Hold The Fries

As a symbol of American conquest, it's easy to forget how McDonald's was first received overseas. Back in 1974, Britons queued for hours at the opening of a Mickey D's in London. When the Golden Arches sprang up in Moscow not long after the fall of the Berlin wall, they were celebrated as a sign of liberation. In 1994, the drive-through line on opening day in Kuwait City was seven miles long.

What to make, then, of McDonald's recent warning to Wall Street, when it announced that it will post its first quarterly loss in 37 years as a public company? Or its plans, disclosed a month earlier, to slow the pace of expansion, closing 175 stores (after shutting 163 in 2001), including 35 in Turkey alone--the first significant closings in its history? For much of the past decade, McDonald's has been the quintessential high-growth multinational, vaulting from success to success and building a uniquely American empire. The number of its restaurants worldwide rose by a third in the past eight years alone--to 13,000, including some 17,000 outside the United States. Along the way, it has become a model for entrepreneurial success, a case study in how to "go international" and succeed.

Has the juggernaut maxed out? McDonald's execs say not. "I don't think that's a fair view at all," says Mike Love, a vice president for corporate affairs, noting, for example, the company's plans to add 300 new restaurants next year to the 6,000 already in place in Europe. Still, there's no question that the troubled financials represent a striking turnaround for a proud company that's long been synonymous with Pax Americana. The secret of McDonald's magic has always been an "aspirational" thing, says Angela Ling Bassage, a retired marketing director in Hong Kong who helped launch the company into China and Russia. "If you could eat hamburgers and drink Coke, you could taste part of the American dream."

It's tempting to suspect that the company's problems might reflect a broader geopolitical backlash against the United States and its global culture. And there have been protests--from Mexico to France--even bomb attacks in India and Lebanon. But according to the experts, that's not what's hobbling McDonald's today. To a surprising degree, the corporation has been tripped up by its own mistakes. "This is not about protesters," says Alan Rugman, a professor of international business at Indiana University. "The company is in trouble because its business model is out of date."

What a comeuppance for a firm that's been counted among the savviest of them all. McDonald's has been obsessed with rapid growth since its inception in 1955, when Ray Kroc first franchised a company that had originated in 1937 as a California burger stand run by the McDonald brothers. Earning steady rent and fat royalties from franchisees, while enforcing rigid standards for quality and cleanliness, the McDonald's model produced stunning annual average revenue growth of 24 percent from 1965 to 1991. As competition grew stiffer at home, the company increasingly turned overseas in the 1990s, opening 2,000 restaurants globally in 1996, the peak year of expansion. But now the U.S. market seems saturated, and McDonald's has expanded too fast in nations where too few people can afford a $1 hamburger. New store openings will fall this year to 600, and many analysts believe it should be opening none and closing hundreds more. "McDonald's is suddenly reaching the boundaries of growth," says David Upton, a Harvard business professor and author of an M.B.A. case study on the company.

These same analysts say the company is showing signs of losing its business touch. This fall, it introduced inexpensive Dollar Meals in the United States, aiming to bury the competition but instead triggering a price war that has depressed the entire fast-food industry. It has also been slow to respond to health complaints about the high fat content of its menu, and now some of the same lawyers who recently won a multibillion-dollar case against Big Tobacco on behalf of cancer victims are suing McDonald's on behalf of the obese. Worse, efforts to appeal to healthy eaters by expanding beyond the burger have faltered. (Anyone remember McPizza?) Critics say the corporation has lost the vision and entrepreneurial flair of founder Kroc, who died in 1984. "They're just not getting it," laments Malcolm Knapp, a New York restaurant consultant. He adds that headquarters in the '70s was filled with a buzz. Now "it's like a tomb."