With fourth-quarter earnings dropping 21% and global sales down, the company needs a back-to-basics turnaround.
In 2002 McDonald’s was losing market share. Employee and franchisee morale were extremely low. The popular view was that the time for McDonald’s had passed. Shares were in severe decline.
Then the company’s chief executive officer, Jim Cantalupo, and president at the time, Charlie Bell, instituted a turnaround that took less than a year to show results. I was at McDonald’s and participated in designing and executing the turnaround plan. The momentum carried the brand until the effects of misguided decisions in recent years put McDonald’s into another downward spiral.
On Monday, the company announced that in January its global sales in restaurants open at least 13 months fell 1.8%—that’s a serious decline in the fast-food industry. Recently, McDonald’s reported a 21% drop in fourth-quarter earnings and announced that CEO Don Thompson would retire at the end of the month.
Another fast turnaround of the McDonald’s brand is possible—and it is essential for the company’s future. If you don’t take care of the short term, there will be no long term. Here are a few immediate actions that would reignite McDonald’s.
Stop the hemorrhaging: Plugging the holes in the bottom of the brand bucket must be the first priority. Going after new customers—as McDonald’s has lately been doing in trying to attract Millennials by offering more customization of its food—without focusing on customer retention won’t succeed. It costs much more to attract a new customer than it does to keep a customer loyal. Love the customers you have.
Focus on the direct competition: Why are Burger King, Chick-fil-A, In-and-Out Burger, Popeye’s, Subway, Wendy’s and others doing well while McDonald’s struggles? In the short term, the company needs to grow its share within the direct competitive set. Be the best in class. For McDonald’s, the class is quick-service hamburger, chicken and sandwich chains. “Fast casual” restaurants like Boston Market, Chipotle Mexican Grill and Panera Bread are rising in popularity, but they’re not the direct competition.
Fix the food: People are not lovin ’ McDonald’s food. A 2014 Consumer Reports survey of 21 burger brands ranked McDonald’s at No. 21, last place. McDonald’s is a restaurant; food taste matters. Popeye’s refocused on its Louisiana food heritage. In-and-Out nourishes its cult following. McDonald’s must revive founder Ray Kroc ’s food-quality passion. Continuous food improvement is a never-ending challenge. Making an even better hamburger is a bigger opportunity than launching a new snack wrap.
Restore fast-food service to fast food: Customers will not wait if they want fast food. Obsessed with how Chipotle does business, McDonald’s sees customization as magical brand elixir. But Chipotle doesn’t compromise service speed for food excellence and customization. Chipotle’s average service time is less than 60 seconds. Average service times in the California test markets for the new McDonald’s burger bar, called Create Your Taste, run as much as seven minutes, according to news reports. Slow service, in an effort to provide customization, won’t save the McDonald’s brand.
Focus is fundamental: Focus on doing a few things extraordinarily well. The “better burger” chains like Five Guys, Shake Shack and Smashburger raise the standard on food quality, but they also demonstrate the power of menu focus. The McDonald’s menu now has more than 100 items, which makes it harder to run the restaurant and harder for customers to decide what to order. It complicates the supply chain. It complicates employee training. Over the past few years, McDonald’s moved from a disciplined, strategic approach to a tactical, try-anything approach.
Restore relevance: Loss of relevance was one of the major issues the brand faced in 2002. In addition to significant demographic, behavioral, economic, social and competitive changes, there were significant changes in attitudes toward food. These same forces are still at work. For example, increased nutritional knowledge, as well as competition from fresh food at grocery stores, have changed the way people eat.
Re-energize the Plan to Win: The 2003 global turnaround plan, called “Plan to Win,” aligned the entire organization to execute “the right actions executed in the right way to achieve the right results.” The basis for it was a laser focus on the customer. Over the past decade the customer focus has been lost.
Adopt a disciplined new-product process: New products are important to maintain customer interest. Too many new products introduce complexity, and too many rollout failures damage brand credibility. In the previous McDonald’s turnaround, we adopted a management system for new products that carefully moved them through a three-year development pipeline. The goal: a few heroes and no zeros.
Internal marketing comes first: Customer focus is important, but employees come first. In 2003 we invested in an internal marketing effort to rebuild employee pride. Jim Cantalupo fought against the demeaning characterization of “McJobs.” Charlie Bell led the effort to build internal alignment behind the “Plan to Win” across 119 countries. (Jim died in 2004 and was replaced as CEO by Charlie, who died the following year.) We launched the new advertising approach internally, reaching out to about 1.5 million employees before the marketing was launched externally. In a service business, a proud, aligned workforce is powerful.
Rebuild trust: Without trust, nothing else matters. In 2003, McDonald’s had to regain credibility with employees, suppliers, franchisees and customers. We adopted a variety of trust-building programs around the world, such as Paul Newman endorsing our salads; an association with Oprah Winfrey’s trainer; the “Open Doors” program in France, with teachers, parents and children invited to the restaurants to see how the food is prepared; and a relationship with Food Group Australia, accredited dietitians who helped develop a healthier-food program Down Under.
The McDonald’s trust bank needs trust deposits. Yet it doesn’t help much to have transparency for food that customers don’t want to eat. Sometimes the more you know the worse it makes you feel: 19 ingredients in McDonald’s fries! These include sodium acid pyrophosphate, hydrogenated soybean oil with tertiary butylhydroquinone (TBHQ) and the delightful dimethylpolysiloxane added as an antifoaming agent.
In 2002 commentators said that McDonald’s was dying. They were wrong. The company became one of the best-performing U.S. businesses for nearly a decade. It can happen again.
Mr. Light, chairman of Arcature LLC, a brand management consulting company, is the former chief marketing officer of McDonald’s and the co-author, with Joan Kiddon, of “Six Rules for Brand Revitalization” (FT Press, 2009).