By Emily Bryson York, Chicago Tribune reporter
March 23, 2012
Big Macs aren’t going anywhere. Egg McMuffins aren’t either. As McDonald’s begins its CEO transition, expect very little to change in the short term.
The Oak Brook-based company announced late Wednesday that longtime CEO Jim Skinner will retire at the end of June, and Chief Operating Officer Don Thompson, long considered heir apparent, will take over.
Thompson, 48, is taking the reins at a high point for the burger giant, on a roll with nearly nine years of global sales growth. But a number of challenges lie ahead, including soaring commodity costs, a stronger U.S. dollar and maintaining its own breakneck pace. The chain also is under pressure to continue international expansion.
Those who have worked with Thompson say he is up to the demands.
“He’s a very talented executive for McDonald’s, a very bright individual who’s been around 22 years and held many jobs that have allowed him to contribute great value to the system, including COO and president of the U.S., a very important job,” Skinner said in an interview. “He’s the real deal.”
Thompson, through a spokesman, declined to comment for this story.
“I’m excited to see where he takes the business,” said Morningstar analyst R.J. Hottovy. As president of the U.S. business, Thompson was a big force behind the McCafe beverage rollout, which added smoothies, frappes and espresso-based beverages to the fast-food giant’s menu, boosting sales, Hottovy said.
“I’m curious to see how he can take that success and apply it to other parts of the business, how well he navigates international growth, which will probably be his legacy,” he said, adding that Thompson has been preparing for this role.
“In grooming him, he’s been jet-setting the last couple of years in the global markets for McDonald’s and has gotten to know them and identify talent in each one of them,” Hottovy said.
Asia looms large on the list of priorities.
Darren Tristano, executive vice president of Chicago-based Technomic, described the chain’s global opportunities as “China, China, China.”
Although chains like Pizza Hut and KFC, both owned by Louisville, Ky.-based Yum Brands, have become ubiquitous in China, Tristano said that their presence can be an opportunity rather than a hindrance for McDonald’s in one of the world’s most coveted markets.
“Yum has opened the door for the Chinese to look at American brands and fast food,” he said, adding that burgers don’t necessarily compete with pizza and chicken. “Yum has laid a lot of groundwork for fast-food chains to move in.”
McDonald’s does business in 119 countries, with 19,000 restaurants and 66 percent of its sales outside the U.S. The chain has been remodeling its restaurants around the world, a program expected to boost sales and brand perception. France, Australia and Canada are among the most complete markets.
“They’re going to be doing a lot more remodeling and re-engineering at existing units which will continue to give them some (sales) increases,” by store, Tristano said. “They’ve got a lot of stores to get through, which will probably take three years.”
With more than 14,000 locations, the United States lags other countries. About 33 percent here have been remodeled on the interior, 16 percent on the exterior.
But additional challenges lie in the not-too-distant future.
McDonald’s is facing pressure from rising commodity costs. As the world’s largest restaurant chain by sales, it benefits from leveraging its size in purchasing food. However, the company has projected its food costs will increase 4.5 percent to 5.5 percent in 2012, which creates a tough balancing act between franchisee profitability and keeping prices low.
Tristano noted that McDonald’s already is coming up with solutions. The chain recently tweaked its dollar menu, removing some items and introducing an extra value menu with items that will cost more than $1 but are expected to represent value for the money.
He added that McDonald’s also may face earnings pressure as the U.S. dollar recovers. While the dollar has been weak, the company has done well in international markets, and those profits have looked even better expressed in U.S. dollars.
“They’re getting gains not just from growing sales but from currency translation,” Tristano said. “The dollar at some point will strengthen, and when that happens some of those currency translations may impact the success they’ve had internationally.”
McDonald’s continues to face the challenge of keeping up with a string of success. After nearly nine years of increasing global same-store sales, the chain has stuck with value promotions while adding higher-priced and more premium products to compete with such chains as Starbucks and Panera.
“(Defending) their market share may be the biggest challenge they have,” Hottovy said, adding that they’re well-positioned to do it with a diverse menu, competitive prices and an unrivaled marketing budget.
Company watchers are wondering how the gregarious Thompson’s tenure will stack up against that of Skinner, a reserved executive with a dry sense of humor.
“He has a natural leadership aura,” Michael Donahue, a former McDonald’s executive, said of Thompson. “He’s tall and affable, really outgoing, warm and inspiring.”
Donahue described Thompson as a “homespun” guy, “ready to roll up his sleeves with anyone.” He recalled a motivational speech Thompson made called “Pick Up the Cup,” which “was another way of saying everybody has a job to do, and if you’re walking in a parking lot and see a cup, you pick it up.”
McDonald’s stock closed down 1 percent Thursday, the first trading day following the announcement, at $95.80.