Why McDonald's Can't Save Itself - The Myth of Core

McDonald’s recently completed another lousy quarter.  All segments saw declining traffic, revenues fell 11%.  Profits were off 33%.  Pretty well expected, given its established growth stall.

A new CEO is in place, and he announced a turnaround plan to fix what ails the burger giant.  Unfortunately, his plan has been panned by just about everyone. Unfortunately, its a “me too” plan that we’ve seen far too often – and know doesn’t work:

1. Reorganize to cut costs.  By reshuffling the line-up, and throwing out a bunch of bodies management formerly said were essential, but now don’t care about, they hope to save $300M/year (out of a $4.5B annual budget.)
2. Sell 3,500 stores McDonald’s owns and operate (about 10% of the total.)  This will further help cut costs as the operating budgets shift to franchisees, and McDonald’s book unit sales creating short-term, one-time revenues into 2018.
3. Muck around with the menu.  Cut some items, add some items, try a bunch of different stuff.  Hope they find something that sells better.
4. Try some service ideas in which nobody really shows any faith, like adding delivery and/or 24 hour breakfast in some markets and some stores.

Needless to say, none of this sounds like it will do much to address quarter after quarter of sales (and profit) declines in an enormously large company.  We know people are still eating in restaurants, because competitors like 5 Guys, Meatheads, Burger King and Shake Shack are doing really, really well.  But they are winning primarily because McDonald’s is losing .  Even though CEO Easterbrook said “our business model is enduring,” there is ample reason to think McDonald’s slide will continue.

Possibly a slide into oblivion.  Think it can’t happen?  Then what happened to Howard Johnson’s?  Bob’s Big Boy? Woolworth’s?  Montgomery Wards? Size, and history, are absolutely no guarantee of a company remaining viable.

A seasonal McDonald’s is closed for the winter on Wednesday, April 8, 2015, in Lake George, N.Y. (AP Photo/Mike Groll)

In fact, the odds are wildly against McDonald’s this time.  Because this isn’t their first growth stall.  And the way they saved the company last time was a “fire sale” of very valuable growth assets to raise cash that was all spent to spiffy up the company for one last hurrah – which is now over.  And there isn’t really anything left for McDonald’s to build upon.

Go back to 2000 and McDonald’s had a lot of options.  They bought Chipotle’s Mexican Grill in 1998, Donato’s Pizza in 1999 and Boston Market in 2000.  These were all growing franchises.  Growing a LOT faster, and more profitably, than McDonald’s stores.  They were on modern trends for what people wanted to eat, and how they wanted to be served.  These new concepts offered McDonald’s fantastic growth vehicles for the cash the burger chain was throwing off, even as its outdated yellow stores full of playgrounds with seats bolted to the floors and products for 99cents were becoming increasingly not only outdated but irrelevant.

But in a change of leadership McDonald’s decided to sell off all their growth concepts.  Donato’s in 2003, Chipotle went public in 2006 and Boston Market was sold to a private equity firm in 2007.  All of that money was used to fund investments in McDonald’s store upgrades, additional supply chain restructuring and advertising. The “strategy” at that time was to return to “strategic focus.”  Something that lots of analysts, investors and old-line franchisees love.

But look what McDonald’s leaders gave up via this decision to re-focus.  McDonald’s received $1.5B for Chipotle.  Today Chipotle is worth $20B and is one of the most exciting fast food chains in the marketplace (based on store growth, revenue growth and profitability – as well as customer satisfaction scores.)  The value of all of the growth gains that occurred in these 3 chains has gone to other people.  Not the investors, employees, suppliers or franchisees of McDonald’s.

We have to recognize that in the mid-2000s McDonald’s had the option of doing completely opposite what it did.  It could have put its resources into the newer, more exciting concepts and continued to fidget with McDonald’s to defend and extend its life even as trends went the other direction.  This would have allowed investors to reap the gains of new store growth, and McDonald’s franchisees would have had the option to convert McDonald’s stores into Donato’s, Chipotle’s or Boston Market as the market warranted.  Employees would have been able to work on growing the new brands, creating more revenue, more jobs, more promotions and higher pay.  And suppliers would have been able to continue growing their McDonald’s corporate business via new chains.  Customers would have the benefit of both McDonald’s and a well run transition to new concepts in their markets.  This would have been a win/win/win/win/win solution for everyone.

But it was the myth of “focus” and “core” markets that led McDonald’s leadership to make what will likely be seen historically as the decision which sent it on the track of self-destruction.  When leaders focus on their core markets, and pull out all the stops to try defending and extending a business in a growth stall, they take their eyes off market trends.  Rather than accepting what people want, and changing in all ways to meet customer needs, leaders keep fiddling with this and that, and hoping cost cutting and a raft of operational activities will save the business as they focus ever more intently on that old core business.  But, problems keep mounting because customers, quite simply, are going to competitors who are implementing on trends.

CEO Esterbrook is unlikely the right man for the job

The current CEO likes to describe himself as an “internal activist” who will challenge the status quo.  But he then proves this is untrue when he describes the future of McDonald’s as a “modern, progressive burger company.”  Sorry dude, that ship sailed years ago when competitors built the market for higher-end burgers, served fast in trendier locations.  Just like McDonald’s 5-years too late effort to catch Starbucks with McCafe – which was too little and poorly done – you can’t catch those better quality burger guys now.  They are well on their way to growing markets, and you’re still in port asking for directions.

McDonald’s is big, but when a big ship starts taking on water it’s no less likely to sink than a small ship (i.e. Titanic.)  And when a big ship is badly steered by its captain it flounders, and sinks (i.e. Costa Concordia.)  Those who would like to think that McDonald’s size is a benefit should recognize that it is this very size which now inhibits McDonald’s management from doing anything effective to really change the company.  Planned turnaround efforts (detailed above) are hemmed in by all those stores, franchisees, commitment to old processes, ingrained products hard to change due to installed equipment base, and billions spent on brand advertising that has remained a constant even as McDonald’s lost relevancy. It is now sooooooooo hard to make even small changes that the idea of doing more radical things that analysts are requesting simply becomes impossible for existing management.

And these leaders, frankly, aren’t even going to try.  They are deeply wedded, committed, to trying to succeed by making McDonald’s more McDonald’s.  They are entrenched in the company and its history.  Not the CEO, or anyone on his team, reached their position by introducing a revolutionary new product, much less a new concept – or for that matter anything new.  They are people who “execute” and work to slowly improve what already exists. That’s why they are giving even more decision-making control to franchisees via selling company stores in order to raise cash and cut costs – rather than using those stores to introduce radical change.

These are not “outside thinkers” that will consider the kinds of radical changes Louis V. Gerstner, a total outsider, implemented at IBM.  In short order he changed the company from a failing mainframe manufacturer/supplier into an IT services and software company.  And that is the only way anyone will turn around McDonald’s.  The Board blew it when it sold Chipotle, et.al. and put in place a core-focused CEO.  Now McDonald’s has fewer resources, a lot fewer options, and the gap between what it offers and what the marketplace wants is a lot larger.