What has caused the dramatic drop in their financial performance in the early 2000s?

In February 1996, McDonald’s stock traded at 27 times earnings. But in July 1997, McDonald’s second quarter profit growth was just 4%, with a 2% decline in earnings from the US business. In December 2002, McDonald’s stock declined 60% over three years. McDonald’s sales were in decline, market share was shrinking, franchisees were frustrated, employee morale was low, and customer satisfaction was even lower.
Focus on growth by opening new restaurants
Focus on growth through acquisition
Incremental degradation of food, service, quality, and cleanliness
Focus on cost management over brand management
Focus on price and convenience alone

When the image of the brand was deteriorating, instead of investing in brand experience renovations and innovations, McDonald’s focused on monthly promotions rather than on brand building. Instead of brand building marketing communications, the focus was on monthly promotional tactics designed to drive short-term sales at the expense of brand equity.As a result, between 1997 and 2002, there was decline of a mismanaged and mismarketed brand.
As same-store sales declined, McDonald’s focused on building new stores as the primary growth strategy. Instead of increasing the number of customers visiting existing stores, McDonald’s focused on increasing the number of stores. The major strategic road to growth was to open new restaurants, open new countries, and generate traffic with the fireworks of monthly tactical promotions and price deals. This projected rate of expansion was approximately equivalent to a new store opening every four hours in 1999.
Even as the company increased the number of restaurants by about 50% over ten years, market share declined. Yet, CEO Jack Greenberg continued the growth strategy based on the rapid opening of new stores. Due to this focus on expansion over organic growth, franchisees reported that revenues and profits per existing store were cannibalized. For every new McDonald’s that opened, franchisees reported that nearby stores lost between 6% and 20% of their revenues. McDonald’s reported six quarters of earnings decline in 2001 and 2002.
There were consequences to the expansion as a growth strategy. It was not possible to properly staff and train people to provide a quality McDonald’s experience at this rate of store openings. Service suffered because people had to be trained too quickly. The focus changed to efficiency at the expense of effectiveness.
McDonald’s was at the bottom of the fast food industry on the University of Michigan survey of customer satisfaction. In a 2001 survey conducted by Sandelman and Associates, McDonald’s came last among 60 fast food brands in terms of food quality ratings.
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