessary in "standard, suburban America," where drive-through customers can account for 60% of sales. "People are not coming to swoon over the decor," he says. "They are coming in and getting out of there. They don't give a rip what is inside."

Yet a change may be needed. Sales at U.S. McDonald's restaurants that have been open more than a year -- a benchmark known as same-store sales -- have been flat to negative for the past two years, according to an analysis by Merrill Lynch & Co. Meanwhile in France, since the remodeling project began in 1998, remodeled restaurants tallied same-store sales increases of anywhere from 3% to 20% a year. Without variety, says McDonald's France President Denis Hennequin, consumers "may get bored."
Back in the 1970s and 1980s, McDonald's was an unstoppable growth engine, quickly ballooning into the world's largest restaurant company. But starting in the mid-1990s, the Golden Arches weren't so golden anymore. The U.S. market -- the Oak Brook, Ill., company's biggest, with 13,000 restaurants -- was becoming saturated, and McDonald's couldn't simply open more outlets and grow profits. Endless tinkering with the menu didn't seem to help, nor did a costly overhaul of the cooking system, known as "Made for You," which was designed to serve up custom-made, fresher and hotter sandwiches.

McDonald's reported a decline in profit in six of the last seven quarters. The company attributes some of the downturn to decreased sales over fears of mad-cow disease in Europe.

Enhanced decor could help McDonald's reach beyond its traditional demographic -- children looking for a Happy Meal and young men seeking the cheapest nearby burger -- to more women and more fashion- and quality-conscious customers. A comfortable setting could also fill the restaurants in between meals, and encourage all diners to stay longer and spend more. "We wanted not to be a pass-through restaurant but a go-to restaurant," says Mr. Hennequin, McDonald's French president.

The hope is that McDonald's can also leverage the new decor to attract customers willing to spring for more expensive food items in addition to the basics. In France and elsewhere in Europe, Mr. Bell is pushing the "Premiere" line of sandwiches, which is priced 30% higher than the average hamburger. The first entry, a chicken-on-focaccia sandwich called the McChicken Premiere, has been a hit, he says. "Our future business will be selling more than burgers and fries," says Mr. Bell, a McDonald's employee since he started flipping burgers in Australia at age 15.

The difficulty will be attracting new customers without alienating the old. "If [the customer] expects speed and convenience, and you offer him a long, sit-down experience, he may be confused," says Nicolas Bloch, a partner at consulting firm Bain & Co. who specializes in European food and retail industries.

Mr. Bell says the changes won't drive away the traditional McDonald's customer base, because the new items will be "delivered to the customer at a real McDonald's value."

Unique Looks
A few U.S. franchisees have taken it upon themselves to invest in a unique look. In Dallas, there's a McDonald's in the shape of Happy Meal box, and in Chicago, there's one with a rock-and-roll theme. According to McDonald's policy, the company selects the site and builds the restaurant while the franchisee foots the bill for restaurant equipment and decor.
"A lot of materials have been in place for too long and need to be upgraded," says Irwin Kruger, a franchisee for 34 years, who has seven restaurants in New York City. He has upgraded all of them at a cost of 50% more than the standard franchiser expense. His new, loftlike McDonald's in Times Square has lots of exposed steel and brick and stage lighting to evoke nearby Broadway. He says sales at his upgraded restaurants generate more than twice the national annual average of $1.5 million per unit.

The European president of McDonald's, Mr. Bell, arrived on the job nearly a year and a half ago from Australia, where he oversaw the launch of the popular McCafes, which are McDonald's restaurants with coffee bars inside. Mr. Bell recently decided to export the French upgrade program to the United Kingdom. In the competitive fast-food business, he says, "if you stand still, you are dead."

One hurdle is the cost of the remodeling program. In France, the company typically pays for two-thirds of the cost of upgrading an existing restaurant, with the franchisee responsible for the rest. (The cost of building a newly designed restaurant from the ground up is about the same as building a basic one.)

French franchisees are willing to pay. The country known for its cuisine has been perceived as resentful of the incursion of McDonald's. A French farmer became a hero in 1999 for driving his tractor into a McDonald's restaurant as a gesture of protest. Nevertheless, the French have been chowing down les Big Macs from the moment McDonald's first arrived here in 1972. Now France is the third-largest market in Europe.

In recent years, French franchisees sensed that they faced a new kind of competitor. With Burger King completing its pullout from France in 1998, burger joints were no longer the main threat. But chains -- not just the corner bakery -- began serving fresh baguettes filled with ham and brie in a bistro setting. Their food came just as fast and as cheap as McDonald's. "We had to find something else," says Michel Reglat, a franchisee of 13 restaurants in Toulouse.

McDonald's French division hired an architect to come up with its new restaurant designs, unveiling the first one in late 1998 on the Champs Elysees, on the site of a former Burger King. Called "Music," the restaurant has blue booths and chairs, and numerous CD players and TVs on the walls that constantly blast rock tunes and videos. The restaurant rang up sales of about $4.9 million in 2001, Mr. Hennequin says, claiming that the same location used to bring in only about $2 million a year back when it was a Burger King. A spokeswoman for Burger King says the chain doesn't disclose sales figures.

Other new motifs include the more playful "Sport," which features chairs that resemble bicycle seats and TVs that play sports games. Another design, called "McDo Generation," has an industrial look with lots of steel, while others, "Autumn" and "Summer," feature exposed brick, dark wooden chairs and tables, and warm colors of orange and brown or shades of blue. Mr. Reglat, the franchisee in Toulouse, says seven of his 13 restaurants have the new designs, and have seen sales increases of 10% to 20%.

"I like the ambiance here," says Nasser Ben, a 30-year-old Hugo Boss salesman in Paris who frequents the "Music" restaurant. "It's not the food. It is the same."

Anne Lizot, a 22-year-old student in Paris, says she goes out of her way to visit the "Music" McDonald's so that she can watch videos while she dines. "There is another McDonald's closer to where I live," she says, but "I come here."