Faced with slumping sales in its biggest markets, McDonald's on Monday announced the first steps of a global turnaround strategy, acknowledging that a business that has served up billions of burgers on the cheap was in urgent need of change.
Investors and franchisees had been closely watching Steve Easterbrook, McDonald's new chief executive, for details on how he intends to reverse years of lacklustre growth at one of the world's largest restaurant chains, perhaps with a revamped menu.
But the changes Easterbrook announced in a video message were largely operational. He said McDonald's would reorganise itself into four new global segments, grouping previously separate markets together: "lead" markets like Britain and Australia; "high growth" markets like China and Russia; the US, which accounts for more than 40 per cent of the company's operating profit; and business in the more than 100 other countries where it operates.
McDonald's will also sell off more company-run locations to local franchisees, a strategy called "refranchising" that Easterbrook said would unlock local entrepreneurship and give the chain more stable revenue. Over the next four years, McDonald's wants to sell off 3,500 restaurants, which would increase the percentage of stores that are franchises to 90 per cent worldwide, from 81 per cent, he said.
Easterbrook said these and other changes to the corporate structure would contribute to some $300 million in net savings a year.
"No business or brand has a divine right to succeed, and the reality is our recent performance has been poor," Easterbrook said in a video message posted on McDonald's corporate site. "I will not shy away from the urgent need to reset this business."
McDonald's has been struggling to hold its own in the face of rivals like Chipotle Mexican Grill, Shake Shack and Panera, which are luring a new generation of customers with higher-end, fresher, seemingly healthier foods.
Same-store sales at McDonald's 14,000-odd restaurants in the US have fallen over the last five years. In the first quarter, revenue fell 11 per cent from a year earlier to $5.96 billion. Earnings per share slumped 31 per cent from the previous year.
Overseas, McDonald's has suffered from supply issues and a food safety scandal in Asia, as well as the lingering effects of delays at West Coast ports that disrupted shipments of potatoes for months.
Easterbrook, a long-time McDonald's executive who took over as chief executive in March, has promised to refashion McDonald's into "a modern, progressive burger and breakfast restaurant." And he initially appeared to move quickly. Within days of taking the company's helm, he announced that all the chicken served at McDonald's restaurants would be free of any antibiotics that are also used in humans.
McDonald's has also started to simplify its menu offerings, which have mushroomed over the last two decades, and is testing all-day breakfast at some restaurants in the US, as well as premium chicken sandwiches and sirloin burgers.
But even as it simplifies its traditional menu board, the restaurant chain is also testing a personalised menu that allows customers to custom-build sandwiches from a menu of higher-quality meats, toppings and buns. But analysts say the burgers, made from raw patties rather than the precooked fare used in standard burgers, could be troublesome because they are more expensive, take longer to prepare and are not offered via the drive-through that makes up a large portion of the chain's business.
Mark Kalinowski, lead restaurant analyst at Janney Montgomery Scott, said that McDonald's faced a conundrum.
"Clearly, customers want more customisation in a quick-service restaurant setting," Kalinowski said, "but customisation is really not McDonald's historic strength. In fact, franchisees are already voicing deep concerns that restaurants are getting too complex to run and manage.
"So on the one hand you have your customers saying they want more customisation, which could mean more complexity, and on the other hand you have your franchisees telling you they want more simplification and less complexity. That's a really difficult challenge to manage your way through."
Easterbrook acknowledged that its personalised burgers operation was a work in progress. He said that McDonald's would not expand an experimental build-your-own burger programme, now at about 30 locations in the US, to as many locations as initially expected, he said.
McDonald's is also testing a downsized version of that programme that is said to allow both store and drive-through customers to choose a bun and one of four sandwich types.
"What I've encouraged is, Let's get it right rather than do it first," Easterbrook said in a conference call with reporters. "But when we do press go, we have a pretty good track record of getting things done quickly."
And asked about next steps in raising the quality of food - one reporter asked when customers might see organic lettuce in McDonald's burgers - Easterbrook was non-commital. He stressed, however, that McDonald's had already made progress in reducing levels of sodium, fat and sugar in its products in some markets.
"Consumer tastes are changing; the things they're inquisitive about are changing," he said, "and we've got to be seen to be moving with those."
On Monday, McDonald's started a delivery service in New York City with the start-up Postmates, whose couriers deliver everything from cupcakes to groceries for a fee. For now, however, Postmates charges a hefty delivery fee, making all but bulk orders uneconomical - an order for a $6.99 Big Mac Meal from a local McDonald's came to more than $12 with all fees included - and McDonald's has not said whether it will team with Postmates on delivery to other markets. Chipotle has a similar partnership with Postmates.
© 2015 The New York Times News Service
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