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Call me (erroneously) risk-averse if you like, but that's ridiculous:

The Upside of Falling Flat
Stefan Michel, Harvard Business Review, Apr 2007, Vol. 85, Issue 4

lachnummer01In the end, the decision by McDonald's to build a couple of four-star European hotels, with arch-shaped headboards for the beds and fast-food restaurants onsite, wasn't as bizarre as it seemed.

The Golden Arch venture in Switzerland ended in 2003 after two and a half years, when the pair of McDonald's hotels closed. But as I tell my MBA students and executive-education participants, the foray can be thought of as an inexpensive "real option" that provided the innovation-hungry company with an opportunity to learn valuable lessons from a controlled failure.

Relatively few travelers ever stayed in – or heard of – the hotels, which opened within a few weeks of each other in the spring of 2001, one near the Zurich airport, the other in Lully near the A-1 interstate. They were the brainchild of Urs Hammer, chairman of McDonald's Switzerland, who was responding to the parent company's push for diversification and new ideas.

The Zurich Golden Arch hotel opened first, and it was unlike any other hotel around. The McDonald's restaurant just off the lobby was open 24 hours (a rarity in Switzerland). The guest accommodations, for $120 to $160 a night, featured a patented curved wall and a cylindrical, see-through shower stall that protruded into the bedroom. The decor was spare and brightly colored. A colleague of mine who stayed there in 2001 recalled frankly that "the entire feeling was one of oddity and discomfort." The second hotel was similar.

The hotels clearly didn't deliver the expected results. The worldwide economic contraction – and the appreciation of the Swiss franc – that followed the attacks of September 11, 2001, contributed to their demise, but there were other factors, both minor and major. The showers, for one thing: Families and business travelers rooming together complained about the lack of privacy (the glass was later frosted as a result). Another issue was that the English phrase "golden arches" isn't associated with McDonald's in German-speaking countries. Even worse, as the owner of a hospitality consulting firm pointed out, was that the word "arch," when pronounced by German speakers, sounds a lot like a vulgar word for a person's posterior.

lachnummer02Beyond all that, the strategy itself was questionable. Although the venture related to the company's food business and relied on many of its core competencies, such as franchising and real estate management, the McDonald's brand doesn't square with the image of a four-star hotel. A financial analyst quoted in the Wall Street Journal noted, "I've just come back from lunch at McDonald's. But I can't imagine staying at a McDonald's hotel on a business trip." Indeed, the company shifted focus in 2003 away from such brand extensions and toward an ultimately better strategy of trying to get more customers into existing restaurants.

But the McDonald's board knew what it was doing when it green-lighted Hammer's project in 1999. Its decision was a real option: a fixed investment for an uncertain but potentially high return. Diversifying into the hotel business gave the company a shot at entering a billion-dollar industry. Because diversifications are generally more likely to fail than succeed, companies need to constrain the costs of moving forward with them. McDonald's did just that. It made a relatively small investment and limited its risk.

By publicizing the venture mainly inside Switzerland and using the name Golden Arch rather than McDonald's, the company avoided damage to the corporate brand. Moreover, the real estate investment did not result in a significant loss: The two hotels are now managed by Rezidor SAS Hospitality, which runs them under its Park Inn brand. While a P&L statement was never made public, the estimated operational losses were insignificant to the McDonald's portfolio. The decision to exit the hotel business after less than three years represents a further limitation of the company's risk.

The venture also offered insights – or at least reminders – about diversification and globalization. First, even for a company with deep pockets and billion-dollar brand equity, it is extremely difficult to take a name that is well established in one category (McDonald's is fast food) and achieve success with it in a different, if related, category. Second, for companies going global, the more complex the service offerings, the more important the cultural context (unlike a fast-food restaurant, a four-star hotel is full of individualized customer interactions, for which guests have diverse and high expectations).

But there's another point that's perhaps even more important. Hammer was one of the company's most successful franchisees, an entrepreneurial manager with a long history of fruitful business venturing. By supporting him, McDonald's was reinforcing and nurturing its bottom-up innovation culture. In the words of a McDonald's manager who participated in one of our executive education programs, "We try hundreds of things every year, and only a few turn out to be successful. But those initiatives make our business grow and keep our spirit alive. Not trying is not an option."

related items:
McDonald's uses graffiti to woo the US Latino market , guest blogger Adam Crouch
Marcin Tustin (guest) meinte am 29. Mar, 12:43:
Sounds like good business
Yep real option, small losses, much learned. The only part that is ridiculous is the decision about the cubicles. They could have just as easily had fully opaque showers. Actually, the decision to use the English phrase "Golden Arches" should have been obviously wrong from the start. 
Mahalanobis antwortete am 29. Mar, 15:08:
McDonald's
USP has always been cleanliness. Their outlets are always tidy and I trust them that their food is technically ok [see recent spoiled meat scandal in Germany and keep in mind that in many countries McDonald's is the only large fast food chain around, so they still compete directly only with street vendors who sell food of unknown quality (indirectly there is probably some entry-deterrence pricing going on)]. Consequently, they could have tried to compete against some shanty motels.

I smell burgers immediately after being exposed to their logo (and after a while I have to think of plastic). So how much do you think they have to pay me for staying in a room with a huge McDonald's logo? Besides that, I get depressed after staying longer than 10 minutes at a McDonald's. Cleanliness has turned into emptiness. 
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I simply love the way in which hotels wisely expose their brands, so as to make sure their clients remember them forever. This is a smart marketing technique, to say it so. Sometimes, you get everything you want, everything is out there available for you, I have come to think that sometimes you don`t even need more information, because they make sure you get all the insight you need for future reservations. 
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