All you can eat

By Fiona Rotherham

Sunday 1st December 2002

The opening of McDonald's in Greymouth in December is more than giving west coasters the choice between eating whitebait or a Big Mac. It is store number 148 for the country's number one fast food chain, filling almost the last geographical area without golden arches in New Zealand.

The bottom line: after 26 years, New Zealand is full of McDonald's - ours is one of the most penetrated markets in the world, with one store for every 22,000 people. Even the US has only 1:26,000. In the past three years, McDonald's New Zealand has only increased store numbers by one a year. Now although Greymouth and another store in an as-yet-secret location will open before Christmas, 149 looks like being, for the time being, the limit of McDonald's growth.

New Zealand chief executive Al Dunn blithely says the focus is now on growing sales within its existing network. That's easy to say but, as McDonald's is finding all over the world, hard to do. In late October, the global chain announced its seventh profit decline in eight quarters, with third-quarter net profit of $US486.7 million compared with $US545.5 million the year before.

Although McDonald's globally expects to open a further 1300-1400 stores this year, same-store sales dropped 3% in the latest financial results. The company warned without "significant improvement" in sales, it won't achieve its full-year earnings target. It is hard to tell how profitable the New Zealand operation is because McDonald's Corporation doesn't segment subsidiaries in its financial results. Dunn points to its recent move into a newly built, $10 million head office in Auckland as proof of "how well we are doing". He claims New Zealand's same-store sales have increased in recent years.

Still, growth is a problem. Two years ago, McDonald's New Zealand set up the Kiwi Leadership Team as it began heading for saturation point. Its first recommendation was a $28 million nationwide refurbishment. The work, including rebuilding two stores, was completed in the first quarter of this year. The rationale is that people spend more in new-looking stores - The Wall Street Journal says when McDonald's outlets were upgraded in France, sales gains ranged from 3% to 20%. US franchisees are currently considering a similar move for all stores over 15 years old.

In addition, McDonald's is trying to meet changing consumer tastes by introducing McCafés into existing outlets. The concept was developed in Australia 15 years ago and first introduced into New Zealand in 1998. The idea is for Mum to drink coffee, eat cake and read a magazine in a separate part of the store while the kids eat burgers and fries and race around the playground. Dunn says McCafés have boosted sales but won't say by how much. By year-end, 24 McCafés will be open and the company plans to have 40 by late 2003.

In the US, McDonald's is pursuing growth by moving into the fast casual restaurant space. It has bought into chicken chain Boston Market, Mexican chain Chipotle and pizza chain Donatos. It owns a stake in gourmet sandwich-maker Pret A Manger and is in a joint venture with casual Italian eatery Fazoli's. The company plans to add about 90 non-hamburger outlets this year and between 150 to 175 next year.

Fast casual involves counter-service food in a restaurant-like setting. It is priced above fast food but below full-service restaurants. British consulting firm Datamonitor forecasts the fast casual food market worldwide will grow by around 6% a year, whereas the fast food industry is expected to grow by only 1% a year.

A trial Boston Market store opened in Sydney earlier this year - the first outside the US - but Dunn won't comment on whether the chain is likely to come to New Zealand. Instead he may be relying on figures from New Zealand's Restaurant Association, which estimates spending on food outside the home will rise considerably by 2010. At present, Kiwi households spend 23 cents in every dollar spent on food on eating meals away from home, compared with 52 cents in the dollar in the US and 33 cents in Australia. Restaurant Association chief executive Neville Waldren forecasts the New Zealand market will match Australia's current level within eight years.

Will fast food share in that increase? Takeaways have increased 5-6% over the past 18 months, according to Statistics New Zealand, although growth in restaurants and cafes has been stronger. "I think [growth] will be across the board," Waldren says.

McDonald's problems in New Zealand are compounded by the fact its two main hamburger chain rivals - Burger King and Wendy's - are still growing. Burger King has opened 61 stores since 1994 and marketing manager Glen Corbett says it's looking for around 90. Wendy's has opened 14 Auckland stores in the past 14 years and plans to eventually go nationwide.

New entrants increase the competition. Designer sandwich chain Subway (the world's second-largest franchise after McDonald's and the fastest growing) has opened 42 stores in New Zealand since 1995 and has another 30 due to open in the next 18 months. And profitable KFC which, with 95 fried chicken stores nationwide has little opportunity for expansion, is banking on growth through Pizza Hut and Starbucks. Jim Collier, chief executive of KFC owner Restaurant Brands, wants to introduce a fourth brand over the next year or so.

He is also looking at co-branding some KFC stores. "For an established store network like KFC, [co-branding] is a good way to get incremental growth as you already have the building and the land. The challenge is finding the right brand that will fit with yours."

Dunn looks shocked at the idea of "diluting the McDonald's brand" through co-branding. But apart from modernisation and McCafés, McDonald's New Zealand has seemingly no other answers to the growth problem. Dunn says its strategy has always been more evolutionary than revolutionary, based on customer demand. He has launched a mystery shopper programme involving 5000 visits nationwide to gauge customer feedback. Maybe this will provide the inspiration the fast food company needs. Or maybe not.

Foodie facts

* Fifteen per cent of New Zealanders eat hamburgers at least once a week

* We are eating 7% less burgers ($50.6 million in 2001) than four years ago

* Pie sales, up 5.5% in 2001 to $59.7 million, are beginning to replace fish and chips

* There are 1.1 million takeaway customers each week

* We spend $3.5 billion a year eating out

Source: Restaurant Assoc, Statistics NZ

McDonald's around the world

* Over 90% of American children eat McDonald's at least monthly

* In 1980, a McDonald's outlet opened on a Mississippi River steamboat

* Chile has a McDonald's in a lighthouse

* Sweden has a ski-through McDonald's

* Frankfurters and beer are on the menu at German McDonald's

* Cyprus has an open-air McDonald's

* The Champs Elysée, Paris, golden arches are white

* When McDonald's opened in Kuwait in 1994, queues were 11km long

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