McDonald's: snafu results in $20 million local advertising shortfall

Nation's Restaurant News, July 8, 1996 by Louise Kramer

OAK BROOK, Ill. -- With less than three months to go before McDonald's Corp. enacts a franchisee-supported plan to switch from national to local media spending, the burger giant's top marketing executive told operators that because of a bureaucratic "screw-up" they will have $20 million less to spend in their local markets than anticipated.

The executive, Paul Schrage, said in a June 17 letter to McDonald's operators in the United States that no monies were actually lost or spent, but that there could be some broadcast spending reductions as a result of the error. He said he was writing the letter to "accept responsibility for this mistake."

The "worst case effect" of the accounting snafu would be a 3-percent reduction in media spending power, he indicated.

In a separate letter to franchisees dated one week later, Edward Rensi, president and chief executive of McDonald's U.S.A., referred to the shortfall as a "budgeting error" in the spending projections of the chain's national advertising agency, Leo Burnett USA, Chicago.

"While we're doing everything we can to ensure this does not impact our marketing presence, I want to assure you that senior management considers the error inexcusable, and, as Paul said, `It will be fixed.' You have his word on it, and now you have mine," Rensi wrote in his June 24 letter addressed to "McFamily."

McDonald's declined to comment. A spokesman for Leo Burnett referred questions to McDonald's.

Ken Banks, president of one of McDonald's major local ad agencies, Tampa, Fla.-based Fahlgren Inc., called the shortfall an "important amount," but he added that he did not think it would have a dramatic impact on advertising strategies. "If there were 30 weeks of advertising, I don't think this will mean 29 weeks," he remarked.

One franchisee with several units, who asked not to be identified, called the error "more of an embarrassment than a catastrophe."

Hugh Schmidt, a franchisee who is trying to sell his McDonald's unit in Vail, Colo., said he is concerned that the ad budget will be even less than projected because the monies are based on a percent of sales. "This will be more than Paul Schrage can take care of. The end result has to be an increase in the franchisees' contribution rates [to buy ads]. With all the food giveaways and discounting, we just can't afford it," he added.

Franchisees have blamed poor sales in part on what they term the company's ill-fated decision in late 1994 to take funds out of local markets in favor of national media buys in a strategy dubbed Operation Mac Attack. In 1994, before Mac Attack went into effect, operators contributed $283 million toward national media spending. Last year they beefed up the contribution to $451 million, according to internal McDonald's documents.

Industry observers said the $20 million shortfall comes at an unfortunate time, given the positive response among operators to the shift back to local spending. The local spending plan is set to go into effect Sept. 1. At that time 2 percent of U.S. restaurant sales will go toward national ad spending, down from the current 2.9 percent, an unprecedented high for McDonald's.

Whatever the outcome of the shortfall, observers call the shift back to local media an important move that may help boost business at McDonald's 11,400 domestic outlets.

"McDonald's is listening to their franchisees, and they realized that if there is anything they learned from the shift away from local, it was that they couldn't ignore local market conditions that are happening day in and day out," noted Thomas Conway, senior vice president of marketing for the Television Bureau of Advertising, a nonprofit organization that represents local television stations and seeks to increase local ad spending. Conway's group worked closely with the McDonald's franchisee community to push for the shift back to more local spending.

Local spending helps bring more customers into stores, Conway said, adding that he believes buying a national spot on a hit network show serves more to spotlight the brand.

"Local spending allows the restaurant to really become entrenched in the local community," Conway explained. "When they are just involved in national media, all it really says is hey, we are a place where you can buy a hamburger."

The move back to local is good news for McDonald's four regional buying agencies, sources said.

"Everybody is gearing up like ourselves to get back to where we were when those dollars were there, and we are putting together plans accordingly," said Banks, whose local agency handles work for 22 different McDonald's advertising cooperatives from Toledo, Ohio, to Key West, Fla.

With the national focus, there were fewer dollars to spend on tie-ins to local sports events and other activities, Banks noted. "In a nutshell everybody realized it wasn't working. Operators said they really missed that ability to market on a local basis. McDonald's has listened."