Chicago - 24 May, 2002 -

Look for a Chipotle to pop up near a McDonald's in a neighborhood near you. McDonald's Corp. executives told shareholders Thursday they intend to aggressively expand Chipotle restaurants nationwide next year to boost sales growth, and to continue experimenting with concepts such as McCafe, McTreat and a 3-in-1 McDonald's, diner and bakery-and-ice-cream shop under one roof. McDonald's has quintupled the number of Chipotle restaurants, to a total of 200, and will open another 70 this year, said McDonald's Chief Financial Officer Matthew Paull. The Denver-based Chipotle chain, acquired by McDonald's three years ago, is popular for its freshly made burritos and tacos. No numbers were disclosed for next year's aggressive Chipotle rollout, but Paull said McDonald's is looking for brands capable of supporting at least 1,000 restaurants. The Oak Brook-based fast-food chain plans to support the Chipotle expansion with national advertising and franchising opportunities, including giving McDonald's franchisees the chance to operate a Chipotle outlet. The expansion strategy includes buying large parcels of land where a McDonald's, a Chipotle, and/or another restaurant concept can share parking space, as well as construction and real-estate costs, said Russ Smyth, president of McDonald's Partner Brands Division. Asked by the Sun-Times whether McDonald's would consider putting its partner brands under one roof, Smyth said that would be the wrong strategy because McDonald's is still trying to build name recognition for its portfolio of restaurant concepts, including Chipotle, Boston Market, Donatos Pizzeria, Aroma Cafe, and Pret A Manger sandwich shops. The brands together generate $1.2 billion in annual sales. However, the "co-development" strategy of developing a shared piece of property for two or more restaurants is already being done in markets where Chipotle is expanding, Smyth said. McDonald's executives also left open the possibility McDonald's will buy more restaurant chains to boost sales in an otherwise saturated U.S. hamburger market. McDonald's is building 1,300 to 1,400 new McDonald's restaurants this year, but only 350 are in the United States. Indeed, McDonald's believes it can add 1 to 2 points to its operating income growth rate in five years with sales from its "partner" brands, Paull said. Marie Driscoll, an equity analyst with Argus Research in New York, said putting partner restaurants next to a McDonald's might cannibalize some of McDonald's business, but the strategy should pump up sales. Driscoll stopped recommending McDonald's stock in April because of what she termed its "mature," slow-growing U.S. market and customer-service problems. The idea of McDonald's buying larger parcels of land prompted concern from one of the company's critics, restaurant consultant and former McDonald's franchisee Richard Adams. Adams is upset that billions of dollars of real estate equity fail to show up on McDonald's balance sheet because a separate company owns the property underneath many McDonald's restaurants. System Capital Corp. (SCC), a holding company owned equally by McDonald's and six suppliers, provides low-cost financing to McDonald's franchisees. In 1997, SCC created Real Property Corp. to acquire sites for new McDonald's restaurants and to lease those properties to McDonald's Corp. "The owners of System Capital Corp. are leveraging McDonald's brand name and the entire McDonald's system for their own benefit to build their own real estate portfolio," Adams said Thursday. "Before SCC was created six years ago, McDonald's Corp. reaped that equity growth." Asked whether McDonald's is turning increasingly to leasing its restaurant properties rather than owning them, Paull said yes, partly because property prices overseas are so high. Another highlight of the shareholders' meeting was McDonald's Chairman and CEO Jack Greenberg's acknowledgement of management's responsibility for six straight quarters of disappointing earnings. Though external factors such as a strong dollar and weak overseas economies caused problems for McDonald's, Greenberg said, "No matter what, we are accountable." Greenberg addressed shareholders who sat squeezed into a 600-seat ballroom in the lodge on McDonald's Hamburger University campus. Other shareholders listened to the meeting via a Webcast and from remote hookups on the Oak Brook campus. More than half the fast-food giant's income now comes from the 120 countries it does business in besides the United States, and that percentage will continue to grow in spite of the economic difficulties in some regions. This year's pace of new McDonald's restaurants is about the same as the 1,319 McDonald's that opened last year and down slightly from the previous year, and will push the world's biggest restaurant company past the 30,000 mark. ''The opportunity outside the United States is just so enormous,'' Greenberg said, citing as an example the still-fledgling McDonald's breakfast business outside the United States. While trimming operations in Latin America and some other areas whose economies have been hard-hit, McDonald's is focusing on the most stable international markets. It plans to open 122 restaurants in China this year on top of the existing 430. The company also has cited plans to open 100 to 150 restaurants of its other, recently acquired brands: Donatos Pizza, Boston Market and Pret A Manger. Only Boston Market is profitable so far, however, and Greenberg said the McDonald's brand ''is still our largest and best growth opportunity.'' While shareholders may be unhappy about McDonald's recent struggles, no one in the overflow crowd at the shareholders' meeting voiced it. That may be because the long-slumping stock is up 15 percent this year even after falling 25 cents to $30.40 Thursday on the New York Stock Exchange, remaining near the 52-week high. An easing of mad-cow fears that had badly depressed sales in Europe also provided reason for Greenberg to say the company is getting back on track after the most challenging year in its history. McDonald's said in April that first-quarter net income fell 33 percent to $253.1 million as sales declined and the company spent more to develop better service in the United States. Greenberg said management will do ''whatever it takes'' to make McDonald's grow, and noted that salaries were frozen for senior executives and bonuses limited as earnings dropped. Another company initiative, aimed at improving poor service in U.S. restaurants, is producing positive early results as the result of evaluations by 60,000 ''mystery shoppers'' so far this year, Greenberg said. Shareholders resoundingly defeated proposals asking that the company unilaterally seek to improve working conditions in China and to extend its animal-welfare standards worldwide.

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