“Super Size Me” Generation Takes Over at McDonald´s

Julie Jargon. March 8, 2012

When Travis Heriaud decided to spend $40,000 on the grand opening of a new
McDonald's here—sponsoring a book giveaway for local children and hosting a parade
of zoo animals—his father, Lee, balked. Lee Heriaud, a 59-year-old owner of 12
McDonald's restaurants, warned that the event risked erasing cash flow for a full year.
"You've gone overboard here," he told his son. Travis, 30, pressed ahead—and busted
the budget for the grand-opening spending by adding even more new-store
promotions. However, first-year revenue at the restaurant is now on track to beat
McDonald's projections by 50%. And other McDonald's in the area are adopting his
tactics. The results surprised the elder Mr. Heriaud: "It was difficult to get my head
around the price tag," he says. "I just didn't think it would pay off."

McDonald's Corp. may seem like a just another giant corporation, but its secret sauce
has always been its small-business franchisees—and now that network is undergoing
one of its biggest generational transformations in decades as the children of owners
start taking over from their parents. As with any entrepreneurial venture, the transition
is fraught with challenges. McDonald's prides itself on carefully selecting its
franchisees, so it is loath to encourage raw nepotism. The sons and daughters of
McDonald's franchisees aren't automatically entitled to become franchisees and they
can't inherit their parents' restaurants. Rather, they have to undergo a one- to five-year
process of proving themselves capable of running strong restaurants before they can
be approved franchisees. "The next gens don't have a birthright to be an owner
operator, they earn it," says John Kujawa, vice president of franchising for McDonald's
USA.

So far, the results are mixed, say McDonald's executives and franchisees. Having
grown up in an era of "Fast Food Nation" and "Super Size Me," the next generation is
moving quickly to address criticism of the fast-food industry. The younger franchisees
are proposing everything from healthier foods—including gluten-free hamburger buns
and organic produce—to more corporate responsibility on issues like recycling and
providing community services like books for low-income kids. The group also promotes
use of more technology, such as installing Wi-Fi in restaurants and building McDonald's
Facebook pages.
The changes aren't always welcome to the older franchisees, some of whom have
resisted new ideas as benign as credit cards. The Oak Brook, Ill., corporate
headquarters has passed on some ideas, preferring to wait and see if they have broad
appeal before they are adopted.

Still, this group of young owners is likely to have a growing impact on the nation's
largest fast food chain by revenue: Next-generation McDonald's franchise owners,
whose parents or grandparents owned restaurants, currently make up the largest
percentage of franchisees ever, 30% of the U.S. base—up from 18% in 2001. The
company expects the figure to reach 37% in the next five years.

In Oak Brook, McDonald's management credits next generation franchisees with

proposing some of the company's most popular products and services, says Jim
Johannesen, McDonald's USA chief operating officer. Among their changes: a line of
upscale burgers with thicker patties called Angus burgers that have contributed to sales
growth; free Wi-Fi, which has helped keep McDonald's competitive with Starbucks
Corp.; a picture-based ordering system that shaves precious seconds from customer
wait times; and payment by credit card, which boosted the value of transactions since
people tend to order more when they charge it.

The credit-card option worried Houston franchisee Nelly Quijano, 66, who says she had
made some computer accounting mistakes over the years. She feared she would make
similar mistakes with the creditcard machines and lose track of sales. "I wasn't against
it, I was scared," she said. But her daughter, Mariselle Quijano, 39, who now owns six
McDonald's, urged her mother to switch to cashless payment. "Today, hardly anyone
carries cash," she told her mother. After installing the machines, sales immediately
improved at their restaurants.

Another seemingly simple idea, Mr. Johannesen said, was to keep McDonald's open
later into the evening, which has helped the company wring more sales out of existing
restaurants. Today, nearly 40% of its U.S. outlets are open around the clock, up from
about 30% seven years ago. "Our young people helped us understand that there's a lot
more going on when the rest of us are sleeping than we would have known," Mr.
Johannesen says.

But the company isn't gung ho about every idea.

Brittaney Kerby, of Austin, Tex., recently stopped working at her father's McDonald's
restaurants and took out a loan to open her own so she could make her own decisions.
Ms. Kerby, 32, has been pushing McDonald's executives during regional meetings to
start a recycling program for employees' soda cans and restaurant products like
cardboard boxes. Partly because of her efforts, McDonald's agreed to test the program
on a regional basis, in Austin, beginning in April.

Ms. Kerby has been less successful in convincing corporate management on some of her
other ideas, such as composting and installing rooftop gardens in restaurants. She asked
the company's menu management team to discuss broadening offerings to include
organic produce and items for people with food allergies— like gluten-free hamburger
buns. But so far, to no avail.

"It's always an open dialogue," she says. "You don't hear a straight-up 'No.'"

McDonald's spokeswoman Danya Proud says new ideas need to be appropriate for all
14,000 restaurants in the U.S. "Not to say it couldn't happen or that we're not looking at
things like gluten-free buns and organic produce," Ms. Proud said. "But with a system
the size of ours it has to be something that has an appeal to the masses."

Indeed, it isn't the first time McDonald's headquarters has resisted new ideas. A
longtime franchisee in the South recalls the company's reticence to adopt a fish
sandwich back in the early 1960s. Proposed by a Cincinnati franchisee, because his
mostly Catholic patrons didn't eat meat on Fridays, the idea was considered radical at
the time, he said. It took five years of testing and development for the Filet-O-Fish to be
included on McDonald's national menu.

"It's very difficult to get any changes through at McDonald's whether you're a younger
or an older franchisee," he said.

Ms. Proud, who confirmed the fish story, said that when the company makes a change
"it needs to be right for our customers, our restaurants, our franchisees and our suppliers
and so that process and the discussions that occur take time." Still, corporate managers
emphasize that they are relying on the young franchisees for fresh ideas to sustain their
multiyear growth tear.

McDonald's shares have nearly quadrupled since the end of 2003, when it adopted a
plan to slow new-store openings in the U.S. and improve restaurant operations. But
some investors are wondering how much more room there is to grow. After the
company posted another strong quarter in January, its shares dropped as investors
questioned how much upside is left. Thursday, McDonald's is expected to announce
another month of strong same-store sales for February.

Some younger franchisees are taking a different approach to criticism than their parents'
generation. For example, Brandon O'Rourke, a 39-year-old franchisee, decided to
proactively approach what he calls the "haters," or people who dislike McDonald's.

Mr. O'Rourke, who until recently owned two McDonald's in Denver and is now opening
five in Phoenix, has visited McDonald's citrus growers in Florida, chicken farmers in
Arkansas, potato fields in Idaho and beef processing plants in Oklahoma. He says what
he has seen has given him confidence in the quality of McDonald's food and
ammunition to fend off critics.

More than a year ago, he invited some mothers who were blogging about whether to let
their kids eat fast food for a tour of a kitchen at one of his restaurants. Some of them
had thought the eggs in the Egg McMuffin were cut from a giant log of processed egg
and were surprised to see that McDonald's actually cracks eggs in the restaurant, he
says. The moms later blogged about what they saw.

Recently, he fielded questions from 7th and 8th graders at his daughter's school after a
teacher showed the documentary "Super Size Me." One kid, he recalls, thought
McDonald's killed chickens by putting them in a blender. "I could answer all their
questions because I had seen it for myself," Mr. O'Rourke says. Some smaller changes
are helping individual franchisees at a time when restaurants are fighting for market
share and even tiny details can influence which restaurant a person chooses.
Adrian Smith, a 39-year-old franchisee in North Carolina, persuaded his dad to add
more electrical outlets to his restaurants to make it easier for people to plug in their
laptops. "I think we've got to stay relevant and fresh for our customers. We need to be a
destination," he says.

Travis Heriaud, the Arizona franchisee, says that with years of experience under his
belt, his dad sometimes has a better feel for customer psychology than he does. In
January, when McDonald's offered a free small coffee giveaway in some parts of the
country for two weeks, the younger Mr. Heriaud wanted to discount medium and large
coffees, too. His father said they would be leaving money on the table and argued to
leave medium and large prices unchanged.

To see who was right, they agreed to test both strategies in a few of their stores. It
turned out the elder Mr. Heriaud was right: While people were happy to get a free small
coffee, those who wanted a bigger size were willing to pay full price and didn't expect a
discount.

When it came to his community-outreach plan, though, the younger Mr. Heriaud's
instincts proved correct.

Tolleson, west of Phoenix, was once a strong agricultural community; the smell of dairy
farms can still be powerful in the right wind. In studying the market, the younger Mr.
Heriaud learned that manufacturing and food-service distribution had overtaken
agriculture, that local schools were short of funds and the local library was struggling to
get kids to participate in its summer reading program.

He argued to his father that, since they were already spending $1.7 million to build a
restaurant, it made sense to invest another $40,000 to try to demonstrate that their
restaurant aimed to be part of the community. "We have a responsibility to be good
corporate citizens," the younger man said. He decided to hold community events year-
round, rather than stop after the grand opening last March. To encourage participation in
the library summer reading program, Mr. Heriaud handed out free books and had
Ronald McDonald do readings.
In the fall, he held a back-to-school fair and handed out free backpacks; more than 100
families waited in line for an hour for the freebies. As Christmas drew near, he held a
toy drive, brought in the local highschool choir to sing carols and invited kids to pose
for photos with Santa. The plan ended up costing $50,000. Sales this year are expected
to total more than $3 million, which is far higher than the $2 million the company
projected the store to ring up and higher than the $2.5 million McDonald's restaurants
around the country average annually. The Heriauds says they will more than recoup
their $50,000 investment. When Travis Heriaud shared his results with other Phoenix
franchisees, all 220 restaurants in the area started adopting parts of his strategy.

This month, the restaurants plan to offer free breakfast to kids before taking
standardized tests. In September, they have pledged to hand out new backpacks to kids
and provide information on how to get after-school tutoring. Ana Cruz, a 27-year-old
mother of two, was eating lunch at the Tolleson McDonald's recently while her 3-year-
old son clambered around on some playground equipment. She said the restaurant's
efforts—including donations to her daughter's school—eased her mind about eating
there. At first, "I wasn't thrilled that it was McDonald's that was donating to my
daughter's school," Ms. Cruz says, "because it's not too healthy." But she says that, over
time, she appreciated the various efforts. "They don't come off like they're only about
getting people to come in," Ms. Cruz says.