BSTR/487

IBS Center for Management Research

ST
PO
R
The Turnaround Plan of Mcdonald’s: A Long Way to Go O
PY
This case was written by Indu Perepu, IBS Hyderabad. It was compiled from published sources,
and is intended to be used as a basis for class discussion rather than to illustrate either effective or
ineffective handling of a management situation.
CO

This case has won the second prize in 2016 John Molson MBA Case Writing Competition,
organized by the John Molson School of Business, Concordia University.
T
O
N
O
D

 2016, IBS Center for Management Research. All rights reserved.

To order copies, call +91 9640901313 or write to IBS Center for Management Research (ICMR), IFHE Campus, Donthanapally,
Sankarapally Road, Hyderabad 501 203, Telangana, India or email: casehelpdesk@ibsindia.org

www.icmrindia.org
 BSTR/487

The Turnaround Plan of Mcdonald’s:

ST
A Long Way to Go
“We’re not on our game. The world has moved faster outside the business than

PO
inside.”1
– Steve Easterbrook, CEO McDonald’s
“I think it’s really an identity crisis. McDonald’s doesn’t seem to have decided
whether it wants to continue to be mainly a value restaurant where people go for
convenient, fast but most importantly cheap food, or whether it wants to be

R
something fancier.”2
– Vendeline von Bredow, Correspondent, The Economist

PLAN TO FIX
O
PY
In April 2015, McDonald’s Corporation (McDonald’s), one of the world’s leading fast food
restaurant companies, announced that its revenue had fallen by 11% to US$ 5.96 billion in the first
quarter of 2015 and that profits had dropped to US$ 812 million from US$ 1.2 billion in the first
quarter of 2014. Worldwide, same-store sales3 fell by 2%, the figure being 8.3% in the Asia
Pacific, the Middle East and Africa and 2.6% in the US. This was a continuation of the company’s
CO

bad performance in 2014, the year called ‘the Lost Year’, when for the first time since 2002, it
reported a decline in global same store sales. (Refer to Exhibit I for the quarterly sales of
McDonald’s).
McDonald’s, whose history dates back to the 1930s, had been the undisputed leader in the fast
food industry, mainly due to its product offerings, consistent taste, convenience, affordable prices,
and franchisee model which helped it spread its operations across the world.
T

Over the years, McDonald’s did face several crisis situations, but it managed to emerge
successfully from them all. In 2003, for the first time since it went public in 1965, McDonald’s
O

reported a quarterly loss. But it revived soon under the guidance of CEO Jim Cantalupo. Even the
US recession4 left it unfazed.
N

But things took a turn for the worse beginning 2013, with a slump in the US sales. For August
2014, McDonald’s witnessed its worst decline in monthly sales in more than a year. For the quarter
ending September 2014, it reported four straight quarters of declining sales in the US. (Refer to
O

Exhibit II for region-wise sales of McDonald’s). This, and falling same store sales globally,
increasing prices, deteriorating customer service, and changing consumer tastes were cited to be
D

1
Lauren Gensler, McDonald’s Pins Hopes On Turnaround Plan To Revive Flagging Sales, May 4, 2015.
2
Jeremy Story Carter, McDonald’s Struggles with Identity and Changing Tastes, www.abc.net.au, August
05, 2015.
3
Sales at restaurants open at least 13 months
4
Following the bursting of the housing bubble and sub-prime mortgage crisis in mid-2007, the USA
entered into recession, resulting in 8.7 million job losses between 2008 and 2010.

1
 The Turnaround Plan of Mcdonald’s: A Long Way to Go

the main reasons for the decline. (Refer to Exhibit III for comparable sales and guest count
details). The trend continued, till early 2015 and the CEO, Donald Thomson (Thomson) retired
from the company after handing over the reins to Steve Easterbrook (Easterbrook).
Easterbrook took over a company whose performance was at its worst in decades. It was losing
customers rapidly, facing pressures in several international markets, dealing with growing
competition in the US and abroad, experiencing falling customer service levels, and facing
disgruntled franchisees. To address these issues, Easterbrook came out with a turnaround plan,

ST
which included restructuring the business, focusing on customers, ensuring financial discipline,
bringing in changes in the menu, and refranchising.
Some analysts thought the efforts were a step in the right direction. Paul Argenti, a corporate
communications professor at Dartmouth’s Tuck School of Business, said, “McDonald’s has

PO
traditionally done a good job of reinventing itself. I think part of what we’re seeing is just another
part of that transformation to try to stay current.”5 However, others were not so sure. Howard
Penney, a restaurant analyst at Hedgeye Risk Management said, “We were not given a lot of detail
about how he is going to fix the operations. Shuffling the decks inside the organization is not a
strategy.”6

R
ABOUT MCDONALD’S

O
The history of McDonald’s dates back to the late 1930s, when two brothers, Richard and Maurice
McDonald, started a hotdog stand called Airdrome in California. Later, in 1940, they opened a
barbeque restaurant in San Bernardino and called it McDonald’s Barbeque. In 1948, they
streamlined the business, incorporating new strategies that would enable quick service at low
PY
prices. This in turn was expected to help them sell larger volumes. Inspired by the automobile
industry, they started to take an assembly line kind of approach to prepare food at the new
restaurant. After implementing the new system, they were able to sell hamburgers at 15 cents
(earlier they cost 30 cents) and French fries at 10 cents.
CO

In 1953, the McDonald brothers decided to go in for franchising in order to expand their business.
In the years that followed, McDonald’s grew from strength to strength and by the mid-1950s, its
annual revenues were US$ 350,000. In 1955, the company was incorporated as McDonald’s
Corporation.
In 1961, the McDonald brothers sold off their business to Raymond Kroc (Kroc), who was
managing the franchise operations at McDonald’s. The company reached new heights in terms of
T

growth under Kroc’s leadership.

O

McDonald’s ventured into international markets in 1967 opening a restaurant in Richmond,

Canada. This was followed by Japan (1971) and the Netherlands (1971). By 1980, McDonald’s
reported sales of US$ 6.2 billion from its 6,263 restaurants in 27 countries. In 1986, McDonald’s
N

opened its ten thousandth restaurant.

Over the years, as business expanded, the company’s operations were divided into four segments –
the US, Europe, Asia Pacific Middle East & Africa (APMEA), and Other Countries, which
O

included corporate sales.

McDonald’s introduced the dollar menu in 2002. This consisted of a group of affordable items,
D

which were priced at just around US$ 1. It included a double cheeseburger, fries, and a salad.

5
Patrick Kulp, “The McDonald’s Makeover: New Kale, New Hamburger, Same Old Problems,”
http://mashable.com, May 09, 2015.
6
Jessica Wohl, “McDonald’s Turnaround Plan ‘More of Just Catching Up’,” Chicago Tribune, May 04,
2015.

2
 The Turnaround Plan of Mcdonald’s: A Long Way to Go

In January 2003, the company announced a quarterly loss for the first time since it went public in
1965. This was mainly due to a dip in sales resulting from a rising concern among the people about
the ill-effects of fast food on the health. McDonald’s was quick to respond to the concern. It
introduced salads and fresh fruits in its menu. In 2004, Jim Skinner became the CEO of
McDonald’s and in the fourth quarter of 2006, McDonald’s posted its strongest quarterly net
income in 30 years.
From 2010, the domestic sales and traffic started to go down. In 2012, Thomson became the CEO

ST
of the company. Sales in the US continued to fall. For the year 2014, McDonald’s revenue was
US$ 27.4 billion as against US$ 28.1 billion in 2013. The net income fell by 15% to US$ 4.75
billion. Comparable guest counts in the US dropped by 4.1% in 2014. (Refer to Exhibit IV for three
year financial summary of McDonald’s)

PO
The system-wide sales7 of McDonald’s in the US dropped by 1.1% in 2014 compared to the
previous year. It fell from US$ 35.86 billion to US$ 34.45 billion. Even in 2003, when
McDonald’s posted its first ever quarterly loss, system-wide sales grew by 1.3%. (Refer to Table I
for Systemwide sales increase and decrease).
Table I:

R
McDonald’s -Systemwide Sales Increase (Decrease) (in %)

O
2014 2013 2012 2011
US (1.0) 1.0 4.0 5.0
Europe 1.0 5.0 (2.0) 14.0
PY
APMEA (3.0) 5.0 5.0 16.0
Other Countries & Corporate (7.0) 3.0 4.0 17.0
Total (2.0) 1.0 3.0 11.0
CO

Source: Annual Reports, McDonald’s

In January 2015, Thomson announced his retirement from McDonald’s amidst falling sales and
loss of customers.

TROUBLE ON THE MENU

T

For several decades, McDonald’s had been synonymous with fast food, but after 2010, customers
started looking at it differently. People started showing an interest in outlets serving food which
O

they perceived to be wholesome and made of healthy ingredients, while McDonald’s become
synonymous with cheap and greasy food made of unhealthy ingredients. According to Mike
N

Donahue, former chief communications officer at McDonald’s US, “McDonald’s) has become the
symbolic scapegoat for anyone wanting to use a generic word to describe obesity or health
problems. Anyone that wants to be a critic for food or health issues, their mind SpellCheck inserts
McDonald’s, and that’s a major problem if you want to bring in more customers.”8
O

At the same time, the millennials, who dined out more often, had different preferences. They
wanted fast casual food and customizable healthy food of high quality in a good ambiance rather
D

than mass-produced fast food. Some analysts said the problems with McDonald’s was more to do
with the image of the company, as millennials usually opted for things that made them look
healthy and savvy, while McDonald’s presented a picture of a company that served unhealthy,
7
Systemwide sales include sales from both company-owned or managed and franchised or licensed
outlets. System-wide sales exclude royalties and franchising revenue fees
8
Katie Little, “McDonald’s has a Big Problem in Uphill Turnaround,” www.cnbc.com, May 05, 2015.

3
 The Turnaround Plan of Mcdonald’s: A Long Way to Go

fatty food. But others had a different view. According to Howard Penney, “I really don’t think they
have a millennial problem. “I think if you serve a good burger, fries, and a Coke, well, millennials
eat burgers, fries, and Coke.”9
In search of a breakthrough product like the Pretzel Bacon Cheeseburger of Wendy’s or Doritos
Locos of Taco Bell, McDonald’s introduced products like fish nuggets, habanero quarter pounders,
chicken wings, and fruit & walnut salads. But these products did not pick up as expected.
McDonald’s went on adding items to its menu. In a span of a decade, over 100 items were added,

ST
and between 2007 and 2014, the menu grew by 70%. These proved to be a burden on the
employees and the wait times increased, leading to a slowdown of service.
McDonald’s also went wrong with products like the Angus burger, which was priced high. As
McDonald’s had always been known for its low prices, customers were wary about spending more

PO
for what the company claimed to be a premium product, believing that it must not be of a high
quality. Many of the customers said that the premium burger was priced at US$ 5 but was similar
to the US$ 2 burger. With McDonald’s focusing on these items, it ignored the consumers who
were looking at getting value for their money.
Some of the products like coffee giveaways and low-price value menu did not earn any profit for

R
the company but McDonald’s continued to offer these to attract customers’.
In order to encourage the customers to spend more, McDonald’s concentrated on gourmet options

O
like Create your taste, and the premium McWrap Chicken & Ranch. This had an altogether
unexpected impact and service slowed down, as they took a long time to prepare, thus reducing the
value proposition. Some analysts felt that McDonald’s was trying to please everyone. In the
process, it was straying away from the very foundation on which it was built. Experts said that
PY
while it would not be difficult for McDonald’s to make high priced, healthy, gourmet food, doing
this would alienate the loyal fast food lovers, who could not afford high priced food. A restaurant
analyst said McDonald’s should stop its plans to serve healthy food and instead concentrate on
providing hotter and fresher burgers and French-fries at a faster pace. According to Bradford
Hudson, marketing professor at Boston College, “McDonald’s needs to return to its roots. It needs
CO

to make the best burgers and fries that can possibly be imagined. And it should leave the salads
and lattes to competitors who make them better.”10
After 2010, the competitors moved briskly and improved the quality of their offerings. They began
to gain new customers, and also to have several regular diners shifting from McDonald’s to them.
Customers who were looking for healthy food options started visiting burrito chain Chipotle
T

Mexican Grill11 and fast casual dining restaurants like Panera. These offered better fare than
McDonald’s and at a lower price. McDonald’s also faced huge competition from companies like
O

Shake Shack, Habit Burger Grill – which supplied gourmet burgers – other burger-centric chains
like Five Guys Burgers and Fries, In-N-Out Burger, and Hopdoddy, and also from traditional fast
food joints like Wendy’s, Yum Brands (Taco Bell, Pizza Hut, KFC). Several local competitors also
N

emerged for McDonald’s in the US.

In 2015, in the American Customer Satisfaction Index in the limited-service restaurant category,
McDonald’s featured at the bottom of the table, while Chik-fil-A and Chipotle topped the list.
O

Some analysts were, however, of the opinion that ‘the problems McDonald’s was facing were
much more than just the changing preferences of people and unpopular products. They said that for
D

several decades, McDonald’s had expanded by targeting middle class people, who wanted cheap,
convenient, good quality food. For several years, its competition came from companies like Burger

9
Patrick Kulp, “The McDonald’s Makeover: New Kale, New Hamburger, Same Old Problems,”
http://mashable.com, May 09, 2015.
10
Bruce Horovitz, “5 Things New McDonald’s CEO Must Do,” USA Today, February 10, 2015.
11
McDonald’s spun off Chipotle in 2006.

4
 The Turnaround Plan of Mcdonald’s: A Long Way to Go

King, which did not possess the scale that McDonald’s did. But there had been changes in the
middle class consumers, with some of them starting to earn more and those in the bottom rung
starting to earn less. Those at the top of the crop were looking for healthier options while the
others were looking for cheaper ones. Unfortunately for McDonald’s, it failed to cater to both.
Panera and Chipotle served those who were looking for healthy options. McDonald’s was left to
serve those who had seen a reduction in real wages after 200012. With the bursting of the credit
bubble, the spending of these people fell, especially the low-wage employees. Those opting for
better value for their money, on the other hand, were catered to by the likes of Jimmy John’s.

ST
According to Don Thompson, “In the U.S. we continue to experience a bifurcation of the
consumer base. McDonald’s core customers skew toward those customers whose disposable
income is not rising as much and are spending a little bit less in QSR (Quick Service
Restaurants).”13

PO
Franchise owners were also unhappy with the company. To open a new store, they had to spend
anywhere between US$ 1 million and 2 million. They faced reducing sales, a slump in traffic, and
tough competition. According to a survey conducted by Janney Capital, the franchisees were very
pessimistic about their future.
One of the issues troubling the franchisees was the complex menu. The ever increasing menu had

R
become unwieldy and this had an adverse impact on the franchisees who felt that it was slowing
down their operations, as customers took a long time to select from a long list of products. The

O
operations in the kitchen also became complicated. This added to the franchises’ discontent with
the company. They also complained that they had had to invest in extra ingredients and equipment.
The falling sales meant that the franchises were making less money.
PY
INTERNATIONAL MARKETS

In several international markets where McDonald’s had a presence, it was slowing down too. In
the third quarter of 2014, the global same store sales dropped by 3.3%. International operations
were affected by challenges in several markets in Europe, Latin America and Asia.
CO

In China, where the company was known for its high quality products, its’ fortunes took a dip,
after a television investigation showed a vendor supplying expired meat to McDonald’s. An
undercover investigation showed that one of the meat suppliers of McDonald’s was relabeling
expired meat and supplying it to the company. This had an adverse impact on McDonald’s, which
relied on cleanliness and high quality in its quest to expand in the market. The company found it
T

extremely difficult to convince customers ‘that it maintained high quality.

McDonald’s also faced other challenges such as increasing competition from local companies like
O

Dicos, which had increased its restaurant count by 40% from 2200 in just one year; increasing
rents, labor shortage, and growing food safety issues. The initial attraction for fast food among the
consumers had also started to wane, and they started demanding healthy food. “Twenty years ago,
N

a McDonald’s or a KFC might have been one of the few locations in some towns that had air
conditioning and a clean bathroom, but now there are lots more alternatives; competition has
greatly increased,”14 said an analyst from China Market Research Group in Shanghai. Several local
O

food joints offered food that catered to local tastes and preferences and brought the Chinese style
of healthy cooking back into vogue.
D

12
Between 2000 and 2012, the real wages in the US declined by 0.2 % to 4.5%, in the lower income group.
13
Joe Cahill, “This is McDonald’s Real Problem (and there is Nothing it can do about it),”
www.chicagobusiness.com, February 08, 2014.
14
Patti Waldmeir, “Fast Food Faces Indigestion in China Amid Rapid Expansion,” www.ft.com, August
22, 2014.

5
 The Turnaround Plan of Mcdonald’s: A Long Way to Go

McDonald’s was performing well in the Japanese market, which was its second biggest market
with 3100 outlets. For a decade it enjoyed strong growth in Japan. But in 2012, in order to improve
service, McDonald’s pulled several products off its menus. This resulted in a fall in sales in 2013.
To add to its problems, the Japanese operations were also impacted by the incident of the Chinese
supplier supplying expired meat. At the same time, there was a dispute about the supply of
American potatoes used to make the French fries, which forced McDonald’s to ration their supply.
More and more problems cropped up when objects like a tooth and vinyl pieces were found in

ST
Chicken McNuggets. From July 2014, sales started to go down, and McDonald’s was staring at its
first annual loss in the Japanese market in 11 years.
In India, another important international market, McDonald’s spent a considerable amount of time
tweaking its menu to suit the Indian palate. It removed the signature beef burgers in deference to

PO
the religious sentiments of the majority of the people in India, who considered beef eating taboo.
McDonald’s was one of the first western fast food restaurants to enter India and it made its mark in
the western styled fast food market, which was still small in the country, but was growing rapidly.
In India, McDonald’s found itself embroiled in a bitter legal battle with its joint venture partner
who operated the McDonald’s restaurants in northern and eastern India. The partner accused the

R
company of mismanagement. The ensuing legal battle was a bonanza for competitors like
Domino’s, KFC, and Subway, who started gaining the upper hand ‘in these regions.

O
In the Russian market, the problems McDonald’s faced were due to deteriorating relations between
the US and Russia. With EU and the USA imposing sanctions on Russia in July 2014 for its
military intervention in Ukraine, Russia’s consumer protection agency claimed that McDonald’s
PY
items did not meet the health and safety standards of the country, and had higher calories than
actually mentioned. The federal agency shut down some of the McDonald’s outlets, including its
flagship store in Moscow, one the world’s largest McDonald’s stores.
In the next few months, almost half of the 440 McDonald’s stores in Russia were put under the
CO

government scanner and 9 stores were closed down. McDonald’s also found itself at the receiving
end of several court cases over issues ranging from employees’ uniforms, kitchens, layouts, and
food products, to labeling food products.
In the Latin American markets too, McDonald’s sales dropped by 11% in the third quarter of 2014
compared to 2013. Arcos Dorados owned exclusive rights to operate McDonald’s outlets in 20
T

Latin American and Caribbean countries. Brazil, Argentina, Mexico, Puerto Rico, and Venezuela
accounted for 80% of McDonald’s Latin American sales, contributing to about 6% of McDonald’s
total revenues.
O

Several of the Latin American countries were facing an economic crisis and the impact was felt by
McDonald’s too. In Venezuela, basic goods were in short supply and so were McDonald’s
N

products. In Argentina, increasing inflation had affected profits. The Brazilian operations and
profits were affected due to decreasing consumption and depreciation of the currency. In most of
these markets, consumers switched to traditional food and rice, beans and tacos.
O

Europe had been one of the pillars as far as McDonald’s was concerned. It usually chose the
European markets to introduce new products and some such products like breakfast, garden wraps,
D

and the McBaguette went on to become highly popular. During the recession, McDonald’s gained
popularity. But after 2012, European consumers too started opting for other foods and competition
grew, especially from high-end burger chains and specialty restaurants serving Japanese and
Mexican fare. The economic conditions in countries like Greece and Italy also had an adverse
impact on McDonald’s.
In the fourth quarter of 2014, the net income from its European operations dropped by 14%.

6
 The Turnaround Plan of Mcdonald’s: A Long Way to Go

THE TURNAROUND PLAN

In March 2015, Easterbrook, who had been the chief brand officer, assumed the role of CEO.
Easterbrook who had worked with McDonald’s since 1993, was instrumental in turning around the
company’s UK business.
On May 04, 2015, as McDonald’s was about to celebrate its 60 years in the business, Easterbrook
announced a growth lead turnaround plan for the company to reset the business. (Refer to Exhibit

ST
V for McDonald’s turnaround framework)
Easterbrook’s operational growth led turnaround, aimed at making McDonald’s a modern and
progressive burger company through a three-fold framework – driving operational growth,
returning excitement toward the brand, and unlocking the financial value. The turnaround was

PO
driven by a few elements which McDonald’s planned to employ to reconnect with the customers.
(Refer to Table II for the elements of turnaround).
Table II:

McDonald’s – Elements of Turnaround

R
 Restructuring business for growth: customer responsive initiatives; turn in the right place
and focus on power. Markets working together on shared challenges and opportunities.


 O
Returning critical markets to sustainable revenue and income growth: implementing a
turnaround blueprint based on winning actions from around the world.
Continuous improvement in food quality and perceptions: sourcing, reformulation, and
PY
innovation to improve quality to serve the best food and grow billion dollar brands.
 Building a differentiated customer experience: through re-imaging, technology
deployment, and world leading digital engagement.
 Building brand trust: by making consistent commitments to invest in brand equity to grow
trust systematically across the globe.
CO

Adapted from www.mcdonalds.com

Till June 2015, McDonald’s was managed as distinct geographic segments – the U.S., Europe,
Asia/Pacific, Middle East and Africa, and Other Countries & Corporate including Canada, Latin
America, and Corporate.
T

According to the new plan, from July 2015, the company would be reorganized into four market
segments – the US, international lead markets, high-growth markets, and foundational markets.
O

The US, which accounted for 40% of the company’s operating income, was to be led by Mike
Andrews as President. A reorganization was underway in the US to remove layers and take the
decision making close to the customers.
N

Second came the international lead markets, which comprised Australia, Canada, France,
Germany, and the UK. These markets also represented about 40% of the company’s operating
income. These markets had a well developed franchising organization, modest opportunities for
O

new store development, similar competitive sets, stable economies, and highly talented teams.
These markets were to be led by Doug Goare as President. He would have a Chief Operating
Officer, Chief Finance & Alignment Officer, and five Managing Directors (one for each of the five
D

markets) reporting to him.

The third was the high growth markets, which consisted of eight countries – China, Italy, Poland,
Russia, South Korea, Spain, Switzerland, and the Netherlands, representing 10% of the operating
income. These countries had strong growth potential, and the company expected half of all the
restaurant openings from these markets in the next several years. To develop these markets
franchising was important as franchising was not well developed there and there were several

7
 The Turnaround Plan of Mcdonald’s: A Long Way to Go

opportunities to grow. McDonald’s planned to grow its share in the informal eating out sectors in
these markets. This segment was to be led by Dave Hoffmann as President. A team of four senior
leaders (Finance, Marketing, RSG, Development) and eight Managing Directors – one for each of
the eight markets, would report to Hoffmann.
The fourth segment was the foundational markets, which included the other markets. These
comprised 100 markets. In these markets, McDonald’s focused on what was important according
to the local culture and customs. This was led by Ian Borden as President. He was assisted by

ST
Vice Presidents for the Middle East, Asia, Europe, Japan, and Latin America and a Chief
Alignment Officer.
According to Easterbrook, “This new structure represents a significant step-change in our thinking.
It sounds simple, but having clusters of similar markets led by one person will create urgency and

PO
speed. It will spread insight faster, enable quick decision-making, eliminate mistakes, reduce costs,
and unlock growth. In short, it will create the optimal conditions for success in our operational
growth led turnaround.”15 (Refer to Exhibit VI for McDonald’s Reporting Segments)
As part of reorganizing the business, McDonald’s also planned to evolve the ownership strategy by
selling over 3,500 of its 6700 restaurants to franchisees by 2018. This was expected to boost the

R
franchise ownership from the existing 81% to 90% across the globe. This would help the company
bring in innovation, test new products, develop future leaders, and get closer to the communities
and customers it served. The move was expected to result in savings of US$ 300 million per
annum in general and administrative expenses by 2017.

O
At the same time, McDonald’s would continue to operate its own restaurants in some of the
markets, especially the large established ones, as it was of the view that these restaurants would
PY
allow it to test new products and initiatives and also develop future leaders. In each market,
McDonald’s was looking at the optimal ownership mix – exiting from own stores completely in
some markets, maintaining both in some. Experts said that McDonald’s was moving toward a
heavily franchised model which would help it generate a stable revenue and consistent cash flow.
CO

Easterbrook announced a few changes in the products and ingredients. He said McDonald’s would
from then on use antibiotic-free chicken, bring in more transparency about the quality of its food,
and introduce products which customers could personalize. McDonald’s planned to bring out made
to order burgers and sandwiches through the ‘Create your own taste’ platform. To simplify the
menu, 16 burgers would be eliminated. Instead of multiple varieties, only one quarter pounder, one
snack wrap, and one premium chicken sandwich would be offered. He also announced plans to
T

offer the breakfast menu all day long.

O

WHAT NEXT?

The heavily franchised business model put forth by Easterbrook was expected to generate more
N

stable revenue and cash flow streams. The structural changes and ownership were expected to
result in savings in the bottom line and spur future growth. McDonald’s planned to deliver US$
300 million in savings in general and administrative expenses through restructuring, refranchising,
and focus on spending.
O

Experts said a change in the organizational structure from geography-based markets to groups
based on the maturity of their presence in the market and shared characteristics would foster easier
D

collaboration and enable these markets to use each other’s’ strategies. Observers said Easterbrook
was trying to make McDonald’s nimbler and quicker and capable of meeting customers’
expectations. They said the turnaround plans suggested that he was cutting down on the corporate
bureaucracy and was giving more authority to local managers.

15
“McDonald’s CEO: ‘We’re not in our Game’,” www.foodbusinessnews.net, May 05, 2015.

8
 The Turnaround Plan of Mcdonald’s: A Long Way to Go

Experts who saw the turnaround plan said it was more about making the company disciplined; it
did not really go into making the food appealing to the customers. Larry Light, a former chief
marketing officer at McDonald’s who ran a brand consulting company, said, “Effective turnaround
plans are customer-led. I didn’t hear a speck of insight into what McDonald’s wants to be when it
grows up.”16
David Donnelly, Investment Analyst at Cantor-Fitzgerald Investors, said the details of the
turnaround plan were disappointing. The plan did not tackle specific issues like addressing the

ST
changing perceptions of the consumers, who equated higher cost with better quality. Others said
issues like a bloated menu and slow service were also not addressed. Asit Sharma, an analyst at the
Motley Fool, said, “The market expected more. Easterbrook set the expectation that he would
present a novel solution to McDonald’s woes, and instead delivered changes that could have been

PO
announced on a quarterly earnings call.”17
While pruning down the menu, McDonald’s also added other items like the chicken burger and
buttermilk sandwich, and reintroduced premium chicken selects. The plan of customization
through ‘Create your taste’, all-day breakfast, and menu upgrades that were announced as a part of
the turnaround efforts appeared to have a negative effect on the company, according to insiders.

R
Franchisees also complained that the upgrades would complicate the menu and meant more
expense for already strained franchisees. Richard Adams, a consultant, who had worked with
McDonald’s previously, said, “On one hand, McDonald’s is talking about menu simplification,

O
while on the other hand they are talking about customization, expanding the line of Quarter
Pounders and adding breakfast all day. They are going in a bunch of different directions and trying
to be all things to all people. That’s been their problem for the last five or six years.”18
PY
The franchisees were not sure of the success of ‘Create your taste’ in the US, as it could be ordered
only through kiosks placed inside the restaurant, while 70% of the sales were from drive-through.
The franchisees needed to spend around US$ 100,000 – 150,000 to set up these kiosks. They also
complained that all-day breakfasts, which were to be rolled out in 14,000 restaurants in October
CO

2015, required them to add more grills, toasters, and other equipment in the kitchen. Some of the
franchisees complained that espresso drinks, the McWrap, and other complicated menu items
created chaos in the kitchen and had slowed down the service, which was not a good sign in the
fast food industry.
The company’s downward spiral continued. In the second quarter of 2015, the profits declined by
T

13% and the comparable sales in the US fell by 2%, and globally by 0.7%. Easterbrook said, “We
have made meaningful progress since announcing the initial steps of McDonald’s turnaround plan
in early May. To position the business for long-term growth, we’ve undergone significant
O

organizational change and are streamlining our global resources to improve our efficiency and
effectiveness. While our second quarter results were disappointing, we are seeing early signs of
N

momentum.”19 This was the seventh straight quarter that McDonald’s was reporting same store
sales decline in the US. While announcing the results Easterbrook said that by the third quarter
McDonald’s would witness a rebound in the global comparable sales.
O

At the same time, the competitors continued to perform well. Comparable sales of Taco Bell
increased by 6%, that of Chipotle by 4.3%, and of Dunkin’ Donuts by 2.9%’.
D

16
Susan Berfield, McDonald’s Revamp Has Missing Ingredients, Business Week, May 11, 2015
17
Lisa Wright, McDonald’s Plan Leaves Investors Hungry, Toronto Star (Canada), May 05, 2015
18
Ashley Lutz, “McDonald’s is making One Mistake that is Killing Business,” www.businessinsider.in,
September 22, 2015.
19
Akin Oyedele, McDonald’s Sales are Still a Mess, www.businessinsider.in, July 23, 2015.

9
 The Turnaround Plan of Mcdonald’s: A Long Way to Go

Analysts said the main problem with McDonald’s was that it was too big. As a giant company,
McDonald’s enjoyed advantages in marketing budgets, purchasing power, and overall efficiency.
But with size came difficulties as well. “You can’t just snap your fingers and say you’re going to
do things differently,” said economist and historian Marc Levinson. “It becomes a huge, huge
burden on management to try and change.”20
Experts said at this stage, McDonald’s had two options before it. One was to go back to the basics
and stick to its tried and tested model of selling burgers; the other was to change itself completely

ST
to compete with the likes of Chipotle and Shake Shack. But McDonald’s was actually doing both –
one format offering a simpler menu and another format called ‘Create your taste’ providing
customized burgers. According to one observer, “It’s decision time at McDonald’s. Is being a low-
end burger chain enough? Is there room for reinvention–and, if so, should that happen under the
Golden Arches or via an ancillary brand?”21

PO
R
O
PY
CO
T
O
N
O
D

20
Justin Fox, The Once But Not Future Burger, Business Week, May 04, 2015
21
Turnaround Plan Needs Supersizing, Crain’s Chicago Business, May 11, 2015

10
 ST
The Turnaround Plan of Mcdonald’s: A Long Way to Go

Exhibit I:

McDonald’s - Quarterly sales

PO
(In US$ Million)
30-Jun- 31-Mar- 31-Dec- 30-Sep- 30-Jun- 31-Mar- 31-Dec- 30-Sep-
2015 2015 2014 2014 2014 2014 2013 2013

R
Sales by Company-operated restaurants 4,261.1 3,914.1 4,296.7 4,596.2 4,785.9 4,490.5 4,744.3 4,923.1

O
Revenues from franchised restaurants 2,236.6 2,044.8 2,275.5 2,390.9 2,395.8 2,209.8 2,348.9 2,400.3
Total Revenue 6,497.7 5,958.9 6,572.2 6,987.1 7,181.7 6,700.3 7,093.2 7,323.4
Operating costs and expenses

PY
Company-operated restaurant expenses 3,596.3 3,354.3 3,676.7 3,874.7 3,969.8 3,767.1 3,928.7 4,004.4
Franchised restaurants–occupancy expenses 411.0 403.6 421.4 431.2 427.6 417.1 421.7 408.4
Selling, general & administrative expenses 592.4 582.8 662.5 575.8 629.2 620.4 627.8 554.3
Other operating (income) expense, net
Total operating costs and expenses
OPERATING INCOME
Interest expense
CO48.7
4,648.4
1,849.3
149.2
232.7
4,573.4
1,385.5
147.3
59.9
4,820.5
1,751.7
147.8
32.9
4,914.6
2,072.5
149.3
(33.9)
4,992.7
2,189.0
137.9
(40.3)
4,764.3
1,936.0
135.5
(85.4)
4,892.8
2,200.4
133.5
(60.4)
4,906.7
2,416.7
130.5
T
Nonoperating (income) expense, net (12.3) (15.9) 7.8 2.1 (20.4) 17.2 11.7 13.6
O

Income before provision for income taxes 1,712.4 1,254.1 1,596.1 1,921.1 2,071.5 1,783.3 2,055.2 2,272.6
Provision for income taxes 510.0 442.6 498.6 852.7 684.4 578.5 658.2 750.4
N

NET INCOME 1,202.4 811.5 1,097.5 1,068.4 1,387.1 1,204.8 1,397.0 1,522.2
Compiled from quarterly reports of McDonald’s
O

11
D
 The Turnaround Plan of Mcdonald’s: A Long Way to Go

Exhibit II:
McDonald’s Revenues – Region Wise
Increase / (Decrease)
Dollars in Millions 2014 2013 2012 2014 2013
Company Operated Sales in (%)

ST
US 4,351 4,512 4,530 (4) 0
Europe 7,808 8,138 7,850 (4) 4
APMEA 5,270 5,425 5,350 (3) 1

PO
Other Countries & Corporate 740 800 873 (7) (8)
Total 18,169 18,875 18,603 (4) 1
Franchised Revenues
US 4,300 4,339 4,284 (1) (1)

R
Europe 3,270 3,162 2,977 3 6
APMEA 1,054 1,052 1,041 0 1
Other Countries & Corporate
Total
648
9,272
678
O
9,231 8,964
662 (4)
0
2
3
PY
Total revenues
US 8,651 8,851 8,814 (2) 0
Europe 11,078 11,300 10,827 (2) 4
CO

APMEA 6,324 6,477 6,391 (2) 1

Other Countries & Corporate 1,388 1,478 1,535 (6) (4)
Total 27,441 28,106 27,567 (2) 2
Source: Annual Reports, McDonald’s
T

Exhibit III:
O

McDonald’s -Comparable Sales and Guest Counts

N

2014 2013 2012

Compa- Compa- Compa-
Guest Guest Guest
rable rable rable
Counts Counts Counts
O

Sales Sales Sales

US (2.1) (4.1) (0.2) (1.6) 3.3 1.9
D

Europe (0.6) (2.2) 0.0 (1.5) 2.4 (0.5)

APMEA (3.3) (4.7) (1.9) (3.8) 1.4 2.2
Other Countries & Corporate 6.6 (1.5) 7.0 0.4 7.7 3.0
Total (1.0) (3.6) 0.2 (1.9) 3.1 1.6
Source: www.aboutmcdonalds.com

12
 The Turnaround Plan of Mcdonald’s: A Long Way to Go

Exhibit IV

McDonald’s - Consolidated Statement of Income

(Year Ended December 31)
In US$ Millions (except per share data) 2014 2013 2012
Revenues

ST
Sales by company operated restaurants 18,169.3 18,874.2 18,602.5
Revenues from franchised restaurants 9,272.0 9,231.5 8,964.5
Total Revenues 27,441.3 28,105.7 27,567.0

PO
Operating Costs and Expenses
Company operated restaurant expenses
Food & Paper 6,129.7 6,361.3 6,318.2
Payroll & employee benefits 4,756.0 4,824.1 4,710.3

R
Occupancy & other operating expenses 4,402.6 4,393.2 4,195.2
Franchised Restaurants - occupancy expenses 1,697.3 1,624.4 1,527.0
Selling, general & administrative expenses
Other operating (income) expense, net O 2,487.9
18.6
2,385.6
(247.2)
2,455.2
(243.5)
PY
Total Operating costs and expenses 19,492.1 19,341.4 18,962.4
Operating Income 7,949.2 8,764.3 8,604.6
Interest expense - net of capitalized interest 570.5 521.9 516.6
CO

Nonoperating (income) expense, net 6.7 37.9 9.0

Income before provision of income taxes 7,372.0 8,204.5 8,079.0
provision for income taxes 2,614.2 2,618.6 2,614.2
Net Income 4,757.8 5,585.9 5,464.8
T

Earnings per common share – basic 4.85 5.59 5.41

Earnings per common share – diluted 4.82 5.59 5.41
O

Dividends declared per common share 3.28 3.12 2.87

N

Source: Annual Reports, McDonald’s

O
D

13
 The Turnaround Plan of Mcdonald’s: A Long Way to Go

Exhibit V:

McDonald’s Turnaround Framework

ST
PO
R
https://mcdonalds.webcasts.com/
O
PY
Exhibit VI:

McDonald’s – Reporting Segments

CO
T
O
N

Source: http://marketrealist.com
O
D

14
 The Turnaround Plan of Mcdonald’s: A Long Way to Go

Suggested Readings and References:

1. Joe Cahill, “This is McDonald’s Real Problem (and there is Nothing it can do about it),”
www.chicagobusiness.com, February 08, 2014.
2. Patti Waldmeir, “Fast Food Faces Indigestion in China Amid Rapid Expansion,”
www.ft.com, August 22, 2014.
3. Ashley Lutz, “McDonald’s CEO Reveals the Brand’s 4 Biggest Problems,”

ST
www.businessinsider.in, October 21, 2014.
4. Brad Tuttle, “5 Problems that’ll Challenge McDonald’s no Matter who’s CEO,”
http://time.com January 29, 2015.
5. “McDonald’s and its Challenges Worldwide: A Market-by-Market Look,” www.ft.com,

PO
January 29, 2015.
6. “McDonald’s Faces many Problems after ousting its Longtime CEO,” www.foxnews.com,
January 29, 2015.
7. Kim Peterson, “5 Problems McDonald’s New CEO Must Fix,” www.cbsnews.com,
January 30, 2015.

R
8. Bruce Horovitz, “Pressure’s on for new McDonald’s CEO, USA Today, “ February 02,
2015
9.

10.
February 03, 2015
O
Beth Kowitt, “McDonald’s CEO: Give us Time for a Turnaround,” Fortune.com,

Jonathan Maze, “All Eyes on McDonald’s,” Nation’s Restaurant News, February 09, 2015
PY
11. Bruce Horovitz, “5 Things New McDonald’s CEO Must Do,” USA Today, February 10,
2015
12. Deborah L. Jacobs, “McDonald’s Recipe For Success Brought New CEO To The Table,”
Forbes, March 22, 2012
CO

13. “New CEO, Same Problems At McDonald’s As Revenue Falls 11%,” www.forbes.com,
April 22, 2015.
14. Matt Egan, “McDonald’s has Supersized Problems,” http://money.cnn.com, April 22, 2015.
15. Michael McLellan, “Is Fast-Food King McDonald’s in Trouble?”
http://bizmology.hoovers.com, April 22, 2015
T

16. Phil Wahba, “McDonald’s Sales Bleed Continues Despite Turnaround Efforts,” Fortune,
April 29, 2015
O

17. Katie Little, “All eyes on the Golden Arches with McDonald’s to Push Turnaround Plan,”
www.cnbc.com, May 03, 2015
N

18. Katie Little, “S&P Downgrades McDonald’s to ‘A-’ from ‘A’ on Restructuring Plan,”
www.cnbc.com, May 04, 2015
19. Justin Fox, “The Once But Not Future Burger,” Business Week, May 04, 2015
O

20. Lauren Gensler, “McDonald’s Pins Hopes On Turnaround Plan To Revive Flagging Sales,”
May 4, 2015.
D

21. Drew Harwell, "A plan to re-gild the Golden Arches,” The Washington Post, May 05,
2015
22. Katie Little, “McDonald’s has a Big Problem in Uphill Turnaround,” www.cnbc.com, May
05, 2015
23. Lisa Wright, “McDonald’s Plan Leaves Investors Hungry,” Toronto Star (Canada), May
05, 2015

15
 The Turnaround Plan of Mcdonald’s: A Long Way to Go

24. Jack Hough, “Trouble on the Menu at McDonald’s,” http://online.barrons.com , May 09,
2015.
25. Patrick Kulp, “The McDonald’s Makeover: New Kale, New Hamburger, Same Old
Problems,” http://mashable.com, May 09, 2015.
26. Dominic Walsh, “McDonald’s Outlines Big Challenges East and West,” The Times
(United Kingdom), May 09, 2015
27. “Briefing Mcdonald’s”, The Sunday Times, May 10, 2015

ST
28. Maureen Morrison,” Hamburglar Steals Back into Mcdonald’s Marketing,” Advertising
Age, May 11,2015
29. Susan Berfield, “McDonald’s Revamp Has Missing Ingredients,” Business Week, May 11,
2015

PO
30. “Turnaround Plan Needs Supersizing,” Crain’s Chicago Business, May 11, 2015
31. “McDonald’s Turnaround Strategy: Toastier Buns, Juicier Burgers,” Toronto Star
(Canada), May 28, 2015
32. “McDonald’s Corp.’s Bun Has More Problems Than Toasting,” www.fool.com, May 30,

R
2015.
33. “Not loving it: McDonald’s in a slump,” CNN Money, July 17, 2015
34.

35.
2015.
O
Akin Oyedele, “McDonald’s Sales are Still a Mess,” www.businessinsider.in, July 23,

“McDonald’s Profits Down 13% as US Customers Decline,” www.belfasttelegraph.co.uk,

PY
July 23, 2015.
36. Lindsay Whipp, “McDonald’s Struggles to Rekindle US Appetites,” www.ft.com. July 23,
2015
37. Joe Cahill, “No Sizzle Yet from New Burger Boss,” www.chicagobusiness.com, July 25,
CO

2015
38. Lisa Baertlein, “McDonald’s Boss Sees Signs of a Turnaround in Declining Sales,”
Waikato Times, July 27, 2015
39. Jeremy Story Carter, “McDonald’s Struggles with Identity and Changing Tastes,”
www.abc.net.au, August 05, 2015
40. Alexia Elejalde-Ruiz, “McDonald’s Layoffs among 700 that Companies Reported to State
T

in July,” Chicago Tribune, August 6, 2015

O

41. “McDonald’s US to Shrink for the First Time in 45 Years,” www.telegraph.co.uk, August
11, 2015
42. Venessa Wong, “McDonald’s Shrinks In America For The First Time In Decades,”
N

www.buzzfeed.com, August 12, 2015.

43. Ashley Lutz, “McDonald’s is making One Mistake that is Killing Business,”
www.businessinsider.in, September 22, 2015.
O

44. Annual Reports, McDonald’s

45. www.mcdonalds.com
D

46. www.aboutmcdonalds.com

16