McDonald's: McBusted

McDonald's: McBusted
July 2, 2003

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 to 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.

INTO THE FRYER

McDonald's challenge is painfully obvious from a May visit to a franchise on Midwest Road in Oak Brook, only a few miles from where Cantalupo spoke to stockholders.

In a restaurant last redecorated in the 1980s, among faux black marble wall tiles and fraying brown leatherette booth benches, a manager repeated the same phrase to customers as their orders were finally filled: "I'm sorry about the wait." With only three customers at the counter, an order for a single Extra Value Meal took more than seven minutes to fill.

As the result of a process reengineering the company forced on its restaurants in the late 1990s, the quality and speed of service is, as Cantalupo acknowledges, at an unacceptable nadir. The restaurant built on the "15-second burger" now finds itself losing its share of customers because of slow and sometimes shoddy service.

The American Customer Satisfaction Index (ACSI), which surveys more than 65,000 customers, has tracked McDonald's lackluster service performance for the past nine years. The study measures customer expectations, perceived quality, perceived value, customer complaints and customer loyalty—scoring each company on a scale of 1 to 100.

In 1994, the first year of the study, ACSI respondents gave McDonald's a score of 63, well below competitors such as Wendy's (71) and Burger King (66), as well as Yum Brands' Pizza Hut (69) and KFC (67) units. In 1995, McDonald's managed to score a 65—the highest level it would attain during the nine years of polling—before slipping back to a 61 in 2002. Meanwhile, its leading competitors have consistently scored from the mid-60s to low-70s over this same period.

Taking a closer look, every fast-food restaurant points to its drive-through window as the benchmark for its service performance.

The most recent data collected by QSR Magazine, a quick-service restaurant trade publication, shows that McDonald's drive-throughs took 162.7 seconds to fill an order between June 7 and July 28 of last year. That's slightly faster than the 165.8-second average of the top five burger-centric fast food restaurants.

However, random secret shoppers hired by McDonald's and other independent watchdogs, such as QSR Magazine, report that orders can take between five and 10 minutes to fill and actually take longer during nonpeak operating hours.

Now, say Cantalupo and McDonald's President and Chief Operating Officer Charlie Bell, the technology efforts of the company will be focused on improving its customers' experience; speeding up the trip through the drive-through or to the counter, and making the trip more convenient so that Quarter Pounder lovers will come back again.

This summer, the company begins its rollout of credit- and debit-card payment systems to about a quarter of its U.S. restaurants. These systems will require no signature for purchases, reducing the time it takes for a credit card transaction to go through to roughly the same time as a cash transaction. McDonald's hopes that taking credit cards will boost its flagging sales—Visa found in a study of credit card use in quick-service restaurants that customers spent 30% to 50% more when they used a credit or debit card than when they spent cash.

But restaurants need to configure their point-of-sale systems to take electronic payments before these systems can be installed—according to one integrator familiar with the McDonald's trial, it costs $12,000 for each McDonald's location to be configured to handle the technology.

Cantalupo says the company also plans to test kiosks that allow customers to punch in their own orders at the drive-through or while waiting to get to the counter—theoretically cutting down on the wait in line and reducing order-errors by cutting McDonald's minimum-wage employees out of that part of the transaction. And, says Bell, the company will focus on other basics of good service—like having clean bathrooms. "We're going to have the cleanest bathrooms in the business," he declared at the stockholder's meeting.

Having clean bathrooms was always a tenet that Ray Kroc insisted be at the forefront of McDonald's image. He would often tell McDonald's insiders that kids can't tell the difference between the quality of one cheeseburger or another but mothers would always know and remember which bathrooms were clean and which weren't.

But information systems don't scrub toilets and they don't fry potatoes.

THE SPECIAL SAUCE

The McDonald brothers first conceived of what would become known as the fast-food or quick-service model shortly after World War II when they mapped out the layout for their original restaurant in San Bernardino, Calif., on a tennis court. The idea was simple: take the mass production, assembly-line system used for manufacturing cars and replicate it in a burger restaurant.

They installed large grills in their kitchen to cook up burgers in large volume and incorporated what they would call the Speedee Service System. This wasn't a system that relied on technology but common sense. It eliminated menu items that required utensils or dishware, replacing them with the nine-item menu that would become the foundation of the McDonald's dynasty. No dishes. No forks. Paper wrappers and cups and a few napkins.

Managers, who often owned the stores they managed, would write down orders on pads of paper and pass them back to the kitchen. More often than not, the burgers and fries would be waiting under heat lamps. Inventory was something that managers handled by intuition and experience. Often, managers would jot down how much milk or cheese or beef they would need for the next week on the back of the order forms they filled out when taking customer orders at the register.

The registers weren't computerized and certainly weren't linked to the kitchen. They simply facilitated the transaction.

Next, they divided the actual food preparation into specific jobs for different workers. One fellow worked the grill, cooking the patties. Another "dressed" the burger with a precise amount of ketchup and mustard before wrapping it and sending it down the line. Another worker was in charge of mixing milk shakes and pouring sodas. Yet another employee would work the register, collect the money and deliver the meal to the customer.

Over the years, McDonald's franchisees and corporate executives came to discover that many of the same problems that originally hampered the McDonald's brothers' California restaurant were still eating away at their profit margins.

Turnover of employees has been and always will be one of the biggest problems facing McDonald's operators. In fact, McDonald's claims that one in 10 Americans has worked at a McDonald's at one time in his or her life. Since the pay is mostly minimum-wage level or slightly above, McDonald's typically attracts teenagers and other relatively inexperienced or unskilled laborers. The fast-food industry attrition rate has been pegged at more than 100%, placing a premium not only on being able to hire and train new employees quickly, but to also make the assembly line method of building burgers extremely easy to understand and quick to pick up.

One feature of Innovate was supposed to fix much of that by streamlining the delivery of employee training and benefit data through the system. Using the Internet to convey training information, such as how to clean fryers or use the point-of-sale system, McDonald's hoped to leverage their existing training system across this platform.

But helping with human resources was just a small part of the $1 billion, five-year grand plan. McDonald's provided few details about Innovate. However, current McDonald's information technology managers, who spoke on condition of anonymity; former McDonald's Chief Information Officer Carl Dill, who worked at the company from 1982 to 1998; and software consultants close to the project confirmed McDonald's lofty intentions.

According to those individuals, an Oracle enterprise resource planning system, which can handle most day-to-day business functions, would serve as the hub. The Oracle software would run on Sun Microsystems Sun Fire Unix servers, replacing the company's homegrown IBM mainframe general ledger accounting system, and enhancing or replacing virtually every major back-office system in place at McDonald's used for finance, supply-chain management and human resources.

But the innovation didn't stop there. Innovate also would have monitored the temperatures of cooking and freezing appliances, as well as the exact usage of food and packaging supplies. The theory was that by working closely with suppliers and store managers, the company could improve the consistency of the product—for example, all burgers would be cooked at the exact same temperature and flipped at the exact same intervals at any restaurant in the world.

In the process, McDonald's hoped to instantaneously collect and send data to stores from the corporate office simply by punching a few keystrokes. If a store in Seattle wasn't moving people through the lines or drive-through as fast as others in the same general area, McDonald's could ask the local manager to add another employee or two to the lunch shift to improve service time. If one store wasn't moving as many McRib pork sandwiches as others in the area, the corporate office could double-check to make sure the restaurant had all the proper signage and marketing resources in place.

McDonald's hoped to be able to let its executives and managers see at any time of day how sales of any product at any store were proceeding, where backup supplies sat anywhere between its stores and its suppliers' plants, and manage its stores accordingly. If there was a run on salads in California, replenishing supplies could be rerouted from trucks originally destined for Iowa. This would give McDonald's the power to react to customer demand quickly, and draw substantial financial rewards from the resulting efficiency.

Monitored remotely and, eventually, managed remotely, the system would take a lot of the responsibilities away from individual store managers.

Scheduling of crew members would be simplified because the system would tell managers exactly how many customers ordered Big Macs or Quarter Pounders between noon and 2 p.m. every day of the week. Predicting the likely volume of sales—not only total sales, but also specific product sales—would make it easier for a manager to pick and choose the specific employees he or she wanted working the different spots on the burger assembly line.

Eventually, McDonald's technology managers and consultants say, the Internet-based network would have linked all of the company's 30,000-plus restaurants and 300-plus approved vendors 24 hours a day, seven days a week, to the back-office system at its corporate office in Oak Brook. This would have given McDonald's executives a complete, instant picture of the company's operations around the world, and, in theory, the ability to act quickly when necessary to adjust the deployment of promotions and supplies to meet demand.

While McDonald's already collects sales data from many of its stores on a daily basis, the company's decade-old financial reporting systems—built on IBM's CICS transaction service and DB2 database—weren't built with real-time business intelligence in mind. Different units within McDonald's used different tools to get at that data, from batch reports to data warehouse tools. McDonald's Canada, for instance, uses IBM's Visual Warehouse tools to analyze marketing and promotional programs. Depending on the location, McDonald's can only cull this data in a matter of days or weeks. But with Innovate, executives would be able to analyze data from all over the world from their Web browser—it would give them a dashboard for driving McDonald's business.

Taking it a step further, McDonald's may have eventually moved in lockstep with its car-making brethren by using the system to replace human workers, one of the most expensive and complicated components of the model. Indeed, McDonald's 2002 corporate payroll topped $3.1 billion. Some McDonald's stores already have installed machines that fill and distribute soda to the service line. Eventually, the cooking, wrapping and frying of burgers might have been handled by machinery, taking the troublesome and unpredictable element of human crew members out of the equation altogether. If every McDonald's restaurant in the chain eliminated just one minimum-wage worker from each shift, each store could save $82.40 a day. It might not seem like much, but taken across McDonald's 30,000-plus restaurants—those owned by McDonald's and those run by franchisees—the automation of one job could save about $900 million a year systemwide.

McDonald's also hoped to extend this detailed flow of data to the kitchen itself, checking to ensure that the consistency of products was maintained remotely. Though officials declined to confirm it, several sources close to the company say Innovate eventually would have incorporated Simple Network Management Protocol (SNMP) technology that would have monitored every significant piece of equipment in each store. Every piece of food storage and preparation hardware would be monitored and managed remotely, ensuring consistency in the products worldwide and reducing the employees needed to staff a typical McDonald's.

SNMP is the standard method used to monitor and manage network equipment like routers, hubs and servers from network management systems such as Hewlett-Packard's OpenView and Computer Associates' Unicenter. It provides a common way to pass status information from intelligent devices back to a monitoring system over a network. With the addition of simple electronic monitoring devices, a network connection, and an SNMP management information base (a piece of software that interprets the data from the device for the monitoring system), that "intelligent device" can be nearly anything—including a freezer, a fryer, or a soda dispenser.

For instance, instead of reacting to a freezer that had malfunctioned overnight, the manager would be alerted instantly by the system to the problem. The system would also tell the manager which freezer repair technicians were in the area and approved by McDonald's and provide the technician with any historical data about the freezer or other McDonald's equipment in need of repair. Early notice to an assistant manager at 10 p.m. could be the difference between a $3 fuse and losing hundreds or thousands of dollars' worth of perishable products left unrefrigerated overnight.

Taking Innovate to its outer limits, the folks in Oak Brook would have been able to track the exact temperature of the oil used for french fries in any store connected to the network. How much syrup and carbon dioxide was in each soda tower would have been monitored.

McDonald's knows that consistency and speed are the cornerstones of its business. The impact could range from the superficial to the disastrous.

If french fries in one restaurant had too much oil or cook even two minutes longer than those at another restaurant, its customers are going to know the difference. If a 16-year-old crew member isn't cooking the beef patties long enough at the prescribed temperature of at least 140 degrees, an E. coli bacteria breakout—and millions of dollars in lost sales and legal settlements, to say nothing of potential loss of human life—could and has happened.

In 1993, an E. coli outbreak at Jack in the Box restaurants claimed the lives of four children. McDonald's also could use this technology to make life easier for its franchisees by automatically generating historical temperature logs for food safety reports required by the Food and Drug Administration. And it also could alert owner-operators in the event of an unusually large voided transaction at the drive-through window point-of-sale system (suggesting that a crew member might be pocketing money instead of putting it in the register).

McDonald's wasn't the only quick-service chain at least thinking about the potential of SNMP. In 2001, Burger King began a trial of SNMP-based monitoring in restaurants in England with equipment from Opto 22, a Temecula, Calif.-based systems integrator. Network-based monitoring is common in European grocery chains concerned with stock spoilage and strict local health regulations.

"This wasn't a new idea by any means," says Michael Disabato, a senior analyst at Midvale, Utah-based Burton Group and former information technology manager at McDonald's. "We were talking about this 10 years ago. But when we first proposed this, [McDonald's executives] just laughed at us. Because it came from the technology group and not the operations people, it wasn't taken seriously. This was a recurring problem at McDonald's."