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.”


How McDonald’s Easterbrook can maintain momentum

February 4, 2016
Joe Cahill
Crains
January 27, 2016
http://www.chicagobusiness.com/article/20160127/BLOGS10/160129896/how-mcdonalds-easterbrook-can-maintain-momentum

McDonalds-all-day-breakfast-win-for-CEO-Easterbook.jpgAll-day sales of Egg McMuffins did more than reverse a three-year slump at McDonald’s: It has inspired confidence in CEO Steve Easterbrook and buys time for the new chief to lock in the elements of a long-term growth strategy.

Last fall, Easterbrook answered the prayers of many customers who had yearned for years to buy breakfast after McDonald’s long-standing 10:30 a.m. cutoff. This week, McDonald’s credited all-day breakfast for the lion’s share of a 5.7 percent rise in fourth-quarter sales at U.S. locations open more than a year. The quarterly increase, outstripping even the expectations of McDonald’s executives, was the second in a row and a sign that McDonald’s is finally moving in the right direction under Easterbrook, who replaced Don Thompson in March.

A pair of quarterly sales gains doesn’t mean Easterbrook has put McDonald’s on track for long-term sustainable growth. But together with some other recent moves, it shows he understands the challenges facing McDonald’s and will move aggressively to meet them.

If Easterbrook still has a long way to go, all-day breakfast gives him a bit more time to get there. He’ll enjoy a grace period of three more quarters, as extended breakfast hours continue to generate sales increases over periods that predate the change. That cushion will disappear in the fourth quarter, when McDonald’s will lap a quarter with all-day breakfast for the first time. “That will be the telling moment,” says Darren Tristano, president of restaurant consulting firm Technomic in Chicago.

During the next three quarters, Easterbrook must build on the success of all-day breakfast, which is bringing in new customers and others who hadn’t visited McDonald’s in years. Now he needs to turn them into regulars. Strong store traffic is essential to the long-term health of any fast-food chain. Guest counts at McDonald’s declined again for the full year of 2015, but turned upward in the fourth quarter.

Customer traffic will keep rising if Easterbrook gives people more reasons to keep coming back after the novelty of afternoon Egg McMuffins wears off. That requires steady progress in three key areas:

Service. Service slowed as McDonald’s menu grew more complex in recent years. Drive-in speeds lagged those of key rivals. Easterbrook has begun to address the problem by expanding on a menu-decluttering effort launched by Thompson. “Simplifying the process is what people want nowadays, and they’re finally addressing that,” says analyst R.J. Hottovy of Morningstar in Chicago.

On McDonald’s earnings call with Wall Street analysts on Jan. 25, Easterbrook said customer feedback shows improvement in “food quality, order accuracy, speed and friendliness.” But all-day breakfast adds a new layer of complexity, potentially undermining service speed and accuracy.

Ruthless purging of slow-selling items will be essential to keep restaurants running smoothly. Restaurant efficiency also could benefit from new technologies that allow customers to order via kiosks and mobile devices. McDonald’s is testing these systems in the U.S. but hasn’t set a date for national rollout.

Value. McDonald’s is still searching for a successor to the Dollar Menu, the low-price offering that drove its last turnaround, in the mid-to-late 2000s. The company badly needs a compelling deal for budget-conscious customers who faded away during the last recession and its aftermath. Always a bulwark of McDonald’s business, lower-income families matter even more today as affluent consumers migrate to fast-casual chains like Panera. “Value-conscious” consumers now represent about 25 percent of McDonald’s customer base, Easterbrook told analysts on the earnings call.

Early this month, McDonald’s began a six-week test of “McPick2,”which offers two menu items for $2. Easterbrook said initial response has been favorable and acknowledged the need to settle on a permanent value proposition this year.

“Value still has to be at the core of their menu,” Tristano says, noting most of McDonald’s rivals offer a low-price combo. “It’s what a lot of their customers want, and if they can’t get it they’ll go elsewhere.”

Listening. McDonald’s boffo launch of all-day breakfast shows what happens when a company listens to customers. For years, McDonald’s rejected customer pleas to extend breakfast service beyond late morning, citing insurmountable operational hurdles. Easterbrook pulled it off in a matter of months, a clear sign his efforts to winnow bureaucracy and accelerate decision-making based on market feedback are bearing fruit. “That shows the company is much more nimble now than it was before,” Hottovy says.

A streamlined management structure established last summer has “sharpened our focus,” and “removed distractions to speed up decisions and increase our ability to move winning strategies quickly across markets,” Easterbrook told analysts.

Of course, faster product rollouts won’t help if customers don’t like them. McDonald’s has struggled for years to cook up menu innovations that click with consumers. Remember, the Egg McMuffin isn’t a breakthrough innovation but a proven winner that McDonald’s made more available.

Acknowledging that all-day breakfast demand will “settle down” from its initial euphoria, Easterbrook said McDonald’s has more initiatives in the pipeline for 2016. We’ll see if he can come up with a hit new product—the true test of whether McDonald’s has developed an ear for customers’ ever-changing preferences.

“As long as they’re listening to the customer and giving them what they want, instead of trying to force something on the customers, they can be successful,” Tristano says.


This is what happens when McDonald’s listens to its customers

February 2, 2016
By Roberto A. Ferdman
Washington Post
January 25, 2016
https://www.washingtonpost.com/news/wonk/wp/2016/01/25/the-incredible-power-of-the-egg-mcmuffin/
It’s no secret that McDonald’s has been struggling. At a time when specialization is increasingly important in the food business, the brand has opted for breadth, offering everything under the moon: hamburgers, salads, yogurt parfaits and fancy chicken wraps. And it hasn’t worked. In fact, that’s putting it mildly.Each time McDonald’s has announced how much money it’s making, the company has been forced to share an embarrassing truth: Americans are eating less and less of its hamburgers, chicken nuggets and French fries. The routine became so consistently depressing that McDonald’s decided to quit sharing monthly performance data altogether in March.

But all of that seems to be changing: For the first time in a long time, McDonald’s is thrilled to tell everyone how it’s doing.

On Monday, McDonald’s said that same-store sales (those open for at least 13 months) increased by 5.7 percent in the last three months of 2015, more than twice what analysts had expected. The hefty jump is the largest the company has reported in almost four years.

The news comes on the heels of a major concession by the fast-food chain, which is no coincidence. For years, adoring fans pleaded with McDonald’s to extend its breakfast menu beyond the current 10:30 a.m. cutoff. For nearly as long, the fast-food behemoth shrugged off the ask, saying it doesn’t have the capacity to make breakfast and everything else at the same time. But this October, McDonald’s finally gave in, agreeing to offer Egg McMuffins and other breakfast fare from open to close. And the reaction has been overwhelmingly positive.

“All-day breakfast was clearly the primary driver of the quarter,” McDonald’s Chief Executive Officer Steve Easterbrook told investors in a conference call following the company’s earnings announcement. “We knew it would be.”

In some ways, the immediate success of all-day breakfast is a reminder of one of McDonald’s biggest follies: its inability to see itself what for what it is. Rather than embrace what its fans adore it for most — a place that serves hamburgers, French fries, chicken nuggets, and yes, an exceedingly popular breakfast menu — McDonald’s tried to become something other than itself, expanding its menu, largely with salads, wraps and other healthier but also more expensive fare, to mimic new competitors.

The Chipotles and Shake Shacks of the fast-food world have managed to sell pricier food, at least in part, because of their association with meaningful trends in the food world that prioritize good food over cheap food. But it’s a much harder pitch at cheap burger chains, which people visit for a respite from their (hopefully) healthier dietary regimen, rather than a reminder that they could be eating something better. It’s no coincidence that fast-food chain Sonic has flourished by accepting what it is, while McDonald’s has struggled by doing just the opposite.

The chain’s re-energized business can also be seen as a testament to the enduring popularity of the Egg McMuffin, arguably the most iconic breakfast sandwich in the world. The affordable egg sandwich, which was first served in the early 1970s, caught on so quickly that it helped popularize the entire breakfast sandwich category. But it hasn’t been replaced. Today, demand for it is such that the chain buys more than 2 billion eggs per year in the United States alone, or almost 5 percent of all eggs produced in the country.

“It’s one of the oldest items they’ve had on their menu, and it’s still one of the most popular,” said Darren Tristano, who is the president of Technomic, a food industry market research firm. “Selling it all daylong was a no-brainer.”

Since Easterbook became McDonald’s CEO last March, he has shown that he’s willing to not only listen to but also heed requests from the fast-food chain’s customers. The introduction of all-day breakfast is perhaps the best example, but during his short stint, he has already also shortened the McDonald’s menu and announced plans to switch to cage-free eggs and antibiotic-free chicken in the United States, among other things.

Tristano reminds that it’s too early to tell whether the most encouraging earnings in years is a sign of things to come. The real test will be what happens in the rest of 2016, and beyond. The excitement around all-day breakfast, and Egg McMuffins specifically, might not last, which even Easterbrook admitted to investors this morning. But the move has set an important precedent.

“I think listening to the customer is going to the most important rule McDonald’s has to follow,” said Tristano. “As long as they’re doing that, they should be fine, because the customer usually has the answer.”

When markets opened Monday, McDonald’s shares were up 3 percent on the news, but finished the day up less than 1 percent. Despite the company’s recent struggles, its stock is at a near all-time high.