To many Americans, hearing that McDonald's (NYSE: MCD) is going upscale is good for a laugh. I mean, could Ronald McDonald really pass himself off as a maitre d'? But it seems that in Europe, McDonald's is trying to do exactly that. Whether or not McEscargot shows up on the menu, this interesting and unexpected strategy highlights American companies' difficulty in expanding into other cultures.
When in Rome ... or London ...
According to the International Herald Tribune, the approach McDonald's has required to succeed in Europe seems to conflict with its American roots. The IHT described McDonald's stores as adding such amenities as lime-green designer chairs, leather upholstery, Internet access, and Apple (Nasdaq: AAPL) iPod rentals, all designed to project a "sophisticated," restaurant-like atmosphere. That's a far cry from our own visions of kid-covered burger joints, but in Europe, the strategy seems to be working.
Not too long ago, Europe was a sticking point for the fast-food giant, but that's changed lately. July same-store sales in Europe climbed 7.7%, with particular strength in France, Germany, and the U.K., and strong European sales have been on the menu for the last couple of quarters. For 2005, McDonald's reported a 2.6% increase in comps in Europe, followed by a 5.8% increase in 2006.
The refurbishments may sound expensive, since McDonald's plans to spend $806.6 million this year on European remodeling. But with long-term results for the region improving, shareholders can take comfort in the apparent fruitfulness of Mickey D's efforts. Also, if McDonald's applies the lessons it's learning in Europe to its U.S. stores, as the article implies it will, it could help McDonald's further distance itself from its already lagging rivals. So far, though, Americans seem unimpressed by European-influenced changes; rather than linger in the stores, we tend to get our Big Macs via carryout or the drive-thru window.
Would you like pommes frites with that?
That said, a bit more class in the stores might lure American customers to have a seat while they eat. We're slowly growing accustomed to more pleasant retail experiences at reasonable prices -- look at cheap-chic Target's (NYSE: TGT) success at appealing to diverse customers, while Wal-Mart's (NYSE: WMT) traditionally no-frills strategy generally draws only lower-income shoppers.
Then again, sophistication might seem odd for most U.S. McDonald's locations, and if the company tries to remake its brand too drastically, it could confuse consumers. For decades, the Golden Arches have appealed to travelers on the road who need to grab a quick bite, and to parents who need a convenient and cost-effective meal to feed their families. I've got to wonder whether remodeling a Ronald McDonald Playland into a chic lounge for professionals will do more harm than good.
Between its recent launch of an upscale coffee line and its attempt to redecorate its restaurants, McDonald's is edging ever closer to direct competition with Starbucks (Nasdaq: SBUX). The java giant has already taken a cue from Europe, attempting to project a sophisticated image to lure professionals and upscale consumers to its stores.
I'm not sure whether McDonald's new concept can succeed throughout the U.S., but I think a few upscale McDonald's in carefully chosen neighborhoods could make rivals like Wendy's (NYSE: WEN) and Burger King (NYSE: BKC) mighty nervous. With today's consumer looking for a fast-food upgrade, McDonald's could even begin to rival fancier establishments such as Panera.
Translation troubles
McDonald's tinkering in Europe also shows the difficulty many companies experience in exporting a brand across national and cultural borders -- Starbucks included. The java giant wants to delve into countries with huge populations (and booming economies) like China and India, but while such plans are good news for shareholders, there's always the possibility that in some regions, the culture clash will simply be too great. Starbucks' failure in China's Forbidden City is one notable example; as for India, is it a little too jarring to charge $4 for a latte where one-fourth of the population makes less than $1 a day? As a long-term Starbucks shareholder, I'm optimistic about the company's future, but I can't deny that it'll have to proceed cautiously in its global expansion.
International growth can be as challenging as it is exciting. Some concepts can get lost in translation, and in tinkering too much with brands, companies risk losing what made them valuable in the first place. As investors, we can only hope that our companies are wise enough to tread carefully into other cultures, armed with full awareness of their brands' strengths and weaknesses. As McDonald's European strategy illustrates, the ability to evolve may be tricky, but it's absolutely necessary.
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Alyce Lomax owns shares of Starbucks, a
Motley Fool Stock Advisor
recommendation. Wal-Mart has been recommended by
Motley Fool Inside Value. The Fool's disclosure policy is never lost in translation.
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