mcdonald’s case history, 2006–2015 · 2016. 2. 16. · mcdonald’s case history, 2006–2015...

McDonald’s Case History, 2006–2015

Larry Light and Joan Kiddon Asacompaniontothebook,weincludethisonlinecasehistoryofMcDonald’susingonlypublishedinformation.TheoriginalSixRulesbookdescribedthe2002–2005McDonald’sturnaroundandourroleinthatbusinesssuccess.Inthiscase,wedetailtheyears2006–2015toshowhowthebrandsurfedtheturnaroundmomentumandeventuallyfounditselfinneedofanotherrevitalization.ThenewMcDonald’sturnaroundisstillinitsinfancyasthiscasecomesonlinewithournewbookontherevisedSixRules.Hopefully,theinitialsuccessofthethird‐quarter2015performanceisthebeginningofanotherneweraatMcDonald’s.Attheendofthiscase,therearesomequestionsforyoutothinkabout.Inansweringthesequestions,youwillneedtosynthesizetheinformationoverthe10‐yearperioddiscussed,2006–2015.Asyoureadthebookandlearnaboutthewaysbrandsfallintotrouble,getoutoftrouble,andcanstayoutoftrouble,youwillseethesebroughttolifeinthisMcDonald’scase.

McDonald’s Case History

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Year 2006

THE STATE OF THE BRAND The Situation BytheendofDecember2005,RussSmythe,headofEurope,ClaireBabrowski,headofoperations,andMarvinWhaley,presidentAsiaoperations,hadresigned.LarryLighthadendedhisthree‐yearcontractandwasslatedtoleaveJanuary1,2006.ByAugust,MikeRoberts,chiefoperatingofficer(COO),wouldbegoneaswell.Andsoonafterthat,BillLamar,headofmarketingforNorthAmerica,wouldretire.ThiswasfollowedbyMattPaull,chieffinancialofficer(CFO),leavinginJuly2007.Inaddition,thehedgefundactivist,WilliamAckman,wasworkingwithotherMcDonald’sshareholdersonbehalfofhisvisiontomakeMcDonald’smoreofarealestate–focusedenterprise.1Hisinitialproposal(November2005)hadbeenrejected2,buthewascomingbackwitharevisedrecommendation.TheoriginalturnaroundleadershipthatworkedwithJimCantalupoandCharlieBellwouldessentiallybegonefromMcDonald’s.Tounderstandhowtheyleftthebrand,theWallStreetJournalOnlinesitepressreleaseonJanuary17,2006,listedtheaccomplishments.“McDonald’sdeliversstrongDecembercomparablesales.Totalglobalcompsalesrose5%inDecemberontopof4.9%increaseachievedforDecember2004.Globalcomparablesalesforthefourthquarterandtheyearwerestrongat4.2%and3.9%respectively.”3JimSkinner,thenewCEO,said,“IntheU.S.,comparablesalesrose4.4%forthemonthofDecember,reflectingtheongoingpopularityofMcDonald’ssignaturebreakfastmenuandourpremiumchickenofferings.U.S.customersalsorespondedpositivelytoMcDonald’sArchCards,ournewgiftcardslaunchedduringtheholidays.Europe’scomparablesalesforthemonthwereup4.6%.WeremainfocusedonbuildingsalesmomentumacrossEurope,andIamconfidentwehavetherightplansinplacetodothis.InAsia/Pacific,MiddleEastandAfricacomparablesales(were)up5.9%.”4McDonald’swasingreatshape.Analysts,observers,reporters,andpunditswouldcommentontheconsecutivequartersofpositiveearnings.JimSkinnerattributedthesuccessfulfourth‐quarter2014totheCantalupoandBellPlantoWinwithitsmust‐doactionsrelatedto“qualityfoodchoices,greaterconvenienceandanenhancedfocusontheMcDonald’srestaurantexperience,”specifically,breakfastandchickenofferings.Skinneralsomentionedthathewouldcontinuetoridethealreadyestablishedmomentum.5Europewasabrightspot.Reportsindicatedthatitwasup4.6%versusa2.2%riseayearago.Thiswasabovethepreviousestimateforflatsales.ResultsfromEuropeindicatedaseventhconsecutivemonthofpositiveresults.6Japan,avolatilecountryforthebrand,alsoreportedaterrificquarter,revisingupwarditsestimatefortheyear.Therewereincreasedcustomervisitseventhoughper‐customerspendingfell8.0%.However,Japansaidthepaceofdeclinecontinuedtonarrow.7


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However,someobserversindicatedthattherewasperhapsahintoftroublesizzlingbeneaththeunbrokenpositiveresults.Eventhoughthebranddemonstratedcontinuedhealthandrobustness,someperceptiveoutsiderssawthepotentialfortrouble.Puttingtheremarkableresultsaside,somequestionedhowMcDonald’splannedtosustainitsperpetualgrowth.WhenaskedofMcDonald’smanagement,theresponsewas“tokeepaddingnewitems,astrategythathastodateworkedwell.”AtMSNDellMoney,areporterwonderedwhetherMcDonald’scouldcontinuetodothisbeforehittingawallandwhetherMcDonald’shadbeguntohitthatwallalready.8Mr.RalphAlvarez,presidentofMcDonald’sNorthAmerica,gaveaspeechinwhichheconfirmedthecontinuedfocusonnewmenuitems.Theseitemsattractnewcustomers.Andthenewcustomersare“demandingmorechickenandthatMcDonald’shastofollowthattrend.”Mr.Alvarezmadeitclearthatthecustomers“donotjustcomeforourtriedandtruecoreproducts.”Althoughhedidemphasizethatthecorporatefocusonnewitemswouldnotcomeattheexpenseofburgers,theMSNDellMoneyreporterquestionedhowthiswouldbepossible.Thereporterobservedthatwithsuchanexpansionofnewmenuofferings,itdidappearthatMcDonald’swas“diversifyingawayfromitscoreburgerandfriesbusiness.”Thereporternotedthatexpandingthemenuhadbeenagoodstrategyforthebrand:withnewitems,McDonald’shadbeenattracting“anewsetofhealthconsciousandpremium‐mindedconsumerstoitsrestaurants.”Butwhatisnotable,thereportercontinued,isthatthecompany“haslargelyignoreditsburgerareawhenitcomestonewofferings.Thatcomplacencymayleadtocustomeralienationoverthelongrun.Afterall,plentyofcompanies,fromCKERestaurantstoRedRobinGourmetBurgersareworkinghardtoreachburgeraficionados.IfMcDonald’sneglectsitscoreproductsfortoolong,itmayfindthatitsnextbigthingwillbetowinburgerfansback.”9Pershing Square Aftertherejectionofhisfirstproposal,PershingSquare,WilliamAckman’shedgefundleakedaglimpseofitsMcDonald’srestructuringproposalonJanuary18,2006,thatincludedplanstoformanewcompanyandsell20%ofsharestothepublic.PershingSquarenowproposedtheeventualsaleof1,000ofMcDonald’scompany‐ownedstoresinmaturemarkets.ObserversindicatedthatthisMcDonald’sproposalwassimilartotheoneAckmanhadwithWendy’s.Mr.Ackmanrevealedthathedidhavesomefranchiseebacking.And,aspartoftheproposal,PershingSquarewantedatleastonefranchiseeseatontheboard.10Mr.Ackmancalledhisrevisedproposalhis“PlantoWin‐Win,”clearlyaplayontheMcDonald’sPlantoWinstrategicdocument.11Interestingly,theanalystcommunitydidnotpresentaunitedfrontsupportingPershingSquare’sproposal.SomeanalystsbelievedthatMr.Ackman’saccusationoflackadaisicalmanagementonthepartofMcDonald’swasan“off‐base”argument.TheseanalystspointedtoMcDonald’sremarkableresultsthatwereenviedbymany.Stakeholderswerealreadyreapingfinancialrewards.Ontheotherhand,supportersofPershingSquaresaiditsplancouldleadtomuchhigherstockprices.AtleastoneofthesePershingSquaresupporterscouldnotunderstandwhytheinitialrecommendationwasrejectedinthefirstplace.12


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ShareholdersrejectedthesecondPershingSquareproposalbyJanuary19,2006.Withtheextraordinaryturnaroundbasedonasolidandprovenstrategythatliftedshareprices,investorswereclearintheirbeliefthatthebrandwouldachieveAckman‐proposedlevelsbythemselves.13Mr.Ackmanstatedthathedidnotbelievetheresultswereasgoodasthesecouldbeeventhoughthe3‐yearturnaroundstrategy(PlantoWin)delivered32consecutivemonthsofhighersalesatthechain’s30,000outletsworldwide.14AlthoughMr.AckmanandPershingSquarelostthissecondround,RichardGibsonofTheWallStreetJournalreportedthatMcDonald’splannedtorefranchiseseveralhundredoverseasrestaurants.CFOMattPaullannouncedtherefranchisingplanbutonceagainrejectedthePershingSquarespinoff.“Webelievethatsomeofthe8,000restaurantsweownwillbebetterservedinthehandsoffranchisees.”Mr.GibsonaddedthatoneplacewhererefranchisingwouldhappenwouldbetheUK,whereMcDonald’sowns800restaurants.15Bymid‐January,McDonald’sappearedtohavecededtosomeofthePershingSquare“requests”whenthebrandannouncedplanstosell1,500loss‐makingstorestolocalfranchiseesinupto20countries.Analystsandthepressbelievedthiswasawaytoaddressconcernsthatitscompany‐ownedrestaurantswereunderperforming.TheobserversalsosawthisasasignthatMr.Ackman’sargumentswerenotdismissedoutrightbutactuallyconsideredviable.JimSkinnerstatedthatthesaleofcompany‐ownedstores(McOpCo)wasaway“tocreatemoretransparencyaroundMcOpCoperformance.”16AckmanmadeitclearthatMcDonald’sactionswereanacceptanceofhisproposalseventhoughinvestorsrejectedPershingSquaretwice.Mr.Ackmansaid,“They’regivingusalmosteverythingwewant,andmore.TheyacknowledgedsignificantunderperformanceinMcOpCo,andselling2,000restaurants.And,they’regivingyoutransparency—transparencygivesyouvalue.They’redoingalltherightthings.Idon’tthinkthemarketyetappreciateswhatthey’redoing.”17

FINANCIALS EventhoughMcDonald’ssharepricedoubledsincethebeginningof2006,thefinancialcommunitywasfeelingconcerned;thesharepricehadfallen8%sinceitsfive‐yearhighonFebruary8,2006.InvestorsandanalystssawthathighergaspricesandeconomicworriesintheU.S.werehavinganeffecteverywhere,includingatMcDonald’s.InJuly,analystsfeltsomewhatrelievedassharesdidcomebackabit.AndMcDonald’sbasicprinciplesseemedtobeasecurewaytoexistinashakyenvironment.Thefinancialcommunitybelievedthatasacheaperalternativethanacasualdiningrestaurant,McDonald’swouldstillbeabletolurecustomersintoitsrestaurants.(However,Applebee’s,TGIFriday’s,andChili’sarenotinthesamecompetitivesetasMcDonald’s.ThefinancialcommunitydidnotreportonhowMcDonald’smightfarerelativetoKFC,Wendy’s,Popeye’s,orBurgerKing.)Relativetoacasualdiningestablishment,McDonald’sisacheapereatingexperience.Analystsoverlookedneedsandoccasionsandbasedtheirpronouncements(incorrectly)onindustrydefinitions.AndthesefinancialproclamationsoverlookedthefactthatMcDonald’shadplacednumerouspremium‐priceditemsonitsmenuboard,reapingprofits.McDonald’sannouncedthatitwouldspend$6billionto$7billionondividendsandstockrepurchases.18


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Second‐quarter2006earningscontinuedthepositivenews.Europewasclearlythedrivingforce.TherewasgoodU.S.growth,buttherewerethebestEuropeanresultsinmorethanadecade.McDonald’sattributedtheEuroperesultstobreakfast,higherendcoffee,andpremiumchicken.19However,astheyearworeon,thecracksinthefortresswerestartingtobecomemorevisible.McDonald’sreportedthatJuly2006U.S.same‐storesalesgrewbytheirsmallestamountinmorethanthreeyears.CEOJimSkinnerremindedinvestorsthatgaspricescouldimpactstoretraffic.Eventhoughanalystscouldseetheissues,thefinancialcommunitybelievedthatMcDonald’scouldstillgrowsubstantially.TheyseemedtobelievethatcustomerscouldpossiblycutbackbutthatMcDonald’shadheadroom.20AttheendofSeptember2006,McDonald’smadethedecisiontoincreaseitsdividendby50%.ThepressreportedthattheMcDonald’sBoardofDirectorscited“confidenceintheongoingstrengthofitsbusinessandthereliabilityofitscashflow.”Theincreasewouldbeanannualpayoutto$1ashareversus67cents,payableonDecember1.MattPaull,McDonald’sCFO,said,“Welikedividends.Ifwearegoingtobebetter,wecanaffordtobepayingahigherdividendasawayofremindingpeopleofhowstrongandsteadyourcashflowgenerationis.”Ofcourse,theanalystcommunitywasthrilled.Oneanalystsaidthefollowing:“Inthe1990sMcDonald’schasedrapidgrowth;theyweremorefocusedonbeingbiggerthantheywereonbeingbetter.Theystartedtorunintosometroublethatthey’veaddressedinthepastfewyears.Thecompany’sstockhasmorethantripledsince2003whenthecompanyinstitutedaturnaroundprogramdubbedPlantoWin,whichitsayshasdriven40straightmonthsofpositiveworldwidesalesincreasesanddouble‐digitincreasesinearningspershareforthepastthreeyears.McDonald’shasseenrecentsuccessfromits“i’mlovin’it”advertisingcampaignandnewproductpromotions,suchasitsbreakfastmenu,premiumcoffeeandchickenitems.”21Thisanalystwaslookingattheresultsfromthetimelineof2003,duringtheturnaround.HementionsthePlantoWinandthe“i’mlovin’it”campaign.Healsomixedinthepremium‐priceditemsandthe2006focusonbreakfast,premiumcoffee,andchicken—afocusthatignoredthecoreproductline.Aboutamonthbeforethedividendannouncement,itwasrevealedthatWilliamAckman,thehedgefundactivistwhohadsoldallhissharesafterthesecondrejectionofhis“proposal,”hadboughtahugestakeinthebrand.Withtheannouncementoftheincreaseddividend,Mr.Ackmanwasquotedassaying,“Themorestockweown,thegreatertheinfluencewecanhave.”McDonald’sdidnotcommentonMr.Ackman’sstockrepurchase.However,McDonald’swasveryclear:itsperformancespeaksforitself,citing40consecutivemonthsofworldwidesalesincreases.ThereappearedtobeagreementinthefinancialcommunitythatwithMcDonald’sexcellentresultsandthisdividendasasignalofinternalperformanceconfidence,Mr.Ackmanmaynotfindareceptiveaudiencefora“shake‐up.”22InOctober,themonthlyearningsstorywasagainpositive.Europe’sstrongsalesandthebreakfastandcoffeeinitiativesalongwithchickensandwichesweregeneratingincreasedsame‐storesales.JimSkinnerstatedthatthebreakfast,coffee,andchickenentriesmadethebrandmorerelevant.HealsoindicatedthatthebrandwasstrongenoughnottobeaffectedbytherisinggaspricesintheUnitedStates.23


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As2006ended,thebrandcontinueditsstrongearningsgrowth.Aswiththepreviousmonths,thereasonswerethemenuofferingsofbreakfast,coffee,ChickenSnackWrap,andextendedhours.McDonald’ssharesshowedtheenormousmomentumofthe2002–2005turnaroundassharesmorethantripledsince2003.The“i’mlovin’it”advertisingcampaign,alongwiththePlantoWinprogram,werestillgeneratingsuccess.24

MARKETING Forever Young InOctober2005,McDonald’shiredaglobalCMOfromQuaker,MaryDillon,toreplaceLarryLight,whohadbeenpartoftheCantalupo/Bell/Lightteamresponsibleforthe2003–2005turnaround.ThecompanybelievedthatMs.Dillon,whohadnoglobalexperience,neededathree‐monthwindowtolearntheMcDonald’sbusinessandunderstandtheconceptsthatpropelledMcDonald’stoitsthree‐yearsuccessfulturnaround.Duringher“transitiontime”Ms.Dillonstayedbelowtheradar.ButsoonsheneededtoaddresstheOlympics,asMcDonald’swasoneofthesponsors.Wasthebrand’smarketingintrouble?ThisiswhatTheChicagoSunTimessaid:“SinceOctober,McDonald’shadbeenkeepingMaryDillonunderwrapsuntilMondaywhenshewasbroughtforthtodiscussthemeageranduninspiringcampaignfortheupcomingWinterOlympicsinTurin,Italy.Sadly,ourfirstbrushwithDillonwaseerieintheextremeaswesatandlistenedtoarecitationforafive‐minutestatementontheadvertisingstrategy.But,perhapsDillon’sperformancewasmerelyareflectionofwhatMcDonald’sisrapidlybecomingunderitsnewleader,JimSkinner—afacelesspre‐programmedbehemothintentsolelyonkeepingthosesalesfiguresgrowingatanacceptablepace.”25MSNDellOnlinereportedthestorydifferently.And,inthatonlinestory,MaryDillonarticulatedhowmuchshesupportedForeverYoung.“We’recontinuingtoletour‘foreveryoung’brandattitudeshinethroughinthisentertainingOlympicGamesthemedadvertising,”commentedMaryDillon,ExecutiveVPandGlobalChiefMarketingOfficer.26Someofthemarketinginitiatives,includingthecampaign“i’mlovin’it,”continued.TheWallStreetJournalreportedthatanongoinginitiativeto“tidyup”in‐storepromotionalmaterialswasontrack,clearingupthe“McJumble”ofmessy,uncoordinatedclutterofmessaging.“Forthefirsttime,nearlyallthefast‐foodchain’s13,700U.S.outletsareusingthesameslickpromotionalsigns.”Asthearticlenoticed,thepreviousapproachof“everyonedoestheirownlocalstoremarketing”hadcreatedconfusionatthecounter.“McDonald’sefforttocoordinateitsin‐storepromotions,implementedgraduallyduringthepastyear,isoneofanumberofstepsthefast‐foodchainhastakentoboostsalesintheaftermathofaslumpearlierthisdecade.Theeffortrequiredalmostayear’sworthofcomplexlogisticalwork.ItwasrolledoutinJanuaryatalimitednumberofrestaurantsandexpandedtotherestofthechaininsubsequentmonths.”27Thiswaspartofthepreviousreimagingeffortthatfocusedonbringingtherestaurants,insideandout,closertobeingexpressionsofForeverYoung.


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Theglobalrestaurantreimagingbeganin2003.ThedesignscamefromFrance,wheretheideasforreimagingstartedasfarbackas1996.Thesewerenotjustexteriorchangeswithinteriorfurniturerenewals.Thechangesassociatedwithfivedifferentdesignswereholistic,addressingthecustomer’sfivesenses.By2006,McDonald’sEuropereportedthatabout2,000outletswouldberefurbished.DenisHennequin,presidentofMcDonald’sEurope,pioneeredtheFrenchreimaging.Whenhespokeaboutthis,heusedtheUKasanexampleforhischanges.Hesaidthat,“‘Britainnolongerwantscheapfoodbutexpectschoice,comfortandambience.”Healsosaidthatreimagingispartof“upgradingthecustomerexperience”tobuildtrustinitsbrand—atrusterodedrecentlyinEuropebyconsumerconcernaboutdietandhealth,foodquality,andadvertisingtochildren.“Onlybybuildingthistrustwillweincreaseloyalty,frequency,penetration,salesandreturns.”28“i’m lovin’ it” Whenthiscampaignbegan,ithadatitscoretheideathatMcDonald’swasapartofpeople’slivesandthatiswhattheylovedaboutthebrand.McDonald’swaspartofyourlifestyle:thereforyouwithdelicious,relevant,anduniquelyMcDonald’sfoodsandbeveragesdeliveringarelevantanduniquelyMcDonald’sexperience.Sincethecampaignbegan,2millionmoredailycustomerswerevisitingMcDonald’s.Thecampaign,knowninternallyas“ili”createdrelevanceforMcDonald’s.AsrelatedinAdvertisingAge,“Itrevitalizedthebrand’simage,andframeditasamodernandcontemporarylifestylebrand.”29Ms.Dillondecidedthatitwouldbebettertobecomeaproduct‐focusedbrand.Shemistakenlybelievedthatthe“it”mustnowrefertoaproduct,notthebigger,moreexciting,andmotivatingideaofbeingapartofyourlife.Shechangedthefocusofthemarketingfrombeingcustomerfocusedtoproductfocused.“Wehavedoneagreatjobonshowingthecustomerweknowthemwiththe‘I‘….Nowwemustfocusonthe‘it’….Whenwegettoconventionwewillshowtheevolution.”30Thischangefrombeingacustomer‐focusedbrandaffectedmorethanjustadvertising.Thisdecisioncontributedtomakingthebrandlessrelevant.InMarch2006,Ms.Dillongavethisnewassignmenttotheadvertisingagencies.However,shecoucheditintermsof“betterconnectingourfoodtothefeelingandmomentthatpeoplehavewiththebrand.”31Competition Duringthe2002–2005turnaround,McDonald’sexperiencedaluckybreak.BurgerKingwasundergoingadifficultperiodofcorporatechanges,decliningsales,andfranchiseeuproaroveritsmarketing.ThisgaveMcDonald’ssomebreathingroom:itsmaincompetitorwasinastateofdisrepair.However,by2006,BurgerKingseemedtohaveappeasedthefranchiseessufficientlyand“peace”reigned,asAdvertisingAgecommented.32ThismeantthatBurgerKingwasgettingitselftogetherandpossiblybecomingastrongcompetitiveforce.OneofthewaysBurgerKingreformedwastofocusonitscoreburgersandfries.Today,theBurgerKingbrandisdoingverywellconsideringitwentthroughanotherseriesofcorporatechanges.However,itstillkeepsalensonitscoremenu.In2006,itwasnotedthatBurgerKing,alongwithotherssuchasCKErestaurants,waschurningoutWhoppers,leavingsaladstoMcDonald’s.ThecoreBurgerKingcustomerissimplynotthatinterestedinsalads,sellingaboutthreeper


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storeperday.Ontheotherhand,onaverage,aBurgerKingrestaurantsellsapproximately300Whoppersaday.33Tocontinuetoappealtoitscorebaseofcustomersandattractmoreyoungadultmales,BurgerKingdidnotfocusonitemswithfewercaloriesandlessfat.WhereasMcDonald’saddeditemstoappealtomoms,women,andthehealthconscious,BurgerKingaddedtoitsreputationasthefastfoodchainwhereyoucouldbeonemealawayfromacoronary.Butwithyoungadultmalesasitscore,thismayhavebeenthecorrect,morerelevantpositioningbecausethisgroupisfarlessconcernedabouthealthandnutritionthanothergroups.“They’rejustinyourfaceandtheyhaveacorecustomerthatlovesthat,”saidMarionNestle,professorofnutrition,foodstudies,andpublichealthatNYU.34Whatevertherationale,BurgerKingbecameatruecompetitortoMcDonald’sagainwithahighlyfocusedapproachandappeal.Evenwithitskeeneyeonitstargetaudience,BurgerKingwasawarethatithadauniqueopportunitywiththisaudiencetogoupagainstMcDonald’swithbreakfast.Afteragreatfiscalfirstquarter,BurgerKingannouncedthatitwasconsideringpromotingabreakfastvaluemealtotakeonMcDonald’s.35Pricing Whenaskedabouttheonethingthatmatteredmosttotheturnaround,LarryLighthascontinuouslysaidthatitwasthethree‐tierpricingstrategy.Thiswasnota“Good,Better,Best”approachwheredegreeofvalueandqualityvarybyprice.Qualitydidnotvarybypricepoint.Andeachpricepointwasexcellentvalue.Whatvariedbypricepointweredifferencesinproductdesign.Itwasadisciplined,thoughtfulapproachtothemenuwhereeachofthethreepricingtiersrepresentedagreatvalue.OnelevelrepresentedtheDollarMenuandvariousmealoptions.Herepriceswere$1andunderforappropriatelysized,deliciousMcDonald’sfood.AnothertiercomprisedthecoremenuitemssuchasBigMacandEggMcMuffin.Thestrategicintentionwasthattherewouldbelittleornodiscountinginthiscategory.Dealingonthecoremenuonlydetractsfromthebrandandextractsvaluefromthebrand.Thethirdtierincludedthepremiumitemssuchaspremiumsaladsandpremiumcoffee.Thesewereitemsoutsidethegroupofcoremenuitems.TheDollarMenuwassuccessfulespeciallyamongtheyoungadultaudiencewithlimitedmoneytospend.TheDollarMenualsoprovidedadd‐ons,suchasyogurtparfaitandextrafries,inadditiontowhatpeoplepurchasedfromtheregularmenu.ObserverssaidthattheDollarMenuwasahugeforceinthe36consecutivemonthsofsalesgrowth.And,asonejournalistpointedout,overthethree‐yearperiodoftheturnaround,theDollarMenubecamesointegralthat“revenueincreasedby33percentwithsharesrocketing170percent,aremarkableturnaroundforacompanythatonlyfouryearsagoseemedtobegoingnowhere.”36However,underJimSkinner,U.S.pricesforthenewmenuoptionsrosetolevelswelloutoftherangeofmostcorecustomers.Analystscommentedthattheheftyriseinpricesincreasedtheaveragechecktotalby5%,whichishugeforacompanythatoperatesinaprice‐sensitiveenvironment.TheCobbSaladhadaticketpriceof$4.50.Thestrategy


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seemedtobeincludingitemsthatwerenotdesignedforchildrenandyoungadults.Thepriceincreaseswereseenasoneofthekeyreasonsthebrandwasdoingsowellintermsofearnings.37Forexample,althoughsaladsmadeuponly10%(atmost)ofturnover,theysoldatapremiumforabout$4.20(onaverage).ABigMaccostabout$2.89.3824/7 InApril2006,thepressbeganreportingonthenewhoursforfastfoodrestaurants.Occasionsegmentationpointedoutthatthethreediscreteeatingoccasions(breakfast,lunch,dinner)hadchangedremarkably.Peoplewereeatingatallhours.Ina24/7world,dinnertimewasnowbleedingintobedtime.Snackingwasbecominganimportantmealtimeoccasion.Datawereshowingthat6.7%offastfoodmealswereconsumedbetween9PMandmidnight.Andresearchshowedthatlate‐nightdiningwasmoreprofitablethanearliermeals:forexample,$4.43wasanaverageticketforadaytimefastfoodcustomer,whereas$6.22wasanaverageticketforalate‐nightfastfoodconsumer.Fastfoodmarketerswereseeingstrongsalesoflate‐nightmeals,whichNPDGroupestimatedwereaccountingfornearly8%ofthe$160billionfastfoodindustry.“Thenotionofbreakfastat7AM,lunchat12(noon)anddinnerat6PMisover,”saidBobGolden,executiveVPatTechnomic.McDonald’ssaidthatstoreswithlatehourswereexperiencingdouble‐digitsame‐salesgains.TacoBellwasalsoenteringlatenightanddifferentiatingitsofferingbycallingthistimezoneafourthmealarounditsfourtasteandtextureprofilesofcrunchy,spicy,melted,andgrilled.39AttheendofAugust2006,JimSkinnerannouncedthatanewkitchensystemwouldfinallyallowforall‐daybreakfast.The“flexibleoperatingsystem”wouldprovidevarietywithgreaterease.Inthepastthreeyears,breakfasthadbeenandremainsthestrongestperformeramongthethreemajormealsegments.40Segmentation PartofBurgerKing’srevivalwasduetothelaserfocusontheyoungadultmale.ThishadbeenoneofMcDonald’stargetaudiencesduringtheturnaround.BurgerKingcalleditstargettheSuperFan.TheSuperFanwasdescribedasayoung,18–34,blue‐collarworker;slightlymoremalethanfemale;andmorethan30%areHispanicorAfricanAmerican.SuperFanslovedtechnologyandtendedtobeearlyadopters.TheyreallylovedBurgerKing.AlthoughSuperFanswereonly18%oftheBurgerKingcustomerbase,theyaccountedfornearlyhalf(49%)ofallvisits.TheywerefrequentusersofBurgerKing,withatleastninevisitsamonth.Onaverage,SuperFansateatBurgerKingaround16timesamonth.Theywerealwaysontherunandalwaysmultitasking;theyoverindexedondrive‐thrus.41McDonald’swasfollowingaverydifferentstrategy;itwasbroadeningitsmenutobroadenitsappeal.Insteadoffocusingonafewmarketsegments,McDonald’sseemedtobetryingtohavesomethingforeveryoneateveryoccasion.Happy Meals Duringearly2006,DisneycutitstiestoMcDonald’sandstoppedsupplyingtie‐inpromotionalmaterialsasgiveawayswithHappyMeals.Disneyfeltthepressurefromthenutritionalcommunityandtheincreasingawarenessofchildhoodobesitywithits


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associateddangerssuchasjuvenilediabetes.McDonald’shadtolookelsewhereforthe“toys”thathelpedtoselltheHappyMeal.Oneofthegreatironiesof2006wastheHummergiveaway.2006wasthebeginningofthe“astronomicalgasprice”summer.Cash‐strappedcustomersfoundthathighergasolinepricesimpactedtheirrestaurantvisits,includingfastfood.ButwhileMcDonald’sfeltthepinchoftheemptierwallet,itglorifiedthebiggestgas‐guzzlericonofthemall:GM’sHummer.Notonlydiditgulpgallonsofgasoline,butfromanecologicalstandpoint,theHummerwasasignofextremeenvironmentaldisregard.Asthefinancialcommunitystartednoticingtheimpactofgaspricesonmealsawayfromhome,McDonald’sdecidedtotouttheHummer.McDonald’scalledita“HummerofaSummer”promo.Thepresstookadimview.Herearesomeofthepresscomments:42

AdvertisingAge:“LicensetoDriveSales:WhyGMIsPuttingHummersinHappyMeals.”“GMlost$3.2billionlastyeargloballyinthesecondquarterandGMlicensedproductsintheUSsoldnearlyasmuch.TheHMinclusionwilltotal42millionHummers,muchtothechagrinofenvironmentalists.”

TheNewYorkTimes:“WouldYouLikeaGasGuzzlerwithThat?”“Withgaspricesat$3agallonandthreateningtogohigher,Hummersalesaredeclining.ButMcDonald’sappearsnottohavegottenthemessage.ByputtingHummersinHMs,McDonald’sissendingamessagetokidsthatutterwasteofthispreciousresourcethatiscausingussuchnationalsecurityproblemsisOK.”

Food Fries Duringthecourseof2006,therewasacontroversyregardingtheiconicMcDonald’sfries.(N.B.:In2015,McDonald’spromisedopennessandtransparency.Itsonlinesiteforinformationonanyfoodproductcausedacontroversyofitsownascustomersaskedquestionssuchas,“Aretheburgersreallymadeofpinkslime?”and,“Whataretheingredientsinthefries?”Perhapsitwasthe2006blow‐upthatcoloredthewayMcDonald’sstartedtoapproach“transparency.”)Thefoodenvironmentin2006reflectedcustomers’newfoundabilitytoseekandfindinformationoneverything,includingingredientsandfoodallergens.TheFDAinstitutednewfoodlabelinglaws,socompanieshadtocomplybylistingallingredients.DuetotheFDAchanges,McDonald’sadmitted,“itsfriescontainwheatandmilkingredientsthatmightcauseproblemsfordinerssensitivetothesesubstances.Previously,McDonald’sdescribeditsfriesasfreeofsubstancesthatcancauseallergicorothermedicalreactionsinsensitivepeople.”Notonlyfreeofallergens,butalso,McDonald’sstatedthatthefriesweresafetoeatregardlessofsensitivities.NowMcDonald’shadtostatethat,infact,“thefriesincludeanaturalflavoringmadeinpartfromextractsofwheatanddairyproducts.”Thisisproblematicforthosewithglutenallergiesandotherfoodsensitivities.43TheMcDonald’sFrenchfriescontroversyblossomedintoseverallawsuitsclaimingthepublicwasmisled.Oneoftheselawsuitswasonbehalfofachildwithceliacdisease(allergytogluten)whobecamesickaftereatingthefries.44


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Additionally,withthenewlabelinglaws,McDonald’shadtoadmitthatitsfrieshadmoretransfatsthanthought.Citing“newtest”results,itturnedoutthatthefrieshadathirdmoretransfats:8gramsratherthanthestated6grams.45ThecontroversyregardingMcDonald’sfoodsdidnotendwiththeFDAlabelingchangesandthefrieswithglutenissues.InApril,inaNewYorkTimesOp‐Ed,NinaTeicholzcontributedheropinionin“NuggetsofDeath.”Inherarticle,sheremindedpeoplethatthereisaheart‐punishingfat(transfat)hiddeninAmericanfastfood—inthiscase,ChickenMcNuggets.46Meat AtrulyimportantinitiativeatMcDonald’swasthepushformeatprovenance.GaryJohnson,theseniordirectorofworldwidesupplychain,spearheadedthiseffort.Hetrulybelievedthatglobalmeatsupplyshouldimplementcattletracebacksocustomerscouldknowjustwherethemeattheywereeatingcamefrom.IfthebiguserslikeMcDonald’swouldaskcattlepeopletodothis,thentherestoftheworldwouldfollow.Hewasforcefulinaskingforanindustrywakeupcallsoconsumerscouldtrusttheirfood.47Breakfast, Coffee, and Chicken Beginningin2006,McDonald’sfocusbecamesolidifiedas“breakfast,coffee,andchicken.”FromthebeginningofCEOJimSkinner’stenure,heconsistentlytoldanalystsandinvestorsthatMcDonald’swasdoingwellbecauseofitsbreakfast,coffee,andchicken.Hedidnotsayanythingaboutthecoreproducts.Infact,inMarch,McDonald’sstatedthatitsFebruarycomparativesaleswereup4.7%—positiveacrossallgeographies.IncreasesinU.S.compsales(3.6%)wereachievedinpart“bythenewspicypremiumchickensandwich,breakfastmenuoptions,andextendedhours.”48Again,thereisnoreferencetocoreproducts.And,inApril,Mr.Skinnerstatedthatcoffeewasdoingincrediblywellandbecomingamajorcontributortoearnings.“Wedidn’tmakeanenormouschangeintheblend…butrevisitedprocedures,madesureweweredoingitintherightway,”saidMr.Skinner.Healsoadmittedthatothercompanieswerefocusingonbreakfast,butMcDonald’swouldcontinueto“communicateverystronglyaroundourhigh‐qualitybreakfast.”Sharepricefell1.3%.49ByApril,McDonald’saddedyetanotherchickenitemtoitsmenu.Long‐timerestaurantbusinessjournalist,RichardGibson(TheWallStreetJournal),noticedthatburgerswerenotadded.Norwereimprovementstothecoreburgerproductsonthemenu.Hecommented,“Forachainfoundedonhamburger,McDonald’sispayingalotofattentiontochicken.ItscoremenualreadyboastsmorethanadozenchickendishesrangingfromsandwichesandsaladstoitsfamedMcNuggets.AspicychickensandwichwasrecentlyaddedandanAsianchickensaladiscomingsoon.Soisanitemcalledsnackwrap.”50(N.B.:CurrentlyCEOSteveEasterbrookistakinghis2006UKmission,“tobeaprogressive,modernburgercompany”andusingitglobally.However,heisnotatthistime,publiclysupportingfixingthecoremenu,whichhasmanyburgers.ThelatestnewproductisCrispyButtermilk‐FriedChicken.Doesbeingaprogressiveburgercompanymeanfocusingonchickenattheexpenseofthebasicburger,BigMac,andQuarterPounder?)


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Duringtheturnaround,newproductdevelopmentchangedtobeginwithhavingafoundationalunderstandingofcustomerneedsandoccasions.Insteadofsaying,“Weneedanewchickensandwich,”thequestionbecame,“Whatneedsdothecustomershave?Whendotheyhavetheseneeds?Whichneedsarebestsatisfiedbyanewchickensandwich?Why?”Thisdisciplinedprocess—foodsdesignedtosatisfyneedsincertainoccasions—workedtoMcDonald’sadvantage.ChickenCaesarSaladandMcGriddlesareexamples.Additionally,CharlieBellstartedconvincingfranchiseestoputMcCafésintheirstores,anideaborninAustralia.(N.B.:whileCharliewasalive,aMcCaféwasbuiltinthelobbyoftheOakbrook,Illinois,headquarters.JimSkinnerrippeditoutuponCharlie’sdeath.)AlthoughMcDonald’sownedbreakfast,StarbucksandDunkin’Donutsweremakinginroads.51Andcoffeewasbecomingapremiumitem.52McCaféwasnotmeanttobeacoffeebrandservingacomplexarrayofhotandcoldbeverages.Aprilquarterlyresultswerepositiveduetobreakfast,chicken,andlongerhours.Same‐storesales,globally,rose6.2%.ThecoreproductswerenotmentionedinMcDonald’sreportstoanalysts:“IntheU.S.,thecompany’slargestmarket,chickensandwichesaswellasitsbreakfastbusinessandlongerstorehourscontributedtoa4.1%salesincrease.”AnditisimportanttorememberthatthechickensandwichintheU.S.wasa“premiumpriced”item.Europeansame‐storesalesrose9.3%,whileinthePacific,theMiddleEast,andAfrica,same‐storesalesrose6.5%.ThiswasreportedlyduetostrongsalesinJapanandAustralia.53McDonald’s,facingbreakfastcompetitionfromStarbucks,Dunkin’Donuts,andBurgerKing,threwmoreresourcesintocoffee.BurgerKing,noticingthatMcDonald’scoffeesweresoldatpremiumpricesandincludedmorecomplicatedfrothyoptions,sawanavenueforgrabbingbreakfastfromMcDonald’s.BurgerKingexecutivessawtheircoffeeasthemoreaffordable,straightforwardoption.AsoneBurgerKingexecutivesaid,“ThosebuyingourBKJoeCoffeedon’twantittobecomplicated,likeachaihalf‐decafwhatever.Ourcustomersdon’thavethatkindofmoney,frankly,anddon’thavethatkindofprofile.Theyjustwantittobestraightforward.Thisisnotfrou‐froucoffee.”However,McDonald’svocallysupporteditsmorepremiumcoffeeofferings,sayingthatitscoffeesaleshaveincreasedatadouble‐digitrate.54(Wasthisaroadto“pricingout”itscorecustomerbase?WasthispartofthebeginningofMcDonald’sdecline?)AdditionalreportsatthetimeindicatedthatMcDonald’swasnowconsideringotherpremium‐pricedbeverageswitharangeofbottlesandcans,includingenergydrinksandicedteaasanalternativetosoftdrinks.55Augustsalesrose.Mr.SkinnerstatedthattheriseinearningswasduetothebreakfastmenuandthenewlyintroducedChickenSnackWrap.Europestillrepresentedthestrength,butthebreakfastmenuandtheChickenSnackWraphelpedtheUnitedStatessignificantly.56Trans Fats Oneofthekeydietaryissuesof2006wastheremovaloftransfatsfromfoodproducts.Intherestaurantbusiness,thiswasatouchyissue.Manyproductswerebeloved,andachangeinformulacouldresultina“NewCoke”fiasco.InNovember,bothKFCand


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Wendy’shadalreadycuttransfats.BurgerKingannouncedthatitwouldtestnewoilin90days.McDonald’sannouncedthatitwouldalsomakesuchachange.Frightenedthatanychangetotheiconicfrieswouldalienatescoresofcustomers,McDonald’sstalled.Eventhoughthecompanymadenochangetothefries,thecompanyheardfromitscustomersthattheydidnotlikethechangedtasteofthefries.Duringthe2002–2005turnaround,therewasaseriouscommitmenttorebuildingtrust.McDonald’shadaprogrambasedontrust‐buildingprinciples.“Transparency”wasoneprinciple.“Becomepartofthedebate;donothidefromit”wasanother.UnderCEOJimSkinner,thosetrustbuildingprinciplesseemedtobeabandoned.Thisbehaviordidnotgounnoticedbythepress.KateMacArthurofAdvertisingAgetitledherarticle“WhyMcDonald’sHasn’tCuttheFat:FastFoodLeaderFearsOilChangeWillLeaveBadTasteAmongItsFryFans.”57Apparently,thefearoflosingcustomersdidnotextendtoEurope,wherethebranddecidedtoreplacetheoffendingoilwithanewrapeseedoil.58

STEVE EASTERBROOK In2006,McDonald’smovedthechairmanandCEOofMcDonald’sUK,PeterBeresford,totheU.S.,reportingtoMaryDillon.Hisnewjobwasdescribedas“leaderofstrategicglobalbranddevelopment.”ReplacingPeterBeresfordwasSteveEasterbrook,whohadbeenreportingtoPeterBeresfordasexecutivevicepresidentandCOOoftheUK.59

PARTNER BRANDS JimCantalupohadgiventheordersthatthePartnerBrandshadtogobecausetheydetractedanddistractedfromconcentratingontheMcDonald’sbrand.Resourceswereredirected.InMay2006,MattPaull,whohadbeenCFOunderJimCantalupo,toldanalyststhatallthePartnerBrandsweresoldorbeingreadiedforsaleexceptforBostonMarket.HetoldinvestorsthatsellingBostonMarketwasnotabigdealbecauseitwas“anunimportantbrand.”McDonald’spurchasedthebrandasBostonChickenin2000for$173.5millionpaidmainlyforitsrealestateportfolio.McDonald’splowedresourcesintothebrandandchangeditsnamefromBostonChickentoBostonMarket.Butanalystspointedoutthatitwascurrentlyworthabout$100million—apossiblelossof$73.5million,notcountingthemillionsinvestedinreimagingthebrand.Mr.PaulladdedthatMcDonald’sshouldnothaveboughtitinthefirstplace.TheBusinessWeekheadlinestatedtheobvious:buyer’sremorse.60


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Year 2007

Financials January2007beganwithmoregoodfinancialnews.ThepositivemomentuminitiatedbyJimCantalupoandCharlieBellcontinued.McDonald’sglobalsalesrose7.2%inDecember2006.61Europewasabrightspot.ThechangesmadebyDenisHennequin,headofEurope,hadenormouspositiveimpact.Asthepressreported,thenewheadoftheUK,SteveEasterbrook,adoptedandimportedtheeffectiveHennequindecisionstofixtheUKbecause,comparedtotherestofEurope,itwasalaggard.“UnderSteveEasterbrook,theUKhasbeentryingtoemulatethecontinentalEuropeanMcDonald’sbusinesswithagreatervarietyofrestaurantdesigns,endingaone‐size‐fits‐allphilosophyatits1,220UKoutletsthathadmadethemlookdecidedlydowdy.”IntheUnitedStates,itwasbecomingclearthatMcDonald’swasmovingaway—albeitinitsownway—fromitscoremenu.The2006additionofchickenwrapswasstillasuccessfulmenuitem.“McDonald’sisnolongerjusta‘burgerjoint’.Theydoabout$5bninchickensalesintheUSonanannualbasis,roughlyequaltotheirburgersales,”saidJackRusso,analystatAGEdwards.“Expectnewchickensnackwrapflavorsandnewchickensandwiches.Expectmorenewproductsatbreakfast.Expandedcoffeeofferingsfromtherecentlylaunchedpremiumcoffeeblendcouldincludespecialtycoffeessuchaslattesandflavoredicedcoffees.”62January2007beganasDecember2006ended:thecoreproductswerenothighpriorityontheMcDonald’sradarscreen.Whenfourth‐quarter2006resultswereannouncedinJanuary2007,revenueswereup11%.McDonald’sfourth‐quarter2006profitmorethandoubled,thanksinlargeparttothespinoffofChipotle,andcontinuedstrengthinEurope.CEOJimSkinnercommented:“McDonald’sisdeliveringthestrongestbusinessresultsin30years.Ourdouble‐digitearningsgrowthforboththefourthquarterandfullyearreflectsthesuccessofourPlantoWin....Webegin2007fromapositionofstrengthandIamconfidentwewillcontinuetodeliversustainedprofitablegrowthwellintothefuture.”63Thebusinessreporterswroteglowingarticles.ButtheremarksfromMr.SkinnerandfromMr.Alvarez,presidentandCOO,madethepressthinkabouthowMcDonald’swouldkeepupthemomentumthatbeganunderCantalupoandBell.ThepressknewthatMcDonald’shadbeen“onatearsince2003.”McDonald’sneededtofigureouthowtomaintainitssuccess,especiallysincethecompetitionwasbecomingmuchsavvierandwasalreadystealingcustomers,particularlyfromprofitableareaslikebreakfast.True,Mr.Skinnerhadannouncedanewflexiblesystemthatwouldallowakitchentoservebreakfastallday,butnothinghadhappened.Therewereotherideasthatweretalkedabout,suchasapaymentsystemforspeedierpurchases,morerestaurantswithlongerhours,andawidevarietyofnewitems,includingmorespecialtycoffeedrinks.64InlateJanuary,ErinBurnett,thenatCNBC,interviewedDavidPalmer,aUBSanalystwhowasquitebullishonMcDonald’s.Mr.Palmerfollowedtherestaurantbusinessandwaswellversedinallthefastfoodandfastcasualentries.Ms.Burnettexpressedsomeconcernthatsomethingisnotseemingly“OK”withMcDonald’s.Itssharesweredown,


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eventhoughMcDonald’spreannouncedthisslippage.Ms.Burnettprefacedtheinterviewwiththisremark:

“GoldenArchescameinwithprofitsof61cents.Theypre‐announced.Sonooneissurprisedaboutthat.Revenuethoughup11percent,alittlebitshyofwhatpeoplewerehopingtoseeandalotofnoiseinthereport.WearegoingtobejoinednowbyDavidPalmer.HeistherestaurantanalystatUBS.HeisgoingtobewithusnowandafterthebelltotalkaboutMcDonald’s.”

Shefollowedwiththis:

“David,nowwehavethat,let’s—whatdoyoudowithMcDonald’sshares?Imean,theypre‐announced.Again,wegetbacktothispoint,peopleshouldhaveknownwhattheyweregoingtoget.Andyetwearestillseeingabitofasell‐off.Sowhatwouldyoudotodaywiththisstock,whichisalreadyup,what,30percentoverthepastsixmonths?”

Mr.Palmerresponded:

“WelikeMcDonald’shere.Thereturnoninvestedcapital,whichisthekeydriverforthisstock,shouldexpandoverthenextyearandinfacttwoorthreeyears;partofwhichisaresultofthefactthatthecompanyissellingunderperformingmarketsaroundtheglobetolicensees.Sotheearningsvolatilitywillgodown.Themarginswillgoup.Thesteadinessofearningswillgoup.Plustheinternationalmarketsareperforming,andthatisdrivingrelativeearningsgrowthrelativetothemarket,which,asyouknow;earningsgrowthinthemarketisprojectedtoslow.”

Ms.Burnett’sco‐anchor,MarkHaines,questionedMr.Palmer’sremarksbysayingthatMcDonald’swouldbeopening800newrestaurantsthatyear.HewonderedwherethesewouldgobecausetheUnitedStatesseemedsosaturated.Mr.PalmerindicatedthatmostoftherestaurantswouldbeinRussiaandChina.ButheaddedthatwiththeMcDonald’sviewthataMcDonald’srestaurantbeontheoutsideofathree‐mileradiusofotherMcDonald’srestaurants,therewouldstillbespaceintheU.S.fornewstores.WhenMr.HainesaskedwhetherbuyingintoaMcDonald’sfranchisewasagoodidea,Mr.Palmersaidyes.ButthenhequalifiedbysayingStarbucksshouldbeyourfirstchoice.65InMarch2007,thereportfromMcDonald’sshowedFebruaryincreasesinglobalsame‐storesales.Therisewas5.7%andderivedfromdouble‐digitgrowthintheAPMEAregion.U.S.same‐storesalesrose3.1%.McDonald’sattributedthesegainstobreakfastandlate‐nightmenuoptions,aswellasanewgrilledandhoney‐mustardChickenSnackWrap.66AprilreportingindicatedthatU.S.same‐storesalesrose6.2%inMarch.Additionally,thesharepricereachedaseven‐yearhigh.ThepopularityoftheSnackWrapwasgivenasthemainreasonforthegoodresults.EuropeandAPMEAalsowerestrong.Same‐storesalesrose11.2%inEuropeinMarch,whilesame‐storesalesgrew9.6%in


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APMEA.Marchsame‐storesalesworldwiderose8.2%.Forthefirstquarter2007,same‐storesalesincreased6.3%.Globalsystem‐widesalesclimbed12.7%inMarch,and10.3%forthefirstquarter.67CEOJimSkinnersaid,“Ourcustomer‐centricPlantoWincontinuestodriveMcDonald’ssustainedmomentumandisgeneratingbroad‐basedgrowthinourbusiness.”68TheamazinglygoodMarchresultscausedanalyststotakepause:couldthebrandcontinueatthispace?Coulditmaintainthegrowth?Fromwherewouldthegrowthcome?“SharesoffastfoodcompanieshadmixedreactionstonewsFridaythatburgergiantMcDonald’ssawprofitsrise22%inthefirstquarter.McDonald’ssaiditwouldsellabout1,600restaurantsinLatinAmericaandtheCaribbeantoafranchiseeandreturnthegaintoshareholdersthroughdividendsandsharebuybacks.ThereportsentMcDonald’ssharestoanall‐timehighof$49.70earlierintheday.”AndthenMcDonald’swasdown42centsto$48.36.69April2007same‐storesalesclimbed4.8%worldwide.McDonald’ssaiditwasduetothesuccessofitsbreakfastmenu,HappyMeals,andnewSnackWrapsandwich.IntheU.S.,theseofferingscontributedtoa3.5%increaseinsame‐storesales.Same‐storesalesclimbed3.5%inEuropeaswellandrose10.3%inAPMEA.JapanandChinahadstrongperformancesduetoextendedhours,breakfast,andlocalmenuofferings.McDonald’ssharesfell6centsto$49.44inlatemorningtrading.Theyreachedanall‐timehighof$50.06lastweek.“McDonald’shasgeneratedfifty‐fourconsecutivequartersofpositiveCashFlowfromOperations.CashFlowfromOperationsforthemostrecentquarteralsoreachedanine‐yearhigh.”70ShrektheThird(DreamWorksAnimation)helpedMcDonald’sU.S.Mayresults.U.S.same‐storesalesrose7.4%and11.9%worldwide.McDonald’sreportedthatthefilmanditsbreakfastinitiativescontributedtoMay’spositiveperformance.IntheU.S.,McDonald’ssaiditsShrektheThirdpromotionandbreakfastcontributedtolastmonth’sstrength.TheShrekpromotionwithMcDonald’sHappyMealsusedthegreenogretofeaturehealthierfooditemslikeitssalads,milk,appleslices,andotherproducts.McDonald’swasconcernedaboutcriticismthatitsfoodisafactorintheobesityepidemicaffectingnotonlychildrenbutadults.InEurope,same‐storesalesrose8.9%,basedonChickenSelectsandSnackWrapinGermanyandlimited‐timeofferingsofpremiumchickenandbeefsandwichesinFranceandtheUK.71Julyresultsshowedanotherrise:globalsame‐storesalesrose6.5%.U.S.same‐storesalesrose4.3%,aidedbybreakfast,newfoodofferings,andlate‐nighthours.Europeansame‐storesalesrose7.7%,boostedbysalesinFrance,Germany,andtheUK.APMEArose9.9%,duetogreatperformanceinJapan,Australia,andChina.72Augustsame‐storesalesclimbed8.1%boostedbystrongoverseassales,itsbreakfastbusiness,andnewfoodofferingsintheU.S.TheU.S.same‐storesalesrose7.4%duetobreakfast,beverages,andnewfooditems.Breakfastaccountedforone‐thirdofU.S.revenue.“McDonald’shas40%ofthebreakfastmarket.McDonald’sisunderpressuretoattractandretainmorningcustomers.”InEurope,same‐storesalesclimbed6.1%.APMEAsame‐storesalesrose12.4%.McDonald’ssharesrose$2.03,or4percent,to$52.18.GoldmanSachsanalystStevenKroncalledthemonth’ssales“exceptionallystrong”andsaidinanotetoinvestorsthateven“apinchedconsumer”doesnotseemtobean


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impedimenttoMcDonald’ssalesgrowth.Consumershavebeenstrugglingwithhighergaspricesandtheweakeninghousingmarket,promptingsomeintherestaurantindustrytoworrythatconsumersmaybelesslikelytospendforamealout.73InSeptember,theMcDonald’sBoardofDirectorsincreasedthedividendagain,thistimedeclaringanannualcashdividendof$1.50pershare,payableonDecember3.Thisincreasewas50%higherthanthecompany’s2006dividendof$1pershare.CEOJimSkinnersaidthatMcDonald’sexpectedtoreturn$15billionto$17billionincashtoshareholdersfrom2007through2009.“McDonald’ssharesrose6percentto$54.30pershareonSept.13.Thatsamedayshareshitanall‐timehighof$54.68.Thelargershareholderdividend,coupledwithadditionalstockbuybacksandanincreaseddebtlevel,willhelpMcDonald’sreturnbetween$15billionand$17billiontoshareholdersthrough2009,thecompanysaid.Thisisasignificantincreasefromthelastcommitmenttoreturnabout$5.7billionby2008.”74Third‐quarter2007same‐storesalesclimbed6.9%,includinga5.1%increaseintheU.S.DuringSeptember,same‐storesalesincreased3.5%intheU.S.,5.7%inEurope,and12%inAPMEA.75However,thegreatperformancewasdiminishedbysubstantialrisesincommoditycoststhatwouldaffectcustomerpricesatthecounterespeciallywhenitcametotheDollarMenu.Eventhoughthird‐quarternetrose27%,revenuewaslight,causedbylaborandcommoditycosts.Cheesecostsrose20%–30%.Chickenrose3%.TheseincreasedcostsforcedMcDonald’storaisepricesintheU.S.byabout3.5%.PresidentRalphAlvarezsaidtheDollarMenuaccountedfor14%ofU.S.sales;therefore,maintainingitwasextremelyimportant.76Additionally,asreportedbyCashFlowNews.com,cashflowfromMcDonald’soperationsforthe“twelvemonthsendedSeptember30,2007was$4,928,200,000,a19.2%increaseovertheyearearliersametwelvemonthswhenMcDonald’sgenerated$4,132,900,000inCashFlowfromOperations.”Thiswasanine‐yearhigh.SharesofMcDonald’sweretradingat$59.74,whichwaswithin1%ofMcDonald’sten‐yearhighof$59.92onNovember6,2007.77DecemberreportsforNovember2007saidthatMcDonald’ssawa6.4%increaseincomparablesalesacrossitsEuropeanbusinessinOctober.78Novemberglobalsame‐storesalesincreased8.2%.IntheU.S.,same‐storesalesrose4.4%duetoitsvalueandbreakfastmenus,alongwithpremiumcoffees.Europesame‐storesalesclimbed10.8%.APMEAsame‐storesalesrose12%.79

MATT PAULL, CFO AttheendofJuly2007,McDonald’sannouncedthatMattPaull,CFO,wasretiring.Mr.Paullagreedtostayuntiltheendof2007tohelpintheswitchovertohisreplacement.MattPaulltooktheCFOjobin2001.HewasakeyplayerintheCantalupo/Bell/Lightturnaround.Hebelievedinbrandbuilding.Infact,hisofficewasnexttoLarryLight’soffice.MattfrequentlysaidthatifLarrycouldshowhowimportantsomethingwasforthebrand,he(Matt)wouldfindthemoney.ThestrategicactionsdefinedinthePlantoWincouldnothaveproceededwithoutMr.Paull’ssupport.


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PLAN TO WIN InaNovember2007webcast,CEOJimSkinnerandotherMcDonald’stopmanagement“reaffirmedthecompany’scommitmenttobeingbetternotbeingbigger.”Mr.SkinnerremindedviewersthatMcDonald’shadexperienced54consecutivemonthsofcomparablesalesincreasesduetothePlantoWin.“We’vestayedfocusedanddisciplinedfinancially.That’sallowedustoconsistentlyexceedthegrowthtargetswelaidoutin2003.Thesetargetshaveserveduswellandwillnotchangeinthenearterm.Theyarerealistic,sustainable,andwillhelpusmakethebestdecisionsforthelongtermbenefitofourshareholders.”80

PARTNER BRANDS Therumorsaboutthesaleofthe630‐unitBostonMarketemergedearlyin2007.MichaelAndres,theCEOofGolden,Colorado‐basedBostonMarket,alertedemployeesonJanuary11thatasale,afteraseven‐yearMcDonald’sownership,wasapossibility.McDonald’sheardofMikeAndresannouncement,soitissuedastatementsayingthatitwasinfactassessingitsoptionsregardingBostonMarket.However,ithadnotyetdeterminedwhattodo.BostonMarketwasbankruptwhenMcDonald’spurchasedit.McDonald’ssawtherealestateasthemainreasontoinvestinandholdthebrand.However,muchtoitssurprise,McDonald’sdiscoveredthatBostonMarket’sfrozenfoodgrocerybusinesswasaveryprofitableoperationwithhigh‐marginsalesofmorethan$100millionannually.BostonMarkethadnofranchiseeswithstoresin28states.In2006,McDonald’sspunoffChipotlethrougha“$320millionIPOandthesubsequentdistributionofMcDonald’sremainingstakeintheDenver‐basedburritochainasaspecialdividendtoMcDonald’sshareholders.”AsfortheotherPartnerBrands,in2003,McDonald’sriditselfofitsstakeinFazoli’s,afast‐casualItalianchain.ItsoldthepizzachainDonato’s.ItalsodivesteditselfofitsstakeinAroma,aEuropeancoffeeconcept.IfitdiddecidetosellBostonMarket,McDonald’swouldnothaveverymuchleftofthePartnerBrands.ItstillhadastakeinLondon‐basedPretAManger,agrab‐and‐gosandwichspecialtychain,whichhadnotbeensuccessfulintheU.S.Redbox,thesuccessfulvideovendingbusiness,wasstillheldbyMcDonald’switha53%stake.ReportssaidthatRedboxwasplanninganexpansionintoatotalof1,600McDonald’sstoresbyJuly2007.81InAugust,McDonald’sagreedtosellBostonMarkettotheprivateequityfirmSunCapitalPartners.SunCapitalPartnersownedFazoli’s,ChevysFreshMex,ElTorito,andBruegger’sBagels.Althoughtermswerenotdisclosed,itwaspublicknowledgethatMcDonald’spaid$173.5millionforBostonMarketin2000.ItwasalsopublicknowledgethatMcDonald’swasinterestedinBostonMarket’srealestate.TheselocationswereseenaspotentialsitesfornewMcDonald’s.However,thisneverhappened.U.S.revenueforBostonMarketwas$680millionin2006.ExceptforitsstakeinPretaManger,thesaleofBostonMarketrepresentedthelastdetachmentfromallthePartnerBrands.82


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SERVICE InFebruary,RichardGibson(TheWallStreetJournal)reportedadownturninMcDonald’sservice.Hepointedoutthatin2006,withearningssoaringandwithCEOJimSkinnertakingcreditforjustabouteverygoodthingthathappenedsince2002,servicecomplaintswererising.Orderaccuracyhadthehighestnumberofcomplaints,followedbyrudeorunprofessionalemployees.Thethird‐highestareaforcomplaintswasspeedofservice.Thereweretoomanyitemsonthemenu,andtoomanycomplexitemsonthemenu,makingithardertopreparetheordersquickly.Mistakeshappened.Orderswereputtogetherincorrectlyormixedup,orcondimentsandutensilswereleftout.Peopleatthedrive‐thru,wherethemajorityofservicehappens,expectfastserviceandwillcomplaintothecrewmember.Thismakescrewmemberssurlyandunresponsiveasaresponsecanaddafewseconds.Thisreportshouldhavebeentreatedasacanaryinacoalmine:awarningsignthatsomethingwasnotquiteright.83Asanadditiontothecomplexityissue,soonafterthismiserableservicequalityreportbecamepublic,McDonald’sannouncedthatitwouldsoonbeofferinglattes.McDonald’sbelievedthatcompetitorsofferingawidervarietyofcoffeedrinkscouldstealcustomersfromitslucrativebreakfastbusiness.84

COMPETITION Nation’sRestaurantNewspublishedanarticleonbreakfastinMarch2007thatpointedtoafullsetofcompetitorsforthebreakfastoccasion.Subway,Dunkin’Donuts,Starbucks,Wendy’s,andTacoBellwereofferingitemsforbreakfasttowrestcustomersfromtheMcDonald’sgrip.Allthesecompetitorssawbreakfastasthebiggestday‐partopportunity.AccordingtoBobSandelman,presidentofSandelman&Associates(aSanClemente,California‐basedfoodserviceresearchfirmthatspecializesintrackingconsumertraffic),McDonald’swasshowingvulnerabilityinthebreakfastarena.Mr.Sandelmansaidthatthisweaknessiswhythereissomuchcompetitiveactivity.McDonald’scontinuestotestitsnew“kitchensystem”thatcouldleadtotheextensionofitsbreakfastofferingstoall‐dayavailability.Nation’sRestaurantNewsobtainedanemailfromMcDonald’stoitsfranchiseesregardinggettingreadyforbreakfast.Intheemail,McDonald’stoldoperatorstobeginyourplansforimplementationof“theBreakfastOptimizationprocedures.”TheemailisattributedtoJanFields,chiefoperatingofficerofMcDonald’sUSA.AsvoicedbyCEOJimSkinnerin2006(seeabove),thesenewprocedureswouldrequirefranchiseestobuyandinstallnewequipment.Thisequipmentwouldexpandthefranchisee’skitchencapabilities,improveitscapacity,andbeabletohandlenewproductsinthefuture.“Breakfastisthenextbattlegroundformarketsharewith8‐to9‐percentdaypartgrowthandincreasedcompetition,"thememosaid.“Thesoonerwecanoptimizeourbreakfastplatformtomeettoday'sgrowthopportunities...andpositionTheEntireSystemforfuturenewbreakfastproducts...thegreaterchancewehaveto'win'amajorityofthoseguestcounts.“85Franchiseeswereunhappy.TheywereconcernedthatthisstrategywasanextensionofplanningarticulatedbyMr.SkinnerinSeptemberwhenheequatedthenewsystemwithall‐daybreakfast.McDonald’sdidnotconfirmthatitwantedtomakebreakfastavailableallday.Itsstatementscontinuedtotellthefranchiseecommunitythat“BreakfastOptimization”wouldbeforbetteroperationsduringthebreakfastrush.


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CFOMattPaulltoldanalystsin2006thatbreakfastwasabout25%ofMcDonald’smealoccasions.Mr.Sandelmansaidthatall‐daybreakfastworkedwellforJackintheBox(amuchsmaller,morediffuseoperation).TheresearcherpointedtothechangingworkhabitsofAmericanswithmanyworkingoddhours.FranchiseesworriedthatJackintheBoxcouldnotpossiblybeagoodmodelbecauseitwasamuchsmalleroperationandhadmuchlessbreakfasttraffic.Further,franchiseescontinuedtocomplainaboutthecomplex,overlyfullmenuboard.Whenitcametoall‐daybreakfast,differentbrandshavedifferentdemands.BurgerKingsaiditsawnoneedforit,whereasDunkin’Donutsbelieveditmadesense.Starbuckshadbreakfastsandwichesinitsfreshcasethroughoutthedayandheatedthemtoorder.86Inthemeantime,reportsindicatedthattherushforbreakfasthegemonyamongfastfoodchainswasbecomingmorecompetitive.BurgerKing,Wendy’s,andStarbuckswereallcreatingitemsformorningmeals.AtaMcDonald’sconferenceofrestaurantmanagers,JanFieldscounseledrestaurantmanagersthatthehoursbetween5AMand7AMshouldbemanagedinthesamewayastheymanagethelunchtime.87

ItwasnotjusttheUnitedStateswherenewburgerrestaurantswereappearing.TheEuropeanhamburgerlandscapewaschangingevenin2007.InMay,anarticleinTheSundayTimesnewspaperreportedthatinLondontherewasariseinthenumberof“qualityburger”restaurants.Thereportersaidthefollowing:“Allofthemservebetter‐qualityfoodinasmarterenvironmentthanatraditionalfast‐foodoutlet.TheyareafarcryfromthesortofrestaurantsfeaturedinFastFoodNation,thefilmversionofEricSchlosser’sbest‐sellingcritiqueoftheindustry,whichwasreleasedthisweekend.Collectively,theseneweateriesamounttoabout50outlets,insignificantnexttothe1,800orsooperatedbythesector’sgiants,McDonald’sandBurgerKing,andhavemadebarelyadentinthe£11billionUKmarket.”Asthearticlepointedout,theriseofthe“posh”burgerrestaurantswasasymptomorasignalofa“flighttoquality”thatwasimpactingtheentireUKfoodindustry.ThewritersaidthatMcDonald’swasfeelingthepressure.McDonald’swasdoingalottochangeitsperceptionof“industrialfood”byusingfree‐rangeeggsandorganicmilk.AndMcDonald’sannouncedthatitwouldintroduceasalimitedtimeoffer(LTO)theDeluxeBurger,whichusedaciabattabunwithBatavialettuce.McDonald’smaintainedthatthissandwichwouldtastedifferentfromitscoreburgerproducts.BurgerKingwasnotgoingtositaround:itintroducedtheAberdeenAngusBurgerin2006.TherewereatleasttwovariationsplannedfortheAberdeenAngusBurgerin2007,suchasonewithaUKbluecheese.SteveEasterbrook,CEOMcDonald’sUK,insistedthatMcDonald’swasnotinanywayrespondingtothesenewburgerjoints.HestatedthatthenewDeluxewasjustoneofmanyinaseriesofsandwichintroductions.Mr.EasterbrookdidnotbelieveMcDonald’sshouldfeelthreatenedbythesenewburgerrestaurants.88

FOOD New Products Onceagain,McDonald’smadethedecisiontoignoreitscorecustomer.InMarch,McDonald’sreportedthetestmarketofthick,higher‐qualityhamburgersaspartofastrategytoappealtomoreupscaleU.S.customers.TheAngusThirdPounderwas


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currentlyavailableinSouthernCalifornia,whereitwasofferedinthreeversionsusinga“denserbun”thanMcDonald’sregularhamburgers.Itcost$3.99,makingitthemostexpensivesandwichontheMcDonald’smenuboard.AspointedoutbyfoodresearchfirmTechnomic,McDonald’swasenteringthepremiumfoodcategoryinabigway:“Theyarenowmerchandisingpremiumsalads,premiumchickensandwiches,premiumcoffee,sowhynotapremiumburger?InsteadofJohnnyRockets,peoplehaveanotheroptionforabetterburger.”89Current Products AninterestingsurveywasreleasedinMarchandreportedinthetradejournalBrandWeek.Thestudy,RestaurantMarketingGroup’sLeakyBucketsurvey,statedthat73%ofMcDonald’slapseduserssaidthereasontheynolongerreturnisthattheycannot“stomachthefood.”90Beverages InMarch,McDonald’ssaiditwasplanningtoaddsmoothiesandspecialtycoffeestothemenuboard.Therewasalsoacommitmenttocreateanicedcoffeeinthehopesthatthiscoldbeveragewouldattractnewcustomers.McDonald’sannouncementsfollowedreportsfromWendy’ssayingthatitwouldbeaddinguniquebeveragesunavailableatanyotherfast‐foodrestaurant.TheMcDonald’srevelationsalsofollowedananalystreportthatBurgerKingwasdevelopingpremiumicedcoffee.91InOctober,McDonald’sconfirmeditsspecialtycoffeedrinkswouldbeavailableinallU.S.restaurantsbytheendof2008.Thismeantaddinglattesandcappuccinostoitslineofsuccessfulpremiumcoffee.Inthereleaseannouncement,McDonald’sforecastmorethan$1billionayearadditionalsaleswouldbeattributabletothesenewdrinks.92DuringDecember,McDonald’sagreedwithfranchiseestosharethebillion‐dollarcostsforthenewcoffeemachinesneededtocompetewithStarbucks.McDonald’sagreedtopayupto40%ofthecostsneededforinstallingthemachinesthatbrewedlattes,mochas,andotherspecialtycoffeebeverages.McDonald’sUSAPresidentDonThompsonacknowledgedthatremodelingcostsmightreacharound$75,000perrestaurantplusanother$25,000foreachpieceof“specialtycoffeeequipment.Mr.Thompsonreinforcedthatthenewspecialtycoffeeshadthepotentialtoboostsalesperrestaurantataround$125,000.93Chicken McDonald’sreportedtoaCanadiannewspaperinMaythatitnowsoldmorechickenthanKentuckyFriedChicken.McDonald’schickensaleswerereportedtobe$5.2billioninthe12monthsthroughMarch,pushingitaheadofYUM!’sKFC.McDonald’sstrengthenedsaleswithpremium‐pricedchickensandwichesandtheaffordableChickenSnackWrap.McDonald’ssaidtheSnackWraphelpedMcDonald’sliftAprilsalesatolderrestaurantsintheU.S.andEuropeby4.8%.Also,chickenhelpedreducecriticismthatMcDonald’ssoldhigh‐calorieandhigh‐fatfoods.94Burgers InAugust,withrestaurantsfromBobEvanstoBurgerKingnowofferingpremiumburgers,McDonald’sdecidedtoofferanewburgeroffering,too.McDonald’ssaiditwas


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testinganewAngusThirdPounderburgerinsouthernCaliforniathatwasalsointestinOhio.95Breakfast InNovember2007,McDonald’sannouncedtheintroductionofanewbreakfastsandwich,theMcSkilletBurrito.Thenewmorningsandwichwasdescribedasanofferingthatwouldgrowsalesandgohead‐to‐headwithcompetitors,BurgerKingHoldingsInc.andWendy’sInternationalInc.AMcDonald’sspokespersonindicatedthatthenewbreakfastburritocouldrangefrom$2.39to$2.59.ThelastnewbreakfastproductwastheTom‐Ryan‐designedMcGriddlesandwichin2003.96Nation’sRestaurantNews,alsoreportingontheMcSkilletBurritointroduction,saidthatMcDonald’senhanceditsbreakfastandbeveragebusinesswithproductssuchasaSouthern‐stylechickenbiscuit,espressodrinks,smoothies,andsweetenedicedtea.Cappuccinos,cafélattes,andmochasalreadyavailableincreasedsales(perrestaurant)by5%annually,or$125,000.97Afterthe2007Thanksgiving,McDonald’sreportedthatitwouldnotbeofferingall‐daybreakfast.BreakfastwasthemostprofitablemealofMcDonald’sU.S.division,accountingfor24%ofMcDonald’sU.S.salesand28%oftransactions.ButJanFieldsMcDonald’sUSAchiefoperatingofficersaidall‐daybreakfastwouldnotbehappeninganytimesoon.True,McDonald’shadexpandedbreakfastitems.Butthisdidnotmeanall‐daybreakfast.AsreportedinTheChicagoSun‐Times,thenewMcSkilletBurritocontained610calories,1,390gramsofsodium,and36gramsoffat,including14gramsofsaturatedfatand0.5gramsoftransfat.Itcost$2.49.AlthoughJackintheBoxofferedall‐daybreakfastitems,franchiseescontinuedtoreinforcethatJackintheBoxisasmalleroperationwithlesstrafficandsmallercrowdsatrushtimes.98

TRUST Happy Meals TheWallStreetJournalreportedthatMcDonald’s“trust”scoresamongmothersweredeclining.FranchiseesbelievedthatthedecliningtrustscoreswereindicatorsofdiscontentwithHappyMeals.Duetothislossoftrust,McDonald’swasfocusingonimprovingthenutritionalconfigurationoftheHappyMeal.Someoftheaspectsunderreviewweresodiumreductionandcaloriereduction.Theperceptionwasthatthecaloriesweretoohighforgirls.99AttheendofDecember2007,McDonald’sinFloridacreatedapromotionthatrewardedchildrenwithaHappyMealiftheyreceivedgoodgradesontheirreportcards.FinancialTimesheadlinedthisnewsas“badmarks”forMcDonald’s.100Quality Correspondents McDonald’scontinuedtofightthecustomerandcriticperceptionsthatitsfoodsweremakingkidsfat.Asacountermeasure,thebrandgatheredlargegroupsofmomscalled“QualityCorrespondents.”McDonald’srevealedthatitstrustscoresamongmomswerenotimpressiveandcertainlynotinsyncwithitssales.However,accordingtoan


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Edelmansurvey,conductedbyStrategyOne,McDonald’strustscoresamongcollege‐educated,informeddomesticopinionleadersages35–64wereattheirhighestlevelsin8years.101McDonald’srecruitedsix“everydaymoms”asQualityCorrespondentstoexperienceMcDonald’sfoodqualityfirsthandandsharelearningswithpeermomsaroundtheUnitedStates.Writingtheirownblogs,thesemomsdescribedtheirpersonalMcDonald’sexperiences.Theiraimwastrustbuildingwithothermoms.TheirgoalwastospreadtheMcDonald’sfoodqualitystory.Aspartofthe“qualitycorrespondents”program,LopezFoods,anOklahoma‐basedMcDonald’sbeefsupplier,openeditsdoorstotheMoms’QualityCorrespondents.MomsintheprogramhadvoicedmanyquestionsandconcernsaboutMcDonald’shamburgers.A40‐yearsuppliertoMcDonald’s,LopezFoodsgavethemomsafactorytoursotheycouldseeexactlyhowMcDonald’sbeefpattiesweremade,packaged,andshippedtotherestaurants.Aspartoftheprocess,themomsbecamecrewmembersatalocalMcDonald’srestaurantinMustang,Oklahoma,wheretheyworkedthehamburgergrill.102Super Sizes AccordingtoTheNewYorkTimes,thenewMcDonald’ssupersizemenuitemwashardtounderstand.Whywouldthebrandgobacktosomethingsoprovocative?Thesupersizebeveragewasbackbutwithanewname.TheHugo,anewdrinksize,wasavailableonlyincertainmarkets.Itwasa42‐ouncedrinkforaslittleas89cents.AccordingtoMcDonald’s,oneHugosodacontainsabout410calories.103Transparency Transparencyoropennessisacriticalcomponentoftrust.Duringthe2002–2005turnaround,DenisHennequinrebuilttrustamongtheFrenchthroughitsOpenDoorsprogram.Customers,schools,parents,andchildrenwereinvitedtovisittherestaurantsandseebehindthescenes:“Wehavenothingtohide.”WantingtocopyMr.Hennequin’ssuccessfultrust‐buildingapproach,theUKteammadeadecisionontransparencythatishauntingthebrandtothisday.InMay2006,oneofthebrand’sagenciescreatedawebsitecalledwww.makeupyourownmind.co.uk.ThesiteansweredcustomerquestionsonallaspectsofMcDonald’s.InApril2007,reportsonMcDonald’stransparencyproblemsthroughitsMcDonald’sUK“makeupyourownmind”initiativesurfacedinthepress.Sinceitslaunch,websitevisitorspostedawiderangeof(inmanycases)inappropriatequestions.Marketingandmediaexpertsquestionedthecontinuationoftheinitiativebecausesomerespondentscomplainedaboutthe“prerecorded”answerstheywerereceiving.McDonald’sadmittedproviding“rote”answersthat“didnotreceivethefullandthoroughanswerdeserved.”ThepressreportedthatthisUKinitiativewasnotatallofthesamequalityasMr.Hennequin’s.The“OpenDoor’strategydevelopedinresponsetotheseissuespaiddividendsinFrance,thecompany’smostprofitablemarketoutsidetheU.S.Transparency,foodquality,andhealthwerethecornerstonesofitsmarketingacrosstheChannel,“whereMcDonald’sfamouslyadvocatedonlyvisitingitsoutletsonceaweek.CriticssaidtheUKworkwasacheapattempttoexploitthissuccess.”AsreportedpublicallybyNicolaClarkinMarketing,


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herearesomeofthequestionsthatappearedontheUKwebsiteforanswers:“DatafileQuestionsonmakeupyourownmind.co.uk

Doyourburgerscontaineyesororgans? Whydidyouremployeesejaculateintomygrandmother’smilkshake? Whyisitallofyourburgerslookliketheyhavebeensaton? Doyousqueezecowslipstomakeyourmilkshake?That’swhatmybigbrother

said. ThetapwaterateveryMcDonald’sI’veevereatenattastedlikepetrol.Why? Doyouputbraincellsinyourburgers? IheardthatMilkshakesaremadefromPig’sfat,isittrue? Arethereeyeballsofchickensinthechickennuggets? DidpeoplefindachickenheadintheirchickenMcNuggets?”104

STEVE EASTERBROOK In2007,SteveEasterbrookstatedhisvisionforMcDonald’sintheUK.Hesaid,“Wewanttobeamodernandprogressivecompany,notsuchafacelesscorporategiant.NotnecessarilyadifferentMcDonald’s,butabetterone.”Mr.Easterbrooksaidthatthecustomer’smind‐sethadchanged:“Peoplecaremoreandmoreaboutthreethings—whattheyeat,wheretheyeat,andthecompanytheyarebuyingfrom.”So,hetookcreditforreducingsaltinfries,removingtheblendedmeats,introducingorganicmilk,andbringinginInnocentSmoothiesforHappyMeals.Thecompanylaunchedanumberofgreeninitiatives.Inaninterview,Mr.Easterbrookwasquiteclearthathismissionwasto“changepublicimpressions(ofMcDonald’s)and,quitepossibly,setnewstandardsforthebrand.”105

MARKETING Olympics InAugustof2007,aheadofthe2008BeijingOlympics,McDonald’sdiscloseditsplansforakid‐focused2008Olympicsprogram.BehindtheinitiativewastheideathatMcDonald’ssupportsresponsiblemarketingtochildren.Called“McDonald’sChampionKids,”theinitiativewouldprovide300childrenworldwidethechancetoattendtheOlympics,watchthegames,meettheOlympicathletes,tourculturalsites,andinteractwithchildrenfromaroundtheworld.MaryDillon,globalchiefmarketingofficer,saidthisreflectedMcDonald’slong“tradition”ofresponsiblemarketingtochildren.ItwasanawkwardannouncementasMcDonald’sOlympicsprogramwasmaderightaftertherevelationofa“studyfindingthatchildrenpreferredthetasteoffoodanddrinkstheythoughtwerefromMcDonald’soveridenticalalternatives.”(HereiswhatTheNewYorkTimessaidaboutthestudy:“Childrenlikefoodbetterifthebaghasacertainlabel.Intastetestswith63childrenages3–5,therewasonlyaslightpreferencefortheMcDonald’sbrandedhamburgeroveronewrappedinplainpaper,notenoughtobestatisticallysignificant.Butforalltheotherfoods,theMcDonald’sbrandmadeallthedifference.Almost77%thoughtthattheMcDonald’sFrenchfriesservedinaMcDonald’sbagtastedbetter,comparedwith13%wholikethefriesinaplainbag.McDonald’sbrandingofmilk,apples,saladsandotherfruitsandvegetableshasdirectly


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resultedinmajorincreasesinthepurchasesofthesemenuitemsbymoms,familiesandchildren.”)106Additionally,McDonald’smadetheOlympicsinitiative“withindaysoftheFederalTradeCommissionissuingsubpoenastoMcDonald’sandahandfulofotherlargechainstorequirethemtohandoverdocumentsonkid‐marketingpractices.”Ms.DillonsaidthatMcDonald’shadbeenveryresponsiblehandlingitsmarketingtochildren.HerstatementdidnotdetercriticizerswhocontinuedtocallattentiontotheproblemswithMcDonald’smarketingpracticesandmenu.Ms.DillonstatedthattheOlympicsinitiativewouldbeastellarexampleofMcDonald’scommitmenttochildrenaroundtheworld.107Dollar Menu TheDollarMenuwasalwaysanessentialpartofthe2002‐2005turnaround,andofthePlantoWin.In2007,commodity‐costrisesimpactedtheDollarMenu,especiallytheDoubleCheeseburger.Somefranchiseestooktheitemoffthemenu,whileothersraiseditsprice,defeatingtheconceptoftheDollarMenu.Thesandwichwasnowalossleaderforfranchisees.DiscussionoftheDollarMenuandtheDoubleCheeseburgerbecameantagonistic.108

U.S. Marketing Team AttheendofNovember,BillLamar,U.S.CMO,retired.McDonald’sannouncedthatNeilGolden(an18‐yearMcDonald’sveteran)wouldreplaceMr.Lamar.109Mr.LamarhadbeenMcDonald’sU.S.CMOsince2002.Hespentcloseto25yearswithMcDonald’s,includingrestaurantoperations,andmorethanfiveyearsrunningMcDonald’sAtlantaregion.110AdvertisingAgereportedthatevenwithMr.Goldeninhisnewjob,nothingdifferentwasexpectedinmarketingasMaryDillonwasstillinherGlobalCMOjob.111

EUROPE McDonald’sannouncedattheendofAugust2007thatitintendedtoinvestabout$1billioninEuropesayingitwasMcDonald’sbiggestopportunityforgrowth.RalphAlvarezstatedthatMcDonald’swouldputasmuchmoneyintoEuropein2007asitwasputtingintotheU.S.market.Europeansaleswereslowingduetoafocusonhealthiereating,andthiswasleadingtolostmarketshare.Mr.AlvarezsaidMcDonald’swouldsellanywherefrom5to10percentofthecompany‐ownedrestaurantsinEurope.112And,McDonald’swouldmovebeyondreimagingofrestaurantstoofferinghealthierfoodsanditemscateringtoregionaltastes.DenisHennequin,PresidentEurope,wouldleadtheseefforts.Mr.HennequinwascorrectabouttheneedtochangetherestaurantdesignstoappealtoEuropean“foodaesthetics.”Hisideasforcompetinginanenvironmentoffood‐conscioussensibilitieswerespoton:salesatreimagedrestaurantsaveraged4.5%increases.113


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Year 2008

FINANCIALS Astheyear2008began,McDonald’sreportedthatglobalcomparablesalesclimbed5.7%forthemonthofJanuary.Worldwide,McDonald’ssystemwidesalesclimbed13.4%inJanuary.U.S.comparablesaleslifted1.9%inJanuaryduetobreakfastcombinedwithMcDonald’sDollarMenu.Europecomparablesalesrose8.2%ineverymarketinJanuary.InAPMEA,Januarycomparablesalesrose7.8%.114JimSkinner,CEO,said,“WhileseverewinterweatherthroughoutthemonthandsofterconsumerspendingresultedinDecember(2007)UScomparablesalesbeingflat,weremainconfidentinourUSbusiness.”SomeeconomistsbelievedtherecouldbeaU.S.recessionbecauseofthehousingslumpandthecreditcrunch.Annualprofitfell32%during2007to$2.39billion,partlyduetoawrite‐offassociatedwiththesaleofcompanyinterestsinCentralAmericaandSouthAmerica.“Mr.SkinnersaidMcDonald’shadtakenanumberofstrategicinitiativestoboostitsperformanceandstressedtheuseofa“three‐tieredmenu”whichofferscustomerspremium,coreanddollarmenuoptions.”115McDonald’ssaidthatits2008netprofitrose80%fromayearagoduetocustomerstradingdowntolow‐costmealsastheglobalrecessiondeepened.McDonald’sreportedthatnetprofitfor2008was$4.3billion,comparedto$2.3billionin2007.Thesestrongannualresultswerejuxtaposedagainsta23%declineinfourth‐quarternetprofit.CEOJimSkinnerstatedthattheresultsfor2008werebasedon“menuchoice,foodqualityandvalue.”Headdedthattheaveragenumberof“customersservedperdayincreasedtomorethan58millionin2008.”McDonald’ssaidcomparablesalesandcustomercountsacrossgrewallsegmentsforeveryquarter.Thecompanyhaddouble‐digitgrowthinoperatingincomeforthefinalquarterandtheyear.116InJanuary,TheSundayTimes(London)polledtwofinanceexpertsfortheirdecisionstoeitherbuyorsellMcDonald’sstock.Onerecommended,“buy”thestockforthefollowingreasons:“Itsglobaloperationsdiversifyitsrevenuestreams.Europebeingthelargest(35.4%)followedbytheUS(34.6%)withtheremainderfromAsia(14.1%),LatinAmerica(7.7%)andCanada(5.0%).ThisspreadpreventsoverexposuretotheweakeningUSdollar.Infact,earningsmaygetaboostduetothestrengthoftheeuroagainstthedollar.Morethan70%isfranchised,generatingrevenueupfrontasafranchiseemustpurchaseequipment,signageanddecorfromthecompany.”Additionally,thisexpertremindedreadersthatMcDonald’sdoeschargerentonitsproperties.“…(McDonald’s)ownsorleasesthelandandbuilding,chargingthefranchiseerentandservicefeesforthe20‐yearfranchiseagreement.McDonald’sgetsguaranteedrentonappreciatingpropertyfor20yearsandapercentageofsales.”And,hepointedoutthatMcDonald’sreceivesapercentageofrevenuesfromfranchiseeswhilesupplyingthefoodandpackagingforeachrestaurant.Thisfinancierfeltthatthe54consecutivemonthsofcomparablesalesincreasedwithitssame‐storesalesgrowthinNovemberacrossallregionswouldallowMcDonald’storiseabovetheunfortunate


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recessionaryeconomictimes.However,hedidsaythatthestockpricewasexpensiveasMcDonald’strades19timesnextyear’searnings.117TheotherfinancialexperthadaslightlydifferentperspectiverecommendingthatpeoplebuyMcDonald’sstockonlywhentheysawapricedip.WhythedifferentinterpretationofthestellarMcDonald’sresults?Hereiswhathesaid:“InDecember(2007),thestocktradedatanall‐timehighof$63…amultipleof20timesearnings.Withthehistoricrangeforthestockbetween10and20timesearningsMcDonald’snowlooksexpensive.Muchoftheturnaroundinitsprospectshasbeenpricedinandthestockhasbeenre‐rated.Quick‐servicerestaurantssuchasMcDonald’shavedonewellrecentlythankstothepopularityofbreakfastandsnackofferings.Thereisevidence,however,thatthesectorishittingaslowdown.”Thisexpertbelievedthatwith35%ofrevenuesand60%ofoperatingincomecomingfromtheU.S.,the$54ashare,or16.5timesearnings,madeMcDonald’sstock“pricy.”Hefeltitmightbesusceptibletoade‐rating.Ifthatweretohappen,McDonald’swouldbeamoreappealingpurchase.118InMarch2008,McDonald’sreportedthatsame‐storesalesintheU.S.forFebruaryfellforthefirsttimein5years.119InadvanceofMcDonald’sreportingitsAprilearnings,someanalystsbegancommentingandofferingopinions.Oneanalystpointedoutthattherestaurantchainhadrobustsalesabroadandwouldprobablybenefitfromforeignearningsduetotheweakdollar.JeffreyBernstein,aLehmanBrothersanalyst,saidMcDonald’smarginsmightsufferasMcDonald’spromotes“value”orlow‐costmenuitems.Bernstein’sratingforMcDonald’sis“Overweight”…“butthinksresultsmayfallshyofconsensusearningsestimatesforthefirstquarter.”120Reportingonfirst‐quarter2008,McDonald’sexceededWallStreet’sfirst‐quarterprofitestimatesbasedonperformanceinnon‐U.S.markets.McDonald’sdidreport,however,thatanessentialU.S.salesgaugeunexpectedlyfellinMarchforthefirsttimeinfiveyears,partlytheresultofaweakeconomy.McDonald’swasoptimisticthattherewouldbeaU.S.rebound,however.ThefinancialcommunityindicateditwasnotworriedaboutanextendedU.S.slump.Yet,someanalystsandinvestorsexpressedconcernsabouttheMarchdeclineinU.S.same‐storesales.MarchU.S.same‐storesalesfell0.8%comparedwiththepreviousMarch.Mostanalystswerelookingfordomesticsame‐storesalesgrowthof1%to1.5%inMarch.Europehadan11%comparable‐salesincreaseover2007,thebiggestsuchjumpinitshistory.McDonald’ssaidthattheU.S.MarchdeclinewasduepartlyfromthetimingofEaster,whichwasinMarch,comparedtoAprilin2007.U.S.salesonEasterweekendtendtobelower.McDonald’sresultswerealsoaffectedbythedownturnintheU.S.economy.And,analystssaidthatMcDonald’swascomparingMarch2008’ssalestoaparticularlystrongMarch2007.“AndsomeofMcDonald’scompetitors,mostnotablyKFCwithitsnewchickenwrap,hadnewproductsoutinMarch.”Competitorshadmorenewnewsduringtheperiod,”Millersaid.Inateleconferencewithanalysts,McDonald’sexecutivessaidtheydidn’tseecompetitionhavinganeffect.KFC’swrapisafollow‐uptoMcDonald’sChickenSnackWrap,whichhasbeenabighit.‘That’ssomethingthathappenswhenyouhavesuccess,’saidRalphAlvarez,McDonald’spresident.”TheChicagoTribunepointedoutthatMcDonald’shasbeenahuge,powerfulfoodandbeverageforceoverthepastfewyears,


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showingquarterafterquarterofsolidsalesandprofits.However,inDecember2007,McDonald’sexperiencedsomebadnews,thefirstinstanceinaverylongtime:U.S.same‐storesaleswereflatpartlybecauseoftheeconomy.ThencameMarch’sU.S.results.McDonald’swasadamantthatU.S.comparablesaleswouldgrowinAprilby2%to2.5%.AndCEOJimSkinnermadeastatementtoanalyststhatthecurrentMcDonald’sstrategywasdesignedtoweatheraweakereconomywherebudget‐consciousconsumersseeklower‐priced,cheaperfoods.“Inthisenvironment,ourstrategyofaffordabilitybecomesevenmoreimportantandwewillcontinuetoemphasizeourvalueofferings,”hesaid.121InCanada,TheFinancialPoststatedthatWallStreetmightnotbeprovidingthebestassessmentofMcDonald’sperformance,underestimatingitsearnings‐growthpotentialforthesecond‐quarterhalfof2008.UBSanalystDavidPalmerrepeatedhis“buy”ratinganddidnotchangehisU.S.$69pricetarget.Mr.Palmersaid,“Whiledividendincreaseswillcontinuetosupportvaluation,webelievereturnofinvestmentcapitalgainsandearnings‐per‐shareupsideshouldremainthekeystockdriversinthesecondhalfof2008andbeyond.”Heremindedreadersthatwiththenewbeveragesbeinglaunched,McDonald’scouldexpectsalesupside.122Nation’sRestaurantNews’s“AheadoftheTape”columninJuly2008notedthatanalysts’expectationsforMcDonald’srosebasedonhigherper‐shareearningsof21%insecond‐quarter2008fromtheyearearlierbasedonoverseasearningsandthriftycustomers.“AheadoftheTape”notedthatalthough“risky,”McDonald’sventureintofancycoffeedrinkswasagreatwaytoofferaffordablecoffeebeveragestoStarbuckscustomerswhomayneedtotradedown.123InSeptember,McDonald’sstatedan8.5%increaseinAugustglobalsame‐storesaleswitha4.5%U.S.gain.Beverages,thebreakfastmenu,andanOlympic‐themedSouthernStyleChickenSandwichfurtheredU.S.performance.Europeansame‐storesalesleaped12%.APMEAexperienced10%growth.Olympic‐relatedmarketingwaspartlyresponsiblefortheincreases.System‐widesalesincreased14%worldwide.“UBSpredictedthatMcDonald’scouldoutperformitspeersonthebackofitsOlympicsadvertisingcampaignandasuccessfulStarWarsHappyMeal.SoaringcommoditycostshaveforcedsomeMcDonald’sfranchiseestore‐evaluatepricing,includingthepopularDollarMenu.McDonald’shasbeentestingmodificationstoitspopular$1doublecheeseburgerandhigherpricesforthesandwichasitpreparestochangeDollarMenuoverthenextyears.”AnalystsbelievethatMcDonald’snewmenuitems,itsexpandedhours,andthetendencyofcash‐strappedconsumerstotradedownfrommorepriceyeating‐outoptionsintheU.S.havebeenthedriversofMcDonald’ssuccess.124McDonald’searningsforthird‐quarter2008cameinearlyOctober.TheresultsforthequarterendedSeptember30showedthatsystemwidesalesforallstoresincreased11.4%inSeptemberand10.1%forthethirdquarter.Systemwidesame‐storesalesincreased7.3%inSeptemberandrose5.8%forthequarter.TheseresultsshowU.S.comparablesalesincreasesof10.6%forthemonthand8.5percentforthequarter.Europeanrestaurantsreporteda0.6%same‐storesalesdeclineinSeptemberanda0.3%increaseforthequarter.InAPMEA,same‐storesalesroseby7.3%inSeptemberand5.4%inthethirdquarter.125


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InOctober,CEOJimSkinnerstatedthatMcDonald’swas“recessionresilient.”Hesaidthisinthecontextofcontinuingcustomerdemandforburgersandfries.AccordingtoMr.Skinner,thecustomer’sdesireforaburgerwithfriesseemedtobe“resilienttoeconomicweakness”worldwide.Mr.SkinnerremindedanalyststhatMcDonald’scontinuedtogroweveninthemidstofafragile,globaleconomicscene.FinancialTimesstatedthatevenwithslowingU.S.customerspending,self‐servicefastfoodrestaurantscontinuedtooutperformmoreexpensive,familyrestaurantswithwaiterservice,includingApplebee’sandDenny’s.FinancialTimesreportedthatcustomersofmorecasual,sit‐downrestaurantswereeatingmoreathome.McDonald’sCOO,RalphAlvarez,commentedonthefactthatintheU.S.,grocerypriceswererising,makingthecostdifferentialbetweeneatingathomeandeatingatMcDonald’sasmallincrement.“Webelieve(thepriceof)foodathomehasgrownsomuchhigherthatitmakesourcategoryabetterdealthaneatingathome.”McDonald’sexecutivescontinuedtoemphasizethebrand’scontinuedcommitmenttotheDollarMenuasakeyvalue‐focusedinitiative.126InreviewingtheSeptember2008results,somemembersofthefinancialcommunityvoicedconcernthatMcDonald’swas“caughtupintheglobalconsumerslowdown.ManyagreedwithMr.SkinnerthatMcDonald’swas“relativelyrecession‐resistant”givenitsvalueandconveniencepositioningaswellasitscontinuingstoreremodelinginitiative.ZacksEquitynoted,“McDonald’s,whichrecentlyboosteditsdividendby33%,hasbeenconsistentlyoutperformingthemarketduringtherecentturbulenceandoverthelong‐term.”AndBankofAmericatookissuewithreportsaboutthefrozencreditlinesforfranchisees.ABankofAmericaspokespersonsaidthebankwouldhonoranyobligationstofranchiseownersspendingupto$100Ktoremodel.127AstrongOctoberwasfollowedbyastrongNovember.AsTheWallStreetJournalpointedout,“…ofthe30companiesontheDJIAonlyMcDonald’sandWal‐Marthaveahigherstockpricetodaythanayearago.”(McDonald’sincreaseditsdividendsby33%inthepreviousmonth.)McDonald’slowpricesaidedcustomerswhoweretradingdowntocheaperrestaurantmealsfrommid‐priced,morecasual,andwaiter‐service‐sit‐downrestaurants.However,McDonald’sfastfoodcompetitorsalsodidwellinNovember.McDonald’scontinuedtosupporttheideathatthekeytoitssuccessisthe6‐yearoldPlantoWinturnaroundstrategy.128U.S.same‐storesalesincreasedby4.5%duringNovember.McDonald’screditedthistothebreakfastmenuandthechickenitemsaswellaseverydayvaluethroughoutthemenu.Globallysame‐storesalesgrew7.7%.However,thedatashowedthatEuropeangrowthdippedfromthe10.8%seeninNovember2007.APMEAsame‐storesalesrose13.2%.U.S.BurgerKingshowedstrongperformanceinDecember.129WhenNovember2008resultswerereported,itturnedoutthatcustomersboughtalotofburgersandchickenbreakfastbiscuitsatMcDonald’sinOctober.Thisledtoasignificantclimbinsales.DuringOctober,globalsame‐storesalesincreased8.2%.McDonald’swasoneoftheonlyrestaurantstodowellinOctober.IntheU.S.,same‐storesalesclimbed5.3%.McDonald’ssaidthiswasduetothenewmenuitems,includingtheSouthernStyleChickensandwichalongwithongoingbreakfastdemand.TheDollarMenuandtheMonopolygameattractedvalue‐focusedcustomers.Same‐storesalesincreased9.8%inEuropeandclimbed11.5%intheAPMEA.AnalystsandthepressusedMr.Skinner’sdescriptionthatMcDonald’sisrecessionresistant.130


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CEOJimSkinnersaiditfirstwhilemanagement(andthepress,financial,andinvestorcommunities)repeated,“McDonald’sisrecessionresistant.”Analystsandinvestorscommentedthatthird‐quarterresultsreinforcedhissentiment.Infact,third‐quarter2008beatanalysts’expectationsbutdidnothelpMcDonald’sstock,whichcollapsedbelowits“buy”pointinOctober.McDonald’swasgrowingduetonewmenuitemsandstrongoverseasgrowth.“ChiefExecutiveJimSkinnercreditedtheDollarMenuwithincreasingfoottrafficinrestaurants,thoughnotprofitsdirectly.”But,asMcDonald’scontinuestostate,economicdownturnsseeconsumerstighteningtheirbudgetsandeatingoutless.131

FOOD Dollar Menu InAugust,TheWallStreetJournalreportedthatMcDonald’srestaurantswerebecoming“stingy”becausefranchiseesreducedtheexpensiveingredientsinthe$1DoubleCheeseburgerduetorisingcommodityprices.DonThompson,presidentofMcDonald’sU.S.business,saidthereisongoingtestingtofigureouthowtomaketheburgerlessexpensivetoproduce.“Somerestaurantsaresellingitwithonesliceofcheeseinsteadoftwoandbillingitasa‘doublehamburgerwithcheese.’”Somemakethesandwichwithoutcheese,billedasa“doublehamburgerwithoutcheese.”Franchiseesareraisingpricesinthetestmarkets.SomefranchiseesaresellingtheDoubleCheeseburgerasisbutat$1.09to$1.19,clearlynot$1orbelowastheDollarMenustates.ThereportersaidthatMcDonald’swasconsideringplacingthisburgerinitsmiddlepricetier,whereitemsrangefrom$1.30to$2.132TheDollarMenuappearedin2003aspartoftheturnaroundplanofathree‐tieredpricingstrategy:DollarMenu,Core,andPremium.Sincethen,theDollarMenuhadbeenakeydriverofsalesintheU.S.SomefranchiseesbelievedthattheDollarMenuattractedlessthandesirablecustomers.McDonald’scontinuedtomonitoritspricingastheeconomyturneddownward.Itwasessentialthatthemenustayedaffordablewithouthurtingprofitmargins.InNovember2008,McDonald’spulledtheDoubleCheeseburgerofftheDollarMenu,replacingitwithaMcDoubleburgerwithonesliceofcheeseinsteadoftwo.ItkepttheDoubleCheeseburgeronitsregularmenuandraisedthesuggestedpriceto$1.19.133Value McDonald’sintroducedlowerpricedbeveragesin2008.Thesebeverageshavebeensiphoningoffthepurchaseofthemoreexpensivepremiumcoffees.InOctober,McDonald’sannouncedthattheicedmochas,$1icedsweettea,alongwithDollarMenufoodsweregaininginsales.CEOJimSkinnersaid,“Value,whichhasalwaysbeenimportant,ismissioncriticaltoday.IntheUS,there’snodoubtthattoday’senvironmentischallengingforconsumersandrestaurants.”134Beverages As2008began,McDonald’sannouncedtherolloutofoneofitsbiggestandmostexpensivenewproductconceptsever:premiumcoffees.Analystssaiditwasan


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opportunitytocompetewithStarbucksforupscalecoffeedrinkers,especiallysinceStarbuckswasintrouble.Starbucks’ssame‐storesaleswereslowing.(StarbucksannouncedduringthefirstweekofJanuarythatCEOJimDonaldwasletgoandthatfounderandchairmanHowardSchultzwouldreturnasCEO.)McDonald’ssaidthatthenewbeveragestrategycouldaddupto$1billioninsales.ThisinitiativerequiresfranchiseestobuildaMcCaféintheirrestaurants.“ThisisthebiggestendeavorforMcDonald’ssinceourintroductionofbreakfast35yearsago,”saysJohnBetts,vicepresidentofnationalbeveragestrategy.StatementsfromMcDonald’sindicatedthatoverthenexttwoyears,mostofthebrand’s14,000domesticlocationswouldaddMcCafécoffeebars(neartheregisters).TheMcCaféareawaswherecoffeebeveragessuchascappuccino,lattes,andmochaswerecreated.Thebeverageswerenotcheap.However,comparedtocoffeecompetitors,McDonald’sspecialtycoffeeswereabout40centsto80centslowerpricedthancoffeechains’$1.99to$3.29.ComparedtoStarbucks,therewerefewcoffeechoices.135Franchiseeswerenotcompletelypositivewhenaskedaboutthecoffeeinitiative.Theywereconcernedabouttheslowsalesofthehotbeverages.Andtheyworriedaboutthecostsofthenewequipment.Thecoffeeinitiativerequiredconstructioncostsofasmuchas$100,000astore.McDonald’sdidagreetopayupto40%.However,asoneconsultantsays,“Franchiseeshavemoredemandsfortheirmoneythantheyknowwhattodowith.”Anotherconsultant,RichardAdams,presidentofFranchiseEquityGroup,said,“Itiscertainlythebiggestpotentialmistakeinthehistoryofthesystem.McDonald’snewproductdevelopmenthasalwaysbeendoneinbabysteps.Thisisagiantleapoffaith.136Inobservingandanalyzingthedifficulteconomicenvironment,analystsquestionedMcDonald’stimingofthepremiumbeveragerollouts(lattes,cappuccinos,smoothies,andsweetice‐blendedfrappes).Inthecaseofcoffee,analystscommentedthatinaweakeconomy,manypeopleforgocoffeeoutsideatcafésandrestaurants,preferringtobrewcoffeeathome.(29%ofStarbuckscustomerswhosaytheywanttospendlessatthechainarebrewingathome.)Therewerefranchiseeswhocontinuedtocomplainaboutthehighcostsassociatedwithfullimplementationofthebeverageprogramalongwiththein‐storeremodeling.McDonald’sstatedtheprogramwouldcostabout$100Kperstore.Formanyfranchisees,thiswasjusttoomuchtospendatthistime.Andthepullbackonloanstofranchiseescomplicatedfinancing.McDonald’sargumentfocusedonitsperceivedsuccessofthebeverageprogram:itwasnotonlyontrackbutdoingverywell.AndMcDonald’sremindedeveryonethatitsrestaurantswerenothurtbytheeconomicdownturnbecauseofitscheapmenu.“Inmanycases,consumersarecomingforthebeverageswhereasbeforetheywerecomingforthemeal,”saysLeeRenz,McDonald’svicepresident,nationalbeveragestrategy.McDonald’swasdefensivewhenitcametothesuccessoftheespressodrinks:therewerereportsthatthedrinkswerenotsellingaswellasexpected.Infact,internaldocumentsrevealedthatespressodrinkssalespeakedabout3weeksaftertheirintroduction,andthenthesedeclinedquitesharply.McDonald’sblamedtheweatherfortheespressodeclines,sayingtheweatherintheentireU.S.wastoohotforhotdrinks.Wasthepricingtoohighforcustomerswhowereimpactedbytheslidingeconomy?Ms.Fieldsagreedthatperhapspeoplewerebrewingcoffeeathome,butshesaidthat“athomecup”wastheirfirstcup.Afterthat,theywerebuyingaway‐from‐homecoffee,andtherewasnothingtoworryabout.137


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InJune,aCanadiannewspaperwrotethatMcDonald’swasbecominga“beveragedestination”forthirstyNorthAmericans.ThejournalistpointedoutthatthiswasgoingwaybeyondjustofferingbeveragesasdoesStarbucks.“Notonlyhastherestaurantchain’slaunchofitspremiumcoffeebeenasuccessonthebackofravereviewsfromtaste‐testers,butitisaddingmanymorespecialtycoffeedrinksatMcCafélocationslaterthisyear,includingvanillalattes,cafemochasandcaramelcappuccinos.”Additionally,McDonald’swouldbeaddingtothebeveragemenuwithnewicedcoffeeandicedteadrinks.Further,therewere“reports”thatMcDonald’swouldbeofferingsmoothiesandenergydrinks.Believingthatfairtradecoffeewouldattractmorecustomers,McDonald’spledgedthatallofitsbeanswouldbegrownin“environmentallyfriendlyconditions”by2009.UBSSecuritiesreportedthatfastfoodburgerrestaurantsserveonly5%ofthenation’sbeverages.UBS“estimatedthatcarbonatedsoftdrinksrepresent60%ofthebeveragessoldbyfast‐foodchains,butsuggestedthatMcDonald’sisseizingthesizeandgrowthopportunitiesinotherbeveragecategories.”UBScommentedthataddingbeverageswassimilartoaddingmorechicken.“Likechicken,beveragesarerelativelyhighermarginandcanbeintroducedinmanyforms.”UBSanalystsestimatedthatMcDonald’scouldadd5%inearningspersharegrowthoverthenexttwoyearswithitsdrinkstrategy.Anditsaidthatthesewereconservativeestimates.UBSalsostatedthatMcDonald’scouldtakemarketsharefromrestaurantsotherthanStarbucks,aswellasconveniencestoresandevenCoca‐Cola.138TheWallStreetJournalreviewedinternaldatashowingatleasttwoorthreemonthsofsaggingsalesoflattes,cappuccinos,andotherespressodrinks.DonThompsonstatedthatthiswasonlypartofthestory.Heindicatedthatsomeconsumerswereswitchingfrompremiumcoffeedrinkstolowerpricedbeverages($1.89icedcoffee,$1fountaindrink,andsweettea…underthe$2to$3espressodrinks).Mr.Thompsonsaidthisswitchingwasunanticipated.However,hedidremarkthatthegoalofhavingbeveragesadding$125,000perstoreisontrackto,andmayevenexceed,theseincrementalperrestaurantsales.139New Products OnMay14,McDonald’sannouncedthatinNewYorkTri‐StateArearestaurantstwonewproductswouldbeaddedtoitsmenuonMay15:SouthernStyleChickenBiscuit,McDonald’sfirst‐everchickenbreakfastmenuitem,andSouthernStyleChickenSandwich.TheannouncementwastoalertcustomersaboutasamplingeventonMay15:theycouldtrytheSouthernStyleChickenBiscuitforfreefrom7:00AMto10:30AM,ortheycouldtryaSouthernStyleChickenSandwichbeginningafterbreakfasthoursuntil7:00PM,withthepurchaseofanymediumorlargebeverageatparticipatingrestaurants(whilesupplieslasted).KenEbo,marketingdirectorforMcDonald’sNewYorkTri‐StateArea,said,“WiththeintroductionoftheSouthernStyleChickenBiscuitandSandwich,ourcustomersaregettingthechancetohaveournewjuicychickenoptionsmorningandnight.Andformany,that’sanentirelynewexperience.”140


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Innovation: Dan Coudreaut, Executive Chef and Director of Culinary Innovation of McDonald’s USA InAugust,aftertheintroductionoftheSouthernStyleChickenbreakfastsandwich,DanCoudre

mcdonald’s case history, 2006–2015 · 2016. 2. 16. · mcdonald’s case history, 2006–2015...

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