McDonald's New Chief Plots Counter Attack

By Annie Gasparro 

McDonald's Corp.'s new chief executive has set expectations high for change at the world's biggest restaurant chain. Now he'll have to deliver.

Steve Easterbrook assumed command of the Golden Arches on Sunday, replacing Don Thompson, who retired. The new chief--a longtime McDonald's executive who also spent nearly two years running other chains in his native U.K.--has long cultivated an image as a change agent.

In the 33 days since the CEO shuffle was announced amid a worsening sales slump, he has rammed the point home, labeling himself an "internal activist" who plans to create a "modern, progressive burger company," according to David Tarantino, an analyst at Robert W. Baird & Co. who met with Mr. Easterbrook.

Investors appear impressed. McDonald's shares, which gained 0.3% in the 31 months between Mr. Thompson becoming CEO and news of his retirement on Jan. 28, have risen more than 11% since then.

Success is far from certain. McDonald's in the U.S. faces both disaffection from some traditional patrons, who are unhappy with problems like slower service, and disinterest from some younger consumers, who see it as unhealthy--and unhip. Revenue last year fell 2.4% to $27.44 billion as net income declined 15% to $4.76 billion. It was the first time both measures have declined in the same year since at least 1981, according to FactSet.

Customers, analysts and industry insiders offer conflicting advice, broadly falling into two camps. Some say Mr. Easterbrook needs to focus on the basics--making better burgers more efficiently. Others argue McDonald's needs a fuller face-lift, shifting its menu and marketing to emulate smaller-but-fast-growing rivals like Chipotle Mexican Grill Inc. that tout fresh ingredients and premium, customized food.

The new CEO is scheduled to discuss his plans this week in a meeting with U.S. restaurant operators, franchise owners and suppliers. McDonald's typically holds such meetings every other year--2015 would have been skipped--but the fast-food chain decided to add one this year, calling it a Turnaround Summit.

When plans for the meeting were set last year, Mr. Easterbook, then global chief brand officer, would likely have been heavily involved.

A draft agenda seen by The Wall Street Journal, highlights goals like "get the order right, every time," and "change the conversation about McDonald's--counter attack brand disparagers with continuous positive news on food quality and employment image."

The big question is how to make effective changes.

Mr. Thompson in December announced a series of measures to revive U.S. sales, which some observers criticized as overly broad and insufficiently aggressive. Many industry insiders and analysts expect some bold moves from the new CEO, whether fast-tracking the most promising initiatives already in the works or unveiling new ones.

A few possibilities:

A big announcement about changes to its ingredients, such as dropping preservatives or artificial ingredients--could make McDonald's more attractive to the growing cohort of consumers who now more closely scrutinize how they eat.

McDonald's has indicated change in this area is coming. "The reality is, more people care about their food than they ever did before," Mr. Easterbrook said in November.

Another move might be to announce plans to switch to antibiotic-free chicken or beef. More food companies are doing this--Chick-fil-A Inc. announced similar plans last year. Such a measure would be complicated, even if rolled out over years. McDonald's has 14,350 restaurants in the U.S.--seven times Chick-fil-A's number--and would need suppliers to make major changes in how they raise livestock.

"McDonald's has had trouble with much less, like when it added baby carrots to happy meals," said Sara Senatore, analyst at Sanford C. Bernstein.

Upgrading the menu could enhance the image of its food. This doesn't mean expanding it. McDonald's currently is cutting a handful of its roughly 120 menu items to improve speed and reduce wait times that have increased because of the menu's complexity.

"Whether it's fewer finished products that a customer gets or fewer raw ingredients that we use to assemble food, it will help us be more efficient," one franchisee said.

But McDonald's could improve items without adding to menu bloat. For example, it recently started quietly rolling out new versions of its premium grilled chicken sandwiches that boast Applewood smoked bacon, caramelized onions and an "artisan" roll.

Mr. Easterbrook could expand such efforts. But McDonald's has had failed attempts at premium offerings like the Arch Deluxe and Angus burgers. Those experiences might also argue against something truly outside the box, like a McVeggie Burger--an idea that has been tested over the years in the U.S. but never caught on.

Mr. Easterbrook also will need to decide what to do with his predecessor's plan for a customizable burger that uses ordering kiosks and requires extra wait time. The idea, which Mr. Easterbrook has so far embraced in analyst meetings, could appeal to fans of rivals like Chipotle and Shake Shack Inc. But some stakeholders fear it will worsen the problems of kitchen complexity and speed that the menu trimming is designed to address.

Financial engineering wouldn't fix falling sales, but it could buy patience from investors and provide cash to fund efforts to improve McDonald's food.

Some analysts see the chance to extract more value out of McDonald's real estate--the company reported $39 billion in property and equipment at the end of 2014--such as by spinning them off into a real-estate investment trust, or REIT. McDonald's has resisted that idea in the past, in part because of the enormous complexity.

Mr. Easterbrook also could accelerate plans to sell restaurants to franchisees to add to McDonald's $2.1 billion in cash.

RBC analyst David Palmer said that when he met with Mr. Easterbrook the day after the announcement, he wouldn't comment on specific financial measures, but some of these, like refranchising and a leaner, more nimble management structure, are out of his U.K. playbook, when he improved the ingredients and marketing there, from 2006 to 2008, Mr. Palmer said.

Write to Annie Gasparro at [e-mail]

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