A lot on his plate

A year ago Steve Easterbrook took over McDonald’s helm. His mission was to bring back the sizzle. It’s still early days, but so far, so good.

Steve Easterbrook developed a fondness for McDonald’s as an 11-year-old student at the Watford Grammar School for Boys in his native England, when he and a friend went gamboling about the suburb of Harrow in northwest London. “We used to go off with three or four quid in our pocket,” he told The Guardian in 2008. “That would cover our train fare, mooching around Harrow, and going to McDonald’s.”
    
At that time, though he loved the shakes and fries, it’s doubtful that he envisioned one day becoming CEO of the world’s largest-revenue restaurant chain. But that’s what happened on March 1, 2015, when Easterbrook, by then a McDonald’s veteran, replaced Don Thompson, who had run the company since 2012.

Easterbrook took the helm at a troubled time. With 36,258 restaurants worldwide and annual revenue of US$27.4 billion in 2014, the Chicago-area corporation was in no danger of losing its status as the world’s most iconic fast-food chain. But the proliferation of competitors in the fast-food sector, the growing popularity of so-called fast-casual chains and consumer demand for fresher, purer food were taking their toll.

In her recent annual report on McDonald’s, Elizabeth Friend, Euromonitor International’s consumer food-service strategy analyst, put it well: “While the company remains strong in many ways … the landscape in which it is competing has evolved beneath its feet.”

While McDonald’s was still making money, its rate of revenue growth had been deteriorating. According to Euromonitor data, while system-wide sales were up by 6.4% in 2011 compared to 2010, that number had dropped to 2.8% by 2014, which meant that the company was growing less than half as fast. In Canada, the growth rate fell to 1.1% in 2014 from 7.1% in 2009. Most painful perhaps to the folks at headquarters in Oakbrook, Ill., was that US comparable sales actually declined by 2% in 2014.

At the same time the fast-casual market was on the rise, with players such as Denver-based Chipotle Mexican Grill and St. Louis-based Panera Bread finding success with food that was more handcrafted, less prepackaged. With McDonald’s lagging stock price bringing pressure from investors, it appeared to be time for a change at the top. So industry watchers weren’t surprised when the board replaced Thompson. The precise reasons for choosing Easterbrook as his replacement, however, remained in the boardroom behind closed doors.

FROM ACCOUNTANT TO CEO

Easterbrook declined to be interviewed for this story. What the North American public knows about him comes mainly from a bio on the company’s website, which notes that the British-born executive is a certified accountant who joined the company in 1993 as a financial reporting manager in London. From there he went on to become CEO of McDonald’s UK, president of McDonald’s Europe and, most recently, global chief brand officer. Segues along the way included short stints running London-based PizzaExpress and Wagamama Ltd., also of London, which serves Asian food in the style of a Japanese ramen bar.

The website says Easterbrook has the goal of “revitalizing McDonald’s as a modern, progressive burger company delivering a contemporary customer experience.” Other tidbits: he is a visiting fellow of the Oxford University Centre for Corporate Reputation and holds a degree in natural sciences from Durham University. Oh, and he played cricket.

According to The Guardian story, he was born in 1967, practised accounting at Price Waterhouse (now PricewaterhouseCoopers) and years later was credited with a turnaround at McDonald’s UK.

The new CEO made a video statement to the business community and worldwide franchisees last year in which he was frank about the company’s need to change: “The reality is our recent performance has been poor,” he said. “The numbers don’t lie, which is why … I will not shy away from the urgent need to reset this business. … This is a global turnaround. We have to modernize our approach and run the system differently.”

Unfortunately, his well-intentioned message was said to have been diluted by a less-than-stellar script and a stiff delivery. That was the view, anyway, of a Forbes contributor who savaged the video as being “mind-numbing” and full of “CEO gobbledygook,” going so far as to suggest it be studied by communications professionals as a way not to do it.

But perhaps Easterbrook deserves a break.

While he has had many years with the company, industry analysts have praised McDonald’s for naming someone from outside Oakbrook, someone with a fresh perspective. One of his main credentials, they say, is his global experience, particularly in Europe, because European operations have been ahead of North America in meeting consumer demand for regional differences, animal rights, more natural food and a more upscale presentation. McDonald’s has used cage-free egg production for years in the UK, for instance. Last fall it tested 100% organic beef burgers in Germany.

“Europe is an interesting case,” says Friend. “Consumers there started to demand higher quality in traditional fast food much earlier than we did in North America. In that sense, Easterbrook is a good person to take this on. His job is to figure out a way to make traditional fast food a little more in line with what consumers want right now.”

FAST AND CHEAP OR FRESH AND PRICEY?

But transforming such a huge company with such deep roots won’t be easy. There’s the question of what consumers want — and then there’s the question of what consumers want from McDonald’s. Yes, more people want healthier, fresher, more sustainably sourced food, free from animal cruelty. But folks who head for the Golden Arches typically do so because they want food fast and cheap. And there is a point where those two desires diverge.

Last year, when McDonald’s announced that it would begin phasing out eggs laid by caged hens in North America, animal rights advocates rejoiced. But there’s little doubt that cage-free eggs will eventually add to the price of the Egg McMuffin. Not only does it cost more to produce these eggs, but farmers will also be spending big dollars to build new facilities and retrofit barns. McDonald’s expects it will take about a decade to fully implement cage-free production in Canada.

Chickens raised without the antibiotics that are used to treat humans, promised in Canada by 2018, are expected to raise the price of McChickens and McNuggets because farmers will lose more of their inventory to disease and the cost of that will eventually be passed along.

Sylvain Charlebois, professor of food distribution and policy at the University of Guelph’s Food Institute, is one food expert who believes consumers will be willing to pay for higher-quality food.

“The needle is shifting. Consumers are beginning to ask questions about the origin of their food,” he says. “Any movement along these lines has market currency. In recent years, more and more consumers find that they are willing to pay for more expensive food products as a result of procurement changes.”

But others aren’t so sure about how higher prices will resonate with McDonald’s customers, who are used to value pricing.

“I really don’t think McDonald’s can raise the quality of all its ingredients if that comes along with price increases,” Friend says. “If people want to pay $8 to $12 per meal, they have many other options.”

John Gordon, founder and principal of Pacific Management Consulting Group, a San Diego-based research firm that focuses on chain restaurants, believes that phasing out cages and antibiotics is a good thing. But he’s not sure the company has decided what it wants to be as it undergoes this image makeover. He cites the “McPick 2 for $2” in the US, which allows customers to choose two items from among McDoubles, McChickens, small fries and mozzarella sticks for US$2.

“They talk about better ingredients, better this and better that,” Gordon says. “But at the same time they get drawn back to their low-price heritage. That confuses customers.”

There also seems to be a bit of confusion out there about whether the company is committed to streamlining its menu, as it has talked about doing, or if it is still trying to woo customers with fancy new menu items. A recent example of this in Canada was the Canadian Holiday Warmers collection, featuring an onion-topped Jolly Burger and ginger cookies. Last fall, McDonald’s Canada launched the Create Your Taste program with customizable hamburgers and gourmet toppings such as blue cheese.

Regional programs in the US, such as the Chicagoland Burger Build Off, have invited contestants to propose all sorts of new things between the bun. The Rio Crisp, a finalist for the ultimate Chicagoland burger, is a quarter-pound beef patty on an artisan roll with creamy peppercorn sauce, guacamole, red onions, tomato, lettuce, pepper jack cheese and chili-lime tortilla strips — a long way from the original Quarter Pounder.

“What this does is it creates a more localized flavour,” says Darren Tristano, president of Technomic Inc., a Chicago consulting and research firm specializing in the food industry. He likes the idea of regionalization. “It allows customers to co-create product and builds a lot of awareness. It helps [the company] better understand what customers are expecting from McDonald’s.”

“So far,” he adds, “I think Easterbrook has made some good decisions.”

Others say McDonald’s should not try to be all things to all people. Friend, for one, is in the back-to-basics camp. She applauds ongoing efforts to improve efficiency from an operational standpoint so that customers can still get their food fast, and advocates paring the menu down to the things that helped the company conquer the fast-food market in the first place. “Small improvements, like the changes they’ve made to the Egg McMuffin, are good examples of how I would see things going forward,” she says, referring to the return of the original muffin recipe and going back to real butter instead of margarine.

David Kincheloe, a CPA and president of National Restaurant Consultants, based in Golden, Colo., believes McDonald’s should focus on its core strengths and forget things such as table service, which it is now testing in some markets. “McDonald’s is a quick-serve restaurant,” he says. “They need to concentrate on what they do and do it extremely well. There are some people you just can’t service. If someone really wants kale, they probably aren’t going to go to McDonald’s.”

BRING BACK THE BEEF FAT AND KEEP THE BREAKFAST

Although Kincheloe’s consultancy focuses on helping smaller restaurants refine their menus, he has one bit of specific advice for the big guys in Oakbrook: bring back the beef fat. In 1990, with awareness running high about the dangers of cholesterol, McDonald’s announced that it would stop cooking its fries in beef fat and switch to 100% vegetable oil. While the company is not likely to reverse that decision, people old enough to remember the original recipe may agree that he has a point. “That gave the fries a great taste,” he sighs. “Now their fries are just not what they should be.”

One thing the experts seem to agree on is the benefit of the all-day breakfast, which was launched last fall in the US, with the company saying it had no plans to make a similar move in Canada at that time. While some US franchisees have complained about the logistical challenges of serving breakfast all day, it has been a hit with consumers, especially young people. The idea was conceived before Easterbrook got to head office, but he is credited with pushing it forward. The move is thought to be a boon to US sales, which showed their first quarterly increase in two years in the third quarter of 2015.

“I’m beginning to see some other good things, beyond just breakfast,” says Gordon, adding that he believes Easterbrook has the right philosophy about regionalization, both in terms of menu items and company structure.

Wall Street seems to be lovin’ it too. When McDonald’s reported its fourth-quarter earnings in January, showing an increase of 5% in same-store sales globally, the stock hit a new high of US$121.90 a share. Easterbrook said, “As we enter 2016, we expect continued positive top-line momentum across all segments.”

Despite the positives, however, it’s too soon to say whether Easterbrook has turned things around. He’s only been in the big chair for a year, after all, and has a lot on his plate running a global fast-food empire. Challenges include restive franchisees, upward wage pressure in the US, an EU investigation into the company’s European tax practices and a worldwide supply chain that sometimes goes awry. Potential customers in Asia are said to still be wary after a 2014 scandal, when a supplier was found to be selling expired meat. And because McDonald’s is so big, that kind of bad news makes headlines around the world.

“McDonald’s didn’t get into the situation that it did in a short period of time,” Gordon says. “Conversely, it’s going to take some time to get out of it. It takes a long time to convince people, to change market perceptions. It’s going to take additional years for McDonald’s to get back to where it wants to get to.”

“I’m not sure I would call it a turnaround at this point,” echoes Tristano. “It’s taken some time for Steve to start making some changes. But so far I think he’s made some good decisions and started the process back to growth for McDonald’s.”

The verdict is still out. But while the industry watches and waits, it’s so far, so good for Steve Easterbrook.

About the Author

Susan Smith


Susan Smith is a freelance writer in Toronto.

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