No Smiles for McDonald's Customers

This article was originally published on Oct. 30, 2001.

Our soccer team passed the McDonald's (MCD - Cramer's Take - Stockpickr) on the way to the tournament, and I knew, if we did OK, that we'd stop in on the way back. I knew that because kids still like to go there, even as we parents are beginning to dread it.

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We played fine, tied one and lost one, so I volunteered to take the half of the team I was driving home to the McDonald's we had passed.

And I dreaded it. Because I knew it would be chaos, as it almost always is these days, because McDonald's can't staff all its restaurants with good enough people.

It was chaotic. The guy in front of me was in a big fight with the people behind the counter; his lunch was ridiculously late, I had to give my order a half-dozen times before it was understood, and the Diet Coke didn't work. It was just cold water. By the time I got my meals, the man in front of me had turned on me because he thought I had gotten my food too fast!

The whole thing was a nightmare, as it almost always is these days, because McDonald's expanded not to please customers, but to please Wall Street. It outstripped the pool of quality applicants and the pool of quality franchisers.

Now it's all coming back to haunt the company. Yesterday the company admitted it is time to cut back, not expand, and it outlined plans to do just that. But it wasn't a serious cutback, and it won't address the woeful service that afflicts so many McDonald's, because McDonald's still regards itself as a growth company.

In fact, McDonald's is giving you the worst of both worlds. It is trying to maintain growth and is buying back $5 billion in stock and boosting its dividend. That's just plain stupid.

McDonald's should shrink its store base to levels where it can maintain quality of food and service. It should stop buying back shares and start helping its franchises more so they can do a better job. It should give up the growth story until it can earn that growth with better products and service.

I am sure that McDonald's thought its stock would go up when it announced the big buyback. But it didn't, because a company that maintains growth without quality is a company that will lose both value and growth buyers. It is a hybrid no one wants.

I would continue to avoid this stock until the company decides to fix its business and grow it internally through higher-quality offerings and service. I think others will, too.

A buyback is not the answer.