UNLV Management Essay

O
23
McDonald’s Corporation
September 1, 2017. Steve Easterbrook walked into his office in the McDonald’s corporate headquar-
ters in Oak Brook, Illinois. Now two and a half years into the job of McDonald’s CEO, he is starting to
see some of his early turnaround initiatives show results.
His thoughts turned to Don Thompson, his predecessor and friend. Thompson was in the top job
for less than three years, overseeing a more than four percent decline in customer traffic in 2014.
In spring 2015, Thompson retired. Easterbrook hoped to avoid this fate. They had both started their
careers at McDonald’s early in the 1990s and had climbed the corporate ladder together. Easterbrook
had not taken personal joy in seeing either his friend and mentor, or the company they both loved,
struggle. Rather, he had hoped to take the helm at the company at its peak and then take it to new
heights-not inheriting the corporate giant in a turnaround situation.
The company’s troubles had snowballed quickly. In 2011, McDonald’s had outperformed nearly all
its competitors while benefitting from the fallout of the great recession (2008-2010) as more custom-
ers flocked to its low-cost meal options. In fact, McDonald’s was the number-one performing stock in
the Dow 30 with a 34.7 percent total shareholder return. But in 2012, McDonald’s dropped to number
30 in the Dow 30 with a -10.75 percent annual return. The company went from first to last in twelve
brief months. In 2012, McDonald’s’ sales growth dropped by 1.8 percent, the first monthly decline since
2003.? Annual system-wide sales growth in 2012 barely met the minimum three percent goal, while
operating income growth was just one percent compared to a goal of six to seven percent.”
Things went from bad to worse. Sales continued to decline over the next two years. Net income in
2014 fell almost 15 percent to $4.76 billion, representing the company’s first annual drop in “like-for-
like” sales since 2002.4 By early 2015, McDonald’s shares had dropped below their 2012 price point,
while the overall market was up by 50 percent.”
Things were not much better overseas. The weak global economy was a further drain on domestic
sales. When the dollar was relatively weak, it had been an asset for the company to generate almost
70 percent of its revenues from other countries, but the dollar’s current strength made McDonald’s
trademark products even more expensive for its international consumers. Asian sales were still recov-
ering from a 2014 scandal, where a major Chinese meat supplier had been accused of selling expired
meat to McDonald’s restaurants. European sales were also soft due to political problems in Russia.
Several McDonald’s outlets had “failed” inspection and been shut down in retaliation for U.S. sanctions
against Russia.
Professors Frank T. Rothaermel and John Kim prepared this case from public sources. The authors gratefully acknowledge the contributions of
Marne Arthaud-Day on an earlier version. This case is developed for the purpose of class discussion. This case is not intended to be used for any
kind of endorsement, source of data, or depiction of efficient or inefficient management. All opinions expressed, and all errors and omissions, are
entirely the authors’. © Rothaermel and Kim 2017.
–
23
Thompson had already tried revitalizing the menu (e.g., with the McWrap), eliminating poorly
selling items, increasing customization, and restructuring U.S. operations to give local franchises
greater autonomy. Yet customers still seemed confused by the complex menu offerings, distrustful of
the quality of ingredients, frustrated at how long it took to get their food, and angry at the company’s
“exploitative” labor policies.9,10 According to analysts, “Thompson) got fatally behind the last couple
of years” and “wasn’t inspiring people the way he needed to be. 11 By the fall of 2017, there was surpris-
ingly little mention of Easterbrook in Wall Street analyst reports, seemingly indicating that he was
quietly, and effectively, creating change behind the scenes.
As Steve Easterbrook took a sip from a can of a zero-calorie Monster energy drink, he looked at
the screen of his laptop. He knew that early results from his strategic initiatives were promising. As
of fall 2017, McDonald’s (normalized) share price had appreciated by more than 55 percent since his
tenure as CEO started in March 2013, outperforming the S&P 500 index by almost 35 percentage
points (Exhibits 1 and 2). But, he wondered how he could build upon these quick wins, and create
continued superior performance in an ever more uncertain and competitive environment.
A Brief History of McDonald’s
McDonald’s was started by the McDonald brothers in 1940 in San Bernardino, California.12 By
limiting the menu to burgers, fries, and drinks, Dick and Mac McDonald could emphasize qual-
ity and streamline their operations. As a result, the popularity of the restaurant grew quickly, and
the brothers started franchising McDonald’s to nearby locations. Alerted to their success when the
McDonalds placed a large order for eight multi-mixers, Ray Kroc joined the brothers in 1954. Together,
they founded the McDonald’s Corporation in 1955, with the vision of establishing McDonald’s fran-
chises throughout the United States. Kroc bought out the brothers’ shares in 1961, the same year that
he founded the Hamburger University (graduates receive a bachelor’s degree in Hamburgerology). He
continued his plans for rapid expansion throughout the 1960s and 1970s, establishing more than 700
new McDonald’s restaurants. In 1965, the company held its first public offering, debuting at $22.50
per share.
Kroc described his management philosophy as a three-legged stool: one leg was the parent corpora-
tion, the second leg was the franchisees, and the third was McDonald’s suppliers. His motto became,
“In business for yourself, but not by yourself” as he built an ever-larger network of store owners and
an integrated supply-chain management system. Many new menu items, such as the Big Mac and Egg
McMuffin, were developed by the franchisees. Kroc encouraged his local owners to be entrepreneurial
as long as they maintained the company’s four main principles: quality, service, cleanliness, and value.
Because of the volume of McDonald’s business, Kroc found many supply partners willing to adhere to
his high standards.
McDonald’s both owns and operates its own restaurants, as well as, franchisees them to others.
The large majority of restaurants are franchised (85 percent) and McDonald’s management has made
it clear they expect that percentage to increase to 95 percent in the coming years. There are three
primary franchise ownership structures: 1) conventional franchisee, 2) developmental license, and 3)
affiliates.
–
0
3
23
the equipment depreciates or new facilities or food preparation processes are required, the franchisee
is expected to reinvest in the business. McDonald’s also co-invests into specific strategic initiatives to
motivate franchisees to adopt changes. Franchisees pay rent and royalties based on a percentage of
sales, with specific minimum rent payments and initial fees paid upon opening a new restaurant or
acquiring a new franchise. The typical franchisee lease is 20 years.
The specific conditions of the franchise agreement vary on the owner’s experience, credit capacity,
and the local legal environment. Franchisees can vary significantly in size. The largest franchisee has
a developmental license for 2,200 restaurants across Latin America and the Caribbean.13 On the other
end of the spectrum, some franchisees own and operate a single location.
The company opened its first international locations in 1967 in Canada. The first McDonald’s
stores in Japan and Europe followed shortly thereafter in 1971. Meanwhile, Kroc continued to add new
items to the restaurant’s menu. After the success of the Big Mac (1968), the quarter pounder debuted
in 1973, and the Egg McMuffin in 1975. A full breakfast menu was available by 1977. The first Happy
Meals-complete with a circus wagon theme-arrived in 1979. The company’s first drive-through
opened in Sierra Vista, Arizona in 1975 to serve soldiers stationed at a nearby post, and the idea
quickly spread to other locations. Competition heated up in the “burger wars” of the 1980s as Burger
King and Wendy’s tried to steal market share from McDonald’s. Despite their advances, McDonald’s
continued to expand globally into more than 30 countries. Even more new products were introduced,
such as Chicken McNuggets in 1983 and fresh salads in 1987. At the same time, McDonald’s used
efficiency and technological advances such as microwaves to gain operational advantages over its
competitors.
When Ray Kroc passed away on January 14, 1984, he left behind a sprawling McDonald’s empire
with more than 7,500 restaurants worldwide. He stayed involved in corporate affairs up until the
end, visiting the San Diego office almost daily in his wheelchair. Three years later, Fred Turner, his
long-time colleague and successor as CEO, likewise stepped down and left the company in the capable
hands of Michael Quinlan. As the first McDonald’s CEO to have completed an MBA, Quinlan was
a savvy businessperson who continued to grow the company aggressively both at home and abroad.
Events in the 1990s finally slowed McDonald’s’ rapid pace of domestic expansion, though the com-
pany’s international locations nearly doubled to 114 from 1991 to 1998. Several of the newer locations
required unique adaptations, which McDonald’s proved increasingly willing to make: kosher menus
in Israel, Halal menus in Arab countries, and lamb patties for non-beef-eating India.’4, 15 At home,
however, the company was plagued by multiple failed attempts to add new menu items such as pizza,
fried chicken, fajitas, and pasta. The Arch Deluxe sandwich line, targeted to adults, was similarly short-
lived. When Jack Greenberg became CEO in 1998, he quickly took corrective action, announcing a
geographic reorganization, a new food preparation system (“Made for You”), and first job cuts ever at
McDonald’s, all while scrapping plans for numerous store openings.16 Instead, he diversified the com-
pany’s portfolio by buying different restaurant chains such as Chipotle Mexican Grill, Donatos Pizza,
Boston Market, and Aroma Cafe coffee shops.)? These acquisitions were divested when McDonald’s
strategy shifted yet again in the early 2000s.
–
From 2003 to 2004, leadership at McDonald’s underwent a rapid string of successions that would
0
direction, freedom within a framework, and measurable milestones and had four goals: to attract more
customers, to convince customers to purchase more often, to increase brand loyalty, and to become
more profitable. Skinner further distinguished five Ps-People, Product, Place, Price, and Promotion-as
essential to efforts at McDonald’s in achieving these goals.19
23
In a saturated market, the main thrust of Skinner’s plan was to shift from acquiring expensive real
estate to generating increased sales from existing restaurants.20 In the early 2000s, McDonald’s was
opening a new store somewhere in the world every 4.5 hours; under Skinner’s watch, the pace slowed
to just 50 to 100 new U.S. sites per year. To compensate, existing stores started to stay open longer,
extending their hours into the late night and early morning. By 2007, roughly 40 percent of McDonald’s
locations
were open nonstop, and some even experimented with staying open on holidays 21, 22
Skinner used the money saved on fewer new openings to revamp existing restaurants. The “new”
McDonald’s look utilized a gentler color scheme, replaced fiberglass and steel chairs with leather
seating, eliminated fluorescent lighting, and added such amenities as flat-screen TVs, free Wi-Fi, live
plants, piped-in music, and the occasional fireplace.23 Headquarters provided grants of up to $600,000
per site, with some projects costing as much as $1.5 million.24 By the time all of the renovations were
completed, the company had invested over $1 billion in the belief that “nicer-looking stores attract
more business.”
At the same time, Skinner sent chefs at McDonald’s back to the drawing board to research new
menu possibilities more in line with current health trends. The company had grown lax in its product
development efforts, as evidenced by its $100 million Arch Deluxe mistake and other failures such as
the McPizza, McHotDog, and McSalad Shaker.25 McDonald’s also lagged significantly behind its com-
petitors in purging trans fats from its recipes.26 Under Skinner, the company took the time to conduct
extensive market research and developed a new passion for numbers. Potential new menu items had to
pass a series of tests before they could move on to the next stage of development, based on an analysis
of their sales, margins, costs, and time and ease of production.27 This more rigorous approach led to
the development of the “Oven Selects” sandwiches, a southern-style fried-chicken biscuit for breakfast,
and of course, the McCafé line of coffees, smoothies, and other beverages.?
28, 29
The other half of the equation involved cost cutting by improving operational efficiency. Adamant
that McDonald’s would not make its burgers smaller just to save money, Skinner directed his execu-
tives to find more creative ways to increase margins. So, the company cut travel, held meetings at
Hamburger University instead of expensive hotels, and increased personal usage fees on company
vehicles. Meanwhile, the company continued to invest in time and cost-saving technologies such as
more efficient drive-through windows and computers.
By the time Don Thompson became CEO in 2012, most of the low-hanging fruit had already been
plucked. Thompson graduated from Purdue University in 1984 with a degree in electrical engineering,
and he was recruited to McDonald’s four years later to design robotics for food transport and control
circuits for cooking equipment. He soon changed his career focus from engineering to operations,
working a wide range of jobs from fry cook to regional manager to understand the company’s day-to-
day activities.30 Ascending to serve as Skinner’s COO, Thompson spearheaded the successful McCafé
campaign and seemed a natural selection to produce the next “McHit.”31 McDonald’s struggled with
weakening sales under Thompson’s reign (see Exhibit 2) despite his efforts to optimize the menu,
improve the customer experience, and make McDonald’s more accessible to a broader market base.
–
leadership
32
()
5
23
Hailing from the U.K., Steve Easterbrook was appointed as the CEO of McDonald’s on March 1, 2015.
Easterbrook came to the top spot having turned around the McDonald’s UK and European opera-
tions, which were now among the best performing in the company. He had worked his way up to
McDonald’s top brand officer by 2010, then left to head two British restaurants (PizzaExpress Ltd. and
Wagamama Ltd.), before returning to his former position in June 2013. Under Thompson, he subse-
quently assumed responsibility for corporate strategy and the restaurant solutions group. While some
questioned whether another inside succession could provide the shake-up that McDonald’s needed,
others argued that Easterbrook had the right expertise in branding and media and willingness to focus
on the menu, the areas with the greatest need of improvement.33 In his first press conference as CEO,
Easterbrook had presented himself as an “internal activist” who was “comfortable making the big deci-
sions that were required to get the turnaround going.”34 Now it was time to deliver on his promise
to turn McDonald’s into a “modern, progressive burger company:”35 Exhibit 3 shows McDonald’s’ rev-
enues by regions and market segments, (2013-2016).
Given his low-key profile, observers were surprised when Steve Easterbrook also announced that
McDonald’s would move its headquarters from Oak Brook, where it resided in a custom-built campus
for some four decades, to Chicago’s West Town neighborhood in 2018. Easterbrook is moving the
McDonald’s HQ to this swanky area of Chicago full of restaurants and bars, to be closer to the mil-
lennials they want as employees and as customers.36
By 2017, McDonald’s was pursuing an aggressive technology upgrade to allow Starbucks-like
interactivity to both smooth out operational waiting times and improve the customer experience.
Franchisees were hesitant to invest the hundreds of thousands of dollars required to upgrade with
stand-alone kiosks, but they were bound by stringent franchising contracts and pressure from corpo-
rate headquarters.
Trends in the Quick-Service Restaurant Industry
The U.S. quick-service restaurant industry is expected to reach $224 billion in 2020 (see Exhibit
4). Yet despite expectations for some growth, several environmental trends suggest challenges ahead.
ECONOMIC TRENDS
The U.S. economy continues to bounce back from the 2008-2010 great economic recession. The
unemployment rate has been cut in half from its 2009 peak at 10.0 percent to just 5.1 percent in 2015,
and per capita real disposable income is near record highs.37 These data present both good and bad
news for the fast food industry. On the one hand, more customers are working and have more money
to eat out; on the other hand, customers with more disposable income are likely to “trade up to higher
quality and higher priced food options. Recent data on dining trends bear this out: For the first time
ever, American spending on dining out exceeded grocery sales in April 2015. A closer look, however,
reveals key differences among market segments. Older consumers (51 to 69 year olds) reported spend-
ing more on groceries and less on restaurant dining compared to recent years. The overall upward
–

Purchase answer to see full
attachment