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McDonald's announced on January 28, 2015, that DonThompson would retire as president and chief executiveat the end of February. He would be replaced by SteveEasterbrook, the firm's chief branding officer. The abruptexit came after the world's largest restaurant chain postedone of its worst financial performances in years (see Exhib-its I and 2). Revenue in the last quarter, through December,1'ell 7 percent to $6.6 billion. Earnings, however, droppedby 21 percent to $1.1 billion from $1.4 billion in the sameperiod a year earlier. "People have seen results go fromthe best in the industry to one of the worst in the course ofthree years," said Will Slabaugh, an analyst.l

Days betbre his retirement, Thompson acknowledgedthat McDonald's results had fallen short of expectations,

" Case prepared by Jamal Shamsie, Michigan State UDiversity, with theassistance of Prolcssor AIan B. Eisncr, Pace Univcrsity. Material has beendrarvn from published sources to be used for purposes of class discussion.Copyright O 201 5 Jamal Shansie and Alan B. Eisner.

but he noted that the firm had sufl'ered partly because ofevents beyond his control. Sales in Asia and the MiddleEast had fallen sharply because of food safety concernswith a Chinese meat supplier. McDonald's also had to faceshortages of French fries in several markets because of aslowdown at the port in Los Angeles. Finally, some Russianoutlets were temporarily closed by food inspectors, appar-ently in retaliation for Western sanctions against Russiaover its military intervention in Ukraine (see Exhibit 3).

However, McDonald's faced its biggest challenge inthe United States, its largest market, where it had 111,200of its 35,000 mostly franchised restaurants. It had losta lot of ground with consumers, especially millennials.who were defbcting to traditional competitors like BurgerKing and Wendy's as well as to new designer burger out-lets such as Five Guys and Shake Shack. Changing tasteswere responsible for the loss of customers who were lin-ing up at fast-casual chains such as Chipotle Mexican

lncome Statement($ millions)

Balance Sheet($ millions)

C1S{ C,&SF ?5:: MCDONALD'S

Revenue

Gross profit

Operating income

lncome before taxes

Net income

;;;'r;;#;;.—

Total current assets

Total assets

Total current liabilities

Total liabilities

Total stockholders' equity

Source: McDonald's

24,01s

9,637

7,473

7,000

4,946

21,006

10,687

8,530

8,012

s,503

27,567

10,816

8,605

8,079

5,465

28,1 06

10,903

8,764

8,204

5,586

21 ,441

10,456

7 QtO

7,312

4,758

4,368

21 07E

2,925

17,341

14,634

4,403

32,990

3,509

18,600

14,390

4,922

35,386

3,403

20,093

15,294

5,050

36,626

3,1 70

20,617

1 6,01 0

4,186

34,281

2,7 48

21,428

12,853

EGrill and Panera Bread. which offered customized order-ing and fresh ingredients (see Exhibit 4).

McDonald's response to this growing competition was toexpand its menu with snacks, salads, and new drinks. From33 basic items that the chain offered in 1990, the menu grewto 121 items by 2014. The greatly expanded menu led ro a

significant increase in costs and longer preparation times.This forced the firm to increase the prices of many of itsitems and to take more time to serve customers. moving itaway fiom the attributes that it had built its reputarion on."McDonald's stands for value, consistency and convenience."said Darren Tristano, a restaurant industry consultant.2

..,r i,t:r- '

Breakdown ofRevenues ($ millions)Company-operated sales:

U.S.

Europe

APMEA

Other Countries & Corporate

Total

Franchised revenues:

U.S.

Europe

API4EA

Other Countries & Corporate

Total

Total revenues:

IJ.S.

Europe

APMEA

Other Countries & Corporate

Total

Source: McDonald's.

$ 4,351

7,808

5,210

740

$18,169

$ 4,300

3,270

1,0s4

648

$ e,272

$ 8,651

11,078

6,324

'1,388

$21,441

$ 4,512

8,1 38

5,425

800

$ 1 8,875

$ +,sss

3,162

1,052

678

$ 9,231

$ s,sst

11,300

6,477

1,478

$28.1 06

$ 4,530

7,850

5,350

873

$ 1 8,603

$ 4,284

2,977

1,041

662

$ 8,e64

$ B,B 14

10,827

6,39'l

1,535

$21,561

U.S. Market Share of Fast-Food Burger Chains

2008

2009

2010

20'11

2012

2013

2A14

46.90/o

48.0

to1

50.1

50.0

49.7

49.6

13.50/o

13.0

12.7

12.5

12.2

12.2

12.3

14.37a

13.8

t 5.l

12.2

12.1

11.8

11.9

6.0%

5.9

5.5

5.4

5.4

5.4

5.4

4.970

4.8

4.5

4.4

4.4

4.3

4.3

1.87o

1.8

1.9

1.9

2.1

2.7

2.8

2.67o

2.6

2.6

2.7

2.1

2.1

2.2Yo

2.1

2.0

2.0

2.0

2.0

2.0

0.50/o

0.8

1.1

1.4

'1.5

1.6

1.1

Source: USA Todnr,, December 8, 20 I,X, and author esitmates.

eASr 25:: MCDONALD'S t"195

The fast-food chajn had gone through a sintilar crtstsbefbre. Back in 2002-2003, McDonald's had experienceda decline in performance because of quality problems asa result of rapid expansion. At that time, the firm broughtJames R. Cantalupo back out of retirement to turn thingsaround. He formulated the "Plan to Win," which was thebasis of McDonald's strategy over the next decade. Thecore of the plan was to increase sales at existing loca-tions by improving the menu, returbishing the outlets, andextending hours. This time, however, such incrementalsteps might not be enough.

Pulling Out of a Downward SpiralSince it was founded mole than 50 years ago. McDon-ald's had been defining the fast-food business. lt providedmillions of Arnericans their filst jobs even as it changed

their eating habits. It rose from a single outlet in a nonde-scr ipt Cl.ricago suburb to one of the largest chains ol outletsspread around the globe. But it gradually began to run intovarious problems that began to slow down its sales growth(see Exhibit 5).

This decline could be attributed in large part to a dropin McDonald's once-vaunted service and quality since it:expansion in the 1990s, when headquarters stopped gradin-ufranchises for cleanliness. speed, and service. By the endof the decade, the chain ran into more problems because oithe tighter labor market. As it stluggled hard to find neurecruits, McDonald's began to cut back on training. leadin-sto a dramatic lallotf in the skills of its employees. Accord-ing to a 2002 survey by market researcher Global GrowthGroup, McDonald's came in third in average service time.behind Wendy's and sandwich shop Chick-fil-A Inc.

1948

'1955

1 961

1 963

1 965

1967

1 968

1912

197 4

1975

1979

1 987

1991

1992

1 996

1997

1 998

1 999

McDonald's Milestones

Brothers Richard and Maurice lVlcDonald open the first restaurant in San Bernardlno, California, that sells hamburgers, fries,

and milk shakes.

Ray A. Kroc, 52, opens his first McDonald's in Des Plalnes, lllinois. Kroc, a distributor of milk shake mixers, figures he can sell

a bundle ofthem if he franchises the McDonalds'business and installs his mlxers in the new stores.

Six years later, Kroc buys out the McDonald brothers for $2.7 million.

Ronald lVcDonald makes his debut as corporate spokesclown, using future NBC-TV weatherman Willard Scott. During the year,

the company also sells its 1-billionth burger.

McDonald's stock goes public at $22.50 a share. lt will split 12 times in the next 35 years.

The first lVcDonald's restaurant outside the U.S. opens in Richmond, British Columbia. Today there are 3'1 ,108 McDonald's in

1 1 B countries.

The Big Mac, the first extension of McDonald's basic burger, makes its debut and is an immediate hit.

McDonald's switches to the frozen variety for its successful French fries.

Fred L. Turner succeeds Kroc as CEO. ln the midst of a recession, the minimum wage rises to $2 per hour, a big cost increase

for McDonald's, which is built around a model of young, low-wage workers.

The first drivethrough wlndow is opened in Sierra Vista, Arizona.

McDonald's responds to the needs ofworking women by introducing Happy Meals. A burger, some fries, a soda, and a toy

give working moms a break.

Michael R. 0uinlan becomes chief executive.

Responding to the public's desire for healthier foods, McDonald's introduces the low{at Mclean Deluxe burger. lt flops and iswithdrawn from the market. Over the next few years, the chain will stumble several times trying to spruce up its menu.

The company sells its 90-billionth burger and stops counting.

In order to attract more adult customers, the company launches its Arch Deluxe, a "grown-up" burger with an idiosyncratic

taste. Like the low-fat burger, it falls flat.

McDonald's launches Campalgn 55, which cuts the cost of a Big Mac to $0.55. lt is a response to discounting by Burger King

and Taco Bell. The move, which prefigures similar price wars in 2002, is widely considered a failure.

Jack l4. Greenberg becomes McDonald's fourth chief executlve. A 1 6-year company veteran, he vows to spruce up the

restaurants and their menu.

For the first time, sales from international operations outstrip domestic revenues. In search of other concepts, the company

acquires Aroma Cafe, Chipotle, Donatos, and, later, Boston l4arket.

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ClS6 CASI 25:: MCDONALD'S

2000

2001

2002

2003

2004

2005

2006

2008

2012

2015

Continued

McDonald's sales in the u.s. peak at an average of $i.6 million annually per restaurant, aIt is, however, still more than sales at any other fast-food chain.

figure that has not changed since.

Su bway s urpasses McDona ld's as the fast-food cha in with the most U. S. o utlets. At the end of the yea r it had j 3,247 stores,148 more than McDonald's.

forecast for per-share earnings growth.

Charles H. Bell takes over the firm afterbeen developed by his predecessor.

the sudden death of cantalupo. He states he will continue with the strategies that have

Jim skinner takes over as cEO after Bell announces retirement for health reasons.

McDonald's launches specialty beverages, including coffee-based drinks.

McDonald's plans to add McCaf6s to each of its ou|ets.

Don Thompson succeeds Skinner as CEO ofthe chain.

Thompson resigns because of declining performance and is replaceci by Steve Easterbrook, the firm's chief branding officer

McDonald's posts its first-ever quarterly loss, of $343.8 rnillion

James R. Cantalupo returns to McDonald's in January as CEO

Ihe stock drops to around $13.50, down 40o/.from five years ago.

He immediately pulls back from the company's 1)y"-15y"

Sourcc; McDonald's.

By the beginning of 2003, consumer sLrrveys were indi_cating that McDonald's was headecl fbr serious trouble.Measures for the service and quality of the chain were con_tinuin-g to fall" dropping far behind those of its rivals. Todeal with its deteriorating perforntance. the firm clecidedto bring back retired vice chair.man James R. Cantalupo,59, who had overseen McDonald's successful interna_tional expansion in the 1980s and I990s. Cantalupo, whohad letired only a year earlier" was perceiveci to be theonly candidate with the necessary qualifications. despiteshareholder sentiment for.an outsicler. The board felt thatit needed someone who knew the company well and couldmove quickly to turn things around.

Cantalupo realized that McDonalcl,s often tencled tomiss the mark on deiivering the cr.itical aspects of consis_tent, l)st, and fiiendly sen,ice and an all-around enjoyableexperience lbr the whole family. He understood that itsfranchisees and ernployees alike needed to be inspired aswell as retrained on their role in putting the smile back intothe McDonald's experience. When Cantalupo and his teamlaid out their turnaround plan in 2003, they stressecl settinsthe basics of service ancl quality righr. in part by reiistitutiing a tough "up or out" gracling system that would kickout underperforming fianchisees. ,,We have to rebuild thefoundation. It's fruitless to add growth if the fbundation isweak." said Cantal upo.3

In his effort to focus on the firm,s core business. Can-talupo sold ofT the nonbur-ter chains that the firm hadrecently acquired. He also cut back on the opening of newoutlets, focusing insteacl on generating more saies fiomits existing outlets. Cantalupo pushecl McDonald's to rr.yto draw more customers through the introduction of new

products. The chain had a positive response to its increasedemphasis on healthiel fbods, led by a revampecl line offancier salads. The revamped menu was promoted througha new worldwide ad slogan. "l'm loving it." u,hich wasdelivered by pop idol Justin Timberlake thr-ough a set ofMTV-s11 Ie cgnt met'ciuls.

Striving for a l{ealthier lrnageWhen Jim Skinner took over from Cantalupo in 2004. hecontinued to push lbr McDonaid's to chan_{e its irnage.Skinner f-elt that one of his top priorities was to dealwith the growing concerns about the unhealthy intage ofMcDonald's, given the rise of obesity in the U.S. Tl.reseconcerns were highlighted in the populal documentarySuper Siz.e Me, made by Morgan Spurlock. Spurlock vii.idly displayed rhe health risks rhat were posecl by a steadydiet of food fi'om tl.re fast-food chain. With a rise in aware_ness of the high fat content of most of the proclucts olferedby McDonald's, the firm was also beginning to face law_suits fiom sorle of its loyal customers.

In response to the growing health concerns, one of thefirst steps taken by McDonald's was to phase out supersiz_ing by the end of 2004. The supersizing option allowedcLrstomers to get a lnrger order of French fries and a big_ger sofi drink by paying a little extra. McDonald,s alsoannounced that it intended to start providing nuh.itioninformation on the packagin-s of its products. The infor_mation would be easy to read and would provide custom_ers with details on the calories. fat, protein, carbohydrates.and sodium that were in each product. Finally. McDonalcl,sbegan to remove the arterl,-clogging trrlns-tut acids fromthe oil that it used to make its French fries. and it recentlv

eA5e ?5:; MCDOI{ALD'S C1S7

announced plans to reduce the sodium content in all of itsproducts by 15 percent.

But Skinner: was also trying to push out more otfer-ings that were likely to be perceived by customers as beinghealthier. McDonald's continued to build upon its chickenofferings using white meat with ploducts such as ChickenSelects. It also placed a great deal of emphasis upon irsnew salad offerings. McDonald's carried out extensiveexperiments and tests on them and decided to use higher-quality ingredients. from a variety of lertuces and tastycherry tomatoes to sharper cheeses and better cuts ofmeat. lt off-ered a choice of Newman's Own dressings, awell-known higher-end brand. "Salads have changed theway people think of our brand." said Wade Thonta, vicepresident for menu development in the U.S. "It tells peoplethat we are very serious about offering things people f'eelcomfortable eating."4

McDonald's was trying to include more fiuits andvegetables in its well-known and popular Happy Meals.It announced in 2011 that it would reduce the amount ofFrench fries and phase out the caramel dipping sauce thataccompanied the apple slices in these meals. The additionof fruits and vegetables raised the firm's operating costs.since they were more expensive to ship and store becauseof their more perishable nature. "We are doing what wecan," said Danya Proud. a spokesperson for the firm. "Wehave to evolve with the times."5

The rollout of new beverages, highlighted by newcoff-ee-based drinks, represented the chain's biggest menuexpansion in almost three decades. Under a plan to adda McCaf6 section to all of its nearly 14,000 U.S. outlets,McDonald's was offering lattes, cappuccinos, ice-blendedfiappes, and fruit-based smoothies to its customers. "Inrnany cases, they're now coming lbr the beverage, whereasbefore they were coming for the meaI." said Lee Renz, anexecutive who was r"esponsible for the rollout.6

Returbishing the OutletsAs part of its turnaround strategy, McDonaid's had beenselling ofT the outlets that it owned. More than 75 percentof its outlets were now in the hands of franchisees and otheraffiliates. Skinner was working with the franchisees toaddress the look and feel of many of tl.re chain's aging stores.Without any changes to their decor, the firm was likely tobe lefi behind by more savvy fast-food and drink retailers.The firm was in the midst of pushing harder to refur-bish-or reimage-all of its outlets around the worid. "People eatwith their eyes first," said Thompson. "If you have a restau-rant that is appealing, contemporary, and relevant both fromthe street and interior. the food tastes better"."7

The reimaging concept was first tried in France in 1996by Dennis Hennequin, an executive in charge of the chain'sEuropean operations, who felt that the effort was essentialto revive the firm's sagging sales. "We were hip 15 yearsago, but I think we lost that," he saici.8 McDonald's wasapplying the reimaging concept to its outlets around the

C19B CASE ?5: MCDONALD,S

world. with a budget of more than half of its total annualcapital expenditures. In the U.S., the changes cost an aver-age of $ 150,000 per restzrurant, a cost that was shared withthe franchisee when the outlet was not company-owned.

One of the prototype interiors being tested out byMcDonald's had curved counters with surfaces paintedin bright colors. In one corner, a touch-activated screenallowed customel's to punch in orders without queuing.The interiors could feature armchairs and sofas. modernlighting, large television screens. and even wireless Inter-net access. The lirm was also developing new features lbrits drive-through customers, who account for 65 percent ofa1l transactions in the U.S. These f'eatures included musicaimed at queuing vehicles and a wall of windows on thedrive-through side of the restaurant allowing customers tosee meals being prepared from their cars.

The chain was even developing McCaf6s inside its out-lets. next to the usual fast-fbod counter. The McCa16 con-cept originated in Australia in 1993 and rvas rolled out inmany restaurants around the world. McDonald's introducedthe concept to the U.S. as part of the refurbishment of itsoutlets. In fact, part ofthe makeover focused on the installa-tion of a specialty beverage platfbrm in all U.S. outlets. Thecost of installing this equipment was about $100,000 peroutlet, with McDonald's subsidizing part of the expense.

The firm planned to have all McCaf6s offer espresso-based coffee. gourmet coffee blends. fiesh-baked muffins.and high-end desserts. Customers would be able to consumethern while relaxing in sofi leather chairs and listening tojazz,br,g band, or blues music. Commenting on this signifi-cant expansion of offerings, Marty Brochstein, executiveeditor of The Lic'ensing Letter, said "McDonald's wants tobe seen as a lifestyle brand, not just a place to go to have aDUrger.

Rethinking the Business FfiodelIn response to the decline in performance, McDonald'swas testing a number of new concepts, including a kioskf'eature in four stores in southern Califbrnia that allowedcustomers to skip the counter and head to tabletlike kioskswhere they could customize everything about their burger.from the type of bun to the variety of cheese to the man)glossy toppings and sauces that can go on it. The firm later'decided to expand the concept to 30 locations in five morestates and to 2,000, or about one in seven, of the 121,000outlets in the U.S.

With its "Create Your Taste" kiosk platfor"m.McDonald's was hoping to attract more younger customerswho might have been moving away liom frozen processedfood that was loaded with preservatives. No one mentionedanything about the quality of meat that the chain used forits burgers. "Today's customers increasingly prefer cus-tomizable lood oprions. dining in a contemporary. invitin-uatmosphere and using more convenient ways to order andpay for their meals," CEO Thompson stated last year whenthe test was launched.lo

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However, there were risks invoived with making sucha change. The butgers were priced higher, at $5.49; couldtake seven minutes to prepare; and could be ordered onlyfiom inside the store and eventuaiiy brought to your table.This ran counter to the image of inlxpenslve and fast foodthat McDonald,s had workeci hard to build over the years.Nevertheless. the firm hopecl this change would bringmore customers into its outlets, bringing the U.S. counterldrive-through customer ratio closerlo 5O_SO, ,p liom thecurrent 10*i0.

At the same time, McDonald,s was working to sim_plify its menu, reducing the number of ,,value meal,,promotions-groups of items that together cost less thanordering the items individually. It tweJed its ,,clollarmenu,,,replacing it with ,,dollar value and more,, ;rnd raising theprices of many items as part of a bid to get each customer tospend more. But McDonald,s had intr.o-duced these b;rgainmenus because its prices had risen over the years, drivingaway customers to cheaper outlets. Over the previous fiveyears, about 15 percent of the chain,s saies hai come fiomits dollar menu, on which everything cost u clotia..

McDonald's was trying out all options. It even quietlyopened a sandwich and salad shop in Australia, a bit of ahybrid of Panera and Starbucks, with no ,ign of a goldenarch or Ronaid McDonald anywhere. eiA it recentlysigaed a deal to begin selling iti coffee in gro"ery ,tor".."They are throwing a lot of .spaghefti at th! *uli, but it,.not clear that any of it is the right spaghetti,,, said Sara Sen_atore, an investment analyst. ,,They have all these thinssgoing on and it's not obvious that,s what ."nrr.;;;;;;;from McDonald's.,,ll

More Gold in These Arches?Even though McDonald,s had appointed a new CEO andmade some changes in its organization, it was not clear howthe chain could pull out of iis present situati on. ln ZOI+, usurvey in Consumer Reporls showed that McDonald,s cus_tomers ranked its burgers significantly below those of 20competitors. McDonald,s also had the Iowest rank in foodquality of all rated hamburger chains in the Nction,s Re,s_taurant 1y'ews Consumer picks survey. ,,McDonald,s hasa huge image problem in America,,, saiO fohrrCorOon, arestaurant consultant. I 2

fiom.just fiye items: Big Macs, hamburgers, cheeseburg_ers. McNuggers. and fi.ies.

. Restaurant analyst Bryan Elliott commented: ..They,ve

l.]"9 t" be all things to ail peopie who walk in their door.,,i3McDonald's recent markeiing campaign, anchored aroundthe catchy phrase ,,I,m Ioving it,,, ioof o, difTerent tbrmsto target each of the groups that the firm was seeking.Larry Light, the head of global marketing ar McDonaid,swho pushed for this campaign, insistJ thar the firmhad to exploit irs brand Uy pustring it in many differentdirections.

^ For the most part, McDonald,s tried to reach out to dif._

ferent^ customer segments by offering different productsat different times of the day. It targef,d young aclults forbreakfast with irs gourmet coffee, ejg ,uodri.f,.r, and farfree muffins. It attracted working uJJtt, fo. lunch, particu_larly those who were squeezed for time, with its burgersand fries. And its introduction of wraps drew in teenagerslate in the evening after they had been partylrg.

Nevertheless, the expansion of the menu"beyond thestaple of burgers and fries raised some fundamental ques_]i:r: M9i, significantly, ir was nor clear jusr how farMcDonald's could stretch its brand while keeping all of itsoutlets under the traditional symbol of its golden-arches. Infact, industry experts believed that the lo-ng_term successof the firm might well depend on its ability ro comperewith rival burger chains. ..The burger category has greatstrength," added David C. Novak, chairian'ancl CEOof Yuml Brands, parent of KFC and Taco Beli- .,That,sAmerica's food. people love hamburgers.,,14

ENDNOTES1. Beth Kowitt. Fallen arches. Fortune,December l,201,{, p. l0g.2. The Economist. When the chips are down. January I 0, U O I S, p. -::.3. Pallavi Gogoi & Michael Arndt. Hamburger hell. B usines,s Week,

March 3,2003, p. 105..1. Melanie Warner you want any fruit with thatBigMac? New york

Iiizes, February 20,200-5, p. g.5. Stephanie Stronr. McDonalrl,s trims jts Happy Med. 1r/er yorkTinrcs,

July 27,2011,p.87.6. Janet Adamy. McDonald,s coffee strategy is tough seli. Wall Street

JournaL, October 27, 200g, p. 83.7. Ben Paynter. Super style me. Fast Company, October 2010, p. I07.8. Jeremy Grant. McDonald,s to revamp UK outlets. Financial l.imes,

February 2, 2006, p. t4.As it tried to make changes, McDonald,s announcedthat it planned to open fewer stores in 201 5 and pare capitalinvestmenr to $2 biilion, the least in more tt u.i*. y"u.r.ll. f,:rn was already rryirrg our a variery oi ..rrui"gi., in"ro:l lo move away from burgers and increase its appealto different segments of the market. Through tt e aaop_tion of a mix of outlet decor and menu items,-McDonald,syut. jlyir.g to targer young aclults, teenagers, children, andrrmllles. tn spire of these effbrts, 30 percent of sales came

9. Bruce Horovitz. McDonald,s ventures beyond burgers to duds, toys.USA Today, November Il. 2003. p. 6F..

10. Bruce Horovitz. McDonald,s sales down, but better than expected.USA Toduy. orenrber I l. 2014. p. 68.

r

1 l. Stephanie Strom. McDonald's tests custom burgers and other newconcepts as sales drop. Nevy york Times, January 24,201 5, p. 83.

12. The Econonirl, op. cit., p. 54.13. Kowitt, op. cir.. p. I 10.14. Juiie Jargon. McDonald,s is feeling fiied. Wall Street Journal

November 9, 2012, p.82.

eASf ;5 :: MCDONALD,S CIBB