(a) What factors have enabled the company to deliver strong performance in the past?
(b) What are some of the important issues confronting this company and what external developments and internal actions might have caused these issues?
(c) If you were taking over as CEO of the company at the end of case, what courses of action would you pursue to address these issues? Explain how you would implement these, how they would address each issue, and what potential risks may exist.Year Ending December
2010 2011 2012
2013 2014
Total current assets
4,368 4,403 4,922 5,050 4,186
Total assets
31,975 32,990 35,386 36,626
34,281
Total current liabilities
2,925 3,509 3,403 3,170
2,748
Total liabilities
17,341 18,600 20,093 20,617 21,428
Total stockholders’ equity 14,634 14,390 15,294 16,010 12,853
Source: McDonald’s
McDonald’s response to this growing competition was to expand its menu with snacks, salads, and new
drinks. From 33 basic items that the chain offered in 1990, the menu grew to 121 items by 2014. The greatly
expanded menu led to a significant increase in costs and longer preparation times. This forced the firm to
increase the prices of many of its items and to take more time to serve customers, moving it away from the
attributes that it had built its reputation on “McDonald’s stands for value, consistency and convenience,” said
Darren Tristano, a restaurant industry consultant.2
EXHIBIT 3
Breakdown of Revenues ($ millions)
2014
2013
2012
$ 4,512
8,138
$ 4,351
7,808
5,270
740
$18,169
5,425
800
$18,875
$ 4,530
7,850
5,350
873
$18,603
Company-operated sales:
U.S.
Europe
APMEA
Other Countries & Corporate
Total
Franchised revenues:
U.S.
Europe
APMEA
Other Countries & Corporate
Total
Total revenues:
U.S.
Europe
APMEA
$ 4,300
3,270
$ 4,284
2,977
1,054
$ 4,339
3,162
1,052
678
$ 9,231
1.041
648
662
$ 9,272
$ 8,964
$ 8,651
$ 8.851
$ 8,814
10,827
777 / 1048
6,391
4.9%
2009
48.0
13.0
13.8
5.9
4.8
1.8
0.8
49.2
12.7
13.2
5.5
4.5
1.9
2.6
2.0
1.1
12.2
5.4
4.4
1.9
2.7
2.0
1.4
50.0
12.2
12.1
5.4
4.4
2.1
2.7
2.0
1.5
49.7
12.2
11.8
5.4
4.3
2.7
2.1
2.0
1.6
12.3
5.4
4.3
2.1
20
Burger SONIC Jack in
Five
McDonald’s Wendy’s King Drive-ins the Box Whataburger Hardee’s Carl’s Jr. Guys
2008 46.9% 13.5% 14.3% 6.0%
1.8%
2.6% 2.2% 0.5%
2.6 2.1
2010
2011 50.1
12.5
2012
2013
2014
49.6
11.9
2.8
1.7
Source: USA Today, December 8, 2014, and author esitmates.
The fast-food chain had gone through a similar crisis before. Back in 2002-2003, Page 196
McDonald’s had experienced a decline in performance because of quality problems as a result of
rapid expansion. At that time, the firm brought James R. Cantalupo back out of retirement to turn things
around. He formulated the “Plan to Win,” which was the basis of McDonald’s strategy over the next decade.
The core of the plan was to increase sales at existing locations by improving the menu, refurbishing the
outlets, and extending hours. This time, however, such incremental steps might not be enough.
Pulling Out of a Downward Spiral
Since it was founded more than 50 years ago, McDonald’s had been defining the fast-food business. It
provided millions of Americans their first jobs even as it changed their eating habits. It rose from a single
outlet in a nondescript Chicago suburb to one of the largest chains of outlets spread around the globe. But it
gradually began to run into various problems that began to slow down its sales growth (see Exhibit 5).
This decline could be attributed in large part to a drop in McDonald’s once-vaunted service and quality
since its expansion in the 1990s, when headquarters stopped grading franchises for cleanliness, speed, and
service. By the end of the decade, the chain ran into more problems because of the tighter labor market. As it
struggled hard to find new recruits, McDonald’s began to cut back on training, leading to a dramatic falloff in
the skills of its employees. According to a 2002 survey by market researcher Global Growth Group,
McDonald’s came in third in average service time, behind Wendy’s and sandwich shop Chick-fil-A Inc.
Page 197
EXHIBIT 5
McDonald’s Milestones
K 778/1048
1948
1955
1961
1963
1965
1967
1968
1972
1974
1975
1979
1987
1991
Brothers Richard and Maurice McDonald open the first restaurant in San Bernardino, California, that sells hamburgers, fries,
and milk shakes.
Ray A. Kroc, 52, opens his first McDonald’s in Des Plaines, Illinois. Kroc, a distributor of milk shake mixers, figures he can sell
a bundle of them if he franchises the McDonalds’ business and installs his mixers in the new stores.
Six years later, Kroc buys out the McDonald brothers for $2.7 million.
Ronald McDonald makes his debut as corporate spokesclown, using future NBC-TV weatherman Willard Scott. During the year,
the company also sells its 1-billionth burger.
McDonald’s stock goes public at $22.50 a share it will split 12 times in the next 35 years.
The first McDonald’s restaurant outside the U.S. opens in Richmond, British Columbia. Today there are 31,108 McDonald’s in
118 countries
The Big Mac, the first extension of McDonald’s basic burger, makes its debut and is an immediate hit
McDonald’s switches to the frozen variety for its successful French fries.
Fred L. Turner succeeds Kroc as CEO. In the midst of a recession, the minimum wage rises to $2 per hour, a big cost increase
for McDonald’s, which is built around a model of young, low-wage workers.
The first drive-through window is opened in Sierra Vista, Arizona.
McDonald’s responds to the needs of working women by introducing Happy Meals. A burger, some fries, a soda, and a toy
give working moms a break.
Michael R. Quinlan becomes chief executive.
Responding to the public’s desire for healthier foods, McDonald’s introduces the low-fat McLean Deluxe burger. It flops and is
withdrawn from the market. Over the next few years, the chain will stumble several times trying to spruce up its menu.
The company sells its 90-billionth burger and stops counting.
In order
to attract more adult customers, the company launches its Arch Deluxe, a grown-up” burger with an idiosyncratic
taste. Like the low-fat burger, it falls flat.
McDonald’s launches Campaign 55, which cuts the cost of a Big Mac to $0.55. It is a response to discounting by Burger King
and Taco Bell. The move, which prefigures similar price wars in 2002, is widely considered a failure.
Jack M. Greenberg becomes McDonald’s fourth chief executive. A 16-year company veteran, he vows to spruce up the
restaurants and their menu.
For the first time, sales
from intemational operations outstrip domestic revenues. In search of other concepts, the company
acquires Aroma Cafe, Chipotle, Donatos, and later, Boston Market.
McDonald’s sales in the U.S. peak at an average of $1.6
million annually per restaurant, a figure that has not changed since.
It is, however, still more than sales at any other fast-food chain.
Subway surpasses McDonald’s as the fast-food chain with the most U.S. outlets. At the end of the year it had 13,247 stores,
148 more than McDonald’s
McDonald’s posts its first-ever quarterly loss of $343.8 million. The stock drops to around $13.50, down 40% from five years ago.
James R. Cantalupo returns to McDonald’s in January as CEO. He immediately pulls back from the company’s 10%-15%
forecast for per-share earnings growth.
Charles H. Bell takes over the firm after the sudden death of Cantalupo. He states he will continue with the strategies that have
been developed by his predecessor.
779 / 1048
Jim Skinner takes over as CEO after Bell
1992
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2005
Jim Skinner takes over as CEO after Bell announces retirement for health reasons.
2006 McDonald’s launches specialty beverages, including coffee-based drinks.
2008 McDonald’s plans to add McCafés to each of its outlets.
2012 Don Thompson succeeds Skinner as CEO of the chain.
2015 Thompson resigns because of declining performance and is replaced by Steve Easterbrook, the firm’s chief branding officer.
Source: McDonald’s
By the beginning of 2003, consumer surveys were indicating that McDonald’s was headed for serious
trouble. Measures for the service and quality of the chain were continuing to fall, dropping far behind those of
its rivals. To deal with its deteriorating performance, the firm decided to bring back retired vice chairman
James R. Cantalupo, 59, who had overseen McDonald’s successful international expansion in the 1980s and
1990s. Cantalupo, who had retired only a year earlier, was perceived to be the only candidate with the
necessary qualifications, despite shareholder sentiment for an outsider. The board felt that it needed someone
who knew the company well and could move quickly to turn things around.
Cantalupo realized that McDonald’s often tended to miss the mark on delivering the critical aspects of
779
consistent, fast, and friendly service and an all-around enjoyable experience for the whole family. He
understood that its franchisees and employees alike needed to be inspired as well as retrained on their role in
putting the smile back into the McDonald’s experience. When Cantalupo and his team laid out their
turnaround plan in 2003, they stressed getting the basics of service and quality right, in part by reinstituting a
tough “up or out” grading system that would kick out underperforming franchisees. “We have to rebuild the
foundation. It’s fruitless to add growth if the foundation is weak,” said Cantalupo.?
In his effort to focus on the firm’s core business, Cantalupo sold off the nonburger chains that the firm had
recently acquired. He also cut back on the opening of new outlets, focusing instead on generating more sales
from its existing outlets. Cantalupo pushed McDonald’s to try to draw more customers through the
introduction of new products. The chain had a positive response to its increased emphasis on healthier foods,
led by a revamped line of fancier salads. The revamped menu was promoted through a new worldwide ad
slogan, “I’m loving it,” which was delivered by pop idol Justin Timberlake through a set of MTV-style
commercials.
Striving for a Healthier Image
When Jim Skinner took over from Cantalupo in 2004, he continued to push for McDonald’s to change its
image. Skinner felt that one of his top priorities was to deal with the growing concerns about the unhealthy
image of McDonald’s, given the rise of obesity in the U.S. These concerns were highlighted in the popular
documentary Super Size Me, made by Morgan Spurlock. Spurlock vividly displayed the health risks that were
posed by a steady diet of food from the fast-food chain. With a rise in awareness of the high fat content of
most of the products offered by McDonald’s, the firm was also beginning to face lawsuits from some of its
loyal customers.
In response to the growing health concerns, one of the first steps taken by McDonald’s was
Page 198
to phase out supersizing by the end of 2004. The supersizing option allowed customers to get a
larger order of French fries and a bigger soft drink by paying a little extra. McDonald’s also announced that it
intended to start providing nutrition information on the packaging of its products. The information would be
easy to read and would provide customers with details on the calories, fat, protein, carbohydrates, and sodium
that were in each product. Finally, McDonald’s began to remove the artery-clogging trans-fat acids from the
oil that it used to make its French fries, and it recently announced plans to reduce the sodium content in all of
its products by 15 percent
But Skinner was also trying to push out more offerings that were likely to be perceived by customers as
being healthier. McDonald’s continued to build upon its chicken offerings using white meat with products
such as Chicken Selects. It also placed a great deal of emphasis upon its new salad offerings. McDonald’s
carried out extensive experiments and tests on them and decided to use higher-quality ingredients, from a
variety of lettuces and tasty cherry tomatoes to sharper cheeses and better cuts of meat. It offered a choice of
Newman’s Own dressings, a well-known higher-end brand. “Salads have changed the way people think of our
brand,” said Wade Thoma, vice president for menu development in the U.S. “It tells people that we are very
serious about offering things people feel comfortable eating. 4
McDonald’s was trying to include more fruits and vegetables in its well-known and popular Happy Meals.
It announced in 2011 that it would reduce the amount of French fries and phase out the caramel dipping
sauce that accompanied the apple slices in these meals. The addition of fruits and vegetables raised the firm’s
operating costs, since they were more expensive to ship and store because of their more perishable nature. “We
are doing what we can,” said Danya Proud, a spokesperson for the firm. “We have to evolve with the times.”
The rollout of new beverages, highlighted by new coffee-based drinks, represented the chain’s biggest
menu expansion in almost three decades. Under a plan to add a McCafé section to all of its nearly 14,000 U.S.
outlets, McDonald’s was offering lattes, cappuccinos, ice-blended frappes, and fruit-based smoothies to its
customers. “In many cases, they’re now could
be hello they were coming for the
mcal,” said Lee Renz, an executive who
780 / 1048
D ::
consistent, fast, and friendly service and an all-around enjoyable experience for the whole family. He
understood that its franchisees and employees alike needed to be inspired as well as retrained on their role in
putting the smile back into the McDonald’s experience. When Cantalupo and his team laid out their
turnaround plan in 2003, they stressed getting the basics of service and quality right, in part by reinstituting a
tough “up or out” grading system that would kick out underperforming franchisees. “We have to rebuild the
foundation. It’s fruitless to add growth if the foundation is weak,” said Cantalupo.?
In his effort to focus on the firm’s core business, Cantalupo sold off the nonburger chains that the firm had
recently acquired. He also cut back on the opening of new outlets, focusing instead on generating more sales
from its existing outlets. Cantalupo pushed McDonald’s to try to draw more customers through the
introduction of new products. The chain had a positive response to its increased emphasis on healthier foods,
led by a revamped line of fancier salads. The revamped menu was promoted through a new worldwide ad
slogan, “I’m loving it,” which was delivered by pop idol Justin Timberlake through a set of MTV-style
commercials.
Striving for a Healthier Image
When Jim Skinner took over from Cantalupo in 2004, he continued to push for McDonald’s to change its
image. Skinner felt that one of his top priorities was to deal with the growing concerns about the unhealthy
image of McDonald’s, given the rise of obesity in the U.S. These concerns were highlighted in the popular
documentary Super Size Me, made by Morgan Spurlock. Spurlock vividly displayed the health risks that were
posed by a steady diet of food from the fast-food chain. With a rise in awareness of the high fat content of
most of the products offered by McDonald’s, the firm was also beginning to face lawsuits from some of its
loyal customers.
In response to the growing health concerns, one of the first steps taken by McDonald’s was
Page 198
to phase out supersizing by the end of 2004. The supersizing option allowed customers to get a
larger order of French fries and a bigger soft drink by paying a little extra. McDonald’s also announced that it
intended to start providing nutrition information on the packaging of its products. The information would be
easy to read and would provide customers with details on the calories, fat, protein, carbohydrates, and sodium
that were in each product. Finally, McDonald’s began to remove the artery-clogging trans-fat acids from the
oil that it used to make its French fries, and it recently announced plans to reduce the sodium content in all of
its products by 15 percent
But Skinner was also trying to push out more offerings that were likely to be perceived by customers as
being healthier. McDonald’s continued to build upon its chicken offerings using white meat with products
such as Chicken Selects. It also placed a great deal of emphasis upon its new salad offerings. McDonald’s
carried out extensive experiments and tests on them and decided to use higher-quality ingredients, from a
variety of lettuces and tasty cherry tomatoes to sharper cheeses and better cuts of meat. It offered a choice of
Newman’s Own dressings, a well-known higher-end brand. “Salads have changed the way people think of our
brand,” said Wade Thoma, vice president for menu development in the U.S. “It tells people that we are very
serious about offering things people feel comfortable eating. 4
McDonald’s was trying to include more fruits and vegetables in its well-known and popular Happy Meals.
It announced in 2011 that it would reduce the amount of French fries and phase out the caramel dipping
sauce that accompanied the apple slices in these meals. The addition of fruits and vegetables raised the firm’s
operating costs, since they were more expensive to ship and store because of their more perishable nature. “We
are doing what we can,” said Danya Proud, a spokesperson for the firm. “We have to evolve with the times.”
The rollout of new beverages, highlighted by new coffee-based drinks, represented the chain’s biggest
menu expansion in almost three decades. Under a plan to add a McCafé section to all of its nearly 14,000 U.S.
outlets, McDonald’s was offering lattes, cappuccinos, ice-blended frappes, and fruit-based smoothies to its
customers. “In many cases, they’re now could
be hello they were coming for the
mcal,” said Lee Renz, an executive who
780 / 1048
D ::
eyes first,” said Thompson. “If you have a restaurant that is appealing, contemporary, and relevant both from
the street and interior, the food tastes better.”
The reimaging concept was first tried in France in 1996 by Dennis Hennequin, an executive in charge of
the chain’s European operations, who felt that the effort was essential to revive the firm’s sagging sales. “We
were hip 15 years ago, but I think we lost that,” he said. McDonald’s was applying the reimaging concept to
its outlets around the world, with a budget of more than half of its total annual capital expenditures. In the
U.S., the changes cost an average of $150,000 per restaurant, a cost that was shared with the franchisee when
the outlet was not company-owned.
One of the prototype interiors being tested out by McDonald’s had curved counters with surfaces painted
in bright colors. In one corner, a touch-activated screen allowed customers to punch in orders without
queuing. The interiors could feature armchairs and sofas, modern lighting, large television screens, and even
wireless Internet access. The firm was also developing new features for its drive-through customers, who
account for 65 percent of all transactions in the U.S. These features included music aimed at qucuing vehicles
and a wall of windows on the drive-through side of the restaurant allowing customers to see meals being
prepared from their cars.
The chain was even developing McCafés inside its outlets, next to the usual fast-food counter. The
McCafé concept originated in Australia in 1993 and was rolled out in many restaurants around the world.
McDonald’s introduced the concept to the U.S. as part of the refurbishment of its outlets. In fact, part of the
makeover focused on the installation of a specialty beverage platform in all U.S. outlets. The cost of installing
this equipment was about $100,000 per outlet, with McDonald’s subsidizing part of the expense.
The firm planned to have all McCafés offer espresso-based coffee, gourmet coffee blends, fresh-baked
muffins, and high-end desserts. Customers would be able to consume them while relaxing in soft leather
chairs and listening to jazz, big band, or blues music. Commenting on this significant expansion of offerings,
Marty Brochstein, executive editor of The Licensing Letter, said: “McDonald’s wants to be seen as a lifestyle
brand, not just a place to go to have a burger.”
Rethinking the Business Model
In response to the decline in performance, McDonald’s was testing a number of new concepts, including a
kiosk feature in four stores in southern California that allowed customers to skip the counter and head to
tabletlike kiosks where they could customize everything about their burger, from the type of bun to the variety
of cheese to the many glossy toppings and sauces that can go on it. The firm later decided to expand the
concept to 30 locations in five more states and to 2,000, or about one in seven, of the 14,000 outlets in the
U.S.
With its “Create Your Taste” kiosk platform, McDonald’s was hoping to attract more younger customers
who might have been moving away from frozen processed food that was loaded with preservatives. No one
mentioned anything about the quality of meat that the chain used for its burgers. “Today’s customers
increasingly prefer customizable food options, dining in a contemporary, inviting atmosphere and using more
convenient ways to order and pay for their meals,” CEO Thompson stated last year when the test was
launched. 10
However, there were risks involved with making such a change. The burgers were priced Page 199
higher, at $5.49; could take seven minutes to prepare and could be ordered only from inside
the store and eventually brought to your table. This ran counter to the image of inexpensive and fast food that
McDonald’s had worked hard to build over the years. Nevertheless, the firm hoped this change would bring
more customers into its outlets, bringing the U.S. counter-drive-through customer ratio closer to 50-50, up
from the current 40-70.
At the same time, McDonald’s was working to simplify its menu, reducing the number of “value meal”
promotions—groups of items that together cost
less than ordering the items individually. It tweaked its “dollar
menu,” replacing it with dollar value ar
ms as part of a bid to get
cach customer to spend more. But McI
781/1048 us because its prices had
risen over the years, driving away custom
ve years, about 15 percent
of the chain’s sales had come from its dollar menu, on which everything cost a dollar.
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