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McDonald’s works on turnaround

McDonald’s works on turnaround

CEO says company must avoid “legacy thinking” as it works to lift global business

McDonald’s Corp. executives avoided discussing details of the company’s turnaround plan during an earnings call Wednesday, following a difficult quarter in which net income fell 33 percent and global same-store sales declined 2.3 percent.

McDonald’s CEO Steve Easterbrook hinted that the company’s changes, to be revealed at a special meeting on May 4, could be significant. He indicated that the company must avoid “legacy thinking” as it plots a turnaround.

“We can’t afford to carry legacy attitudes or legacy thinking,” Easterbrook said during the call, his first as McDonald’s CEO. He was named to the top job in January, and took over on March 1 for Don Thompson, who retired.

A potential change that executives did not discuss was delivery. Last week, McDonald’s filed a trademark for the term “McDelivery.” The patent was first reported by CNBC.

Delivery has been a growing part of quick-service restaurants’ arsenal. Burger King has tried delivery in some markets. And Taco Bell plans to test delivery this year.

Beyond McDonald’s trademark application, there are no other indications that it is working on a delivery program. Trademarks are often filed before concrete plans are revealed. The company has not yet responded to a request for comment.

Executives did suggest that McDonald’s is developing a smartphone app that should be ready in the second half of the year. Easterbrook indicated that the app would focus on improving customer experience, but later iterations of the app could focus on customer engagement.

“We do see it as a business driver as we look out ahead,” Easterbrook said. He added that an app would help the company “personalize” its relationship with customers and “shift from a transactional to a more purposeful relationship with customers.”

Easterbrook added that this “personalization” could extend to the menu, which could be done through the company’s customization test, Create Your Taste, which will be expanded to a couple markets in the U.S. this year, he said.

Executives said the company closed 350 restaurants in the first quarter in the U.S., Japan and China, in addition to 350 previously planned closures, but also said that few additional closures will come.

The company will reveal more details in May, and investors seem to be expecting big news. McDonald’s stock jumped more than 3 percent by mid-afternoon trading Wednesday.

Investors have been pushing McDonald’s to take more drastic financial steps to improve shareholder value in the short term, particularly selling units to franchisees and spinning off real estate. McDonald’s controls its franchisees’ real estate. Investors want the company to spin off that real estate out of a belief that the company’s stock doesn’t get credit for those assets.

But Mark Kalinowski, analyst with Janney Capital Markets, suggested there are a few easy levers for McDonald’s to pull for a short-term gain.

“Folks hoping for a near-term rise in the stock may be hanging their hat on hopes that McDonald’s can spark some pizzazz in investors that day,” Kalinowski wrote. “With meaningful capex cuts having been announced a few months ago and no non-core brands to sell off, doing so successfully will be a more difficult challenge than the similar challenge McDonald’s faced when it had a relatively new CEO meet with investors in New York City back in spring 2003.”

Challenging conventional thinking

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Easterbrook noted that the turnaround would be mostly about finding ways to lift sales and keep them there.

“We want to sell more hamburgers to more customers more often,” he said. “This is going to be a growth-led turnaround.”

Still, Easterbrook strongly hinted that the company is thinking differently this time, which isn’t easy for a brand that’s been around for 60 years, and which has been enormously successful for most of that time.

“We have been phenomenally successful for 60 years, and there are so many good reasons for that,” Easterbrook said. “Much of that I’d never, ever wish to change. That’s very precious to us. But there is a certain conservatism and incrementalism that builds into that. As a company that has not necessarily been a bad thing, but when you need to make a step change, our organization doesn’t naturally go there. It has to be led there.”

“We’re challenging some conventional thinking on a number of fronts,” he added.

Easterbrook said the company could work on innovation, both through new products and limited-time offers, and still simplify its operations. Simplification doesn’t just mean menu cuts, he said, though he called the cuts announced in January an “initial phase.”

“It’s not just simplification,” Easterbrook said. “It’s what else can we take off the workload of the teams and management in the restaurants. There are other things we can take out of the restaurants to simplify the job of management and crew.”

Easterbrook offered some views on how McDonald’s got into its current state, with 18 months of sales weakness and problems at many of its key markets around the world, notably its two biggest, the U.S. and Japan.

He suggested that the company should have worked on potential future growth pipelines during its successful run from 2003 through 2010.

“We had four or five growth initiatives working together from 2003 through 2010,” he said. “There were a number of different growth platforms that worked and worked around the world. That included delivering great quality coffee, which lifted the breakfast business, extended hours and the reimaging program, to name three. But perhaps what we didn’t see is the need to create that future pipeline of growth platforms.

“Sometimes the consumer will guide you there, but sometimes you have to take things into your own hands.”

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

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