CASE 28 MCDONALD'S IN 2019* On November 3, 2019, the McDonald's board of directors dismissed Steve...

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CASE 28 MCDONALD'S IN 2019* On November 3, 2019, the McDonald's board of directors dismissed Steve Easterbrook over violations of company policy regarding a relationship with an employee and named Chris Kempczinski the new CEO. Kempczinski had experience at Kraft Foods and PepsiCo prior to joining McDonald's in 2015, most recently as president of the USA business unit.' In March 2019, McDonald's, the largest restaurant chain, announced it will acquire artificial-intelligence startup Dynamic Yield, a company focused on personaliza tion and decision logic technology. Access to this technol- ogy will allow the firm to update instantaneously its drive-through menus based on factors such as time of day. weather, and trending menu items. McDonald's plans to roll out the updated drive-through menus across the United States during the year. "With this acquisition, we're expand ing both our ability to increase the role technology and data will play in our future and the speed with which we'll able to implement our vision of creating more personalized Case prepared by Jamal Shamsie, Michigan State University, with the assistance of Professor Alan B. Eisner, Pace University: Material has been drawn from published sources to be used for purposes of class discussion. Copyright 2019 Jamal Shamsie and Alan B. Eisner. EXHIBIT 1 Income Statement ($ millions) experiences for our customers," former CEO Steve Easterbrook said in a statement. McDonald's has been trying to attract more customers to its restaurants by offering more customized products that are also healthier. It has removed high fructose corn syrup from its buns, changed from the use of liquid margarine to real butter, decided to use chicken that has been raised without antibiotics, and to make use of cage-free eggs. Mike Andres, former president of McDonald's USA explained why the firm has decided to make these changes: "Why take a position to defend them if consumers are saying they don't want them?" These changes are expected to address some of chal- lenges that McDonald's has been facing in many markets, including in the United States, where it has almost 15,000 of its 38,000 mostly franchised restaurants. It has lost a lot of ground with consumers, especially millennials, who are defecting to traditional competitors like Burger King and Wendy's as well as to new designer burger outlets such as Five Guys and Shake Shack. Changing tastes are also re- sponsible for the loss of customers that are lining up at fast- casual chains such as Chipotle Mexican Grill and Panera Bread, which offer customized ordering and fresh ingredi- ents (see Exhibits 1 to 4). Dec. 31, 2018 Year Ending Dec. 31, 2017 Dec. 31, 2016 Total Revenue $21,025 $22,820 $24,622 Operating Income 8,823 9,553 7,745 Net Income 5,924 5,192 4,687 EXHIBIT 2 Balance Sheet ($ millions) Source: Annual Report of McDonald's Corporation, 2018. Year Ending Dec. 31, 2018 Dec. 31, 2017 Dec. 31, 2016 Current Assets $ 4,053 $ 5,327 Total Assets 32,811 33,803 $ 4,849 31,024 Current Liabilities 2,973 2,890 3,468 Total Liabilities Shareholder Equity 39,069 37,071 33,228 (6.258) (3,268) (2,204) Sources: Annual Report. McDonald's Corporation, 2018: Annual Report. McDonald's Corporation, 2015. 2018 2017 2016 EXHIBIT 3 Breakdown of U.S. International Lead Markets $7,666 $8,006 $8,253 Revenues ($millions) 7,600 7,340 7,223 High Growth Markets 3,989 5,533 6,161 Foundational Markets & Corporate 1,770 1,941 2,985 Source: Annual Report of McDonald's Corporation, 2018. EXHIBIT 4 U.S. Customer Satisfaction Index for Selected Chains Burger Taco Chipotle Panera Year McDonald's King Wendy's KFC Bell Mexican Grill Chick-fil-A Bread Subway 2018 69 76 77 77 74 79 87 81 80 2017 69 77 76 78 76 79 87 82 81 2016 69 76 76 78 75 78 87 81 80 2015 67 72 73 73 72 83 86 80 77 2014 71 76 78 74 72 78 2013 73 76 79 81 74 83 Source: American Customer Satisfaction Index (ACSI) Over the years, 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 had grown by 2014 to 121 items. The greatly expanded menu led to a significant increase in costs and longer preparation times. This forced the firm to in crease 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 upon. "McDonald's stands for value, consistency, and convenience," said Darren Tristano, a restaurant industry consultant. The fast food chain has been through a similar crisis be fore. Back in 2002 and 2003, McDonald's had experienced a decline in performance because of quality problems as result of rapid expansion. At that time, the firm had brought James R. Cantalupo back out of retirement to turn things around. He formulated a "Plan to Win," which has been the basis of McDonald's strategy over the last 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 has been defining the fast food business. It provided mil lions of Americans their first jobs even as it changed their eating habits. It rose from a single outlet in a nondescript San Bernardino, California to become one of the largest chain 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 ex pansion 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. McDonald's began to cut back on training as it struggled hard to find new recruits, 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. By the beginning of 2003, consumer surveys were indi- cating that McDonald's was headed for serious trouble. Measures for the service and quality of the chain were con- tinuing to fall, dropping far behind those of its rivals. In order 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 had felt that it needed someone who knew the company well and could move quickly to turn things around. CASE 28 :: McDONALD'S IN 2019 C219 EXHIBIT 5 McDonald's Milestones 1948 Brothers Richard and Maurice McDonald open the first restaurant in San Bernadino, California, that sells hamburgers, fries, and milkshakes. 1955 Ray A. Kroc, 52, opens his first McDonald's in Des Plaines, Illinois. Kroc, a distributor of milkshake mixers, figures he can sell a bundle of them if he franchises the McDonald's business and install his mixers in the new stores. 1961 Six years later, Kroc buys out the McDonald brothers for $2.7 million. 1963 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 1965 McDonald's stock goes public at $22.50 a share. It will split 12 times in the next 35 years. 1967 The first McDonald's restaurant outside the U.S. opens in Richmond, British Columbia. Today there are 31,108 McDonald's in 118 countries 1968 The Big Mac, the first extension of McDonald's basic burger, makes its debut and is an immediate hit. 1972 1974 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. 1975 The first drive-through window is opened in Sierra Vista, Arizona. 1979 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. 1987 Michael R. Quinlan becomes chief executive. 1991 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. 1992 The company sells its 90 billionth burger, and stops counting 1996 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 also falls flat. 1997 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. 1998 Jack M. Greenberg becomes McDonald's fourth chief executive. A 16-year company veteran, he vows to spruce up the restaurants and their menu. 1999 For the first time, sales from international operations outstrip domestic revenues. In search of other concepts, the company acquires Aroma Cafe, Chipotle, Donatos, and, later, Boston Market. 2000 McDonald's sales in the U.S. peak at an average of $1.6 million annually per restaurant. It is, however, still more than at any other fastfood chain. 2001 Subway surpasses McDonald's as the fastfood chain with the most U.S. outlets. At the end of the year it had 13,247 stores. 148 more than McDonald's 2002 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. 2003 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. 2004 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 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 2012 McDonald's plans to add McCafs to each of its outlets. 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. 2016 McDonald's opens restaurant in the 120th country, the first McDonald's restaurant opens in Astana, Kazakhstan, on March 8, 2016. 2017 Global McDelivery Day is celebrated on July 26 to support the global launch of McDelivery with UberEATS. 2019 Steve Easterbrook is replaced due to poor judgement in a personal relationship with an employee and Chris Kempczinski, president of the USA business unit is named CEO. Source: The McDonald's Story: Timeline McDonald's Leadership. McDonald's Corporation Cantalupo realized that McDonald's often tended to miss the mark on delivering the critical aspects of consis tent, 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 McDonald's experience. When Cantalupo and his team laid out their turnaround plan in 2003, they stressed upon getting the basics of service and quality right, in part by re instituting 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 its core business, Cantalupo sold off the non-burger chains that the firm had recently ac quired. He also cut back on the opening of new outlets, fo cusing 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 world-wide 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 United States. These concerns were highlighted in the popular documen tary, 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 to phase out supersiz ing by the end of 2004. The supersizing option allowed cus tomers 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 was easy to read and would tell customers about the calories, fat, pro tein, carbohydrates, and sodium that are in each product. Finally, McDonald's also began to remove the artery clogging trans fatty acids from the oil that it used to make its French fries and subsequently announced plans to re duce the sodium content in all of its products by 15 percent. But Skinner was also trying to push out more offerings that are likely to be perceived by customers to be healthier. McDonald's has continued to build upon its chicken offerings using white meat with products such as Chicken Selects. It has also placed a great deal of emphasis upon its new salad offerings. McDonald's has carried out extensive experiments and tests with these, deciding to use higher qual- ity ingredients, from a variety of lettuces and tasty cherry to matoes 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 develop ment in the US. "It tells people that we are very serious about offering things people feel comfortable eating" McDonald's has also been 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 has raised the firm's operating costs, because these are 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 expan sion in almost three decades. Under a plan to add a McCaf section to all of its nearly 14,000 US. outlets, McDonald's has been offering lattes, cappuccinos, ice-blended frappes. and fruit-based smoothies to its customers. "In many cases, they're now coming for the beverage, whereas before they were coming for the meal," said Lee Renz, an executive who was responsible for the rollout. Refurbishing the Outlets As part of its turnaround strategy. McDonald's also been selling off the outlets that it owned. More t ore than 80 p 30 percent of its outlets are now in the hands of franchisees and other affiliates. Skinner began working with the franchisees to ad dress the look and feel of many of the chain's aging stores. Without any changes to their dcor, the firm was likely to be left behind by other savvier fast food and drink retailers. The firm is in the midst of pushing harder to refurbish-or re-image-all of its outlets around the world. "People eat with their eyes first," said Thompson. "If you have a restau- rant that is appealing, contemporary, and relevant both from the street and interior, the food tastes better." The re-imaging 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 has been ap plying the re-imaging concept to its outlets around the world. with a budget of more than half of its total annual capital expenditures. In the United States, the changes cost as much as $650,000 per restaurant, a cost that is shared with the franchisees when the outlet is not company owned. One of the prototype interiors that was tested out by McDonald's has curved counters with surfaces painted in bright colors. In one corner, a touch-activated screen allows customers to punch in orders without queuing. CASE 28:: McDONALD'S IN 2019 C221 The interiors can feature armchairs and sofas, modern lighting, large television screens, and even wireless Internet access. The firm is also trying to develop new features for its drive-through customers, which account for 65 percent of all transactions in the United States. They include music aimed at queuing 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 has even been developing McCafs inside its outlets next to the usual fast food counter. The McCaf con cept originated in Australia in 1993 and has been rolled out in many restaurants around the world. McDonald's has been introducing the concept to the United States as part of the refurbishment of its outlets. In fact, part of the refur bishment has focused on the installation of a specialty bev- erage platform across all U.S. outlets. The cost of installing this equipment is running at about $100,000 per outlet, with McDonald's subsidizing part of this expense. The firm has planned for all McCafs to offer espresso based coffee, gourmet coffee blends, fresh baked muffins. and high-end desserts. Customers will be able to consume these while they relax in soft leather chairs 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 is testing a number of new concepts, including a kiosk in some locations that allows customers to skip the counter and head to tablet-like kiosks where they can customize ev erything about their burger, from the type of bun to the va riety of cheese to the many, glossy toppings and sauces that can go on it. The firm has plans to gradually expand the concept to more locations, but franchises are concerned about the costs, which can run up to $125,000 per restau rant to make the required changes. "Customization is not McDonald's historic strength," said Mark Kalinowski, an analyst at Janney Montgomery Scott. Dubbed the "Create Your Taste" platform, McDonald's was hoping to attract more younger customers who may be moving away from frozen processed food that is loaded with preservatives. But it realized that there were considerable risks involved with making such a change. The burgers would be priced higher at $5.49, could take seven minutes to prepare, and could only be ordered from inside the store and eventually brought to your table. Franchises complained that this could not be offered to drive-through customers that make up about 70 percent of the chain's business. Furthermore, such a change ran counter to the image for inexpensive and fast food that McDonald's has worked hard to build over the years. Easterbrook has subsequently shifted to a more efficient and less expensive format called "Signa ture Crafted Recipes" that would allow both in-store and drive-through customers to choose a bun and one of four sandwich types. McDonald's is hoping that such a push to ward more customization would bring more customers into their outlets, bringing the U.S. counter/drive-through customer ratio closer to 50/50, up from the current 30/70. McDonald's has also been working to simplify its menu, reducing the number of "value meal" promotions, groups of items that together cost less than ordering items individually. It has tweaked its "dollar menu" replacing it with "dollar value and more" raising the prices for many items as part of a bid to get each customer to spend more. But McDonald's had intro duced these bargain menus because its prices had risen over the years, driving away customers to cheaper outlets. Conse quently, as much as 15 percent of the chain's sales had been coming from its "dollar menu" where everything cost a dollar. Over the past year, McDonald's saw a slight jump in U.S. sales after launching an all-day breakfast at most of its locations. The franchises had to be convinced to invest about $5,000 to add food preparation space in order to of fer breakfast along with the regular lunch or dinner items. However, sales from the all-day breakfast have begun to flat- ten out, with a gradual decline in sales from customers who were coming in throughout the day to order breakfast. More Gold in These Arches? In spite of all the changes that have been made by Easter brook, sales growth for McDonald's has continued to be sluggish. The firm does, however, believe that sales will re- bound in the United States as well as in foreign markets. In order to provide a boost to its operations in China and Hong Kong. McDonald's announced a deal with Citic, a state-owned conglomerate and the Carlyle Group, a private equity firm. "China and Hong Kong represent an enormous growth opportunity for McDonald's," Easterbrook said in a recent news release. "The new partnership will combine one of the world's most powerful brands and our unparal leled quality standards with partners who have an un- matched understanding of the local markets." McDonald's has also been trying to grow by reaching out to different customer segments with different products at different times of the day. It has tried to target young adults for breakfast with its gourmet coffee, egg sandwiches, and fat-free muffins. It attracts working adults for lunch. particularly those who are squeezed for time, with its burg ers and fries. And its introduction of wraps has drawn in teenagers late in the evening after they have been partying. Restaurant analyst Bryan Elliott commented: "They've tried to be all things to all people who walk in their door." Above all, McDonald's is concerned about the findings of a recent survey that showed only 20 percent of millenni- als had even tried a Big Mac. It is also aware that despite its efforts to diversify its menu, 30 percent of sales come from just five items: Big Macs, hamburgers, cheeseburgers, McNuggets, and fries. It has managed to increase traffic during the late-night hours, but this may be hurt by their recent announcement that they would offer a more limited sample of their full menu between midnight and 5 am. Above all, the expansion of the menu beyond the staple of burgers and fries does raise some fundamental questions. Most significantly, it is not clear just how far McDonald's can stretch its brand while keeping all of its outlets under the traditional symbol of its golden arches. In fact, industry experts believe that the long-term success of the firm may well depend on its ability to compete with rival burger chains. "The burger category has great strength," added David C. Novak, chairman and CEO of Yum! Brands, par ent of KFC and Taco Bell. "That's America's food. People love hamburgers."15 ENDNOTES 1. PRNewswire, 2019, McDonald's Corporation Anne Lendhip Transition, hips://www.amewswire.com/new corporation-announces leadership-transition-300950405 November 3, Grothhaus, M. 2009, Who a Chris Kempinski Mcdonald's new CEO, Festcompany, hps://www.fastcompany. com/90426246/who-is-chris-kempinskimodonalds-new-cee-5-things- you-need-to-know, November 4. 2. Taylor, K. 2019. McDonald's makes $300 million deal to sell things like Amazon does. By March 30, 3. Stem. 5. 2015. In a shift. McMuffins with mal butter New York Time Aug.B2. 4. The Economist, 2015. When the chips are down January 10, p. 53. 5. Pallavi G. and M. Amdt. 2003. Hamburger hell. W March 3, p. 105. 5 Warner, M. 2005. You want any fruit with that Big Mac? New York Times, February 20, p.8. 7. Strem, S. 2011. McDonald's trims its Happy Meal. New York Times. July 36, B 8. Adamy, J. 2008. McDonald's coffee strategy is tough sell. Wall Street Jounal, October 27, p. 83. 9. Pater, B. 2010. Super style me. Fat Company, October, p. 107. 10 Grant, J. 2006. McDonald's to revamp UK cutlets Time February 214 11. Herovkz, B. 2003. McDonald's ventures beyond burgers to dads, toys USA Today, November 14, p.6 B. 12. Tabuchi, H. 2015, McDonald's Chief Promises Turnaround in a Restructuring New Bike May 4 13. Tang, A. and W. SiLee. 2017. McDonald's Chins operations to be sold to locally led consortium. New York Times, January 9, p. Bl. 14. Kowitt, B. 2014 Fallen Andes: Can McDonald's get its mojo back? December 1. p. 110 15. Jargen, J. 2012. McDonald's is feeling fried. Wall Street Journal November 9, p. 82. CASE 28 MCDONALD'S IN 2019* On November 3, 2019, the McDonald's board of directors dismissed Steve Easterbrook over violations of company policy regarding a relationship with an employee and named Chris Kempczinski the new CEO. Kempczinski had experience at Kraft Foods and PepsiCo prior to joining McDonald's in 2015, most recently as president of the USA business unit.' In March 2019, McDonald's, the largest restaurant chain, announced it will acquire artificial-intelligence startup Dynamic Yield, a company focused on personaliza tion and decision logic technology. Access to this technol- ogy will allow the firm to update instantaneously its drive-through menus based on factors such as time of day. weather, and trending menu items. McDonald's plans to roll out the updated drive-through menus across the United States during the year. "With this acquisition, we're expand ing both our ability to increase the role technology and data will play in our future and the speed with which we'll able to implement our vision of creating more personalized Case prepared by Jamal Shamsie, Michigan State University, with the assistance of Professor Alan B. Eisner, Pace University: Material has been drawn from published sources to be used for purposes of class discussion. Copyright 2019 Jamal Shamsie and Alan B. Eisner. EXHIBIT 1 Income Statement ($ millions) experiences for our customers," former CEO Steve Easterbrook said in a statement. McDonald's has been trying to attract more customers to its restaurants by offering more customized products that are also healthier. It has removed high fructose corn syrup from its buns, changed from the use of liquid margarine to real butter, decided to use chicken that has been raised without antibiotics, and to make use of cage-free eggs. Mike Andres, former president of McDonald's USA explained why the firm has decided to make these changes: "Why take a position to defend them if consumers are saying they don't want them?" These changes are expected to address some of chal- lenges that McDonald's has been facing in many markets, including in the United States, where it has almost 15,000 of its 38,000 mostly franchised restaurants. It has lost a lot of ground with consumers, especially millennials, who are defecting to traditional competitors like Burger King and Wendy's as well as to new designer burger outlets such as Five Guys and Shake Shack. Changing tastes are also re- sponsible for the loss of customers that are lining up at fast- casual chains such as Chipotle Mexican Grill and Panera Bread, which offer customized ordering and fresh ingredi- ents (see Exhibits 1 to 4). Dec. 31, 2018 Year Ending Dec. 31, 2017 Dec. 31, 2016 Total Revenue $21,025 $22,820 $24,622 Operating Income 8,823 9,553 7,745 Net Income 5,924 5,192 4,687 EXHIBIT 2 Balance Sheet ($ millions) Source: Annual Report of McDonald's Corporation, 2018. Year Ending Dec. 31, 2018 Dec. 31, 2017 Dec. 31, 2016 Current Assets $ 4,053 $ 5,327 Total Assets 32,811 33,803 $ 4,849 31,024 Current Liabilities 2,973 2,890 3,468 Total Liabilities Shareholder Equity 39,069 37,071 33,228 (6.258) (3,268) (2,204) Sources: Annual Report. McDonald's Corporation, 2018: Annual Report. McDonald's Corporation, 2015. 2018 2017 2016 EXHIBIT 3 Breakdown of U.S. International Lead Markets $7,666 $8,006 $8,253 Revenues ($millions) 7,600 7,340 7,223 High Growth Markets 3,989 5,533 6,161 Foundational Markets & Corporate 1,770 1,941 2,985 Source: Annual Report of McDonald's Corporation, 2018. EXHIBIT 4 U.S. Customer Satisfaction Index for Selected Chains Burger Taco Chipotle Panera Year McDonald's King Wendy's KFC Bell Mexican Grill Chick-fil-A Bread Subway 2018 69 76 77 77 74 79 87 81 80 2017 69 77 76 78 76 79 87 82 81 2016 69 76 76 78 75 78 87 81 80 2015 67 72 73 73 72 83 86 80 77 2014 71 76 78 74 72 78 2013 73 76 79 81 74 83 Source: American Customer Satisfaction Index (ACSI) Over the years, 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 had grown by 2014 to 121 items. The greatly expanded menu led to a significant increase in costs and longer preparation times. This forced the firm to in crease 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 upon. "McDonald's stands for value, consistency, and convenience," said Darren Tristano, a restaurant industry consultant. The fast food chain has been through a similar crisis be fore. Back in 2002 and 2003, McDonald's had experienced a decline in performance because of quality problems as result of rapid expansion. At that time, the firm had brought James R. Cantalupo back out of retirement to turn things around. He formulated a "Plan to Win," which has been the basis of McDonald's strategy over the last 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 has been defining the fast food business. It provided mil lions of Americans their first jobs even as it changed their eating habits. It rose from a single outlet in a nondescript San Bernardino, California to become one of the largest chain 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 ex pansion 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. McDonald's began to cut back on training as it struggled hard to find new recruits, 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. By the beginning of 2003, consumer surveys were indi- cating that McDonald's was headed for serious trouble. Measures for the service and quality of the chain were con- tinuing to fall, dropping far behind those of its rivals. In order 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 had felt that it needed someone who knew the company well and could move quickly to turn things around. CASE 28 :: McDONALD'S IN 2019 C219 EXHIBIT 5 McDonald's Milestones 1948 Brothers Richard and Maurice McDonald open the first restaurant in San Bernadino, California, that sells hamburgers, fries, and milkshakes. 1955 Ray A. Kroc, 52, opens his first McDonald's in Des Plaines, Illinois. Kroc, a distributor of milkshake mixers, figures he can sell a bundle of them if he franchises the McDonald's business and install his mixers in the new stores. 1961 Six years later, Kroc buys out the McDonald brothers for $2.7 million. 1963 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 1965 McDonald's stock goes public at $22.50 a share. It will split 12 times in the next 35 years. 1967 The first McDonald's restaurant outside the U.S. opens in Richmond, British Columbia. Today there are 31,108 McDonald's in 118 countries 1968 The Big Mac, the first extension of McDonald's basic burger, makes its debut and is an immediate hit. 1972 1974 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. 1975 The first drive-through window is opened in Sierra Vista, Arizona. 1979 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. 1987 Michael R. Quinlan becomes chief executive. 1991 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. 1992 The company sells its 90 billionth burger, and stops counting 1996 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 also falls flat. 1997 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. 1998 Jack M. Greenberg becomes McDonald's fourth chief executive. A 16-year company veteran, he vows to spruce up the restaurants and their menu. 1999 For the first time, sales from international operations outstrip domestic revenues. In search of other concepts, the company acquires Aroma Cafe, Chipotle, Donatos, and, later, Boston Market. 2000 McDonald's sales in the U.S. peak at an average of $1.6 million annually per restaurant. It is, however, still more than at any other fastfood chain. 2001 Subway surpasses McDonald's as the fastfood chain with the most U.S. outlets. At the end of the year it had 13,247 stores. 148 more than McDonald's 2002 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. 2003 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. 2004 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 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 2012 McDonald's plans to add McCafs to each of its outlets. 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. 2016 McDonald's opens restaurant in the 120th country, the first McDonald's restaurant opens in Astana, Kazakhstan, on March 8, 2016. 2017 Global McDelivery Day is celebrated on July 26 to support the global launch of McDelivery with UberEATS. 2019 Steve Easterbrook is replaced due to poor judgement in a personal relationship with an employee and Chris Kempczinski, president of the USA business unit is named CEO. Source: The McDonald's Story: Timeline McDonald's Leadership. McDonald's Corporation Cantalupo realized that McDonald's often tended to miss the mark on delivering the critical aspects of consis tent, 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 McDonald's experience. When Cantalupo and his team laid out their turnaround plan in 2003, they stressed upon getting the basics of service and quality right, in part by re instituting 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 its core business, Cantalupo sold off the non-burger chains that the firm had recently ac quired. He also cut back on the opening of new outlets, fo cusing 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 world-wide 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 United States. These concerns were highlighted in the popular documen tary, 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 to phase out supersiz ing by the end of 2004. The supersizing option allowed cus tomers 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 was easy to read and would tell customers about the calories, fat, pro tein, carbohydrates, and sodium that are in each product. Finally, McDonald's also began to remove the artery clogging trans fatty acids from the oil that it used to make its French fries and subsequently announced plans to re duce the sodium content in all of its products by 15 percent. But Skinner was also trying to push out more offerings that are likely to be perceived by customers to be healthier. McDonald's has continued to build upon its chicken offerings using white meat with products such as Chicken Selects. It has also placed a great deal of emphasis upon its new salad offerings. McDonald's has carried out extensive experiments and tests with these, deciding to use higher qual- ity ingredients, from a variety of lettuces and tasty cherry to matoes 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 develop ment in the US. "It tells people that we are very serious about offering things people feel comfortable eating" McDonald's has also been 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 has raised the firm's operating costs, because these are 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 expan sion in almost three decades. Under a plan to add a McCaf section to all of its nearly 14,000 US. outlets, McDonald's has been offering lattes, cappuccinos, ice-blended frappes. and fruit-based smoothies to its customers. "In many cases, they're now coming for the beverage, whereas before they were coming for the meal," said Lee Renz, an executive who was responsible for the rollout. Refurbishing the Outlets As part of its turnaround strategy. McDonald's also been selling off the outlets that it owned. More t ore than 80 p 30 percent of its outlets are now in the hands of franchisees and other affiliates. Skinner began working with the franchisees to ad dress the look and feel of many of the chain's aging stores. Without any changes to their dcor, the firm was likely to be left behind by other savvier fast food and drink retailers. The firm is in the midst of pushing harder to refurbish-or re-image-all of its outlets around the world. "People eat with their eyes first," said Thompson. "If you have a restau- rant that is appealing, contemporary, and relevant both from the street and interior, the food tastes better." The re-imaging 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 has been ap plying the re-imaging concept to its outlets around the world. with a budget of more than half of its total annual capital expenditures. In the United States, the changes cost as much as $650,000 per restaurant, a cost that is shared with the franchisees when the outlet is not company owned. One of the prototype interiors that was tested out by McDonald's has curved counters with surfaces painted in bright colors. In one corner, a touch-activated screen allows customers to punch in orders without queuing. CASE 28:: McDONALD'S IN 2019 C221 The interiors can feature armchairs and sofas, modern lighting, large television screens, and even wireless Internet access. The firm is also trying to develop new features for its drive-through customers, which account for 65 percent of all transactions in the United States. They include music aimed at queuing 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 has even been developing McCafs inside its outlets next to the usual fast food counter. The McCaf con cept originated in Australia in 1993 and has been rolled out in many restaurants around the world. McDonald's has been introducing the concept to the United States as part of the refurbishment of its outlets. In fact, part of the refur bishment has focused on the installation of a specialty bev- erage platform across all U.S. outlets. The cost of installing this equipment is running at about $100,000 per outlet, with McDonald's subsidizing part of this expense. The firm has planned for all McCafs to offer espresso based coffee, gourmet coffee blends, fresh baked muffins. and high-end desserts. Customers will be able to consume these while they relax in soft leather chairs 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 is testing a number of new concepts, including a kiosk in some locations that allows customers to skip the counter and head to tablet-like kiosks where they can customize ev erything about their burger, from the type of bun to the va riety of cheese to the many, glossy toppings and sauces that can go on it. The firm has plans to gradually expand the concept to more locations, but franchises are concerned about the costs, which can run up to $125,000 per restau rant to make the required changes. "Customization is not McDonald's historic strength," said Mark Kalinowski, an analyst at Janney Montgomery Scott. Dubbed the "Create Your Taste" platform, McDonald's was hoping to attract more younger customers who may be moving away from frozen processed food that is loaded with preservatives. But it realized that there were considerable risks involved with making such a change. The burgers would be priced higher at $5.49, could take seven minutes to prepare, and could only be ordered from inside the store and eventually brought to your table. Franchises complained that this could not be offered to drive-through customers that make up about 70 percent of the chain's business. Furthermore, such a change ran counter to the image for inexpensive and fast food that McDonald's has worked hard to build over the years. Easterbrook has subsequently shifted to a more efficient and less expensive format called "Signa ture Crafted Recipes" that would allow both in-store and drive-through customers to choose a bun and one of four sandwich types. McDonald's is hoping that such a push to ward more customization would bring more customers into their outlets, bringing the U.S. counter/drive-through customer ratio closer to 50/50, up from the current 30/70. McDonald's has also been working to simplify its menu, reducing the number of "value meal" promotions, groups of items that together cost less than ordering items individually. It has tweaked its "dollar menu" replacing it with "dollar value and more" raising the prices for many items as part of a bid to get each customer to spend more. But McDonald's had intro duced these bargain menus because its prices had risen over the years, driving away customers to cheaper outlets. Conse quently, as much as 15 percent of the chain's sales had been coming from its "dollar menu" where everything cost a dollar. Over the past year, McDonald's saw a slight jump in U.S. sales after launching an all-day breakfast at most of its locations. The franchises had to be convinced to invest about $5,000 to add food preparation space in order to of fer breakfast along with the regular lunch or dinner items. However, sales from the all-day breakfast have begun to flat- ten out, with a gradual decline in sales from customers who were coming in throughout the day to order breakfast. More Gold in These Arches? In spite of all the changes that have been made by Easter brook, sales growth for McDonald's has continued to be sluggish. The firm does, however, believe that sales will re- bound in the United States as well as in foreign markets. In order to provide a boost to its operations in China and Hong Kong. McDonald's announced a deal with Citic, a state-owned conglomerate and the Carlyle Group, a private equity firm. "China and Hong Kong represent an enormous growth opportunity for McDonald's," Easterbrook said in a recent news release. "The new partnership will combine one of the world's most powerful brands and our unparal leled quality standards with partners who have an un- matched understanding of the local markets." McDonald's has also been trying to grow by reaching out to different customer segments with different products at different times of the day. It has tried to target young adults for breakfast with its gourmet coffee, egg sandwiches, and fat-free muffins. It attracts working adults for lunch. particularly those who are squeezed for time, with its burg ers and fries. And its introduction of wraps has drawn in teenagers late in the evening after they have been partying. Restaurant analyst Bryan Elliott commented: "They've tried to be all things to all people who walk in their door." Above all, McDonald's is concerned about the findings of a recent survey that showed only 20 percent of millenni- als had even tried a Big Mac. It is also aware that despite its efforts to diversify its menu, 30 percent of sales come from just five items: Big Macs, hamburgers, cheeseburgers, McNuggets, and fries. It has managed to increase traffic during the late-night hours, but this may be hurt by their recent announcement that they would offer a more limited sample of their full menu between midnight and 5 am. Above all, the expansion of the menu beyond the staple of burgers and fries does raise some fundamental questions. Most significantly, it is not clear just how far McDonald's can stretch its brand while keeping all of its outlets under the traditional symbol of its golden arches. In fact, industry experts believe that the long-term success of the firm may well depend on its ability to compete with rival burger chains. "The burger category has great strength," added David C. Novak, chairman and CEO of Yum! Brands, par ent of KFC and Taco Bell. "That's America's food. People love hamburgers."15 ENDNOTES 1. PRNewswire, 2019, McDonald's Corporation Anne Lendhip Transition, hips://www.amewswire.com/new corporation-announces leadership-transition-300950405 November 3, Grothhaus, M. 2009, Who a Chris Kempinski Mcdonald's new CEO, Festcompany, hps://www.fastcompany. com/90426246/who-is-chris-kempinskimodonalds-new-cee-5-things- you-need-to-know, November 4. 2. Taylor, K. 2019. McDonald's makes $300 million deal to sell things like Amazon does. By March 30, 3. Stem. 5. 2015. In a shift. McMuffins with mal butter New York Time Aug.B2. 4. The Economist, 2015. When the chips are down January 10, p. 53. 5. Pallavi G. and M. Amdt. 2003. Hamburger hell. W March 3, p. 105. 5 Warner, M. 2005. You want any fruit with that Big Mac? New York Times, February 20, p.8. 7. Strem, S. 2011. McDonald's trims its Happy Meal. New York Times. July 36, B 8. Adamy, J. 2008. McDonald's coffee strategy is tough sell. Wall Street Jounal, October 27, p. 83. 9. Pater, B. 2010. Super style me. Fat Company, October, p. 107. 10 Grant, J. 2006. McDonald's to revamp UK cutlets Time February 214 11. Herovkz, B. 2003. McDonald's ventures beyond burgers to dads, toys USA Today, November 14, p.6 B. 12. Tabuchi, H. 2015, McDonald's Chief Promises Turnaround in a Restructuring New Bike May 4 13. Tang, A. and W. SiLee. 2017. McDonald's Chins operations to be sold to locally led consortium. New York Times, January 9, p. Bl. 14. Kowitt, B. 2014 Fallen Andes: Can McDonald's get its mojo back? December 1. p. 110 15. Jargen, J. 2012. McDonald's is feeling fried. Wall Street Journal November 9, p. 82.