MGMT project
carter
McDonalds.pdf
LA}C}
'=?1 _f*'
cAsE ,f: ': &*Fh&hk t g htp] iv* q- {"Jq-,} gv&&&- !.-, b
McDonald's announced on January 28, 2015, that Don Thompson would retire as president and chief executive at the end of February. He would be replaced by Steve Easterbrook, the firm's chief branding officer. The abrupt exit came after the world's largest restaurant chain posted one of its worst financial performances in years (see Exhib- its I and 2). Revenue in the last quarter, through December, 1'ell 7 percent to $6.6 billion. Earnings, however, dropped by 21 percent to $1.1 billion from $1.4 billion in the same period a year earlier. "People have seen results go from the best in the industry to one of the worst in the course of three years," said Will Slabaugh, an analyst.l
Days betbre his retirement, Thompson acknowledged that McDonald's results had fallen short of expectations,
" Case prepared by Jamal Shamsie, Michigan State UDiversity, with the assistance of Prolcssor AIan B. Eisncr, Pace Univcrsity. Material has been drarvn from published sources to be used for purposes of class discussion. Copyright O 201 5 Jamal Shansie and Alan B. Eisner.
but he noted that the firm had sufl'ered partly because of events beyond his control. Sales in Asia and the Middle East had fallen sharply because of food safety concerns with a Chinese meat supplier. McDonald's also had to face shortages of French fries in several markets because of a slowdown at the port in Los Angeles. Finally, some Russian outlets were temporarily closed by food inspectors, appar- ently in retaliation for Western sanctions against Russia over its military intervention in Ukraine (see Exhibit 3).
However, McDonald's faced its biggest challenge in the United States, its largest market, where it had 111,200 of its 35,000 mostly franchised restaurants. It had lost a lot of ground with consumers, especially millennials. who were defbcting to traditional competitors like Burger King and Wendy's as well as to new designer burger out- lets such as Five Guys and Shake Shack. Changing tastes were responsible for the loss of customers who were lin- ing up at fast-casual chains such as Chipotle Mexican
lncome Statement ($ millions)
Balance Sheet ($ millions)
C1S{ C,&SF ?5:: MCDONALD'S
Revenue
Gross profit
Operating income
lncome before taxes
Net income
;;;'r;;#;;.---
Total current assets
Total assets
Total current liabilities
Total liabilities
Total stockholders' equity
Source: McDonald's
24,01s
9,637
7,473
7,000
4,946
21,006
10,687
8,530
8,012
s,503
27,567
10,816
8,605
8,079
5,465
28,1 06
10,903
8,764
8,204
5,586
21 ,441
10,456
7 QtO
7,312
4,758
4,368
21 07E
2,925
17,341
14,634
4,403
32,990
3,509
18,600
14,390
4,922
35,386
3,403
20,093
15,294
5,050
36,626
3,1 70
20,617
1 6,01 0
4,186
34,281
2,7 48
21,428
12,853
E Grill and Panera Bread. which offered customized order- ing and fresh ingredients (see Exhibit 4).
McDonald's response to this growing competition was to expand its menu with snacks, salads, and new drinks. From 33 basic items that the chain offered in 1990, the menu grew to 121 items by 2014. The greatly expanded menu led ro a
significant increase in costs and longer preparation times. This forced the firm to increase the prices of many of its items and to take more time to serve customers. moving it away fiom the attributes that it had built its reputarion on. "McDonald's stands for value, consistency and convenience." said Darren Tristano, a restaurant industry consultant.2
..,r i,t:r- '
Breakdown of Revenues ($ millions)Company-operated sales:
U.S.
Europe
APMEA
Other Countries & Corporate
Total
Franchised revenues:
U.S.
Europe
API\4EA
Other Countries & Corporate
Total
Total revenues:
IJ.S.
Europe
APMEA
Other Countries & Corporate
Total
Source: McDonald's.
$ 4,351
7,808
5,210
740
$18,169
$ 4,300
3,270
1,0s4
648
$ e,272
$ 8,651
11,078
6,324
'1,388
$21,441
$ 4,512
8,1 38
5,425
800
$ 1 8,875
$ +,sss
3,162
1,052
678
$ 9,231
$ s,sst
11,300
6,477
1,478
$28.1 06
$ 4,530
7,850
5,350
873
$ 1 8,603
$ 4,284
2,977
1,041
662
$ 8,e64
$ B,B 14
10,827
6,39'l
1,535
$21,561
U.S. Market Share of Fast-Food Burger Chains
2008
2009
2010
20'11
2012
2013
2A14
46.90/o
48.0
to1
50.1
50.0
49.7
49.6
13.50/o
13.0
12.7
12.5
12.2
12.2
12.3
14.37a
13.8
t 5.l
12.2
12.1
11.8
11.9
6.0%
5.9
5.5
5.4
5.4
5.4
5.4
4.970
4.8
4.5
4.4
4.4
4.3
4.3
1.87o
1.8
1.9
1.9
2.1
2.7
2.8
2.67o
2.6
2.6
2.7
2.1
2.1
2.2Yo
2.1
2.0
2.0
2.0
2.0
2.0
0.50/o
0.8
1.1
1.4
'1.5
1.6
1.1
Source: USA Todnr,, December 8, 20 I,X, and author esitmates.
eASr 25:: MCDONALD'S t"195
The fast-food chajn had gone through a sintilar crtsts befbre. Back in 2002-2003, McDonald's had experienced a decline in performance because of quality problems as a result of rapid expansion. At that time, the firm brought James R. Cantalupo back out of retirement to turn things around. He formulated the "Plan to Win," which was the basis of McDonald's strategy over the next decade. The core of the plan was to increase sales at existing loca- tions by improving the menu, returbishing the outlets, and extending hours. This time, however, such incremental steps might not be enough.
Pulling Out of a Downward Spiral Since it was founded mole than 50 years ago. McDon- ald's had been defining the fast-food business. lt provided millions of Arnericans their filst jobs even as it changed
their eating habits. It rose from a single outlet in a nonde- scr ipt Cl.ricago suburb to one of the largest chains ol outlets spread around the globe. But it gradually began to run into various problems that began to slow down its sales growth (see Exhibit 5).
This decline could be attributed in large part to a drop in McDonald's once-vaunted service and quality since it: expansion in the 1990s, when headquarters stopped gradin-u franchises for cleanliness. speed, and service. By the end of the decade, the chain ran into more problems because oi the tighter labor market. As it stluggled hard to find neu recruits, McDonald's began to cut back on training. leadin-s to a dramatic lallotf in the skills of its employees. Accord- ing to a 2002 survey by market researcher Global Growth Group, McDonald's came in third in average service time. behind Wendy's and sandwich shop Chick-fil-A Inc.
1948
'1955
1 961
1 963
1 965
1967
1 968
1912
197 4
1975
1979
1 987
1991
1992
1 996
1997
1 998
1 999
McDonald's Milestones
Brothers Richard and Maurice lVlcDonald open the first restaurant in San Bernardlno, California, that sells hamburgers, fries,
and milk shakes.
Ray A. Kroc, 52, opens his first McDonald's in Des Plalnes, lllinois. Kroc, a distributor of milk shake mixers, figures he can sell
a bundle ofthem if he franchises the McDonalds'business and installs his mlxers in the new stores.
Six years later, Kroc buys out the McDonald brothers for $2.7 million.
Ronald lVcDonald makes his debut as corporate spokesclown, using future NBC-TV weatherman Willard Scott. During the year,
the company also sells its 1-billionth burger.
McDonald's stock goes public at $22.50 a share. lt will split 12 times in the next 35 years.
The first lVcDonald's restaurant outside the U.S. opens in Richmond, British Columbia. Today there are 3'1 ,108 McDonald's in
1 1 B countries.
The Big Mac, the first extension of McDonald's basic burger, makes its debut and is an immediate hit.
McDonald's switches to the frozen variety for its successful French fries.
Fred L. Turner succeeds Kroc as CEO. ln the midst of a recession, the minimum wage rises to $2 per hour, a big cost increase
for McDonald's, which is built around a model of young, low-wage workers.
The first drivethrough wlndow is opened in Sierra Vista, Arizona.
McDonald's responds to the needs ofworking women by introducing Happy Meals. A burger, some fries, a soda, and a toy
give working moms a break.
Michael R. 0uinlan becomes chief executive.
Responding to the public's desire for healthier foods, McDonald's introduces the low{at Mclean Deluxe burger. lt flops and is withdrawn from the market. Over the next few years, the chain will stumble several times trying to spruce up its menu.
The company sells its 90-billionth burger and stops counting.
In order to attract more adult customers, the company launches its Arch Deluxe, a "grown-up" burger with an idiosyncratic
taste. Like the low-fat burger, it falls flat.
McDonald's launches Campalgn 55, which cuts the cost of a Big Mac to $0.55. lt is a response to discounting by Burger King
and Taco Bell. The move, which prefigures similar price wars in 2002, is widely considered a failure.
Jack l\4. Greenberg becomes McDonald's fourth chief executlve. A 1 6-year company veteran, he vows to spruce up the
restaurants and their menu.
For the first time, sales from international operations outstrip domestic revenues. In search of other concepts, the company
acquires Aroma Cafe, Chipotle, Donatos, and, later, Boston l\4arket.
l
1
a
1
t
I
t
ir
o
fi
tt r( or
itr
to
ClS6 CASI 25:: MCDONALD'S
2000
2001
2002
2003
2004
2005
2006
2008
2012
2015
Continued
McDonald's sales in the u.s. peak at an average of $i.6 million annually per restaurant, a It is, however, still more than sales at any other fast-food chain.
figure that has not changed since.
Su bway s urpasses McDona ld's as the fast-food cha in with the most U. S. o utlets. At the end of the yea r it had j 3,247 stores, 148 more than McDonald's.
forecast for per-share earnings growth.
Charles H. Bell takes over the firm after been developed by his predecessor.
the sudden death of cantalupo. He states he will continue with the strategies that have
Jim skinner takes over as cEO after Bell announces retirement for health reasons.
McDonald's launches specialty beverages, including coffee-based drinks.
McDonald's plans to add McCaf6s to each of its ou|ets.
Don Thompson succeeds Skinner as CEO ofthe chain.
Thompson resigns because of declining performance and is replaceci by Steve Easterbrook, the firm's chief branding officer
McDonald's posts its first-ever quarterly loss, of $343.8 rnillion
James R. Cantalupo returns to McDonald's in January as CEO
Ihe stock drops to around $13.50, down 40o/.from five years ago.
He immediately pulls back from the company's 1)y"-15y"
Sourcc; McDonald's.
By the beginning of 2003, consumer sLrrveys were indi_ cating that McDonald's was headecl fbr serious trouble. Measures for the service and quality of the chain were con_ tinuin-g to fall" dropping far behind those of its rivals. To deal with its deteriorating perforntance. the firm clecided to bring back retired vice chair.man James R. Cantalupo, 59, who had overseen McDonald's successful interna_ tional expansion in the 1980s and I990s. Cantalupo, who had letired only a year earlier" was perceiveci to be the only candidate with the necessary qualifications. despite shareholder sentiment for.an outsicler. The board felt that it needed someone who knew the company well and could move quickly to turn things around.
Cantalupo realized that McDonalcl,s often tencled to miss the mark on deiivering the cr.itical aspects of consis_ tent, l)st, and fiiendly sen,ice and an all-around enjoyable experience lbr the whole family. He understood that its franchisees and ernployees alike needed to be inspired as well as retrained on their role in putting the smile back into the McDonald's experience. When Cantalupo and his team laid out their turnaround plan in 2003, they stressecl settins the basics of service ancl quality righr. in part by reiistituti ing a tough "up or out" gracling system that would kick out underperforming fianchisees. ,,We have to rebuild the foundation. It's fruitless to add growth if the fbundation is weak." said Cantal upo.3
In his effort to focus on the firm,s core business. Can- talupo sold ofT the nonbur-ter chains that the firm had recently acquired. He also cut back on the opening of new outlets, focusing insteacl on generating more saies fiom its existing outlets. Cantalupo pushecl McDonald's to rr.y to draw more customers through the introduction of new
products. The chain had a positive response to its increased emphasis on healthiel fbods, led by a revampecl line of fancier salads. The revamped menu was promoted through a new worldwide ad slogan. "l'm loving it." u,hich was delivered by pop idol Justin Timberlake thr-ough a set of MTV-s11 Ie cgnt met'ciuls.
Striving for a l{ealthier lrnage When Jim Skinner took over from Cantalupo in 2004. he continued to push lbr McDonaid's to chan_{e its irnage. Skinner f-elt that one of his top priorities was to deal with the growing concerns about the unhealthy intage of McDonald's, given the rise of obesity in the U.S. Tl.rese concerns were highlighted in the populal documentary Super Siz.e Me, made by Morgan Spurlock. Spurlock vii. idly displayed rhe health risks rhat were posecl by a steady diet of food fi'om tl.re fast-food chain. With a rise in aware_ ness of the high fat content of most of the proclucts olfered by McDonald's, the firm was also beginning to face law_ suits fiom sorle of its loyal customers.
In response to the growing health concerns, one of the first steps taken by McDonald's was to phase out supersiz_ ing by the end of 2004. The supersizing option allowed cLrstomers to get a lnrger order of French fries and a big_ ger sofi drink by paying a little extra. McDonald,s also announced that it intended to start providing nuh.ition information on the packagin-s of its products. The infor_ mation would be easy to read and would provide custom_ ers with details on the calories. fat, protein, carbohydrates. and sodium that were in each product. Finally. McDonalcl,s began to remove the arterl,-clogging trrlns-tut acids from the oil that it used to make its French fries. and it recentlv
eA5e ?5:; MCDOI{ALD'S C1S7
announced plans to reduce the sodium content in all of its products by 15 percent.
But Skinner: was also trying to push out more otfer- ings that were likely to be perceived by customers as being healthier. McDonald's continued to build upon its chicken offerings using white meat with ploducts such as Chicken Selects. It also placed a great deal of emphasis upon irs new salad offerings. McDonald's carried out extensive experiments and tests on them and decided to use higher- quality ingredients. from a variety of lertuces and tasty cherry tomatoes to sharper cheeses and better cuts of meat. lt off-ered a choice of Newman's Own dressings, a well-known higher-end brand. "Salads have changed the way people think of our brand." said Wade Thonta, vice president for menu development in the U.S. "It tells people that we are very serious about offering things people f'eel comfortable eating."4
McDonald's was trying to include more fiuits and vegetables in its well-known and popular Happy Meals. It announced in 2011 that it would reduce the amount of French fries and phase out the caramel dipping sauce that accompanied the apple slices in these meals. The addition of fruits and vegetables raised the firm's operating costs. since they were more expensive to ship and store because of their more perishable nature. "We are doing what we can," said Danya Proud. a spokesperson for the firm. "We have to evolve with the times."5
The rollout of new beverages, highlighted by new coff-ee-based drinks, represented the chain's biggest menu expansion in almost three decades. Under a plan to add a McCaf6 section to all of its nearly 14,000 U.S. outlets, McDonald's was offering lattes, cappuccinos, ice-blended fiappes, and fruit-based smoothies to its customers. "In rnany cases, they're now coming lbr the beverage, whereas before they were coming for the meaI." said Lee Renz, an executive who was r"esponsible for the rollout.6
Returbishing the Outlets As part of its turnaround strategy, McDonaid's had been selling ofT the outlets that it owned. More than 75 percent of its outlets were now in the hands of franchisees and other affiliates. Skinner was working with the franchisees to address the look and feel of many of tl.re chain's aging stores. Without any changes to their decor, the firm was likely to be lefi behind by more savvy fast-food and drink retailers. The firm was in the midst of pushing harder to refur-bish- or reimage-all of its outlets around the worid. "People eat with their eyes first," said Thompson. "If you have a restau- rant that is appealing, contemporary, and relevant both from the street and interior. the food tastes better"."7
The reimaging concept was first tried in France in 1996 by Dennis Hennequin, an executive in charge of the chain's European operations, who felt that the effort was essential to revive the firm's sagging sales. "We were hip 15 years ago, but I think we lost that," he saici.8 McDonald's was applying the reimaging concept to its outlets around the
C19B CASE ?5: MCDONALD,S
world. with a budget of more than half of its total annual capital expenditures. In the U.S., the changes cost an aver- age of $ 150,000 per restzrurant, a cost that was shared with the franchisee when the outlet was not company-owned.
One of the prototype interiors being tested out by McDonald's had curved counters with surfaces painted in bright colors. In one corner, a touch-activated screen allowed customel's to punch in orders without queuing. The interiors could feature armchairs and sofas. modern lighting, large television screens. and even wireless Inter- net access. The lirm was also developing new features lbr its drive-through customers, who account for 65 percent of a1l transactions in the U.S. These f'eatures included music aimed at queuing vehicles and a wall of windows on the drive-through side of the restaurant allowing customers to see meals being prepared from their cars.
The chain was even developing McCaf6s inside its out- lets. next to the usual fast-fbod counter. The McCa16 con- cept originated in Australia in 1993 and rvas rolled out in many restaurants around the world. McDonald's introduced the concept to the U.S. as part of the refurbishment of its outlets. In fact, part ofthe makeover focused on the installa- tion of a specialty beverage platfbrm in all U.S. outlets. The cost of installing this equipment was about $100,000 per outlet, with McDonald's subsidizing part of the expense.
The firm planned to have all McCaf6s offer espresso- based coffee. gourmet coffee blends. fiesh-baked muffins. and high-end desserts. Customers would be able to consume thern while relaxing in sofi leather chairs and listening to jazz,br,g band, or blues music. Commenting on this signifi- cant expansion of offerings, Marty Brochstein, executive editor of The Lic'ensing Letter, said "McDonald's wants to be seen as a lifestyle brand, not just a place to go to have a DUrger.
Rethinking the Business Ffiodel In response to the decline in performance, McDonald's was testing a number of new concepts, including a kiosk f'eature in four stores in southern Califbrnia that allowed customers to skip the counter and head to tabletlike kiosks where they could customize everything about their burger. from the type of bun to the variety of cheese to the man) glossy toppings and sauces that can go on it. The firm later' decided to expand the concept to 30 locations in five more states and to 2,000, or about one in seven, of the 121,000 outlets in the U.S.
With its "Create Your Taste" kiosk platfor"m. McDonald's was hoping to attract more younger customers who might have been moving away liom frozen processed food that was loaded with preservatives. No one mentioned anything about the quality of meat that the chain used for its burgers. "Today's customers increasingly prefer cus- tomizable lood oprions. dining in a contemporary. invitin-u atmosphere and using more convenient ways to order and pay for their meals," CEO Thompson stated last year when the test was launched.lo
1
l
1
(
(
I I c
f
r 5
1',1
a
v it
o h
a
:l
n1
a1
fr
F/
E
m
th SU
to CC
qr tu a
rel
thi in. TT
Of(
to tio wa
far
However, there were risks invoived with making such a change. The butgers were priced higher, at $5.49; could take seven minutes to prepare; and could be ordered only fiom inside the store and eventuaiiy brought to your table. This ran counter to the image of inlxpenslve and fast food that McDonald,s had workeci hard to build over the years. Nevertheless. the firm hopecl this change would bring more customers into its outlets, bringing the U.S. counterl drive-through customer ratio closerlo 5O_SO, ,p liom the current 10*i0.
At the same time, McDonald,s was working to sim_plify its menu, reducing the number of ,,value meal,, promotions-groups of items that together cost less than ordering the items individually. It tweJed its ,,clollarmenu,,, replacing it with ,,dollar value and more,, ;rnd raising the prices of many items as part of a bid to get each customer to spend more. But McDonald,s had intr.o-duced these b;rgain menus because its prices had risen over the years, driving away customers to cheaper outlets. Over the previous five years, about 15 percent of the chain,s saies hai come fiom its dollar menu, on which everything cost u clotia..
McDonald's was trying out all options. It even quietly opened a sandwich and salad shop in Australia, a bit of a hybrid of Panera and Starbucks, with no ,ign of a golden arch or Ronaid McDonald anywhere. eiA it recently sigaed a deal to begin selling iti coffee in gro"ery ,tor".. "They are throwing a lot of .spaghefti at th! *uli, but it,. not clear that any of it is the right spaghetti,,, said Sara Sen_ atore, an investment analyst. ,,They have all these thinss going on and it's not obvious that,s what ."nrr.;;;;;;; from McDonald's.,,ll
More Gold in These Arches? Even though McDonald,s had appointed a new CEO and made some changes in its organization, it was not clear how the chain could pull out of iis present situati on. ln ZOI+, u survey in Consumer Reporls showed that McDonald,s cus_ tomers ranked its burgers significantly below those of 20 competitors. McDonald,s also had the Iowest rank in food quality of all rated hamburger chains in the Nction,s Re,s_ taurant 1y'ews Consumer picks survey. ,,McDonald,s has a huge image problem in America,,, saiO fohrrCorOon, a restaurant consultant. I 2
fiom.just fiye items: Big Macs, hamburgers, cheeseburg_ ers. McNuggers. and fi.ies.
. Restaurant analyst Bryan Elliott commented: ..They,ve
l.]"9 t" be all things to ail peopie who walk in their door.,,i3 McDonald's recent markeiing campaign, anchored around the catchy phrase ,,I,m Ioving it,,, ioof o, difTerent tbrms to target each of the groups that the firm was seeking. Larry Light, the head of global marketing ar McDonaid,s who pushed for this campaign, insistJ thar the firm had to exploit irs brand Uy pustring it in many different directions.
^ For the most part, McDonald,s tried to reach out to dif._
ferent^ customer segments by offering different products at different times of the day. It targef,d young aclults for breakfast with irs gourmet coffee, ejg ,uodri.f,.r, and far free muffins. It attracted working uJJtt, fo. lunch, particu_ larly those who were squeezed for time, with its burgers and fries. And its introduction of wraps drew in teenagers late in the evening after they had been partylrg.
Nevertheless, the expansion of the menu"beyond the staple of burgers and fries raised some fundamental ques_ ]i:r: M9i, significantly, ir was nor clear jusr how far McDonald's could stretch its brand while keeping all of its outlets under the traditional symbol of its golden-arches. In fact, industry experts believed that the lo-ng_term success of the firm might well depend on its ability ro compere with rival burger chains. ..The burger category has great strength," added David C. Novak, chairian'ancl CEO of Yuml Brands, parent of KFC and Taco Beli- .,That,s America's food. people love hamburgers.,,14
ENDNOTES 1. Beth Kowitt. Fallen arches. Fortune,December l,201,{, p. l0g. 2. The Economist. When the chips are down. January I 0, U O I S, p. -::. 3. Pallavi Gogoi & Michael Arndt. Hamburger hell. B usines,s Week,
March 3,2003, p. 105. .1. Melanie Warner you want any fruit with thatBigMac? New york
Iiizes, February 20,200-5, p. g. 5. Stephanie Stronr. McDonalrl,s trims jts Happy Med. 1r/er yorkTinrcs,
July 27,2011,p.87. 6. Janet Adamy. McDonald,s coffee strategy is tough seli. Wall Street
JournaL, October 27, 200g, p. 83. 7. Ben Paynter. Super style me. Fast Company, October 2010, p. I07. 8. Jeremy Grant. McDonald,s to revamp UK outlets. Financial l.imes,
February 2, 2006, p. t4.As it tried to make changes, McDonald,s announced that it planned to open fewer stores in 201 5 and pare capital investmenr to $2 biilion, the least in more tt u.i*. y"u.r. ll. f,:rn was already rryirrg our a variery oi ..rrui"gi., in "ro:l lo move away from burgers and increase its appealto different segments of the market. Through tt e aaop_ tion of a mix of outlet decor and menu items,-McDonald,s yut. jlyir.g to targer young aclults, teenagers, children, and rrmllles. tn spire of these effbrts, 30 percent of sales came
9. Bruce Horovitz. McDonald,s ventures beyond burgers to duds, toys. USA Today, November Il. 2003. p. 6F..
10. Bruce Horovitz. McDonald,s sales down, but better than expected. USA Toduy. \orenrber I l. 2014. p. 68.
r
1 l. Stephanie Strom. McDonald's tests custom burgers and other new concepts as sales drop. Nevy york Times, January 24,201 5, p. 83.
12. The Econonirl, op. cit., p. 54. 13. Kowitt, op. cir.. p. I 10. 14. Juiie Jargon. McDonald,s is feeling fiied. Wall Street Journal
November 9, 2012, p.82.
eASf ;5 :: MCDONALD,S CIBB
