Web Exclusive | February 2015 | By Barney Wolf

How Easterbrook Can Fix McDonald’s

Incoming CEO has his work cut out for him at struggling McDonald’s.
Quick service restaurant behemoth McDonald's hired new CEO to turn company around.
Incoming McDonald's CEO Steve Easterbrook hopes to turn the company around. image used with permission.
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As Steve Easterbrook readies to take over the helm at McDonald’s Corp. next month, one point seems crystal clear: He has his work cut out for him.

In the wake of two years of declining sales and profits, the world’s largest restaurant enterprise is turning to Easterbrook to turn around the ship after current chief executive Don Thompson decided to step down after nearly three tumultuous years.

Most experienced observers believe Easterbrook has the experience and ability to pull McDonald’s out of its funk, but they caution that it is going to take time.

“There’s no single thing that’s caused this situation,” says Andy Barish, a restaurant industry analyst with San Francisco–based investment banking company Jeffries Group. “They kind of lost their edge in a lot of ways.”

There have been a few positive signs for the company: Same-store sales rose in December for the first time since late 2013, and the Super Bowl commercial tied to the chain’s “I’m Lovin’ It” tagline was deemed a big winner. But there’s significant work to do.

“We don’t expect overnight improvement,” Barish says. Even with recovering restaurant industry trends and better weather in much of the country so far this winter, he says, the company’s U.S. business is likely in for another year of same-store sales declines.

Wall Street generally applauded the CEO change. The company’s stock jumped 5 percent when McDonald’s announced the move last month.

“Franchisees don’t think there will be any progress until they simplify the menu and operations.”

Easterbrook, who spent most of his career in Europe, has proven acumen in leading a turnaround effort. Having been named CEO of McDonald’s U.K. in 2006, he successfully initiated steps to boost the brand’s flagging British business. In 2010, after a short stint as chief brand officer at McDonald’s headquarters in Oak Brook, Illinois, he was named president of McDonald’s Europe. He left the company a year later to lead two separate British chains—Pizza Express and Wagamama—but was lured back to McDonald’s in 2013 as global chief brand officer.

“If you look at Easterbrook’s background, he clearly has McDonald’s ketchup in his veins,” says Dennis Lombardi, foodservices strategist for WD Partners, a branding firm based in Dublin, Ohio. “I think it’s a benefit he has international experience with the company, and I think it’s also good that he’s shown expertise in digital.”

The CEO’s marketing background is key, Lombardi adds. “What will serve McDonald’s best is marketing at the brand level and enhancing the company’s brand value,” he says.

However, Easterbrook faces a much tougher environment in the U.S. than he did in Europe. Barish says the U.S. market is increasingly difficult because of intense competition, along with various regulatory, legal, operational, and technological issues that face the company.

McDonald’s franchisees are taking a wait-and-see attitude to the new CEO, says Richard Adams, a San Diego–based restaurant franchisee consultant and former McDonald’s operator.

“Don Thompson wasn’t unpopular with the franchisees, but they were getting frustrated with him because of a lack of progress,” Adams says. “Most franchisees agreed a change had to be made, but nobody really knows Steve Easterbrook.”

Adams says the company is holding a turnaround summit with franchisees in the next few weeks, although the company declined to confirm the meeting.

Several initiatives have been launched at McDonald’s in an effort to improve results, including “Experience of the Future,” which aims to provide more relevant food and beverage options and uses major digital investments to transform the company’s service and convenience. Another is the “Create Your Taste” customization platform being tested that allows in-restaurant customers to choose their toppings through a digital ordering platform.

Still, there’s little doubt among many experts that the most important task for McDonald’s going forward is to find operational methods to improve its speed of service, whether as part of “Experience of the Future” or as a separate initiative.

“Speed and accuracy make a difference, and McDonald’s has seen their focus on that slip,” Barish says. As the company expanded its menu and added more moving parts, including the successful McCafe platform, operations became slower and more complex.

“I get where they’re going with ‘Experience of the Future’ and ‘Change Your Taste,’ and those are things they have to work on, but at the end of the day, McDonald’s is a brand for speed and convenience and value,” Barish adds.

A number of franchisees believe this can be achieved by simplifying the menu for both consumers and operators, Adams says. “That’s the universal cry from franchisees. They don’t think there will be any progress until they simplify the menu and operations.”

One initiative in “Experience of the Future” would streamline the core menu by highlighting popular items, eliminating out-of-favor ones, and allowing regional franchisee groups to create local versions of burgers, chicken, and other menu items.

“It strikes me, as an outsider, they seem to have a handle on what needs to be done, and some of these programs are in place,” Lombardi says. “It’s going to take some time.”

Barish expects McDonald’s earnings to be flat this year, with same-store sales likely to fall or be flat most of this year.

“We’re not fundamentally convinced we’re on the cusp of a notable change with Don departing and Steve coming in,” he says.