McDonald’s reaps the benefit of all day breakfasts and table service

February 9, 2016

McDonald's signature rangeEven though we’re only into its second month, 2016 been rather a good year for Steve Easterbrook, McDonald’s chief executive. His football team, Watford, is enjoying its best season in years and much the same can be said for the US fast-food giant.

The company surprised analysts with its latest quarterly results last week, with sales up 5.7pc in the US – nearly twice as much as had been predicted. Global sales are up by 5pc.

It has taken a Briton – albeit one steeped in McDonald’s corporate culture – to revive the most American of institutions, which was in danger of being left behind by rather nimbler competitors in the fast food industry.

From introducing all-day breakfasts throughout the US to testing waiter service at some of its outlets, including in the UK, Easterbrook has overhauled how the company operates at a bewildering pace.

The chain was in something of a mess when Easterbrook took over as chief executive in March 2015. Last August, for the first time in more than 45 years, McDonald’s announced that it was closing more outlets than it was opening.

European sales had dropped by 1.4pc, between 2008-14. In the US, the decline was 3.3pc and in Asia, the Middle East and Africa, once considered a growth region, a rather frightening 9.9pc.

It was not just the dire figures which suggested that McDonald’s was in need of a cultural shift. The company was facing competition from not only its traditional rivals, such as Burger King and Wendy’s, but also from hipper new competitors entering the market, such as Honest, Byron, Five Guys and Shake Shack.

It was pretty clear that the golden arches had lost their sparkle. Within weeks of taking over the reins, Easterbrook appeared on CBS’s This Morning television progamme in the US to signal that the 60-year-old company was in for a radical overhaul.

“We really want to assert McDonald’s as a modern burger company. To do that you have to make meaningful changes in the business,” he said. “The pace of change outside McDonald’s has been a little quicker than the pace of change within. You act your way to success, you can’t talk your way to success.”

For once, this was not empty corporate-speak. All-day breakfasts were tested in San Diego in April, and within months were available at all the company’s 16,000 US restaurants. This has brought back customers who might have gone elsewhere and even tempted in newcomers.

Other changes have seen the introduction of a “McPick menu” where US customers can have two items for only $2, despite the wafer-thin profit margin the deal provides.

The range of burgers has also been increased to include Pico Guacamole and Buffalo Bacon, and diners are now being allowed to customise their burgers. McDonald’s has also launched its first loyalty programme for people who register their details, offering, for example, a free cup of coffee for every five bought at one of its restaurants.

Easterbrook has also done something to improve McDonald’s corporate image, announcing a 10pc pay rise for the 90,000 people who work in outlets directly owned by the company in the US. This has taken their hourly minimum wage to $9.90 an hour – increasing to more than $10 this year – considerably higher than the legal minimum of $7.95.

The one caveat, however, was that the pay rise was limited to those staff who work for the 10pc of restaurants which are owned by the company rather than franchisees. Even the white packaging is being ditched after more than a decade. Instead, food now comes in brown paper bags which, in theory, are seen as more environmentally friendly.

According to a company spokesman, the change is “consistent with our vision to be a modern and progressive burger company” –a phrase now something of a corporate mantra.

“One of the things Easterbrook has done is create a sense of urgency in the the McDonald’s business culture,” said Mark Kalinowski, a restaurant analyst at Nomura in New York. “When the company started trialling the all-day breakfast in San Diego county in April, it only took until October before it went nationwide.

“He doesn’t want to waste time, he operates on speed to market and saw it was clearly something customers wanted.

“For McDonald’s, that is rather quick. Although it can be innovative, the company is traditionally slow- moving. I think it’s a reflection on its sheer size.” Even though Easterbrook has spent much of his career with McDonald’s, having joined in 1993, he also spent time with the rather more upmarket Wagamama and Pizza Express chains. He returned to McDonald’s in 2013 as chief brand officer, having held previous roles including its head of Europe.

“Most of the presidents and chief executives at McDonald’s we have seen have been promoted from within. Having somebody with an outside perspective is exactly what the company needed” said Darren Tristano, president of Technomic, a Chicago-based company specialising in the food industry.

Tristano believes that Easterbrook’s strategy has been shrewd. “He has aggressively marketed the all-day breakfast, which has put McDonald’s back at the top of the mind of consumers.

“The price point appeals to lower and middle-income consumers who are looking for something which is less expensive than the dinner menu. This has helped McDonald’s get back some of the market share which it had been losing to rivals.”

McDonald’s has also been helped by the rehabilitation of the egg in the mind of the consumer, Tristano added.

“If you go back a few years, eggs were seen as high-cholesterol. Now they are seen as high-protein and eggs are a key part of breakfast.

“The sales growth on a year over year basis is over a few years of weak sales performance, so the numbers are good but we should expect to see sustainable growth and especially year over year, fourth quarter 2016 would signal McDonald’s is officially back.

“McDonald’s appears to be listening to their customers and staying more true to their brand under Easterbrook.”

The consensus appears to that Easterbrook has enabled McDonald’s to regain its mojo. “He has brought a sense of strategic clarity, said John Quelch, professor of marketing at Harvard Business School.

“There is a tendency when a company gets into trouble to sling products at the wall and see what sticks. All that does is adds complexity. If you reach a point when you can’t explain to an employee or a franchisee what the point of a product is, then how can you expect them to explain that to a customer?

“The bench strength of McDonald’s is enormously good. It is no surprise that they were able to find somebody like him to step up,” added Quelch.


McDonald’s need for speed: Inside CEO Steve Easterbrook’s bold strategy to transform the fast-food giant

February 8, 2016

Hollie Shaw
Financial Post
January 29, 2016 4:13 PM ET
http://business.financialpost.com/news/retail-marketing/mcdonalds-need-for-speed-inside-ceo-steve-easterbrooks-bold-strategy-to-transform-the-fast-food-giant

 

 Justin Sullivan/Getty ImagesSteve Easterbrook was behind the counter at one of North America’s first two standalone McCafé restaurants, watching intently as line cooks prepared Egg McMuffins over a sizzling grill.

The CEO of McDonald’s Corp. was clearly pleased: Unlike the years-long struggle in its U.S. unit, the Canadian division of McDonald’s has performed well in the past seven years, tripling its coffee sales, and this country remains one of the fast-food giant’s top-performing global markets.

“I’m just like a sponge, I am learning,” Easterbrook said. “More than anything, I am just soaking up what is going on so that I can then share it as I move around the world.”

The Financial Post spoke with Easterbrook during a recent top-secret visit to the bowels of one of Toronto’s busiest office towers, his second visit to Canada in six months, for a tour with Canada division president John Betts of the new café concept, now open at two new downtown restaurants.

Almost a year into his tenure as CEO of the world’s largest restaurant chain, the British-born Easterbrook, 48, is now known for his ruthless commitment to simplifying processes and speeding up service.

“What I set out to do very early on is to acknowledge at a global level that this is a turnaround situation,” Easterbrook said. “We are not necessarily looking to be ahead of the trend, but we should absolutely be in lockstep with where consumers were at, and universally we weren’t,” despite the restaurant’s endurance in markets such as Canada, the U.K. and Australia.

The McCafé is a departure from a regular McDonald’s, bright and airy with abundant white tile and modern fixtures as opposed to the cozy functionality of its revamped Canadian restaurants. But its menu is the real standout: It serves the iconic Egg McMuffin sandwich and other breakfast items all day long, as well as baked goods, a range of trendy non-McDonald’s salads such as kale and brussels sprouts with mixed veggies, and sandwiches on artisanal bread.

On the January day Easterbrook visited, the newly opened outlet had hit a record that morning, serving 280 people in an hour, a fact not lost on a CEO with a keen desire to expedite traffic inside its restaurants. Though the bulk of his career has been spent at McDonald’s, Easterbrook trained as an accountant at Price Waterhouse after university and joined the restaurant chain in 1993 as a financial reporting manager. But he said spending time outside the company as CEO of smaller British restaurant chains between 2011 and 2013 gave him a fresh perspective on the broader industry.

“The one thing I recognized, more than anything, was the speed with which they moved,” he said of his tenure at PizzaExpress and Wagamama before returning to McDonald’s in 2013 as global chief brand officer.

“I was determined when I rejoined the company that I never wanted our size and scale to be a barrier to speed. The world is moving at an ever-faster pace. The world is not waiting for us to catch up. The world is just going to get on with it.”

Easterbrook remained mum on whether all-day breakfast, a key driver behind the company’s standout U.S. earnings this week, might eventually be brought to Canada, or whether standalone McCafés, a clear rival to Starbucks and Tim Hortons in Canada, will get introduced elsewhere in the world.

“It is not just about whether the idea is transferable,” he said. “You have to understand the context behind the idea before you start to imagine where you think it could work in the other markets.”

But making bold moves — albeit well-informed ones; all-day Egg McMuffins had been a request of U.S. consumers for years — appeals to Easterbrook’s action-oriented sensibilities for the global organization.

“Today, everyone else is more nimble (than McDonald’s is) because they are smaller,” said Darren Tristano, president of the Chicago-based food industry research firm Technomic.

“Getting to be more nimble allows McDonald’s to become more competitive. Put it this way: We had heard about all-day breakfast for years — you might not even say that it was (Easterbrook’s) idea — but he made it happen.”

That drive for speed and efficiency was evident in Easterbrook’s move to reconfigure the company’s structure and combine its five top markets of Canada, France, Germany, U.K. and Australia into one unit to more readily share best practices. The prior structure had the company’s country divisions organized by geographic region, which made sense when the company was in a period of rapid global expansion decades ago, but worked less well for a more mature company.

“I wanted to challenge the legacy structure we had globally, to leverage the experience of the market leaders and move quicker to seize the opportunities ahead of us,” Easterbrook said. “We had never, I felt, maximized the learnings that the (top countries) could have gained from each other.”

Robert Carter, executive director at market research firm NPD Group Canada, said the strategy makes particular sense given that overall global restaurant industry growth is slowing down.

“Really, the only market that is experiencing a lot of growth is China, so in that kind of environment, you really need to be stealing share from your competitive set and you have to be much quicker to adapt to changes,” Carter said. “McDonald’s has been traditionally viewed as a slow-turning machine in terms of renovations and getting new items out. Throw in the competitive threat coming from the fast casual market, it just makes sense that one of the first things you would do is how do we make things happen quicker.”

As such, Easterbrook seems to be intent on smart, productive growth rather than growth at all costs. He has closed underperforming outlets around the world and simplified the menu by paring it back rather than continuing with an all-things-to-all-people strategy, introducing a broad range of new items to try to draw in customers seeking healthier or ethnic fare.

“Customers are relying on us for convenience and consistency, and what we were actually finding was it was getting more complicated for our customers than they cared for and more complicated for our teams to deliver,” Easterbrook said.

“That is where someone has to make some brave calls. You never want to take something away because you think that it is going to hurt, but actually the net benefit is that the operation got smaller, and the customer experience becomes a lot easier to navigate. Lives are complicated. Going to McDonald’s shouldn’t be. People’s lives are hectic and they come to us for a break.”

His decisions have paid off. After a multi-year slump and seven straight quarters of declining same-store sales in its biggest market of the United States, same-store volume has now grown for the past two fiscal periods. In fourth quarter results released last Monday, same-store sales jumped 5.7 per cent at the company’s U.S. restaurants, more than double the analyst forecast of 2.7 per cent, and U.S. operating income surged 30 per cent. Operating income in its international lead markets, including Canada, rose eight per cent excluding currency impact.

Investors are also regaining faith in the company, sending McDonald’s shares up 30 per cent in a period in which the Dow Jones industrial average has dropped nine per cent.

“I would like to get certainly four quarters of growth under my belt before we would consider moving out of the turnaround phase to the next two phases,” Easterbrook said of his progress, describing the next steps as a “strengthening” phase and a “leading” phase.

“We should have an expectation of ourselves to get there, to a true leadership position,” he added. “I’m careful not to forward-promise…I much prefer to act now, talk later. It’s one of my personal mantras. But I have extremely high expectations for the business and for the brand.”