A new plan for McDonald’s
He says company needs to be more responsive to changing customer tastes to reverse sales decline
Its CEO says the chain needs to be more responsive to changing customer tastes to reverse a sales decline.
McDonald’s Corp. Chief Executive Steve Easterbrook said Monday that he is simplifying the company’s organizational structure to make it more nimble and responsive to changing customer tastes.
In a 23-minute video posted online, Easterbrook, who took the helm of McDonald’s in March, said the company needs to catch up with changing tastes.
“Our business model strength is enduring, but no business or brand has a divine right to succeed,” he said. “The reality is, our recent performance has been poor. The numbers don’t lie.”
McDonald’s global sales declined 2.3% for the first three months of the year. In the U.S., sales dropped 2.6% as customers flocked to rivals with more healthful food reputations.
Easterbrook said the Oak Brook, Ill., company would rely on more market research to adjust its menu and also would listen to customers.
He told analysts Monday that the company has already started to introduce new items to the U.S. menu including sirloin burgers and artisan chicken, which he said “really does resonate well with customers.”
Easterbrook also mentioned all-day breakfast tests in San Diego restaurants and a delivery service in New York City as options for future growth.
He said the U.S. businesses are in the “early days” of the turnaround and that it “will be a little bumpy,” but that they were ultimately “on the right track.”
McDonald’s shares fell $1.67, or 1.7%, to $96.13 on Monday.
McDonald’s has struggled in recent years to attract customers because of the perception that the company’s food is unhealthy. Analysts have said that millennials in particular are interested in fresher fare.
High calorie, saturated fat and sodium counts for many of McDonald’s signature items, including the Big Mac, as well as rumors about the quality of its food pushed the company to launch a public relations campaign in October to address what it considered to be misconceptions about its menu. To address further health concerns, the company said in March that it would phase out the use of chickens treated with antibiotics.
Restaurant chains that market themselves as all-natural or high-quality alternatives, such as Chipotle Mexican Grill Inc., have reaped the financial benefits. In the first quarter of 2015, revenue for the Denver-based burrito chain increased 20.4% to $1.09 billion compared with the first quarter of 2014.
McDonald’s faced another wave of criticism last month when the company said it would raise wages only for workers at company-owned stores and not franchises, which make up 90% of the roughly 14,000 U.S. stores.
The company will be organized into four segments: the U.S., which accounts for more than 40% of operating income; international lead markets, which include Australia, Canada, France, Germany and Britain and makes up about 40% of operating income; high-growth markets like China, Russia and South Korea, which generate about 10% of operating income; and foundational markets, which account for the remaining restaurants.
The new structure is “designed to remove cultural and structural blockers to growth,” Easterbrook said.
He also said McDonald’s would accelerate the conversion of company-owned restaurants to franchises, increasing the percentage of franchises globally to 90% from 81%.
Easterbrook said the company expects $300 million in savings by the end of 2017.
“We believe we have the strong foundations for winning customers back,” he said. Analysts weren’t so sure. Standard & Poor’s Ratings Services lowered McDonald’s corporate credit rating to an A-minus, citing the higher debt from the company’s share repurchases and also the “fierce” competitive environment. But S&P said the outlook was “stable.”
Equity analyst Efraim Levy from S&P Capital IQ said he thought that there was “no quick fix” for the restaurant chain.
“While trimming menus should be relatively easy, we think the big challenge will be wooing millennials” and turning around profits, Levy said. “Improving restaurant appeal won’t be easy, in our view, and even successful execution will take time.”