McD seeks green with new salads, blasts legal setback

Nation's Restaurant News,  May 12, 2003  by Amy Garber

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OAK BROOK, ILL. -- Bolstered by a 29-percent increase in first-quarter profits, embattled McDonald's Corp. is seeking even greener pastures with a new salad line that could boost U.S. same-store sales as early as this month, observers said.

But on the same day that McDonald's issued a positive earnings report--which gave its share price a 7-percent boost--the company suffered a financial setback on a different front.

A Los Angeles County Superior Court jury ordered the Oak Brook-based burger chain to pay $16.5 million to former four-unit Southern California franchisee Sandra Darling, who had charged the company with conspiracy to defraud and wrongly forcing her from the system.

Darling was awarded $6.5 million in compensatory damages and $10 million in punitive damages after the jury heard charges that McDonald's had coveted a $3.5 million-a-year branch she ran and would not subordinate a loan she needed to make required improvements. Darling wound up in bankruptcy, and McDonald's bought the branch in 1993 for $2.7 million.

McDonald's will appeal its rare franchising-litigation setback.

"The facts and the law simply do not support [Darling's] claims," McDonald's spokesman Bill Whitman said. "We are confident the decision will be overturned. McDonald's has more than 2,400 franchisees in the U.S. They are supported by a company that cares about them and recognizes their value to our business."

As part of the burger chain's strategy to improve operations through a restaurant-grading system, executives have indicated previously that they would deal with "poor-performing operators in an expedient matter." The company said 68 U.S. franchisees who operated about 160 underperforming stores left the system last year.

But investors are aware that reducing the number of franchisees could stir up lawsuits, according to restaurant analyst John Glass of CIBC World Markets.

"I would think that McDonald's, in electing to transform its operator base, might try to buy out franchisees," Glass said. "It is harder to motivate people through punishment than through reward."

Meanwhile, many Wall Street analysts voiced optimism about McDonald's entree salad line, which was launched nationally in April.

"The company didn't quantify what the new product was adding to sales, though in test markets salads added about 1.5 percent to the average check," Glass said. He acknowledged that "the company has had an uneven track record" with new products in the past. "But there is some evidence that management understands its past shortcomings and is addressing the issues," Glass said.

McDonald's three new premium salads--California Cobb, Bacon Ranch and Caesar--are priced around $4 each, though are higher in some markets. They include mixed greens, grape tomatoes and a choice of hot grilled or crispy chicken. The line will replace salads sold in plastic shaker cups.

In June McDonald's plans to shuffle its menu again with a new portable breakfast item called the McGriddle--priced from $1.59 to $2.19--that will replace a few varieties of bagel sandwiches. The McGriddle also is a sandwich, but it is made from two pancakes, instead of an English muffin or a bagel, that are filled with various combinations of eggs, sausage and bacon.

McDonald's predicted that its most recent rollouts would be more effective than previous attempts to lift sales.

"We have launched new products in the past and then abandoned them," Charlie Bell, McDonald's president and chief operating officer, told analysts during the first-quarter conference call. "You will see continued advertising through the balance of the year to keep these products in the minds of customers."

McDonald's could benefit from the recent proliferation in the popularity of quick-service salads--a trend pioneered by rival Wendy's, the No. 3 burger chain, starting last year.

"Wendy's only has share to lose," Glass explained. "Coming in second sometimes gives you an advantage in terms of customers having lower expectations."

But, as Glass pointed out, McDonald's isn't targeting Wendy's core customers. Instead, the fast-food giant is appealing to mothers who bring their children in for Happy Meals. Company officials said those female customers previously might have purchased beverages but not food.

McDonald's reached out to females through a variety of media, including ads on Web sites known to be popular with women, like iVillage and MSN, according to Neil Perry, senior director of digital marketing for McDonald's USA. Previously, McDonald's had advertised products like the Chicken Flatbread sandwich on the Internet, but had not targeted women.

"Today women are dividing their time between checking email and shopping online as well as listening to the radio or watching television," Perry explained. "If we want to reach women, we have to be where they are."