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2018 2017 2016 EXHIBIT 3 Breakdown of Revenues ($ millions) U.S. $7,666 $8,006 $8,253 International Lead Markets 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 Taco Burger King McDonald's Chipotle Mexican Grill Year Wendy's Panera Bread KFC Bell Chick-fil-A 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 San Bernardino, California to become one of the largest competition was to expand its menu with snacks, salads, chain of outlets spread around the globe. But it gradually and new drinks. From 33 basic items that the chain offered began to run into various problems that began to slow down in 1990, the menu had grown by 2014 to 121 items. The its sales growth (see Exhibit 5). greatly expanded menu led to a significant increase in costs This decline could be attributed in large part to a drop in and longer preparation times. This forced the firm to in McDonald's once-vaunted service and quality since its ex- crease the prices of many of its items and to take more time pansion in the 1990s, when headquarters stopped grading to serve customers, moving it away from the attributes that franchises for cleanliness, speed, and service. By the end of it had built its reputation upon. "McDonald's stands for the decade, the chain ran into more problems because of the value, consistency, and convenience," said Darren Tristano, tighter labor market. McDonald's began to cut back on a restaurant industry consultant." training as it struggled hard to find new recruits, leading to a The fast food chain has been through a similar crisis be dramatic falloff in the skills of its employees. According to a fore. Back in 2002 and 2003, McDonald's had experienced 2002 survey by market researcher Global Growth Group, a decline in performance because of quality problems as McDonald's came in third in average service time behind result of rapid expansion. At that time, the firm had brought Wendy's and sandwich shop Chick-fil-A Inc. James R. Cantalupo back out of retirement to turn things By the beginning 2003, consumer surveys were indi- around. He formulated a "Plan to Win," which has been the cating that McDonald's was headed for serious trouble. basis of McDonald's strategy over the last decade. The core Measures for the service and quality of the chain were con- of the plan was to increase sales at existing locations by tinuing to fall, dropping far behind those of its rivals. In improving the menu, refurbishing the outlets, and extending order to deal with its deteriorating performance, the firm hours. This time, however, such incremental steps might decided to bring back retired vice-chairman James R. not be enough Cantalupo, 59, who had overseen McDonald's successful international expansion in the 1980s and 1990s. Cantalupo, Pulling out of a Downward Spiral who had retired only a year earlier, was perceived to be the Since it was founded more than 50 years ago, McDonald's only candidate with the necessary qualifications, despite has been defining the fast food business. It provided mil- shareholder sentiment for an outsider. The board had felt lions of Americans their first jobs even as it changed their that it needed someone who knew the company well and eating habits. It rose from a single outlet in a nondescript could move quickly to turn things around. 1948 1955 1961 1963 1965 1967 1968 1972 1974 1975 1979 1987 1991 1992 1996 1997 Brothers Richard and Maurice McDonald open the first restaurant in San Bernadino, California, that sells hamburgers, fries, and milkshakes. 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. Six years later, Kroc buys out the McDonald brothers for $2.7 million Ronald McDonald makes his debut as corporate spokesclown using future NBC-TV weatherman Willard Scott. During the year, the company also sells its 1 billionth burger. McDonald's stock goes public at $22.50 a share. It will split 12 times in the next 35 years. The first McDonald's restaurant outside the U.S. opens in Richmond, British Columbia. Today there are 31,108 McDonald's in 118 countries. The Big Mac, the first extension of McDonald's basic burger, makes its debut and is an immediate hit. McDonald's switches to the frozen variety for its successful French fries. Fred L. Turner succeeds Kroc as CEO. In the midst of a recession, the minimum wage rises to $2 per hour, a big cost increase for McDonald's, which is built around a model of young, low-wage workers. The first drive-through window is opened in Sierra Vista, Arizona. McDonald's responds to the needs of working women by introducing Happy Meals. A burger, some fries, a soda, and a toy give working moms a break. Michael R. Quinlan becomes chief executive. Responding to the public's desire for healthier foods, McDonald's introduces the low-fat McLean Deluxe burger. It flops and is withdrawn from the market. Over the next few years, the chain will stumble several times trying to spruce up its menu. The company sells its 90 billionth burger, and stops counting, In order to attract more adult customers, the company launches its Arch Deluxe, a "grown-up" burger with an idiosyncratic taste. Like the low-fat burger, it also falls flat. McDonald's launches Campaign 55, which cuts the cost of a Big Mac to $0.55. It is a response to discounting by Burger King and Taco Bell. The move, which prefigures similar price wars in 2002, is widely considered a failure. Jack M. Greenberg becomes McDonald's fourth chief executive. A 16-year company veteran, he vows to spruce up the restaurants and their menu. For the first time, sales from international operations outstrip domestic revenues. In search of other concepts, the company acquires Aroma Cafe, Chipotle, Donatos, and, later, Boston Market. McDonald's sales in the U.S. peak at an average of $1.6 million annually per restaurant. It is, however, still more than at any other fastfood chain. 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. McDonald's posts its first-ever quarterly loss, of $343.8 million. The stock drops to around $13.50, down 40% from five years ago. James R. Cantalupo returns to McDonald's in January as CEO. He immediately pulls back from the company's 10-15% forecast for per-share earnings growth. Charles H. Bell takes over the firm after the sudden death of Cantalupo. He states he will continue with the strategies that have been developed by his predecessor. Jim Skinner takes over as CEO after Bell announces retirement for health reasons. McDonald's launches specialty beverages, including coffee-based drinks. McDonald's plans to add McCafs to each of its outlets. Don Thompson succeeds Skinner as CEO of the chain. Thompson resigns because of declining performance and is replaced by Steve Easterbrook, the firm's chief branding officer. McDonald's opens restaurant in the 12th country; the first McDonald's restaurant opens in Astana, Kazakhstan, on March 8, 2016. Global McDelivery Day is celebrated on July 26 to support the global launch of McDelivery with UberEATS. 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, 1998 1999 2000 2001 2002 2003 2004 2005 2006 2008 2012 2015 2016 2017 2019 Cantalupo realized that McDonald's often tended to new salad offerings. McDonald's has carried out extensive miss the mark on delivering the critical aspects of consis- experiments and tests with these, deciding to use higher qual- tent, fast, and friendly service and an all-around enjoyable ity ingredients, from a variety of lettuces and tasty cherry to- experience for the whole family. He understood that its matoes to sharper cheeses and better cuts of meat. It offered franchisees and employees alike needed to be inspired as a choice of Newman's Own dressings, a well-known higher- well as retrained on their role in putting the smile back into end brand. Salads have changed the way people think of our McDonald's experience. When Cantalupo and his team brand," said Wade Thoma, vice president for menu develop- laid out their turnaround plan in 2003, they stressed upon ment in the U.S. "It tells people that we are very serious getting the basics of service and quality right, in part by re about offering things people feel comfortable eating. "6 instituting a tough up or out" grading system that would McDonald's has also been trying to include more fruits kick out underperforming franchisees. "We have to rebuild and vegetables in its well-known and popular Happy Meals. the foundation. It's fruitless to add growth if the foundation It announced in 2011 that it would reduce the amount of is weak," said Cantalupo. French fries and phase out the caramel dipping sauce that In his effort to focus on its core business, Cantalupo sold accompanied the apple slices in these meals. The addition off the non-burger chains that the firm had recently ac of fruits and vegetables has raised the firm's operating quired. He also cut back on the opening of new outlets, fo costs, because these are more expensive to ship and store cusing instead on generating more sales from its existing because of their more perishable nature. "We are doing outlets. Cantalupo pushed McDonald's to try to draw more what we can," said Danya Proud, a spokesperson for the customers through the introduction of new products. The firm. "We have to evolve with the times."7 chain had a positive response to its increased emphasis on The rollout of new beverages, highlighted by new coffee- healthier foods, led by a revamped line of fancier salads. The based drinks, represented the chain's biggest menu expan- revamped menu was promoted through a new world-wide ad sion in almost three decades. Under a plan add a McCaf slogan I'm loving it," which was delivered by pop idol Justin section to all of its nearly 14,000 U.S. outlets, McDonald's Timberlake through a set of MTV style commercials. has been offering lattes, cappuccinos, ice-blended frappes, and fruit-based smoothies to its hers. "In many cases, Striving for a Healthier Image they're now coming for the beverage, whereas before they were coming for the meal," said Lee Renz, an executive When Jim Skinner took over from Cantalupo in 2004, he continued to push for McDonald's to change its image. who was responsible for the rollout. Skinner felt that one of his top priorities was to deal with the growing concerns about the unhealthy image of Refurbishing the Outlets McDonald's, given the rise of obesity in the United States. As part of its turnaround strategy, McDonald's also been These concerns were highlighted in the popular documen- selling off the outlets that it owned. More than 80 percent tary, Super Size Me, made by Morgan Spurlock. Spurlock of its outlets are now in the hands of franchisees and other vividly displayed the health risks that were posed by a affiliates. Skinner began working with the franchisees to ad- steady diet of food from the fast food chain. With a rise in dress the look and feel of many of the chain's aging stores. awareness of the high fat content of most of the products Without any changes to their dcor, the firm was likely to offered by McDonald's, the firm was also beginning to face be left behind by other savvier fast food and drink retailers. lawsuits from some of its loyal customers. The firm is in the midst of pushing harder to refurbish-or In response to the growing health concerns, one of the re-image-all of its outlets around the world. People eat first steps taken by McDonald's was to phase out supersiz with their eyes first," said Thompson. "If you have a restau- ing by the end of 2004. The supersizing option allowed cus rant that is appealing, contemporary, and relevant both tomers to get a larger order of French fries and a bigger soft from the street and interior, the food tastes better." drink by paying a little extra. McDonald's also announced The re-imaging concept was first tried in France in 1996 that it intended to start providing nutrition information on by Dennis Hennequin, an executive in charge of the chain's the packaging of its products. The information was easy to European operations, who felt that the effort was essential read and would tell customers about the calories, fat, pro to revive the firm's sagging sales. "We were hip 15 years ago, tein, carbohydrates, and sodium that are in each product. but I think we lost that," he said." McDonald's has been ap- Finally, McDonald's also began to remove the artery plying the re-imaging concept to its outlets around the world, clogging trans fatty acids from the oil that it used to make with a budget of more than half of its total annual capital its French fries and subsequently announced plans to re expenditures. In the United States, the changes cost as much duce the sodium content in all of its products by 15 percent. as $650,000 per restaurant, a cost that is shared with the But Skinner was also trying to push out more offerings franchisees when the outlet is not company owned. that are likely to be perceived by customers to be healthier. One of the prototype interiors that was tested out by McDonald's has continued to build upon its chicken McDonald's has curved counters with surfaces painted offerings using white meat with products such as Chicken in bright colors. In one corner, a touch-activated screen Selects. It has also placed a great deal of emphasis upon its allows customers to punch in orders without queuing. . Factors that have enabled the company to deliver strong performance in the past The important external issues and competitive challenges confronting the company in 2020, including COVID The company's actions addressing these issues If you were a member of the C-level management team, indicate the strategic actions -- based on the concepts discussed in this course - you would pursue to address the challenges