McDonald’s is on a tear. U.S. same-store sales have been surging for the last three years, and 2017 boasted the company’s best sales growth in six years.
It’s a far cry from 2015, when McDonald’s was in a tailspin and named company veteran Steve Easterbrook CEO in a bid to inject some new energy into the business. That’s exactly what Easterbrook has done, and this past March—almost exactly three years after taking the helm—the CEO sat down with QSR’s Sam Oches to discuss the keys to McDonald’s stunning turnaround. (This interview has been edited for clarity.)
In May 2015 you released a video explaining McDonald’s Turnaround Plan. What’s been the biggest key to the turnaround in the last three years?
I was fortunate in having spent many years within McDonald’s before I got appointed to this position, so I felt I had a pretty good understanding of the business—where we were at and also what was needed. If I were to summarize it at all, I think one thing I tried to introduce with urgency from early on was the need for a mind shift or change in attitude to recognizing that what had made us successful for our first 60 years wasn’t necessarily going to be sufficient to make us successful for our next 60. Therefore, you’re really getting into evolving the culture and outlook of the company, and probably most importantly, introducing a completely new pace of change.
When the pace of change outside of a company has quickened the pace of change within, you start to hit some roadblocks. And we had. The business had stalled. The brand was looking a little tired in relation to a fast-moving world outside. So really, it was to create a sense of urgency and acceptance that without throwing out all the heritage and values that had made us so successful as a business and a brand, we needed to adopt a different approach.
What was holding McDonald’s back? What wasn’t working?
We were holding on very proud to our heritage and what got us to where we were. The confidence from the business was ebbing away. The pride remains high but the confidence starts to dip away, and therefore the appetite for risk starts to reduce. What I wanted to try and do with some of the early moves we made as part of the Turnaround Plan was to inject some purpose into the business, but also give people permission to be confident in their decision-making. The minute decision-making seizes up, the business seizes up, and customers notice.
We made some pretty significant changes, which mattered probably more internally than externally initially. We totally reorganized the way we operated as a global business. We previously organized ourselves around geographic segments, which I think, as you develop from country number one, the U.S., into 120 countries, some of that makes sense; we wanted to have these centers of expertise. But a 30–40 country Europe is varying, with differences in maturity, different consumer sets, different phases of franchising. We weren’t organized to enable the best transfer of ideas between similar markets.
We re-initiated away from areas of the world to what we called a segment structure, where we grouped markets together into a structure where knowledge transfer is much quicker. Because that was the other thing that was holding us back. We had pockets of brilliance all over the place, but we hadn’t necessarily pulled it all together or allowed that knowledge transfer as quick as we wanted it. As well as just physically changing the structure, we also took out two or three layers of management whilst doing that, which wasn’t because the people we had were not working hard or were not high-quality individuals, it was just taking too long for ideas to move up and down the organization and across the organization. So we stripped a lot of that away. It’s at a level now where I will have one segment president between me and a market. Previously there could have been up to five people in that chain of management.
What are some of the ideas that get exchanged across the markets?
Menu innovation—so, great new items. We’re all trying to work on the premium end of our menus with our Signature ranges. We call it something different in every country, but there’s different flavors, different beef patties, different buns they’re creating, different flavor profiles. While not every flavor and taste are transferable, let’s at least share the idea.
Restaurant design. Again we have some beautifully designed restaurants, where perhaps the design catalog wasn’t transferring across.
Embracing of technology. We had a market such as France, which was really on the sharp end within McDonald’s of introducing self-order kiosks, giving customers a totally different way to order their food, giving them ways to pay, giving them ways to be served. But France had been on that for four or five years before it really even transferred to the next market. We just needed to shorten the timeline between good ideas getting spread across the business.
You were in charge of the UK/Europe business for years. What were some of things you saw first-hand that you were able to share with the global business?
Consumers became more challenging and had higher expectations sooner in Europe than probably anywhere else in the world, whether it was around their expectations around the experience and ambiance of a restaurant, all the way through to having a greater interest in what’s in their food, where it came from, and how it got there. I think Europe had been on the sharp end of that shift in consumer expectation and had embraced it and adapted to it. So I think some of the confidence [was] in knowing that we could evolve our business and continue to grow our business and still be true to McDonald’s. But—I say quite often—it’s not about being a different McDonald’s, it’s about being a better McDonald’s. The confidence of seeing that work in many mature markets, how we could continually evolve the business and the brand, gave me the confidence that it was absolutely transferable knowledge and skill that we could share elsewhere in the McDonald’s global system, and particularly here in the U.S. as well.
The franchisees are obviously a big piece of this success, and the refranchising initiative was a significant part of the turnaround. How were you empowering the franchisee to communicate that better McDonald’s experience?
The franchisees are everything about the turnaround, and our continued growth. Franchisees embody everything we stand for, because while we’re a significant global business, we’re made up of many, many small businesses from local businessmen and women. They’ve made significant commitments, not just financially; in terms of just the time they’re committing to McDonald’s, a typical franchise agreement with us is 20 years. They’re pretty much committing the most important years of their careers and their business lives into McDonald’s. Therefore their passion and commitment is second to none.
Part of what we did through the turnaround and then the subsequent launch of the Velocity Growth Plan was bring the franchisees to be a part of that. Whilst they want leadership and expect it from McDonald’s as a franchisor, they also want to be brought on that journey. Once they have that buy-in, the ability for us to get the job done is so much higher. Part of what’s been very important—and we can do that at a global level, but it’s done country by country with the market leadership teams—is to take the franchisees on that journey with you, have them buy in with you. The commitment to investing in restaurants such as where they are today, all the way to embracing changes like moving to fresh beef on the Quarter Pounders, embracing technology—whether it’s on mobile order and pay or with the self-order kiosks—you want to bring them with you. It’s all about the execution.
The reality is a strategy can be fantastic, but if you don’t execute it well, it becomes worthless. I’ll always say that an 80 percent perfect strategy executed 100 percent is way better than a perfect strategy executed at 80 percent. And the execution happens at the restaurant level, and the vast majority through our franchisees.
The refranchising initiative that was launched as part of the Turnaround Plan, for 4,000 [refranchised] restaurants, we literally went through country by country and identified, do we think that is better run by the company as a company-owned market, with traditional franchisees? Or do we think that country, given its geography, given its culture, given its business environment, is better run with what we call a development licensee? So we created a very clear plan very early on and moved really quickly to get ourselves to what we thought was the best organizational structure. Once we dealt with the geographic operating side, it was more about, who do we want running each and every restaurant in the McDonald’s system? And the 4,000 restaurant target we actually got to a year ahead of time, and I think that’s been an influential part in building enthusiasm and momentum, because franchisees love to grow. They’re incredibly proud to be the representative within their country for the McDonald’s brand. Therefore their commitment to supporting the plans and executing them well has been executed at a really high level.
You mention refranchising ahead of schedule. How much do you feel like you can step on the gas pedal of a company at this scale?
We had to execute and demonstrate that we could turn the business around. That was what that Turnaround Plan was all about. From May 2015, when we publicly committed to it, through ’15 and through ’16, we could see we were getting traction in the business. It wasn’t in just one country or just one segment. We were getting the vast majority of our significant mature markets back into growth—customer growth, sales growth, income growth for the company, cash-flow growth for the owner-operators. And we felt confident enough that we had the right pieces in place that we should start developing a growth plan, because you can’t stay on a Turnaround Plan forever. If you do, you either haven’t gotten a plan for continued growth or you haven’t turned it around. So we felt we had executed the turnaround.
That’s when we created—what we publicly announced the first of March 2017—the Velocity Growth Plan. It was grounded in the deepest consumer insight work that we had ever conducted in McDonald’s on a global basis. We felt we had a really good understanding of who our customers were, what their needs were. Those that were coming less often, we wanted to understand why they were coming less often and what we could do to address that. Those floating boats on the side, what would it take to turn their heads and bring them into McDonald’s and have them become more regular customers. So we had a very good understanding across most of our major geographies and most of our major countries of what levers we could be pulling on behalf of the customer to drive sustaining, strong growth. That, in itself, gave us conviction that we had a growth plan that we thought would satisfy the majority of stakeholders.
Then we took a look at ourselves, and, through the course of that period of time, we rebuilt our global leadership team and made some adjustments as necessary in managing directors in our major markets, and felt we had a really high-quality team—a world-class team. We looked at ourselves and thought, if we’re creating a world-class team to lead a world-class business, does a steady growth plan meet our expectations? And of course, our ambitions are greater than that. So we challenged ourselves to say, are there additional growth drivers that we can put on top of our traditional growth plan, which would really accelerate growth? We just call them our accelerators.
We looked to identify things outside of the normal planning cycle that we could layer on top of our normal growth that would really start to springboard a more aggressive growth perspective. [First] there was accelerating the Experience of the Future, particularly here in the U.S., because it’s a little more tired and we’re a little further behind here, and this is our mother ship, it’s our most significant market. We felt the business was on a trajectory where it could embrace that level of commitment.
[Second was] adopting at-home delivery, which we’d had a solid business in Asia. But really the majority of the mature markets around the world—when I say mature markets, I’m talking about the U.K., France, Germany, Spain, Italy, Canada, Australia, Japan to a certain degree—really hadn’t embraced the concept of home delivery, even though that trend had taken hold. We knew there was opportunity there.
So we had EOTF—Experience of the Future—in the U.S., delivery, and then there was putting our foot on the accelerator on technological advancements. For us, we call it digital, or technology. For us, the majority of our technology focus has been back of house, behind the counter, and we’ve been very effective at doing that. But we hadn’t introduced as much consumer-facing technology as society was accepting, whether it was the basics of a mobile app all the way through to loyalty or mobile order ahead. We didn’t have that one-on-one connectivity with customers that we know would make us a much more valuable commodity to customers if we understood their behavior.
So those are the three accelerators we layered on top, and we felt that would turn us into a top performer, whichever stakeholder group you look at. The early signs are encouraging.
It seems the challenge McDonald’s has is that the iconic American brands—like, say, Apple or Google—are all representing this idea of a lifestyle brand. McDonald’s seems to be adapting to that idea, but how do you balance that with the heritage?
I think it’s really important to always be true to who we are and be true to the role we play in customers’ lives. We’re not a life-transforming business to many of our customers, but we can make their lives more fun, more convenient, more enjoyable on an everyday basis. What does that look like in the modern world when you’ve got these tech giants who are transforming lifestyles in certain ways? Let’s not set out to try to transform lives, but let’s face the strengths that we have.
So, instead of the traditional McDonald’s where customers had to fit around our business model, can technology now enable us to offer an entirely different experience where customers can order how they like, order what they like, pay the way that suits them, and then be served in a manner that suits them? Can they customize their favorite? Instead of necessarily having to go up to the front counter and saying, “I want a Quarter Pounder with cheese, no pickle,” maybe you can install that as your favorite on your phone and order that in advance. Or you can go to a kiosk and adapt your orders and have more customization than you would typically be able to have. Or there are different payment levers where you can register your credit card on your app all the way to paying cash. Or if you want to order on the kiosk and then go pay in cash because that’s the way you want to, then you can.
If it comes down to how you’re served, if you’re in a rush and you’re a grab-and-go customer—in a restaurant like this that has a very busy breakfast shift and you just want a cup of coffee—you may just want to go straight up to the counter, order it, and go. Because that’s what suits you; that’s the customer journey that suits you. However, if there are three or four of you and there’s a breakfast meeting here and you want to have something to eat and a coffee, then you can use the kiosk, choose to sit down, and we’ll just bring it out to you. So it’s a totally different customer journey because the need of the customer is different.
We didn’t have the flexibility to offer customers that choice in the past, so I guess our interpretation of the way consumers want to behave and the way society is going is, can we offer more choice? Choice in what they order, how they order, how they pay, and how they’re served. And I think that will be the journey we continue on. As long as we stay close to the customer and what their needs are, and we continually look to evolve and restructure ourselves to meet that, I believe we’ll continue to be successful.
With the UberEats partnership, and with the increasing importance of off-premises dining, how do you make sure the quality is consistent across those experiences?
It’s probably the best example of cultural change I could talk to, where myself and other members of our senior team regularly travel internationally and go around our markets, and each of our markets was recognizing that trend, was talking to it but hadn’t done anything about it. It got to the stage where, by the end of 2016, I had a really strong conviction that this was something we needed to embrace, and if we were going to wait and test and delay until we found the perfect solution, we’d never get there.
One of the other, I guess, attitudes I tried to introduce from that May 2015 video was around progress over perfection. Why do we get into this? Going to our scale, our ability to learn quickly is second to none. Will it be perfect every order? No. Are we concerned about the way the quality of fries hold because of a 10-minute delivery window? Yes we are. Does that mean we shouldn’t do it? No it doesn’t. It means we should get into it and then through innovation—either product innovation, packaging innovation, fine-tuning delivery radius around the restaurant, continuing to train not just our staff but our partners, in this case UberEats—can we just get better at it with scale?
We moved from a 20-restaurant test in Miami in the second week of January to a 200-store test in Miami, Orlando, and Tampa at the end of January, to by the end of the year we were in more than 7,000 restaurants, including 5,000 here in the U.S., and in 21 countries.
I think that’s probably the best example of how we rallied the broader system just to embrace an opportunity and go hard at it, rather than the slightly more methodical, incremental way that perhaps we would have done in the past. It still doesn’t mean we’re perfect, but we’re better now than we were a year ago, and we’ll be better in a year’s time than where we are today, because we continued to improve and learn as we go.
I’ve heard you say that you’re aiming to get more customers more of the time. Obviously the value menu has been a big part of that, and I’m wondering where that goes in the future? How do you get more customers, especially with millennials and Gen Z, in more of the time?
To frame the challenge, the broader IEO industry—the informal eating out industry—is going to grow very marginally, as best we can tell, over the next short to medium term, probably long term. A lot of that growth will come from new units, either new concepts coming in or people expanding. Which means, if you really want to grow your business, serve more customers more often, it’s a market share fight. It’s as simple as that. The supplier premises is going to exceed the demand from customers. So how do you win that market-share fight?
I think part of it is you stay very, very close to the consumer needs and the consumer trends—delivery, off-premises is one good example. I think the other piece is, we’re still far from having gotten everything right just within the four walls of our restaurant. We continue to work all levels of our menu, because value can very closely relate to price for some customers, but a sumptuous burger with different flavor profiles at the premium end of the price can also be value to another customer. Value means different things to different people. But I think for us, we just need to be first of all delivering the basics right—nothing beats what I call running good restaurants. Ultimately, if we can just serve hot, fresh food in a friendly, safe environment—and we do so at a speed our customers have come to expect—nothing beats that. Nothing is more important than that.
To all the other nudges and tweaks and introductions and innovation we have, we have to build upon that base. While we are evolving and introducing concepts which are more challenging sometimes, or just require a change of mindset, the underlying foundation we’ve tried to keep very in tune with in all of our internal conversations is, just don’t forget to run the restaurant well. Keep it clean. Keep it well staffed. Keep training your staff. Keep motivating your staff. Because remember, the customers have maybe 20 minutes, maybe a 5-minute interaction with you, or maybe an hour; just make that as comfortable and enjoyable as you can, and there’s more chance that they’ll come to you than the guy next door.
The reason why I talk about more customers more often is we can grow topline sales if we do that solely through average check growth, which could be through product makeshift or through price. That can give you some short-term results, but the long-term health of our business, the lifeblood of our business, is serving more customers more often. That has really helped us internally move from talking about being customer-driven to actually thinking about being customer-obsessed. As we go through our normal planning cycles in our business in all of our countries around the world, if they can truly demonstrate that the plans they’re building are going to meet the needs today and the needs tomorrow of the customer, as opposed to just suit us, then I’m going to start feeling pretty good about where we’re at.
Talking about the idea of growth, you see the stock price going up, and profitability and unit counts too. Where are you directing growth for the future?
The Velocity Growth Plan still has plenty of legs in it for the short to medium term. At a country level, a market level, at a local organization level, if we still keep delivering against the key tenets of that, then the growth opportunity is evident, but it’s up to us to get it. What we also should expect of ourselves is, as our owner-operators and as our teams in our markets are staying focused on short to medium term, there will be a smaller number of people at a senior level thinking about what’s next. You’ve got to take care of the brand in the long term. It may not happen during my tenure, but it’s responsible that I’m still setting up that train of thought for whoever comes next.
We will transform almost 4,000 restaurants here in the U.S. with the Experience of the Future this year. That will only get us about half of the estate. So we’ve still got a lot of legs to actually get done what we’ve laid out in the Velocity Growth Plan. But I’d be lying if I didn’t tell you that a small number of us have begun to think what’s over and above that. And I think that’s what people expect out of leadership.
The Experience of the Future has to become the Experience of Today. How do you stay on that leading edge of innovation?
I think we’re scratching the surface in the relationship that we have with our customers. At the moment, we’re still something of a mass marketer, and we’re in the early stages of a journey toward what I call mass personalization. The percentage of our customers who come in today who we have that true one-on-one engagement with—which is, you walk up, they scan your phone, it will say, “Hi Sam, do you want to order the same as you had last time?” or, “Hi Sam, you have X number of loyalty points, do you want to redeem them or do you want to continue to build?” Or if you have kids, you may want to know about the next Happy Meal program coming in. Do you want a sneak peak of the next Disney movie? Because we just signed with Disney. Are there ways that we can build the value in the experience over and above simply just the food you get and the price you pay. The better we can sell to our customers, the more valuable we become to them.
In terms of unit growth, we still have substantial unit growth opportunity—less so here in the U.S., but as we look around the world. At the moment we’re putting the majority of our capital into completing our existing real estate and making it look fantastic. We’re a very cash-generative business, and we have an opportunity to use that cash in any one of a number of ways. But fundamentally, I never want us to lose touch with where the customer is at and where they’re heading, because the minute you take your eye off that, you tend to lose your way. I don’t know what we’ll look like in five years’ time, but I hope we’re addressing the needs of where the consumer’s at in five years’ time. Because you’re right, this will look great, and does look great, and customers are responding to it—business has taken a meaningful upturn post the relaunch of the restaurant. But the world is moving at an ever-faster pace, and today’s the slowest the world’s ever going to move, but today is also the quickest it’s ever moved so far. That’s just the conundrum we have.
I think it’s a fascinating and really challenging time to be in business. That’s when you just try to surround yourself with a ton of fantastic people who can help you navigate this. Typically the answers come from the markets; we’ve got a small number of really smart people in the center, but the reality is, it’s just as likely to come from innovation in the Philippines or Malaysia as it is from Denmark or Poland, or it could be from a market here in the U.S., from Southern California or the Great Western Heartland. So we just stay close to it and enjoy the ride.
No pressure, right?
I don’t feel the pressure, on the basis that if you do your best and you try to get the best out of everyone around you, whether that’s every owner-operator, every company employee, every supplier, then you’re doing the best you can. And we do have the advantage of a brand and a scale, that when you get it right, you get it right in a very big way. The flipside is, if you don’t, it goes the other way. We’re three years in. If I was to use a baseball analogy, we’ve probably just rounded first base. I’m excited about what’s to come.
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