Turning a frown upside-down

by Erica Shaffer
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Steve Easterbrook, CEO, McDonald's
Steve Easterbrook, CEO, explains how his "operating principles" will drive McDonald's turnaround.

OAK BROOK, Ill. – McDonald's Corp. is in need of a turnaround, and CEO Steve Easterbrook knows it.

Global comparable sales slipped 2.3 percent in the first quarter ended March 31, 2015, reflecting negative guest traffic in all major segments, the company reported. In the United States, comparable sales declined 2.6 percent on weak sales and guest traffic. McDonald's product and promotional offers weren't enough to overcome stiff competition in the quarter.

In response to the company’s lower-than-expected results, Easterbrook made clear his business philosophy and how it will drive a turn-around at McDonald’s. Easterbrook schooled analysts — and anyone else listening — on his “operating principles” during an earnings call on April 22.

“First is a greater emphasis on personal accountability,” he said. “I am honest and fair if I don’t dispense forced kindness.

“Where we need to fix the fundamentals, we need to act now; and where we need to make an impact, I'm not looking for incremental steps.”

Easterbrook said the company intends to make meaningful impact with customers and how they perceive the McDonald's brand and food.

“I will hold people accountable for tangible actions and outputs, and I can assure you that I hold myself accountable to these same high standards,” he said.

Easterbrook’s second principle is grounded in the customer. He emphasized that McDonald’s needs to be more customer-centric and, to accomplish this goal the company must leverage resources and business intelligence about its customers to turn insights into actionable results.

McDonald's Artisan Grilled Chicken sandwich
McDonald's CEO Steve Easterbrook says simplicity will drive the company's operations. Starting with its menu, the company is moving toward simpler ingredients.

“This means deeper understanding, better listening, better segmentation, genuine sharp insights regarding what our customers want and need and when they want it, as determined from the smart use of data and analytics,” Easterbrook explained. “We need to be the best at knowing what matters most to consumers, and we will focus our best talent and prioritize spending where it will optimally support our turnaround.”

This leads into the third principle of progress over perfection. Don’t expect McDonald’s to stay the course on a strategy that isn’t working. Do expect McDonald’s to move quickly on strategies that support the turnaround. Initial details of a plan are to follow on May 4.

Easterbrook said “when we find winning plays, we will be more nimble — much like we did with the rollout of Apple Pay this last fall — from first contact to going live in 12 weeks. We can make meaningful changes for customers in weeks. We just have to do it more often.”

Finally, simplicity will drive the other three principles. Easterbrook said he will champion simplicity in operations.

“We are simplifying for greater transparency, accountability, and speed,” he said. “We're making the business more responsive to market conditions, while using our scale advantage more effectively. We cannot afford to carry legacy attitudes and legacy thinking — and we won't.”

Easterbrook, who became CEO on March 1, already has stirred the pot through his rejection of “legacy thinking”. Under his short watch he announced a wage increase, paid time off and other benefits for the 90,000 employees working at company-owned stores. In March, McDonald's said it will only buy chicken raised without antibiotics that are medically important to human health. Also, the chain's restaurants will serve low-fat white milk and fat-free chocolate milk from cows that are not treated with rbST, a growth hormone.

Easterbrook cited as an advantage his broad experience within McDonald's and at other restaurant chains. Seeing other cultures, different structures, different models, he said, helps him to look objectively at the business and make decisions to position McDonald's for enduring and profitable growth.

“My overall vision is for McDonald's to be seen as a modern progressive burger company delivering a contemporary customer experience,” Easterbrook said. “Modern is about getting the brand to where we need to be today, and progressive is about doing what it takes to be the McDonald's our customers will expect tomorrow.”

APMEA issue

McDonald's restaurant in Beijing, China
Food safety and quality concerns continue to weigh on McDonald's businesses in Asia.

Overall, McDonald’s net income for the quarter dropped 33 percent to $811.5 million compared to $1.2 billion in the year-ago quarter. Revenues were down 11 percent to $5.959 billion. Operating income fell 28 percent to $1.39 billion from $1.94 billion in the first quarter of 2014.

On a segment basis, comparable sales in the company's APMEA segment fell 8.3 percent, and operating income for the quarter plunged 80 percent due to strategic restaurant closings and other charges in addition to negative operating performance in Japan and China.

“While these results are partly due to the lingering impact of the APMEA supplier issue, Japan's performance reflects the broad-based consumer perception challenges that the market is working to overcome,” said Kevin Ozan, McDonald's CFO. “Japan accounts for the lion's share of this segment's quarterly comparable sales decline.”

“Sales trends in China continued to show sequential improvement as we moved through the quarter,” he added. “And Australia remains a bright spot, posting its third consecutive quarter of positive comparable sales.”

In Europe, strong results in the United Kingdom were more than offset by weak results in France and Russia, the company said. McDonald's first quarter comparable sales eased 0.6 percent while operating income fell 20 percent on soft consumer sentiment and currency and inflation pressures in Russia. Ongoing macro-economic headwinds across much of Europe also weighed on results in Europe, the company noted.

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