Easterbrook’s plan for major change at McDonald’s

Steve Easterbrook, who has replaced the retired Don Thompson, is a longtime McDonald’s executive who also spent nearly two years running other chains in his native UK.

In the five weeks since the CEO shuffle was announced amid a worsening sales slump, he has labelled himself an “internal activist“ who plans to create a “modern, progressive burger company,“ according to an observer who knows him. 

Investors appear impressed. McDonald’s shares, which gained 0.3% in the 31 months between Mr Thompson becoming CEO and news of his retirement on January 28, have risen more than 11% since then.

Success is far from certain. McDonald’s in the US faces both disaffection from some traditional patrons, who are unhappy with problems like slower service, and disinterest from some younger consumers, who see it as unhealthy and unhip. 

Revenue last year fell 2.4% to $US27.44 billion as net income declined 15% to $US4.76 billion. It was the first time both measures have declined in the same year since at least 1981.

Customers, analysts and industry insiders offer conflicting advice, broadly falling into two camps. Some say Mr Easterbrook needs to focus on the basics – making better burgers more efficiently. 

Others argue McDonald’s needs a fuller facelift, shifting its menu and marketing to emulate smaller-but-fast-growing rivals such as Chipotle Mexican Grill, that tout fresh ingredients and premium, customized food.

The new CEO was scheduled to discuss his plans last week in a Turnaround Summit with US restaurant operators, franchise owners and suppliers. These are usually held every other year – 2015 would have been skipped.

When plans for the meeting were set last year, Mr Easterbook, then global chief brand officer, would likely have been heavily involved.

A draft agenda seen by The Wall Street Journal highlights goals like “get the order right, every time,“ and “change the conversation about McDonald’s – counter attack brand disparagers with continuous positive news on food quality and employment image.“

Effective changes needed

The big question is how to make effective changes.

Mr Thompson in December announced a series of measures to revive US sales, which some observers criticised as overly broad and insufficiently aggressive. 

Many industry insiders and analysts expect some bold moves from the new CEO, whether fast-tracking the most promising initiatives already in the works or unveiling new ones.

These involve changes to its ingredients, such as dropping preservatives or artificial ingredients, to make McDonald’s more attractive to the growing cohort of consumers who now more closely scrutinise how they eat.

“The reality is, more people care about their food than they ever did before,“ Mr Easterbrook said in November.

Another was confirmation it would switch to antibiotic-free chicken and beef. Such a measure is complicated and could take several years to implement fully. 

McDonald’s has 14,350 restaurants in the US and will need suppliers to make major changes in how they raise livestock.

“McDonald’s has had trouble with much less, such as when it added baby carrots to happy meals,“ says Sara Senatore, analyst at Sanford C Bernstein.

Upgrading menus

Upgrading the menu could enhance the image of its food. This doesn’t mean expanding it. McDonald’s is cutting a handful of its roughly 120 menu items to improve speed and reduce wait times that have increased because of the menu’s complexity.

“Whether it’s fewer finished products that a customer gets or fewer raw ingredients that we use to assemble food, it will help us be more efficient,“ one franchisee says.

But McDonald’s could improve items without adding to menu bloat. For example, it recently started quietly rolling out new versions of its premium grilled chicken sandwiches that boast Applewood smoked bacon, caramelised onions and an “artisan“ bread roll.

Mr Easterbrook could expand such efforts. But McDonald’s has had failed attempts at premium offerings like the Arch Deluxe and Angus burgers. Those experiences might also argue against something truly outside the box, like a McVeggie Burger – an idea that has been tested over the years in the US but never caught on.

Mr Easterbrook also will need to decide what to do with his predecessor’s plan for a customisable burger that uses ordering kiosks and requires extra wait time. The idea, which Mr Easterbrook has so far embraced in analyst meetings, could appeal to fans of rivals like Chipotle and Shake Shack. 

But some stakeholders fear it will worsen the problems of kitchen complexity and speed that the menu trimming is designed to address.

Financial engineering won’t fix falling sales but it can buy patience from investors and provide cash to fund efforts to improve McDonald’s food.

Some analysts see opportunities to extract more value out of McDonald’s real estate – the company reported $US39 billion in property and equipment at the end of 2014 – by spinning them off into a real-estate investment trust. McDonald’s has resisted that idea in the past, in part because of the enormous complexity.

Mr Easterbrook also could accelerate plans to sell restaurants to franchisees to add to McDonald’s $US2.1 billion in cash.