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America’s ‘Recession-Proof’ Chain?
McDonald’s emerges as the biggest winner of all on Wall Street.
image: The Golden Arches is weathering the economic storm nicely.

Talk about a turnaround. In just six years, McDonald’s Corp., the world’s largest restaurant chain, has gone from a company that could do no right to one that can do no wrong.

Even as the Dow Jones Industrial Average (DJIA) sank by 34 percent in 2008, its worst performance since the Great Depression, the burger chain saw its fortunes—and stock—soar. In fact, McDonald’s was one of just two DJIA companies to do so in 2008.

After McDonald’s posted 52 consecutive months of sales increases in August, company stock prices hit an all-time high of $67 per share and closed January 21 at $58.71 per share.

Now, the Oak Brook, Illinois–based quick-serve is being hailed as “recession-proof,” a moniker Morningstar Senior Analyst John Owens doesn’t quite buy, though he acknowledges company management has made all the right moves since 2003, when the company found itself mired in a building binge gone wrong.

“Management likes to say it took its eyes off the fries,” Owens says, noting that quality, cleanliness, service and sales all suffered.

Factor in flops such as the Arch Deluxe, as well as the gathering momentum of the anti-obesity movement, and it appeared as if the McDonald’s juggernaut was running on fumes.

CEO Jim Skinner, who seized company reins in 2003, “switched the focus from being bigger to being better,” Owens says. “The quality of the menu improved, as did the quality of existing items such as McNuggets.” To appease nutritionists, McDonald’s also jettisoned its “Super Size” menu option.

In addition to revamping its menu, McDonald’s extended its hours, inventing a new daypart for night owls while consolidating its hold on the booming breakfast category.

Some competitors haven’t fared as well. In mid-January, Atlanta-based Wendy’s/Arby’s Group pulled the plug on breakfast in more than half its 850 units after items such as the Buttermilk Frescuit and Grande Breakfast Burrito failed to win over franchisers and customers.

With one failed ad campaign following another, and none resonating with the clarity of McDonald’s “I’m lovin’ it,” “Wendy’s seemed to lose its way after founder Dave Thomas died in 2002, about the same time both McDonald’s and Burger King began to turn themselves around,” Owens recalls.

If anything, Owens says, Burger King’s return to prosperity is even more unexpected than McDonald’s, though the Miami-based burger chain “borrowed a page or two from the McDonald’s playbook” in order to correct its course. “Like McDonald’s it extended its hours and like McDonald’s it added a dollar menu,” says Owens.

The King also harbors McDonald’s-size ambitions.

“One of the factors contributing to McDonald’s performance is size,” says Owens. “You’re more likely to encounter a McDonald’s than a Burger King or Wendy’s on your way to work, which gives it a tremendous advantage in the breakfast category. Size also provides it with more advertising muscle when it introduces items like the Snack Wrap—consumers immediately become aware of it.”

Size, says Dean Small, managing partner with Laguna Beach–based Synergy Restaurant Consultants, can be a double-edged sword.

“It’s one of the reasons it took McDonald’s so long to right the ship,” Small says. “It also makes it difficult to successfully implement new concepts, though that’s something McDonald’s has managed to avoid lately.”

Despite a near-unprecedented winning streak, Owens, like Skinner, believes McDonald’s is “recession-resistant” rather than “recession-proof.”

The good news is that consumers really can’t trade down from McDonald’s the way they can from a casual venue,” he says. “What they can do is trade down from a more expensive menu item to a less expensive one, or simply order a burger without the fries or the soda pop.”

“It’s the beverages that drive profits, not the burgers,” says Small. “It’s a margins game. If you can manage the pennies, the dollars will take care of themselves.”

And dividends will take care of shareholders, Skinner indicated on January 26, sending company stocks climbing by 1.9 percent, to $59.10.

Nevertheless, a recent survey of franchisees by New York City–based Buckingham Research Group finds franchisees worried that rising labor and raw product costs will crimp margins. According the survey, franchisees also believe business will be only fair to good through the first six months of 2009.

"It is possible that, following the 'boom times' of domestic growth [from 2003 through 2007], franchisees' expectations are coming down to levels that might reflect more sustainable comp numbers over the long haul," the survey reads.

For now, says Small, you have to look very hard indeed to find a chink in those Golden Arches.