McDONALD’S: THE ARCH DELUXE LAUNCH

In 1995 McDonald’s was the largest restaurant chain in the United States with domestic sales of almost $15.9 billion. McDonald’s was also the country’s fourth-largest advertiser, spending $490 million on measured media in 1995.1 In the spring of 1996 the company was preparing to introduce the Arch Deluxe, a quarter-pound hamburger that was the first in a planned series of sandwiches targeted to adults. It had budgeted $70 million for the launch campaign, which would be handled by Fallon McElligott, small Minneapolis-based agency that had won a string of advertising awards in recent years. As McDonald executives, met with their agency counterparts, they wondered what message the launch advertisements should communicate to the target audience. McDonald’s

In 1948 Maurice and Richard McDonald opened the first self-serve McDonald’s in San Bernardino, California. Six years later Ray Kroc, a milkshake machine salesman, convinced the brothers to let him become their franchising agent. In 1961 Kroc paid $2.7 million for the brothers’ share of McDonald’s System, Inc. To raise money for expansion, Kroc took the company public in 1965.2 By the time of Kroc’s death in 1984, the company had 7,500 restaurants in 32 countries.3 By 1995, the number of McDonald’s restaurants exceed 16,000, with more than 10,000 located in the United States.

U.S. expenditures on fast food in 1995 totaled nearly $93.9 billion. According to the market research firm NPD CREST, each year Americans made 30 billion visits to fast-food restaurants. Adults aged 35 and older accounted for 44 percent of these visits, while children under 17 accounted for 23 percent.4 McDonald’s was ranked as the top-selling hamburger chain, followed by Burger

1 Bruce Horovitz and Dottie Enrico, “Now Serving: Boomer Burger McDonald’s Debuts Fast Food Aimed at Making

Adults Happy; Chain Hoping Grown-Up Chow Boosts Sales ,” USA Today, 9 May 1996, 1A. 2 Charlie Bernstein, Allen J. Bernstein, and David Q. Maler, “McD at 35: Unparalleled Success; Clouds on the

Horizon,” Nation’s Restaurant News 24 no. 34 (August 27, 1990): 60. 3 “Death of a Salesman,” The Economist (January 21, 1984): 66. 4 “Death of a Salesman,” 66.

This case was prepared by Mark E. Parry, Associate Professor of Business Administration, University of Virginia, and Professor Yoshinobu Sato, University of Marketing and Distribution Sciences, Kobe, Japan. It was written as a basis for class discussion rather than to illustrate effective or ineffective handling of an administrative situation. Copyright ♥ 1996 by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. To order copies, send an e-mail to sales@dardenpublishing.com. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of the Darden School Foundation. Rev. 4/00.

-2- King (BK) and Wendy’s (see Exhibit 1). Each day, seven percent of Americans ate at McDonald’s.5 Frequent diners, who accounted for 75 percent of U.S. sales, visited McDonald’s at least twice a week and tended to be male, aged 15 to 35.6 Exhibits 2 and 3 provide additional information regarding McDonald’s recent performance.

Franchisees

When Kroc began selling McDonald’s franchises in the 1950s, most franchisors made their money selling territorial rights, equipment, and supplies. Kroc chose a different tack, selling singlestore franchises to individual entrepreneurs, not absentee owners, for $950 and 1.9 percent of gross sales. In part, these terms reflected Kroc’s belief that the best way to make McDonald’s profitable was to do everything possible to make the franchisees profitable.7

From his franchisees Kroc demanded exact compliance with his pricing structure and guidelines for food preparation, customer service, and cleanliness.8 In 1958 Kroc told the McDonald brothers:

. . . the only way that we can positively know that these units are doing what they are supposed to do . . . is to make it so that they have no alternative whatsoever. You can’t give them an inch. The organization cannot trust the individual; the individual must trust the organization [or] he shouldn’t go into this kind of business.9

By 1996, new franchisees typically paid a $45,000 franchise fee, along with a $15,000 security deposit. An additional $385,000 to $520,000 was required for equipment, landscaping, etc., from approved suppliers. To learn the McDonald’s system, aspiring franchisees spent two years, 20 hours a week, in restaurants cleaning and cooking. Other requirements included a two-week course at Hamburger University in Oak Brook, Illinois (see Exhibit 4), and an on-the-job evaluation. According to The New York Times, one recent franchisee, Philip Fuentes:

. was sent where he was needed, as in a ministry. The corporate real estate

division had already chosen and bought his site. . . . The property was leased to Fuentes for 20 years; in return he pays a monthly fee to the corporation, at least 8.5 percent of monthly sales. Additional costs include a monthly service fee, typically four percent, and a minimum of four percent of annual sales for local advertising.10

5 Stephen Drucker, “Who Is the Best Restauranteur In America?” The New York Times, 10 March 1996, 45. 6 Drucker, 45. 7 “McDonald’s; Kroc’s Gold,” The Economist (February 28, 1987): 108. 8 Lisa Bertagnoli, “McDonald’s Company of the Quarter Century,” Restaurants & Institutions 99 no. 18 (July 10,

1989): 22. 9 John F. Love, McDonald’s: Behind the Arches (New York: Bantam Books): 144. 10 Drucker, 45.

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McDonald’s determined store layout, specified seating, lighting fixtures, music, napkins, and cleaning soap. Company procedures even covered bag folding and presentation.11 The spirit of these directions was articulated in the 1958 operations manual by future CEO Fred Turner, who wrote:

YOU MUST BE A PERFECTIONIST! There are hundreds and hundreds of details to be watched. There isn’t any compromising. Either, (A) the details are watched and your volume grows, or (B) your are not particular, not fussy, and do not have a pride or liking for the business, in which case you will be an also-ran. If you fall into the “B” category, this business is not for you!12

Real estate

The Economist once observed that Kroc’s franchising scheme was “so good for the franchisees it would have either lost McDonald’s money or even driven it bankrupt.” The solution, created by McDonald’s partner Harry Sonneborn, was to lease or purchase land and then sublease it to franchisees at a 40 percent premium. By 1987, real-estate rentals generated 90 percent of McDonald’s profits from its franchisees, and McDonald’s was the largest owner of real estate in the world.13 In 1989 an article entitled “McDonald’s: Company of the Quarter Century” reported that McDonald’s:

. . . owns 60 percent of its real-estate sites, which, along with equipment, are worth $6.8 billion of the company’s $8.1 billion in net assets. The chain uses real estate as collateral to borrow: the debt to equity ratio is 49%, and the corporation’s total debt obligation is $3.2 billion. Because most of the debt is financed long term, the company can reinvest cash provided by operations in the business.14

Quality, service, cleanliness, and value

Kroc built McDonald’s on one simple formula: quality, service, cleanliness, and value, or QSCV for short. The company’s success at implementing this formula was reflected in one competitor’s assessment: “Do they have great french fries? Yes. Is the service quick? The fastest. Are the restaurants clean? Immaculate. You have to give McDonald’s credit for knowing exactly what they’re doing.”15

Quality: From McDonald’s perspective, quality was inseparable from consistency. In the words of Senior Vice President Richard Starmann, McDonald’s customers were not looking for “the best burger I’ve ever had” but rather “the same burger I’ve always had.”16 Thus the objective of

11 Drucker, 45. 12 Love, McDonald’s: Behind the Arches. 13 “McDonald’s; Kroc’s Gold...,” 108. 14 Bertagnoli, 22. 15 Monci Jo Williams, “McDonald’s Refuses to Plateau,” Fortune (November 12, 1984): 34. 16 Drucker, 45.

-4- McDonald’s management was “to look for new, innovative ways to create an experience that is exactly the same no matter what McDonald’s you walk into, no matter where it is in the world.”17

The result, according to Fortune, was that McDonald’s had become “a symbol of stability. A McDonald’s meal tastes pretty much the same everywhere.”18

To achieve such consistency, McDonald’s invested constantly in process innovation. For example, during the company’s first 10 years it invested over $3 million developing a better french fry (see Exhibit 5).19 One innovation, the clamshell grill, simultaneously cooked both sides of 24 frozen hamburger patties for exactly 108 seconds, the top sides at 400 degrees, and the bottom at 325 degrees.20

McDonald’s also relied on a close relationship with and intense loyalty to suppliers who “were willing to reinvest in new capacity and in new technology designed to improve their quality and efficiency.”21 From the time Kroc began franchising McDonald’s restaurants, suppliers worked without a written contract. As Restaurants & Institutions explained:

Giving McDonald’s freedom to dismiss an errant supplier at will—not when the contract was up—was the only way Kroc felt he could force suppliers to meet McDonald’s quality specifications . . . Kroc’s legendary handshake deals built a stable of steady suppliers, among them the biggest retail names in spices, chicken, and cheese. Suppliers maintain separate facilities for McDonald’s, and send their employees who work directly on McDonald’s accounts to short courses at Hamburger University located near the Oak Brook home office. “We develop relationships with people, not with corporations,” says a McDonald’s spokesman.22

Service: In the Kroc credo, service meant minimal customer waiting time. In 1990, Nation’s Restaurant News reported that “hotter and faster” was “a constant theme” at McDonald’s, and the company’s United States president, Ed Rensi, agreed: “we are working on service now more than anything..”23 In July 1992, McDonald’s introduced a satisfaction guarantee, promising a free meal if consumers were unhappy with either service or food quality. According to Rensi, “it’s how we’re going to be doing business in our restaurants from now on. . . . If you’re not satisfied, we’ll make it right or your next meal will be free.”24

17 Herma M. Rosenthal, “Inside Big Mac’s World,” Newsday, 4 June 1989, 8. 18 Penny Moser, “The McDonald’s Mystique,” Fortune (July 4, 1988): 112. 19 John F. Love, “McDonald’s Behind the Arches,” Restaurant Business Magazine 86 (February 10, 1987): 122. 20 Drucker, 45. 21 John F. Love, cited in Herma M. Rosenthal, “Inside Big Mac’s World,” Newsday, 4 June 1989, 8. 22 Bertagnoli, 22. 23 Bernstein, “McD at 35.” 24 Milford Prewitt, “Sandwich Giants Wage Service War,” Nation’s Restaurant News 26 no. 31 (August 3, 1992): 90.

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Cleanliness: In a television interview, Phil Donahue once asked Kroc: “Did you really clean the johns?” Kroc replied, “You’re damn right I did, and I’d clean one today if it needed it.”25 Kroc had no patience with dirty restaurants. According to one McDonald’s executive:

When Ray read out an operator with a dirty store, you could hear him six blocks away. . . “You’re in the wrong business, and you ought to sell out,” he would tell them. After he got through reaming a guy out, he would talk to him like a son, and tell him he knew he could do better.26

After Kroc’s death, the obsession with cleanliness continued under McDonald’s USA President Rensi. When Rensi was asked “What’s on your mind these days?” he replied: “We’ve got some 20,000 bathrooms that need to be cleaned every day.”27 Asked where McDonald’s would be in the year 2020, he replied: “I can’t tell you; I just want to make sure that all the bathrooms are clean tomorrow.”28 To this end, top executives like Rensi spent 70 percent of their time visiting McDonald’s restaurants.29 Rensi had “one simple but fail-safe way to grade a store on its Q.S.C.: ‘All you need to do is walk into a McDonald’s restaurant-or any restaurant, for that matter-and walk toward the rest rooms. If you can smell them before you get there, you know there’s a problem.”30

Value: From the time Ray Kroc began franchising, he viewed the 15-cent hamburger as a core component of McDonald’s image. Price discounting, however, was traditionally considered the province of local franchisees. Moreover, by the late 1980s, corporate headquarters was preoccupied with environmental (e.g., foam packaging) and nutritional issues. As one executive later explained:

As a prominent company, we obviously had to respond to public criticism. But while they were the front-burner issues for the company, they were not front-burner issues for heavy consumers of our products. If we had paid more attention to our research, we would have realized that our number-one problem was value.31

During the summer of 1990, McDonald’s responded to competitive prices with a $1.99 promotion on kid-oriented Happy Meals.32 According to McDonald’s: Behind the Arches, “The results were eye opening to the system—transaction increases ranging from 40 to 50 percent when the Happy Meal was priced under $2.”33 By 1995, Extra Value Meals (combination meals that

25 Moser, 112. 26 Love, McDonald’s: Behind the Arches, 144. 27 Bertagnoli, 22. 28 Peter Berlinski, “Edward Rensi: President and Chief Operating Officer McDonald’s U.S.A., Chief Operations

Officer McDonald’s Corp,” Restaurant Business Magazine, 87 no. 7 (May 1, 1988): 200. 29 Bertagnoli, 22. 30 Berlinski, “Edward Rensi:” 200. 31 Love, McDonald’s: Behind the Arches, 293. 32 Richard Martin, “McD Bruised by Upstarts in Sandwich Market War,” Nation’s Restaurant News 24 no. 31

(August 6, 1990): 1. 33 Love, McDonald’s: Behind the Arches, 457.

-6- included a sandwich, fries, and a drink) accounted for almost half of all menu transactions at McDonald’s, up from only 20 percent four years earlier.34

To maintain profitability, McDonald’s began an aggressive cost-cutting program. From 1985 to 1990, restaurant development costs in the United States had risen 50 percent. To reduce construction costs, McDonald’s reduced the size of its restaurants by a third, saving almost $150 million on the 324 U.S. units opened in 1993. Smaller, more efficient kitchen equipment also yielded operating savings.35 Other cost-cutting experiments included unwarmed buns (warmed buns increase labor, electricity, and equipment costs); pasteurized, liquefied eggs; precooked meat patties; frozen pancakes; self-service beverage fountains; and self-ordering kiosks.36

Marketing strategy

From the beginning, Kroc envisioned McDonald’s as a family restaurant. Thus a 1958 operations manual prohibited jukeboxes, cigarette machines, and public telephones. As Kroc later explained: “I had made up my mind that all hamburger joints had jukeboxes, telephones, and cigarette machines, and that your wife and my wife wouldn’t go to a place with leather-jacketed guys and smoke-filled rooms.”37

Advertising: In 1969, McDonald’s hired Needham, Harper, and Steers to create a new advertising campaign. Needham’s research indicated that “a trip to a McDonald’s was an event for each member of the family that could be likened to an escape to an island of enjoyment. Kids could see the mountains of french fries, moms could escape from meal planning, and dads could escape the hassles of business.”38 The result was a theme song that advised: “You deserve a break today, so get up and get away to McDonald’s.” One of the best-known “break” commercials focused on cleanliness with a musical production number and lyrics that began: “Grab a bucket and mop, scrub from bottom to top, before we open the door, put a shine on the floor.”39

Needham also distinguished McDonald’s from its competitors in another way: “The product was almost never sold directly or separately, but rather as part of a package of positive human experiences to be gained from a McDonald’s visit.” Within the company, this strategy was summarized in three words: food, folks, and fun.40 In 1986, Chief Operating Officer Michael Quinlan observed that McDonald’s had “two types of commercials. One says that McDonald’s is a food company that serves great food, with fast service, squeaky clean. . . . The other type is for the

34 Carol Casper, “Cutting the Mustard; Hamburger and Sandwich Fast Food Restaurants,” Restaurant Business 94 no.

3 (February 10, 1995): 138. 35 Richard L. Papiernik, “Mac Attack?” Financial World (April 12, 1994): 28. 36 Richard L. Papiernik, “Big Mac’s Guns Target Margins to Blast Through Burger Battles,” Nation’s Restaurant

News 29 no. 6 (June 26, 1995): 11; see also Bruce Horovits, “McDonald’s Trimming Fat from Operations,” USA Today, 14 June 1995, 2B.

37 Love, McDonald’s: Behind the Arches. 38 Love, McDonald’s: Behind the Arches. 39 Love, McDonald’s: Behind the Arches. 40 Love, McDonald’s: Behind the Arches.

-7- general image of the company, what the public thinks about McDonald’s. Good for kids, a happy place.”41

Children: Kids were an integral part of the focus on families. While some adults found the idea of a 15-cent hamburger distasteful, by the end of the 1950s a number of franchisees realized that children liked coming to a places that “sold their favorite foods in an environment that gave them a chance to place their own orders and to be entertained by watching the cooking process.”42 Thus marketing to children became a way to reach adults. As Minneapolis franchisee Jim Zein later explained: “I knew if we could get the kids, we would get their folks, too.” Zein also concluded that children’s television was the best way to reach children. He soon began devoting his entire advertising budget to three children’s show in Minneapolis.43

Zein’s success prompted franchisees in other cities to target children through television. In 1963, the Washington, DC partnership of John Gibson and Oscar Goldstein introduced Ronald McDonald, played by local TV personality Willard Scott. According to Scott: “the concept was that Ronald did everything kids like to do, and the commercials showed him roller skating, biking, swimming, or playing baseball. Ronald was their pal.” Ronald made his national debut in 1965 and eventually became “the only commercial character in the United States with a recognition factor among children equal to that of Santa Claus.”44

The Needham agency bolstered Ronald’s appeal by creating commercials set in McDonaldland, a fantasy land peopled by Ronald McDonald, the Hamburgler, Mayor McCheese, Officer Big Mac, and Grimace (a character that sucked down milkshakes). Soon these characters were incorporated into restaurant playgrounds called Playlands, a key part of McDonald’s focus on children.45 By 1995 about 40 percent of McDonald’s restaurants had playgrounds for children.46

Happy Meals: McDonald’s also relied on promotions such as Happy Meals to attract children. The first Happy Meal, introduced in 1977, combined a hamburger, french fries, and a soft drink packaged in boxes designed to look like cars in a circus train. The first national Happy Meal promotion, Star Trek, followed one year later. Happy Meals soon became the company’s most important promotion. During a 1983 Happy Meals promotion featuring Hot Wheels die-cast cars, the company purchased 44 million toy vehicles.47 Although McDonald’s initially offered one or two promotions each year, the company was forced to add additional promotions because “the kids were disappointed when they didn’t get a Happy Meal.”48

41 John Gorman, “McDonald’s Fast-Rising Burger King,” Chicago Tribune, 13 October 1986, 1 42 Love, McDonald’s: Behind the Arches. 43 Love, McDonald’s: Behind the Arches. 44 Love, McDonald’s: Behind the Arches. 45 Love, McDonald’s: Behind the Arches. 46 Drucker, 45. see also “The Lettuce and Tomato Wars,” Fortune (December 9, 1985): 10-11. 47 Love, McDonald’s: Behind the Arches; see also Jane W. Applegate, “Good for Tots; Restaurants Find They Can

Use Toys as Well as Taste to Win Over the Under-10 Crowd,” Los Angeles Times, 23 October 1988, B1. 48 Love, McDonald’s: Behind the Arches; see also Applegate, B1.

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Premium Hamburgers

McDLT

In 1985, McDonald’s responded to three years of attack from Burger King and Wendy’s with its first new burger since the Quarter Pounder, introduced in 1972. The new hamburger, dubbed the McDLT, was a quarter-pound hamburger served in a double-cup foam-box package that separated the hamburger from its condiments (lettuce, tomato, mustard, ketchup, mayonnaise, onions, and pickles). Although as many as 1,800 restaurants offered the sandwich by mid-1985, McDonald’s launched the McDLT nationally in the first week of November 1985.49 Television ads claimed that the “hot stays hot” and the “cool stays cool” and added that the McDLT “could be the best-tasting lettuce and tomato hamburger ever.”50

By the end of March 1986, promotional spending for the McDLT was approaching $100 million.51 During a public speaking engagement in April, McDonald’s Corporation President and COO Michael Quinlan admitted that the McDLT was nothing more than a Quarter Pounder with lettuce and tomato. Then how could McDonald’s call the McDLT a new product? Quinlan responded: “Were we selling it two years ago? No. Now we’re selling it. It’s a new product.”52

In October 1986, Advertising Age reported that McDonald’s was “putting heavy pressure on the Leo Burnett Company advertising agency to buttress McDLT sales.” One source said the sandwich was “heavily media dependent,” meaning that when advertising slowed down for the sandwich, so did sales. Several months earlier, McDonald’s “forced a change in the personnel handling its account” at the Burnett agency. The result was a new series of ads that employed celebrities proclaiming the McDLT was misnamed, because it contained more than a burger, lettuce, and tomato.53 By the end of the year, however, ADWEEK was predicting that the McDLT “could be headed for a McFlop.”

McLean Deluxe

In the spring of 1991, McDonald’s replaced the McDLT with the McLean Deluxe, which featured a hamburger patty mixed with carrageenan (a seaweed derivative). The new sandwich contained 320 calories and 10 grams of fat, 16 grams fewer than a Big Mac.54 Early reports from some franchisees indicated that the McLean Deluxe accounted for three percent to four percent of sales, but others questioned the value of a product that “requires high promotion, offers questionable sales growth and mixed taste results.” As one franchisee said: “I’ve been in this business since the

49 “Top 100 Advertisers,” Advertising Age (September 26, 1985): 110. 50David Zuckerman, “Burger Giants Launch New Product Assaults; McD Speeds Rollout of McDLT Sandwich,”

Nation’s Restaurant News 19 (November 18, 1985) 1. see also Barbara Lippert, “McDLT’S Wheel of Fortune,” The Record, 23 November 1986, 8.

51 Brian Moran, “Herb Helped BK Visibility, But Little Else,” Advertising Age (March 24, 1986): 1, 120. 52 Moran, 1, 120. 53 Scott Hume and Patricia Winters, “Fast Foods on Grill,” Advertising Age (October 20, 1986): 1, 110. 54 Drucker, 45.

-9- day I walked out of college 24 years ago, and I’ve never had a customer say to me, ‘Gee, I wish you guys had healthful food.’”55 One analyst agreed, noting that “People talk thin and eat fat.”56 When McDonald’s finally discontinued the McLean Deluxe in January 1996, Vice President Starmann offered the same explanation: “People talk thin and eat fat.”57

Arch Deluxe

To replace the McLean Deluxe, McDonald’s began testing a new hamburger called the Arch Deluxe. The May edition of Mac Today reported that the Arch Deluxe was a new flagship brand with a “brand new taste that’s paving the way for a dramatic refreshening of our entire menu.” Mac Today continued: “While the Arch Deluxe will help regain the balance between being special for kids and being special for adults, an entire line of Deluxe sandwiches will be aggressively tested to capitalize on the tremendous adult momentum it generates.” Objectives for the launch included (1) creating a $500-million brand by the end of 1996; (2) inviting “adults back to McDonald’s by enhancing our adult and food image”; and (3) generating “system unity and pride.”58

The Arch Deluxe was created by Andrew Selvaggio, who spent two years developing the new sandwich. Before joining McDonald’s, Selvaggio served as the head chef at the Pump Room, an upscale Chicago restaurant. According to Selvaggio, the Arch Deluxe was a “home-style” that would ring back memories of ,“When I was a kid. . . .” A reporter who interviewed Selvaggio noted that the new sandwich had “leaf lettuce that looks torn, rather than shredded lettuce that looks processed, and two mustards, as if the refrigerator had been raided.” Selvaggio called the potato roll bun “soft and nurturing.” He continued: “Black pepper and hickory-smoked bacon give this sandwich an outdoorsy taste. . . . The sandwich has an adult taste. But it’s not any one bite. . . . It’s how the sandwich makes you feel.” 59

According to McDonald’s, consumer reaction to the new sandwich was positive. Internal research reported in Mac Today revealed that “72 percent of consumers think the chain has the best burgers for kids, but only 18 percent say it has the best adult burger.” However, “Eight out of 10 adults who tried the Arch Deluxe said they would buy it again, and two-thirds said it is equal to or better than the fast-food burgers they eat most often.”60 While these results were encouraging, McDonald’s executives wondered about the kind of launch campaign that would be needed to insure the success of the new burger.

55 Milford Prewitt, “McLean Triggers Sales, Questions; McD Licensees Enjoy Traffic Surge, Ponder Long-term Outlook,” Nation’s Restaurant News 25 (20), May 20, 1991, 1.

56 Richard Turcsik, “McDonald’s Beefing up Taste of McLean Burger,” Supermarket News 42 no. 22, (June 1, 1992): 43.

57 Drucker, 45. 58 Louise Kramer, “McD Targets Adults with New Menu Line,” Nation’s Restaurant News 30 no. 18 (May 6, 1996):

1. 59 Drucker, 45. 60 Drucker, 45.

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Exhibit 1 MCDONALD’S: THE ARCH DELUXE LAUNCH

The Largest 25 Restaurant Chains Sales

1994 U.S. Total U.S. % Company Name Sales ($000s) % Change Units Change

1 McDonald’s $14,941,000 5.3 9,744 5.0

2 Burger King 6,100,000 9.3 6,327 4.4

3 Pizza Hut 4,858,000 1.2 8,399 5.4

4 Taco Bell 4,160,000 11.9 4,453 20.6

5 Wendy’s 3,887,200 9.4 3,998 5.5

6 KFC 3,500,000 2.9 5,149 0.4

7 Hardee’s 3,427,848 1.7 3,444 2.1

8 Dairy Queen 2,370,000 3.5 4,914 1.1

9 Subway Sandwiches 2,235,000 10.6 8,949 14.5

10 Domino’s Pizza 2,085,000 (0.7) 4,239 (2.3)

11 Little Caesar’s 1,930,000 0.0 4,700 2.0

12 Red Lobster 1,776,000 5.2 628 4.5

13 Denny’s 1,715,701 1.1 1,490 2.7

14 Arby’s 1,696,076 11.0 2,621 4.2

15 Shoney’s 1,346,446 2.1 922 0.8

16 Dunkin’ Donuts 1,187,519 10.4 2,622 12.0

17 Olive Garden 1,094,000 8.2 447 8.8

18 Big Boy 1,030,000 2.0 850 (0.2)

19 Jack in the Box 1,026,900 2.0 1,208 4.0

20 Long John Silver’s 932,843 3.3 1,440 2.1

21 Applebee’s 887,600 45.9 505 39.9

22 Chili’s 856,265 15.2 379 10.5

23 Sonic Drive-Ins 802,598 11.0 1,403 7.3

24 T.G.I. Friday’s 783,544 12.5 277 14.0

25 Cracker Barrel 710,922 22.9 201 18.9

Total/Average $65,340,462 8.3 80,309 7.5 Source: Schroder Wertheim & Co. Inc., March 7, 1996, Report No. 1717851.

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Exhibit 2

MCDONALD’S: THE ARCH DELUXE LAUNCH

McDonald’s and Industry’s Total Units by Country

1994 1995 United States Operated by franchisees 7,849 8,180 Operated by company 1,546 1,634 Operated by affiliates 349 527 Total 9,744 10,341 Outside of the United States Operated by franchisees 2,609 3,060 Operated by company 1,537 1,879 Operated by affiliates 1,315 1,529 Total 5,461 6,468 Total Units 15,205 16,809 Total Units by Type of Operator Operated by franchisees 10,458 11,240 Operated by company 3,083 3,513 Operated by affiliates 1,664 2,056 Total 15,205 16,809 Satellite Restaurants United States 494 1,027 Outside the United States 251 544 Total 745 1,571 Systemwide Countries 79 89 Traditional Restaurants by Country Japan 1,169 1,482 Canada 824 902 Germany 570 649 England 530 578 Australia 454 530 France 353 430 Brazil 195 243 Netherlands 110 128 Mexico 113 132 Other 1,394 1,938 Total 5,712 7,012

Source: Wheat First Securities, Inc., February 5, 1996, Report No. 1702803.

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Exhibit 3

MCDONALD’S: THE ARCH DELUXE LAUNCH

Total Systemwide Dollar Sales (in millions of dollars)

1994 1995

United States

Operated by franchisees $11,964.4 $12,474.5

Operated by company 2,550.2 2,725.1

Operated by affiliates 426.4 705.6

Total 14,941.0 15,905.2

Outside of United States

Operated by franchisees $5,181.8 $6,648.1

Operated by company 3,242.4 4,138.4

Operated by affiliates 2,622.2 3,222.2

Total 11,046.4 14,008.7

Total systemwide sales 25,987.4 29,913.9

Total systemwide sales by type of operator

Operated by franchisees $17,146.2 $19,122.6

Operated by company 5,792.6 6,863.5

Operated by affiliates 3,048.6 3,927.8

Total 25,987.4 29,913.9

Source: Wheat First Securities, Inc., February 5, 1996, Report No. 1702803.

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Exhibit 4 MCDONALD’S: THE ARCH DELUXE LAUNCH

McDonald’s Hamburger University

McDonald’s leaves nothing to chance in making sure its employees know the business and company philosophy. From day one, from crew to upper management, employees are indoctrinated into the McDonald’s way. “Training in McDonaldland is a real fundamental element,” says Keith Magnuson, director of operations development. “When you’re a crew person, the first thing you go through is training, and that training is an ongoing process. The same thing happens with management. It culminates at HU [Hamburger University].”

About 3,500 students a year comprised of franchise management, corporate employees, prospective licensees, and suppliers attend HU’s two-week intensive course in management, equipment, maintenance and the McDonald’s corporate culture. By the time they get there, most have had about 2,000 hours of training. From all parts of the McDonald’s empire (the session I attended had acolytes from Sweden and Brazil), they come to sit in state-of-the-teaching-art classrooms replete with translation booths so the McD mantras can be interpreted in a passel of languages. The training is motivational as much as instructional, relying on techniques borrowed from transactional analysis. Games and contests reinforce lessons: One competition calls for participants to put together a shake machine in less than 20 minutes—blindfolded.

“We want to pump ’em up and send ’em out raring to go,” says HU professor Tom Warwick during the graduation banquet, an event with the fervor of a pep rally before the big game. While it all appears rather hokey, scoff not at a degree in hamburgerology. Eighteen courses and programs can be credited toward degrees in restaurant or food management at several universities, and the button-down boys at IBM know a good thing when they see it. They frequently check out the McDonald’s training program.

“We have a saying . . .” A lot of conversations with McDonald’s executives, who have nearly as many maxims as they do franchises, begin this way. “We have two employees: those who serve customers and those who serve those who serve customers,” says Randy Vest, the dean of Hamburger University. In other words, McDonald’s workers, whether at the retail level or in the executive offices, must be part of a team. Source: Excerpted from Herma M. Rosenthal, “Inside Big Mac’s World,” Newsday, 4 June1989, 8.

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Exhibit 5 MCDONALD’S: THE ARCH DELUXE LAUNCH

The Search for Consistently Perfect French Fries

First Steps

In 1954 Ray Kroc adopts the “Chicago method” of cooking french fries in two steps (blanche for three minutes in the morning and finish-fry for two minutes later in the day). Kroc also contacts Interstate Foods, a supplier of beef-fat based shortening, which eventually develops a customized shortening formula for McDonald’s.

Process Improvements

Improvements

Monitoring temperature and time settings on fryer.

Monitor vat temperatures.

Use No. 1 Idaho Russet Potatoes Reasons: oblong shape and high solids content.

Cure potatoes for three weeks (permits sugars to be converted to starches)

Encourage specific planting and fertilizing methods.

Find processors “willing to invest in modern storage facilities with automated temperature controls.”

Learnings

Vat temperatures still vary

Depends on solids content of potato

Solids variability depends on storage time, storage temperature, and planting techniques

Source: Love, “McDonald’s: Behind the Arches,” 122.