Reporter's Notebook
How much change will Easterbrook make?

How much change will Easterbrook make?

Jonathan Maze

Steve Easterbrook is taking the helm at McDonald’s Corp. as an “internal activist” determined to make significant changes needed to pull the burger giant out of its slump.

But the exact nature of those changes aren’t yet fully certain — at least based upon reports from analysts who attended a “meet and greet” with top executives in New York this week.

Easterbrook took over as CEO earlier this month and was immediately tasked with lifting the company’s sales while pacifying both investors and activists eager for some positive movement. Investors have high hopes for the new management —the company’s stock price is up 10 percent since former CEO Don Thompson announced his retirement in January.

Yet turning around McDonald’s won’t be easy. The chain is a behemoth, by far the largest restaurant chain in the world, with 35,000 locations and $27 billion in revenue. It has numerous constituents, including customers, investors and franchisees and is a common target for activists pushing issues like health, worker pay and environmental issues.

Its problems are also global, with serious issues in Asia and Europe along with sales weakness in the U.S. driven by a combination of the chain’s own weakness and strength of competitors like Burger King Corporation.

In fixing these problems, Easterbrook is leaving no stone unturned, leaving open the possibility of major changes at the QSR giant. Sara Senatore, analyst at Bernstein Research, said in a note that the new CEO is “taking a critical eye to resource allocation in both operating and ownership strategies and … shaking up a culture that risks growing ossified.”

Brian Vaccaro, analyst at Raymond James, said that Easterbrook “can be a real agent for change that brings a renewed sense of urgency and fresh perspectives across the enterprise.”

The clearest elements of McDonald’s plan are in its U.S. operations, where the company is hoping a combination of decentralized decision-making and customization could lift U.S. sales. But those efforts are complex and could take some time.

The decentralized business could help restaurants compete more strongly on a regional basis. Customization, largely through its “Create Your Taste” platform, could provide customers with an experience mirroring those of better burger chains, according to Stephens Analyst Will Slabaugh.

But improvement could take some time. Vaccaro said that McDonald’s turnaround “involves a complex and interrelated set of initiatives … that will need to be effectively sequenced and likely take time to gain traction.”

Nicole Miller Regan, analyst at Piper Jaffray, said she hopes that technology that could speed service “is a priority and not overshadowed by the relative ease of menu/marketing evolution.”

Perhaps more interestingly, said Senatore, McDonald’s appears more willing to take risks to increase the pace of innovation — and improve its connection with younger consumers.

Less certain, however, is what the company will do on the shareholder value front, or issues investors are pushing. Executives are apparently willing to look at more refranchising in the U.S. and could consider a real estate spinoff. But analysts said that the company has yet to make any firm commitments on those issues, at least as of now.

“The management team appears to be bringing a fresh perspective to its operating and capital allocation strategies, as investors have been advocating,” Senatore said. “But without any concrete plans, it is difficult to grow more constructive.”

Senatore noted that the company has reduced capital expenditures from $2.8 billion this year to $2 billion, and that reduction should ensure that only the “best projects get approved.”

One of the more interesting discussions is over selling, general and administrative spending, or SG&A. According to Senatore, executives suggested that they could find efficiencies in that spending.

But the company also held fast to its belief that higher spending on G&A helps build unit volumes and profits. According to Vaccaro, executives said that McDonald’s spends twice what its competitors do for SG&A on a per-unit basis. But McDonald’s has five times the cash flow per unit. 

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