UK: MCDONALDS LONG MARCH.

UK: MCDONALDS LONG MARCH. - There seems to be no stopping the fast-food family. 'Like Oliver Twist,' it announced recently, 'we want more.'

by Nick Hasell.
Last Updated: 31 Aug 2010

There seems to be no stopping the fast-food family. 'Like Oliver Twist,' it announced recently, 'we want more.'

The question is doubtless familiar but still it seems to sting. 'Sinister?' echoes Paul Preston in a tone of incomprehension, if not hurt. 'McDonald's, sinister?' The frown passes, his voice rises and the words, in his distinct Ohio twang, suddenly come much faster. 'Listen,' he counters, 'if making money is sinister, then I guess we are. If quality, service, cleanliness and value are sinister, then sure. If anything that we've done demonstrates something sinister, then paint me.'

If Preston sounds overly proprietorial it is perhaps understandable. This, after all, is the company (or 'family', as he sometimes calls it) for which he has worked since the age of 16, whose UK subsidiary - a £650-million fast-food operation - he helped to establish and now heads. And if he sounds exasperated it is probably because such aspersions on McDonald's virtue seem to be made with increasing regularity. Indeed, a few days later he is to give evidence in a High Court libel action to seek to refute the claims of a six-page leaflet allegedly distributed by two unemployed environmental campaigners.

It is entitled 'What's wrong with McDonald's' and promises to reveal 'everything they don't want you to know'. Its headings - 'McDollars, McGreedy, McMurder' etc - give a good idea of its content.

Yet the fact that McDonald's sees fit to take such a litigious course to protect its name is itself instructive. Why, after all, would a vast and highly profitable enterprise seek to pursue two small-fry campaigners through the courts at great cost and with little chance of compensation? Perhaps more pertinently, why should the wider charges - that Preston's employer is the repository of every conceivable corporate vice - ever arise in the first place?

The straightforward answer is rather banal. Put aside the defendants' conspiracy theories, militant vegetarianism and accusations of environmental destruction and you're left with the ire routinely directed at any large multinational. Bigness in business is typically synonymous with badness, and McDonald's, with global revenues of $24 billion and the world's second most recognised brand name after Coca-Cola, is a vast and highly visible target.

Yet apart from its size, McDonald's draws attention for its distinctive - and to outsiders, extremely opaque - culture. Talk to anyone connected with the company, from CEO to franchisee, for any length of time and you'll notice how little they refer to McDonald's by name.

Instead they use two words without apparent need for explanation - 'the System'. Its derivation is innocent enough - a hangover from the company's pre-flotation days in the US when it was known as McDonald's System Inc - but the effect is of arrogance, even evangelism. It is not simply the usual 'the way we do things round here' but an entire philosophy developed and refined over 40 years and supported by a 600-page operating manual.

It makes McDonald's, in a sense, the perfect multinational; a highly efficient one-product organisation in possession of a basic ground plan that can be laid down almost anywhere in the world, even, famously, in the turbulence of late 1980s Moscow.

Talking in another context, Preston comes close to pinpointing the seemingly monolithic creed that underpins it: 'Anyone can make a hamburger,' he says. 'Fitting into a finely working machine, that's what McDonald's is about.'

McDonald's operating system is based on its roots as a franchised operation: the smooth running comes from the strong control exerted over a network of distant and independent agents. Ray Kroc, the corporation's charismatic founder, was unforgiving in pursuit of uniformity. 'We cannot trust some people who are non-conformists,' he thundered to his US partners in the late 1950s. 'We will make conformists out of them in a hurry.'

The solution, he decided, was to ensure that franchisees had little alternative but to do things the company way. 'You can't give them an inch. The organisation cannot trust the individual; the individual must trust the organisation.' Nowadays, however, the talk is more of checks and balances and a 'tight-loose' style of management.

'There are some things - food specifications, for example - about which we are absolutely inflexible,' claims Preston. 'There are others - such as how a franchisee markets the restaurant within its area - that we're very flexible on.' Preston accordingly refers to franchisees as 'our enterpreneurial eyes and ears out on the street ... a great pipeline of information back to the parent company'.

Franchising, the powerful engine of McDonald's expansion worldwide, was initially eschewed in the UK in favour of direct control. Today only 16% of its restaurants are franchised (compared with 84% in the US, 65% in Germany and 50% in France), the source of £83 million of annual sales.

McDonald's aim is for 40% of all restaurants to be franchised by the end of the century - an easy target perhaps for a company which never seems to fail. Since it opened its first restaurant in Woolwich, south-east London, 20 years ago next month, McDonald's has become the country's largest retailer of fast food, with 530 stores, 32,000 employees and a 70% share of all hamburgers sold through branded outlets (making the UK its largest European market).

The signature red frontage with oversailing golden arches has become a fixture on most high streets. Its marketing emblem, Ronald McDonald, is etched on the minds of children and its five-star system of staff motivation is familiar to thousands of teenagers who have passed through its kitchens.

Its success, however, was not always assured. Business at the first store, recalls Preston, was initially slow. 'It was difficult,' he says. 'Damn few people came in. They didn't know who we were.' At the end of the first year, revenues were half those of a comparable store in the US, where the relatively low property prices made the investment far sounder. All the same, claims Preston, 'I never had any doubts that it would work'.

His confidence stemmed from a faith in the operating principles developed by Kroc (whose proud boast was to have 'put the hamburger on the assembly line'). Foremost among these principles was the ability to deliver a consistent, high-quality product based upon the ready availability of equally consistent, high-quality supplies. Yet when in the mid-'70s McDonald's approached major British food suppliers with its specifications, the typical reaction was to baulk at the requirements - the standards were either unnecessarily high, technically impossible to meet, or simply too costly.

'The problem in those days was that we only had a handful of restaurants,' claims Ed Oakley, chief purchasing officer. 'People didn't really believe in the growth that McDonald's would generate in the years to come. Other restaurant chains had come and gone and, to many, we appeared no different.'

Faced with such scepticism, McDonald's saw no option but to move into the supply chain itself. Hence in 1977 it established Golden West Foods, a joint venture with one of its principal US suppliers, West Baking. A year later it entered into a similar arrangement with its major American meat supplier, Keystone Foods, to form McKey Food Services. For Brian McGuire, chairman and managing director of Golden West, the experience of working with McDonald's proved salutary.

'I had to relearn the chemistry of baking,' he recalls. 'The amount of detail required was enormous.' The effort, however, was evidently worthwhile. Having proved itself in baking, McDonald's entire distribution and drinks business swiftly followed. In the ensuing years, as is typically the policy, the US joint venture partner withdrew and McDonald's reduced its stake to just one share, leaving the rest of the equity in McGuire's hands.

Today, as well as the entire UK, Golden West supplies branches of McDonald's as far apart as Israel and Iceland, providing an annual turnover of £241 million (in the process amassing McGuire a personal fortune at least on paper of somewhere in the region of £50 million). And the extraordinary thing is that the relationship is carrried out without a formal contract.

Though the arrangement with Golden West is in many ways unique (it is McDonald's one dedicated supplier in the UK) the degree of involvement that the customer has in production technology and capacity planning finds echoes among McDonald's other major suppliers - what has since come to be known as 'partnership sourcing'.

All are encourged to visit the plants of their Continental counterparts and share technical innovations. Similarly, all are urged to export - Sun Valley Poultry, for example, which supplies chicken to all UK stores, now sells to 70% of the McDonald's subsidiaries in western Europe.

While building its supply infrastructure, McDonald's sought to expand the geographic spread of its restaurants. The emphasis in the UK was on raising its profile through seeking prime urban locations. In what Preston terms a 'stepping stone development plan', McDonald's spent its early years moving systematically from one region to another, first targeting London and the South East, then the Midlands and the North.

As in the US, television played a major role in selling the chain. Indeed, today it is still one of the UK's heaviest users of the medium, having last year spent £27.3 million on above-the-line advertising.

Yet its strategy of focusing on urban centres proved expensive, particularly in the property boom of the late '80s. 'We wanted to dominate the quick-service restaurant industry and so had to pay premium rents and land prices for freeholds to secure the best real estate,' says Gareth Thomas, corporate property manager.

Such bullishness has now given way to restraint. 'With retrospect we've probably paid too much attention to the customers in the high street and built vast palaces, typically 250-seat restaurants, where we could cater for the same population with half that number of seats.' Recent experience has shown that reducing the floor space of new restaurants by over 50% only cuts sales by between 5 and 10%.

Yet however ubiquitous its brash, brightly lit stores might already appear, it seems they are set to become even more so. In April, Michael Quinlan, worldwide chairman and chief executive, announced a further major expansion. Over the next 10 years McDonald's intends to double its presence in the UK to over 1,000 restaurants.

'We're like Oliver Twist,' Quinlan said, 'we want more.' What it wants more of is the custom of the remaining third of the population that its stores currently do not reach. Whereas in the US it has one store for every 23,000 people, the equivalent figure in the UK is one to 103,000. Its aim is to halve that ratio. To do so it will shift its focus away from the high street to sites previously considered inaccessible or unremunerative - petrol stations, motorway service areas, kiosks in shopping malls. It is also discussing the possibilities of 'institutional feeding' - restaurants in schools and hospitals - with Gardner Merchant.

To those who see the future of the UK as a land of 'knowledge workers' in highly skilled industries, the prospect of an ever-expanding McDonald's becoming one of the country's largest job creators - an estimated 30,000 over the next 10 years - with its north London Hamburger University as its seat of learning, is no doubt alarming. In the US, it might be noted, the term 'McJob' is used to describe any form of employment with low skills, low wages and no future.

Unsurprisingly, as someone whose first job was behind a McDonald's counter, Preston rejects the image, describing it as a valuable induction into the disciplines of work. He points also to the prospect of rapid advancement. Indeed, age seems to count for little. As one franchisee remarks, there can't be many sectors in which a 25-year-old can be running a £2 billion business with over 50 staff. This strong strain of egalitarianism finds expression elsewhere: anyone who works for McDonald's externally - suppliers, lawyers, accountants or merchant bankers - is expected to spend at least one day a year working in a restaurant.

In many ways McDonald's appears the epitome of the competitive service business championed by the Thatcher administration in the 1980s. In this light it is perhaps appropriate - not to say coincidental - that its head of communications is the former prime minister's ex-agent, that Sir Bernard Ingham sits on the board as a non-executive director and that McDonald's HQ is situated in the heart of the one-time member for Finchley's constituency. Inside, images of Lady Thatcher abound.

When asked of the connection Preston becomes suddenly philosophical: 'I guess her and Ray Kroc could have come out of the same pod. They were both motivational, straightforward, straight-talking and not afraid to take a risk.' But then, realising one major difference, he pauses, and grins. 'But she's gone,' he says, 'and we're still here.'

1955 McDonald's Corporation founded by Ray Kroc

1973 McDonald's established in the UK as a joint venture

1974 First UK restaurant opens in Woolwich

1976 First TV advertisement broadcast

1986 First UK drive-thru restaurant opens; first UK franchised restaurant

opens

1990 First airport restaurant opens at London Gatwick

1992 First railway station restaurant opens at Liverpool Street

1993 500th UK restaurant opens at Notting Hill Gate, London.

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