Testing McDonald's Inside Wal-Mart Stores Pleases Giants

Article excerpt

N.Y. Times News Service

CHICAGO _ McDonald's Corp. and Wal-Mart Stores Inc., each king of the mountain in its own area of business, have been quietly experimenting with joining forces since January and, so far, they like what they have seen.

Starting with the opening of a McDonald's restaurant inside a Wal-Mart in Visalia, Calif., a sleepy agricultural center in the heart of that state's Central Valley, the alliance has since expanded to include more than 25 stores, most recently in a cluster around St. Louis.

"It's a partnership," said Don Shinkle, spokesman for Wal-Mart, the enterprise, based in Bentonville, Ark., that passed Sears, Roebuck Co. to become the nation's largest retailer after expanding at a breakneck pace through the 1980s. "We're very pleased at the way it's gone."

For companies the size of McDonald's, with more than 9,000 restaurants in the United States and 13,500 worldwide, and Wal-Mart, which has nearly 2,000 variety stores and 310 warehouse discount stores, the scale of the joint ventures to date is barely a blip on the corporate radar.

But industry experts say it would be no surprise to see the relationship blossom rapidly because it comes as a growing number of retailers and fast food chains link up, including Kmart and the Little Caesar's pizza chain, Jamesway and Burger King, Bradlees and Pizza Hut, and Caldor's and Nathan's Famous Hot Dogs.

The alliances offer the restaurateurs both semi-captive audiences and new places to sell their products. From the restaurant chains' perspective, the retailers are an important addition to the list of what the industry calls "nontraditional sites," which include airports, schools, military bases, gasoline stations, supermarkets, hotels and hospitals.

And co-branding, as analysts call alliances between nationally known merchants, can offer opportunities for cooperative sales promotions.

"The key in retail host situations is whether there is enough traffic to cover the restaurant's costs," said Ronald Paul, president of Technomic Inc., a food service consulting firm here. "It's got a very good chance to work in cases like Wal-Mart, where you attract a lot of people on family outings."

The benefit for retailers is that turning over some space to a nationally known restaurant chain can produce a jump in revenues per square foot and profits compared with what they have been able to earn from their own food operations.

Food service inside mass retail establishments have a long history, like the luncheon counters of Woolworth's drugstores, but most retailers have regarded restaurants as a sideline service needed to keep customers in the store longer.

"These arrangements shift the job to companies that know how to do it," said Stephen Sibert, director of program development for the International Mass Retailing Association in Washington. "Food service is a tricky business."

Wal-Mart has fared better than many retailers with its food operations, which have evolved from the odd popcorn machine into 1,600 snack bars that contributed $47 million to profits last year. The snack bars are not directly comparable to a typical McDonald's, but it is easy to see why the two companies see room for improvement.

McDonald's generated more than $480 million in operating income from fewer than 1,400 company-owned restaurants in the United States last year. Margins for the company and its franchisees average more than 18 percent, among the industry's highest.

McDonald's and Wal-Mart are reluctant to discuss their cooperative efforts, saying the experiment is in its early stages. The venture grew out of discussions begun last year after McDonald's sent a team from its headquarters in suburban Oak Brook, just west of Chicago, to Bentonville, Ark., to explore a different subject: what performance benchmarks Wal-Mart uses to assess how well it is doing in various operations aspects. …