OAK BROOK, ILL. — What would Ray Kroc say?
In McDonald’s quest to become a “modern, progressive” burger chain, the fast-food company is overhauling its decades-old operational model as part of a global turnaround plan executives shared with investors on May 4. Steve Easterbrook, the recently named president and chief executive officer of McDonald’s Corp., did not mince words in a video to the investment community detailing the company’s steps to restoring the business, even admitting, “We’re not on our game.”
“The reality is our recent performance has been poor,” Mr. Easterbrook said. “The numbers don’t lie, which is why as we celebrate 60 years at McDonald’s, I would not shy away from the urgent need to reset this business.”
Net income for fiscal 2014 fell 15% to $4.8 billion, and revenues dropped 2% to $27.4 billion, as traffic fell in all major markets. The challenges have continued into the current year; first-quarter net income tumbled 33% to $1.2 billion, and revenues slid 11% to $6.7 million.
Beginning July 1, McDonald’s is restructuring its worldwide business into four new segments: U.S., International Lead Markets, High-Growth Markets, and Foundational Markets. New leaders were announced for each segment. The new structure is designed to remove cultural and structural barriers to growth to enable more nimble decision making and action.
The United States represents the company’s largest segment and accounts for more than 40% of operating income. Mike Andres, president, McDonald’s U.S., will continue to oversee the segment.
International Lead Markets include established markets of Australia, Canada, France, Germany and the United Kingdom and collectively account for about 40% of McDonald’s operating income. These markets have a developed franchising organization, modest new store development, similar competitive sets, stable economies and resourced talent. Doug Goare, president, McDonald’s Europe, will become president, International Lead Markets. Mr. Goare will work with two senior leaders and five managing directors.
High-Growth Markets, which have relatively higher restaurant expansion and franchising potential, include China, Italy, Poland, Russia, South Korea, Spain, Switzerland and The Netherlands, and accounts for about 10% of the company’s operating income. About half of McDonald’s restaurant openings are expected to occur in these markets over the next few years.
Dave Hoffman, president, McDonald’s Asia/Pacific, Middle East and Africa (APMEA), will transition to the position of president, High-Growth Markets. He will work with a team of four senior leaders and eight managing directors.
Foundational Markets include about 100 countries in McDonald’s system and have the potential to operate under a largely franchised model. Corporate activities will be reported under the Foundational Markets segment. Ian Borden, chief financial officer, McDonald’s APMEA, will become president, Foundational Markets.
“This new structure represents a significant step-change in our thinking,” Mr. Easterbrook said. “It sounds simple, but having clusters of similar markets led by one person will create urgency and speed. It will spread insight faster, enable quick decision-making, eliminate mistakes, reduce costs, and unlock growth. In short, it will create the optimal conditions for success in our operational growth led turnaround.”
Accompanying the enhancements to McDonald’s operating approach are plans to accelerate refranchising. McDonald’s said it will refranchise 3,500 restaurants by the end of 2018, increasing the global franchised percentage from 81% to about 90%. The company expects to deliver approximately $300 million in net annual general and administrative expense savings, most of which will be realized by the end of 2017.
McDonald’s also expects to return $8 billion to $9 billion to shareholders in 2015 and to reach the top end of its three-year target of $18 billion to $20 billion cash return to shareholders by the end of 2016.
In the United States, where McDonald’s traffic and sales have declined in recent quarters, the early stages of a turnaround are already under way.
“If we start to look at some of the actions they’re taking in the short term, we begin to see the entire U.S. system embrace our strong value programs, certainly commitment to food quality, both the day-to-day running better restaurants, as well as the introduction of new products, such as the artisan chicken and the sirloin burger,” Mr. Easterbrook said. “Also, they’re pushing the boundaries with some of their testing. They’re looking to challenge current paradigms around things such as all-day breakfast and delivery, and seeing whether we can develop platforms for future growth to fix the business today, get the fundamentals right, get your structure right, and start to build up platform superb going forward.“But it is early days, and it will be a little bumpy in these early days. But they’re on the right track.”