Changing Conditions

The Great Depression of the 1930s left many business leaders very cautious about expanding their operations, especially if this required borrowing money that might be hard to repay if the economy turned down. Even highly profitable businesses could decide to save their money for a rainy day, rather than risk it in new ventures. Against this background, it is not surprising that the dramatic changes in the American economy and society between the Great Depression of the 1930s and the booming prosperity that began after World War II were perceived very differently by different business leaders.

Fear that a new depression might be coming caused the managements of Montgomery Ward and A & P to be reluctant to pay high prices for suburban locations for new stores, while Sears and Safeway plunged ahead with expansion into such areas, to which much of the most affluent population was now moving. In this case, those who gambled won and those who played it safe lost. In other cases under other circumstances, those who expanded met disaster. The W. Grant variety store chain, once one of the biggest retailers in America during the first half of the twentieth century, became in the 1970s one of the biggest bankruptcies in the history of the country, after financing a costly expansion which did not work out.

Grocery stores and department stores were not the only businesses presented with a radically changed environment as a result of the rapid increase of automobile ownership during the post-World War II boom and suburbanization. Although urban newspapers suffered huge declines in circulation, and many leading big-city papers went out of business, suburban newspapers had dramatic increases in their circulation. Changes were equally dramatic in the fast-food industry.

McDonald's fast-food restaurants were entirely a postwar phenomenon, going from one hamburger stand in southern California operated by the McDonald brothers in 1955 to 4,000 nationwide just 20 years later and 8,000 a decade after that. By 2001, there were more than 29,000 McDonald's restaurants in 121 countries. When McDonald's first spread across America, many of its restaurants were built on highways or at other locations from which they could draw customers in automobiles from miles around. In previous decades-from the 1920s into the 1950s-White Castle was the dominant hamburger chain in the United States. People walked to White Castle hamburger restaurants, which meant that these restaurants had to be located in places with high population densities, so as to generate a large volume of pedestrian traffic coming in, enabling White Castle to sell to many people who came from a limited distance. Accordingly, White Castles were , often located near factories or in crowded working class neighborhoods in central cities. And they stayed open around the clock.

Financing was also very different in that earlier era. Unlike later fast-food chains, White

Castle did not have franchises. The parent company owned each restaurant and built new ones only when it had the money on hand to pay cash to do so. This enabled White Castle to ride out the Great Depression of the 1930s, when many other businesses, homes, and farms were lost because mortgages could not be paid at a time when money was so scarce.

Indeed, White Castle expanded during the Depression. It was almost ideally adapted to the world in which it existed. But it lost its unchallenged leadership of the industry and began a decline into obscurity when the economy and society changed around its restaurants in the middle of the twentieth century.

As middle-class and even working class people became more prosperous, acquired automobiles, and moved out of the central cities into the suburbs, reducing population densities in the cities, White Castle could no longer count on the heavy urban pedestrian traffic on which it had thrived. Its conservative financing policies meant that it could not expand as rapidly into the suburbs as other businesses which went into debt to do so, or raised capital by requiring their franchisees to put up part of the money needed. The rising crime and violence of the central cities in the 1960s were more of a problem for White Castle than for other hamburger chains located in suburban shopping malls. Staying open all night in low-income urban neighborhoods was no longer safe, financially or otherwise.

At the heart of the changed environment for fast-food chains was the automobile. Unlike White Castle, McDonald's did not have to adapt to the world of the automobile, because McDonald's began in that part of the country where automobile ownership was most widespread-southern California-and was geared to that environment from the beginning. As automobile ownership and suburbanization spread across the country, so did McDonald's. By 1988, half of McDonald's sales in America were made at drive-through windows, which were capable of handling a car every 25 seconds, or well over a hundred per hour.

As with the supermarkets, this high turnover represented extremely low costs of selling, enabling prices to be kept down to levels that were highly competitive. Drive-through restaurants in general require far less land per customer served than does a sit-down restaurant. This of course lowers the cost of doing business. Such economies enable prices to be kept down, while competition forces them to be kept down.

Just as neighborhood grocery stores, catering to pedestrian customers in central cities during the pre-World War II era, were eclipsed in the postwar world by suburban supermarkets serving customers coming from miles around in their cars, so local fast food restaurants serving customers walking in off the street were surpassed-and often forced out of business-by competition from drive-in fast food restaurants, serving people arriving in automobiles. Although at one time there were hundreds of White Castle hamburger restaurants and only one restaurant operated by the McDonald brothers, by 1996 White Castles sales were just one percent of McDonald's.

In a society that is constantly evolving, the conditions surrounding a given company or industry are always changing, and not all business leaders are equally quick to spot the changes or grasp their implications. For example, the changing age-structure of the American population created a huge market for hamburgers as the baby boom generation reached adolescence and young adulthood. The number of Americans aged 18 to 24 years nearly doubled between 1960 and 1980, but then began to drop. Accordingly, the total number of hamburgers sold in the United States eventually dropped for the first time in 1989, as baby boomers began reaching the ages when many people start going to salad bars and upscale restaurants. Such demographic changes, combined with a growing emphasis on the calorie and fat content of foods, and what the

Washington Post characterized as a "savage price war with competitor Burger King" all took an economic toll on McDonald's. In 2002, the chain had its first quarter operating at a loss-$390 million in the red-since McDonald's became a public corporation back in 1965. The Economist attributed this to the "top management" at McDonald's being "long-time insiders, shaped by the previous, out-of-date strategy." If so, it would not be the first time that a formula for success became a formula for failure when times changed. Of?1y the future will tell. However, what is already clear is that even the most successful businesses cannot rest on their past achievements.

The economic pressures to keep abreast of changes in the industry, the economy and the society force business owners and managers to seek a wide range of knowledge, going beyond the internal management of their own enterprises. Among the responses to this imperative have been trade associations, which provide highly detailed data on what is happening in their respective industries. A trade association for hotels, for example, provides detailed statistics on such things as what percentages of what kinds of hotels provide king-size, queen-size, and twin beds, cable television, voice mail, video games in the rooms, ironing boards, written material in foreign languages, and even what percentage of what kinds of hotels provide liquid soap in their bathrooms.

.An individual hotel needs this kind of information because it competes With other hotels, and cannot afford to fall behind in what it provides to the public. Small economy motels do not need to match everything provided by large luxury resorts, but a given small motel cannot afford to fall too far behind other small motels and still expect to survive.

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