case study

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 to 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 from the attributes that it had built its reputation on. “McDonald’s stands for value, consistency and convenience,” said Darren Tristano, a restaurant industry consultant.2

The fast food chain had gone through a similar crisis before. 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, refurbishing 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 more than 50 years ago, McDon- ald’s had been defining the fast-food business. It provided millions of Americans their first jobs even as it changed EXHIBIT 5 McDonald’s Milestones their eating habits. It rose from a single outlet in a nonde- script Chicago suburb to one of the largest chains of 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 its expansion in the 1990s, when headquarters stopped grading franchises for cleanliness, speed, and service. By the end of the decade, the chain ran into more problems because of the tighter labor market. As it struggled hard to find new recruits, McDonald’s began to cut back on training, leading to a dramatic falloff 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 Brothers Richard and Maurice McDonald open the first restaurant in San Bernardino, California, that sells hamburgers, fries, and milk shakes.

1955 Ray A. Kroc, 52, opens his first McDonald’s in Des Plaines, Illinois. Kroc, a distributor of milk shake mixers, figures he can sell a bundle of them if he franchises the McDonalds’ business and installs his mixers in the new stores.

1961 Six years later, Kroc buys out the McDonald brothers for $2.7 million.

1963 Ronald McDonald makes his debut as corporate spokesclown, using future NBC-TV weatherman Willard Scott. During the year, the company also sells its 1-billionth burger.

1965 McDonald’s stock goes public at $22.50 a share. It will split 12 times in the next 35 years.

1967 The first McDonald’s restaurant outside the U.S. opens in Richmond, British Columbia. Today there are 31,108 McDonald’s in 118 countries.

1968 The Big Mac, the first extension of McDonald’s basic burger, makes its debut and is an immediate hit.

1972 McDonald’s switches to the frozen variety for its successful French fries.

1974 Fred L. Turner succeeds Kroc as CEO. In 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.

1975 The first drive-through window is opened in Sierra Vista, Arizona.

1979 McDonald’s responds to the needs of working women by introducing Happy Meals. A burger, some fries, a soda, and a toy give working moms a break.

1987 Michael R. Quinlan becomes chief executive.

1991 Responding to the public’s desire for healthier foods, McDonald’s introduces the low-fat McLean Deluxe burger. It flops and is withdrawn from the market. Over the next few years, the chain will stumble several times trying to spruce up its menu

1992 The company sells its 90-billionth burger and stops counting.

1996 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.

1997 McDonald’s launches Campaign 55, which cuts the cost of a Big Mac to $0.55. It 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.

1998 Jack M. Greenberg becomes McDonald’s fourth chief executive. A 16-year company veteran, he vows to spruce up the restaurants and their menu.

1999 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 Market.

EXHIBIT 5 Continued 2000 McDonald’s sales in the U.S. peak at an average of $1.6 million annually per restaurant, a figure that has not changed since. It is, however, still more than sales at any other fast-food chain. 2001 Subway surpasses McDonald’s as the fast-food chain with the most U.S. outlets. At the end of the year it had 13,247 stores, 148 more than McDonald’s. 2002 McDonald’s posts its first-ever quarterly loss, of $343.8 million. The stock drops to around $13.50, down 40% from five years ago. 2003 James R. Cantalupo returns to McDonald’s in January as CEO. He immediately pulls back from the company’s 10%–15% forecast for per-share earnings growth. 2004 Charles H. Bell takes over the firm after the sudden death of Cantalupo. He states he will continue with the strategies that have been developed by his predecessor. 2005 Jim Skinner takes over as CEO after Bell announces retirement for health reasons. 2006 McDonald’s launches specialty beverages, including coffee-based drinks. 2008 McDonald’s plans to add McCafés to each of its outlets. 2012 Don Thompson succeeds Skinner as CEO of the chain. 2015 Thompson resigns because of declining performance and is replaced by Steve Easterbrook, the firm’s chief branding officer. Source: McDonald’s. By the beginning of 2003, consumer surveys were indi- cating that McDonald’s was headed for serious trouble. Measures for the service and quality of the chain were con- tinuing to fall, dropping far behind those of its rivals. To deal with its deteriorating performance, the firm decided to bring back retired vice chairman James R. Cantalupo, 59, who had overseen McDonald’s successful interna- tional expansion in the 1980s and 1990s. Cantalupo, who had retired only a year earlier, was perceived to be the only candidate with the necessary qualifications, despite shareholder sentiment for an outsider. The board felt that it needed someone who knew the company well and could move quickly to turn things around. Cantalupo realized that McDonald’s often tended to miss the mark on delivering the critical aspects of consis- tent, fast, and friendly service and an all-around enjoyable experience for the whole family. He understood that its franchisees and employees 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 stressed getting the basics of service and quality right, in part by reinstitut- ing a tough “up or out” grading system that would kick out underperforming franchisees. “We have to rebuild the foundation. It’s fruitless to add growth if the foundation is weak,” said Cantalupo.3 In his effort to focus on the firm’s core business, Can- talupo sold off the nonburger chains that the firm had recently acquired. He also cut back on the opening of new outlets, focusing instead on generating more sales from its existing outlets. Cantalupo pushed McDonald’s to try to draw more customers through the introduction of new products. The chain had a positive response to its increased emphasis on healthier foods, led by a revamped line of fancier salads. The revamped menu was promoted through a new worldwide ad slogan, “I’m loving it,” which was delivered by pop idol Justin Timberlake through a set of MTV-style commercials. Striving for a Healthier Image When Jim Skinner took over from Cantalupo in 2004, he continued to push for McDonald’s to change its image. Skinner felt that one of his top priorities was to deal with the growing concerns about the unhealthy image of McDonald’s, given the rise of obesity in the U.S. These concerns were highlighted in the popular documentary Super Size Me, made by Morgan Spurlock. Spurlock viv- idly displayed the health risks that were posed by a steady diet of food from the fast-food chain. With a rise in aware- ness of the high fat content of most of the products offered by McDonald’s, the firm was also beginning to face law- suits from some 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 customers to get a larger order of French fries and a big- ger soft drink by paying a little extra. McDonald’s also announced that it intended to start providing nutrition information on the packaging 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, McDonald’s began to remove the artery-clogging trans-fat acids from the oil that it used to make its French fries, and it recently

announced plans to reduce the sodium content in all of its products by 15 percent. But Skinner was also trying to push out more offer- 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 products such as Chicken Selects. It also placed a great deal of emphasis upon its new salad offerings. McDonald’s carried out extensive experiments and tests on them and decided to use higher- quality ingredients, from a variety of lettuces and tasty cherry tomatoes to sharper cheeses and better cuts of meat. It offered 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 Thoma, vice president for menu development in the U.S. “It tells people that we are very serious about offering things people feel comfortable eating.”4 McDonald’s was trying to include more fruits 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 coffee-based drinks, represented the chain’s biggest menu expansion in almost three decades. Under a plan to add a McCafé section to all of its nearly 14,000 U.S. outlets, McDonald’s was offering lattes, cappuccinos, ice-blended frappes, and fruit-based smoothies to its customers. “In many cases, they’re now coming for the beverage, whereas before they were coming for the meal,” said Lee Renz, an executive who was responsible for the rollout.6 Refurbishing the Outlets As part of its turnaround strategy, McDonald’s had been selling off 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 the chain’s aging stores. Without any changes to their decor, the firm was likely to be left behind by more savvy fast-food and drink retailers. The firm was in the midst of pushing harder to refurbish— or reimage—all of its outlets around the world. “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. “We8were hip 15 years ago, but I think we lost that,” he said. McDonald’s was applying the reimaging concept to its outlets around the 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 restaurant, 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 customers 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 firm was also developing new features for its drive-through customers, who account for 65 percent of all transactions in the U.S. These features 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 McCafeś inside its out- lets, next to the usual fast-food counter. The McCafé con- cept originated in Australia in 1993 and was 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 of the makeover focused on the installa- tion of a specialty beverage platform 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 McCafeś offer espresso- based coffee, gourmet coffee blends, fresh-baked muffins, andhigh-enddesserts.Customerswouldbeabletoconsume them while relaxing in soft leather chairs and listening to jazz, big band, or blues music. Commenting on this signifi- cant expansion of offerings, Marty Brochstein, executive editor of The Licensing Letter, said: “McDonald’s wants to be seen as a lifestyle brand, not just a place to go to have a burger.”9 Rethinking the Business Model In response to the decline in performance, McDonald’s was testing a number of new concepts, including a kiosk feature in four stores in southern California 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 many 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 14,000 outlets in the U.S. With its “Create Your Taste” kiosk platform, McDonald’s was hoping to attract more younger customers who might have been moving away from 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 food options, dining in a contemporary, inviting atmosphere and using more convenient ways to order and pay for their meals,” CEO Thompson stated last year when the test was launched

However, there were risks involved with making such a change. The burgers were priced higher, at $5.49; could take seven minutes to prepare; and could be ordered only from inside the store and eventually brought to your table. This ran counter to the image of inexpensive and fast food that McDonald’s had worked hard to build over the years. Nevertheless, the firm hoped this change would bring more customers into its outlets, bringing the U.S. counter– drive-through customer ratio closer to 50-50, up from the current 40–70. 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 tweaked its “dollar menu,” replacing it with “dollar value and more” and raising the prices of many items as part of a bid to get each customer to spend more. But McDonald’s had introduced these bargain 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 sales had come from its dollar menu, on which everything cost a dollar. 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 sign of a golden arch or Ronald McDonald anywhere. And it recently signed a deal to begin selling its coffee in grocery stores. “They are throwing a lot of spaghetti at the wall, but it’s not clear that any of it is the right spaghetti,” said Sara Sen- atore, an investment analyst. “They have all these things going on and it’s not obvious that’s what consumers want from McDonald’s.”11 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 its present situation. In 2014, a survey in Consumer Reports showed that McDonald’s cus- tomers ranked its burgers significantly below those of 20 competitors. McDonald’s also had the lowest rank in food quality of all rated hamburger chains in the Nation’s Res- taurant News Consumer Picks survey. “McDonald’s has a huge image problem in America,” said John Gordon, a restaurant consultant.12 As it tried to make changes, McDonald’s announced that it planned to open fewer stores in 2015 and pare capital investment to $2 billion, the least in more than five years. The firm was already trying out a variety of strategies in order to move away from burgers and increase its appeal to different segments of the market. Through the adop- tion of a mix of outlet decor and menu items, McDonald’s was trying to target young adults, teenagers, children, and families. In spite of these efforts, 30 percent of sales came from just five items: Big Macs, hamburgers, cheeseburg- ers, McNuggets, and fries. Restaurant analyst Bryan Elliott commented: “They’ve tried to be all things to all people who walk in their door.”13 McDonald’s recent marketing campaign, anchored around the catchy phrase “I’m loving it,” took on different forms to target each of the groups that the firm was seeking. Larry Light, the head of global marketing at McDonald’s who pushed for this campaign, insisted that the firm had to exploit its brand by pushing 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 targeted young adults for breakfast with its gourmet coffee, egg sandwiches, and fat- free muffins. It attracted working adults for 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 partying. Nevertheless, the expansion of the menu beyond the staple of burgers and fries raised some fundamental ques- tions. Most significantly, it was not clear just 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 long-term success of the firm might well depend on its ability to compete with rival burger chains. “The burger category has great strength,” added David C. Novak, chairman and CEO of Yum! Brands, parent of KFC and Taco Bell. “That’s America’s food. People love hamburgers.”14 ENDNOTES 1. Beth Kowitt. Fallen arches. Fortune, December 1, 2014, p. 108. 2. The Economist. When the chips are down. January 10, 2015, p. 53. 3. Pallavi Gogoi & Michael Arndt. Hamburger hell. Business Week, March 3, 2003, p. 105. 4. Melanie Warner. You want any fruit with that Big Mac? New York Times, February 20, 2005, p. 8. 5. Stephanie Strom. McDonald’s trims its Happy Meal. New York Times, July 27, 2011, p. B7. 6. Janet Adamy. McDonald’s coffee strategy is tough sell. Wall Street Journal, October 27, 2008, p. B3. 7. Ben Paynter. Super style me. Fast Company, October 2010, p. 107. 8. Jeremy Grant. McDonald’s to revamp UK outlets. Financial Times, February 2, 2006, p. 14. 9. Bruce Horovitz. McDonald’s ventures beyond burgers to duds, toys. USA Today, November 14, 2003, p. 6B. 10. Bruce Horovitz. McDonald’s sales down, but better than expected. USA Today, November 11, 2014, p. 6B. 11. Stephanie Strom. McDonald’s tests custom burgers and other new concepts as sales drop. New York Times, January 24, 2015, p. B3. 12. The Economist, op. cit., p. 54. 13. Kowitt, op. cit., p. 110. 14. Julie Jargon. McDonald’s