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Industry experts: McDonald's turnaround will be tough

Industry experts: McDonald's turnaround will be tough

Steve Easterbrook may find it difficult to fix chain’s problems quickly, observers say

When Steve Easterbrook officially becomes CEO of McDonald’s Corp. on March 1, replacing Don Thompson, he will be presented with an opportunity: The chance to turn around the largest, most iconic restaurant brand in the world.

But it won’t be easy. Analysts, observers and those formerly with McDonald’s all say the Oak Brook, Ill.-based burger giant has a unique set of problems.

The 36,000-unit chain’s size and number of constituents make change difficult. And the company’s recent weak performance makes it more challenging for management to get franchisee buy-in for marketing and investment plans.

“Nothing’s easy,” said Richard Adams, a former franchisee turned consultant who works with McDonald’s operators. “You can’t just snap your fingers and make a change.”

Easterbrook began working at McDonald’s in 1993 as a financial reporting manager in London, and he has held several key leadership roles at the company. He led McDonald’s in the United Kingdom, and later led McDonald’s Europe. He left in 2011 for U.K.-based Pizza Express, and then Wagamama Ltd.

Easterbrook returned in 2013 as McDonald’s chief brand officer, and will take the top job once Thompson’s retirement becomes official in about a month.

A former company official privately called Easterbrook “a good choice” for the CEO role partly because he is something of an outsider, despite his long history with the chain.

But while McDonald’s stock rose 5 percent today on the news of the shakeup, analysts said the company might have gotten a better reception among investors had it hired a true outsider.

“The thing that would have startled the market is if the company went outside its wheelhouse, instead of people who spent decades in the company,” said Stephen Anderson, analyst at Miller Tabak + Co.

The two people who will be most responsible for McDonald’s turnaround — Easterbrook and McDonald’s USA president Mike Andres — are longtime employees who recently returned to the company after time spent elsewhere. Andres spent more than a year running Logan’s Roadhouse before returning to McDonald’s in September.

A difficult year

Thompson’s retirement wasn’t exactly a surprise, as McDonald’s is coming off one of the worst years in its history.

Domestic systemwide sales fell 1.1 percent last year, the first time that figure declined in at least 30 years. Same-store guest counts fell 4.1 percent for the year.

Meanwhile, quick-service chains like Burger King, Wendy’s, Sonic and Jack in the Box have reported sales growth. In the third quarter last year, McDonald’s underperformed its primary quick-service burger competitors by 620 basis points.

As a result, the company’s stock price has underperformed the stock market. McDonald’s stock closed yesterday at $88.78, just more than $1 a share less than where it traded at the beginning of 2013. Since that time, the Dow Jones Industrial Average has risen 28 percent, and the S&P 500 index has increased 37 percent.

“They’ve underperformed their peers,” said Mark Kalinowski, analyst at Janney Capital Markets. “They’ve underperformed the general market. By any meaningful measure, it’s been a rough go for them. They need a change agent.”

There had been rumors for months that Thompson’s job was on the line. Yet the timing still surprised some, especially after Thompson participated in McDonald’s earnings call last week, sounding confident in the company’s plan to fix its sales problems.

“I thought they’d probably give Don a bit longer to fix things,” Kalinowski said.

But Thompson’s retirement is a sign that the company’s board is not patient with the chain’s plan, he said.

“The fact that the board was willing to act here hints they’re less patient, and they should be less patient with what’s going on here,” Kalinowski said.

Tough fix

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Repairing McDonald’s sales in the U.S. won’t be easy. The level of competition today is greater than it was in 2002, when the chain last experienced major problems.

Quick-service burger chains have improved their systems since then. Fast-casual chains like Chipotle Mexican Grill, Shake Shack and the Habit Burger Grill are attracting customers in search of better food. And Chick-fil-A has overtaken McDonald’s leadership with a key constituent — families. The Atlanta-based quick-service chicken chain was rated more highly than McDonald’s as a destination for families, the first time another brand besides McDonald’s led that category. Grocery stores, pharmacies and convenience stores have also improved their prepared food offerings.

“The competitive set McDonald’s faces is the most challenging since the company went public in the 1960s,” Kalinowski said.

The chain’s size also makes change difficult. The brand has more than 14,000 locations in the U.S., more than any other restaurant chain except Subway.

McDonald’s is also a franchise, which can make decisions more arduous. While a company-owned concept like Starbucks or Chipotle can make quick, systemwide decisions and implement them following a management directive, a franchise must go through franchise operators. And in McDonald’s system, franchisees can vote on marketing plans, which is not always the case with some franchises.

Franchisee discontent has grown over the past two years as the chain’s sales have softened. As discontent grows, operators’ willingness to follow management’s spending plans has diminished.

“When you have a large franchise model and you have a good relationship, it’s easy to sell new ideas,” said Steve Crichlow, a former franchisee and now CEO of Compass Restaurant Consulting and Research. But if you don’t, he added, it’s a bigger burden, especially when the ideas could cost operators money.

There have been recent signs that franchisees have resisted plans to remodel locations and add equipment in recent months.

“They’ve just been learning to say no,” Adams said. “That was starting to become a problem for him [Thompson].”

That could be a big problem for the customizable Create Your Taste platform, one of Thompson’s plans to turn sales around. McDonald’s wants to roll the program out to 2,000 restaurants this year, but it would be costly for operators to add and operate.

What now?

(Continued from page 2)

Create Your Taste is part of a wide array of changes that Thompson and Andres have announced in recent months. Other plans include cutting menu items, adding customer-facing technology and giving regions more control over marketing and menu items to satisfy local tastes.

The question now is how much of that plan survives under Easterbrook. “If there’s not going to be changes to it, then why make the move in the first place?” Kalinowski said, adding that perhaps Easterbrook might speed the pace of change.

Some also wondered whether Create Your Taste would survive under new management. “I would not be surprised if they simply abandoned it,” Anderson said.

Many analysts said the chain should be more aggressive about cutting menu items and should focus on its core products rather than adding new items. Anderson suggested the company pare its menu down to 90 to 100 items and concentrate on speed and value.

“They’ve got to focus,” he said. “If you’re not fast, if you’re not value, if you don’t have clean restaurants, people won’t come back to you. All three have suffered the last few years.”

McDonald’s also needs to re-examine its image and what it stands for, given changes in consumer demands in recent years, said Leann Leahy, president of the VIA Agency, a creative advertising agency based in Portland, Maine. McDonald’s needs to stand for something besides convenience and value, she said.

“They’ve done such an amazing job over the decades of communicating convenience and value,” Leahy said. “But as the world demands more than convenience and value, they haven’t kept up. The image of a happy family and friends is not enough. Consumers are demanding something more, and value is an expectation.”

Contact Jonathan Maze at [email protected].
Follow him on Twitter: @jonathanmaze

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