McDonald’s tastes victory in Europe

By Kerry Capell

updated 3:57 p.m. ET July 22, 2008

Three years ago, Denis Hennequin was faced with the supersized task of turning around the lackluster growth of McDonald's Europe. The Frenchman — the first non-American president of the fast-food chain's European operations — embarked on a massive McMakeover of more than one-third of the Oak Brook, Ill., company's 6,400 European outlets. And voilà, today McDonald's Europe is sizzling. "The European business is growing much faster than the U.S.," says Steve West, restaurant analyst with St. Louis brokerage Stifel Nicolaus.

Europe is now McDonald's largest region by revenues, despite having roughly one-quarter the number of outlets as the U.S. Last year, revenues from company stores and royalties from franchisees topped $8.9 billion in Europe, compared with $7.9 billion in the U.S. West expects U.S. sales to rise by 3.4 percent, vs. 9 percent for Europe (19 percent if you include the foreign currency impact). This year, he reckons, McDonald's, the most American of brands, will generate 55 percent of its earnings outside the U.S.

The European region is leading the way, thanks to its transformation under Hennequin. The profitability of existing operations has improved in top performing markets such as Britain, Germany, and France (the country where the chain's profitability is second only to that of the U.S.). And growth in Russia and Eastern Europe has soared. Hennequin says Russia, with 230 outlets planned by the end of this year, boasts the company's highest sales and profits worldwide on a per-restaurant basis.

Hennequin's recipe for success focuses on upgrading the customer experience. "The brand position is different in different parts of the world," he says. In the U.S., customers tend to eat on the go, and around 70 percent U.S. sales come from drive-throughs. Europeans prefer to linger. "In Europe it's more about the experience," he says. "It's convenient and a destination place at the same time."

To make the Golden Arches a place where Europeans want to hang out necessitated a major design overhaul. Hennequin, as French country head, refurbished the chain's outlets there, and he was tapped to do the same across the 40-country-strong European operation. He created a McDonald's design studio outside Paris to come up with a range of eight design packages from which franchisees, who account for 68 percent of European outlets, can choose.

The transformation is dramatic. The bold red-and-yellow plastic signage has been replaced by muted facades in dark olive and yellow, and the 1970s-style interiors have given way to more elegant spaces. Retro plastic and Formica fittings are gone, supplanted by wood, leather, and stainless steel. Many outlets are even kitted out with wireless Internet connections and "egg" chairs designed by Danish architect Arne Jacobsen. This year, McDonald's will invest $800 million on opening 150 restaurants (up from 80 in 2007) and remodeling existing company-owned outlets.

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