McDonald’s in 2019
On November 3, 2019, the McDonald’s board of directors dismissed Steve Easterbrook over
violations of company policy regarding a relationship with an employee and named Chris
Kempczinski the new CEO. Kempczinski had experience at Kraft Foods and PepsiCo prior to
joining McDonald’s in 2015, most recently as president of the USA business unit.
In March 2019, McDonald’s, the largest restaurant chain, announced it will acquire artificial-
intelligence startup Dynamic Yield, a company focused on personalization and decision logic
technology. Access to this technology will allow the firm to update instantaneously its drive-
through menus based on factors such as time of day, weather, and trending menu items.
McDonald’s plans to roll out the updated drive-through menus across the United States
during the year. “With this acquisition, we’re expanding both our ability to increase the role
technology and data will play in our future and the speed with which we’ll able to implement
our vision of creating more personalized experiences for our customers,” former CEO Steve
Easterbrook said in a statement.
McDonald’s has been trying to attract more customers to its restaurants by offering more
customized products that are also healthier. It has removed high fructose corn syrup from its
buns, changed from the use of liquid margarine to real butter, decided to use chicken that has
been raised without antibiotics, and to make use of cage-free eggs. Mike Andres, former
president of McDonald’s USA explained why the firm has decided to make these changes:
“Why take a position to defend them if consumers are saying they don’t want them?”3
These changes are expected to address some of challenges that McDonald’s has been facing
in many markets, including in the United States, where it has almost 15,000 of its 38,000
mostly franchised restaurants. It has lost a lot of ground with consumers, especially
millennials, who are defecting to traditional competitors like Burger King and Wendy’s as
well as to new designer burger outlets such as Five Guys and Shake Shack. Changing tastes
are also responsible for the loss of customers that are lining up at fast-casual chains such as
Chipotle Mexican Grill and Panera Bread, which offer customized ordering and fresh
ingredients (see Exhibits 1 to 4).
EXHIBIT 1 Income Statement ($ millions)
Year Ending
Dec. 31, 2018 Dec. 31, 2017 Dec. 31, 2016
Total Revenue $21,025 $22,820 $24,622
Operating Income 8,823 9,553 7,745
Net Income 5,924 5,192 4,687
Table Summary: Table divided into two columns compares income of Mc Donald’s from
2016 to 2018. Column 1 notes the account heads. Column 2, year ending, is further divided
into three sub-groups as: December 31, 2018; December 31, 2017; and December 31,
2016.
Source: Annual Report of McDonald’s Corporation, 2018.
EXHIBIT 2 Balance Sheet ($ millions)
Year Ending
Dec. 31, 2018 Dec. 31, 2017 Dec. 31, 2016
Current Assets $ 4,053 $ 5,327 $ 4,849
Total Assets 32,811 33,803 31,024
Current Liabilities 2,973 2,890 3,468
Total Liabilities 39,069 37,071 33,228
Shareholder Equity (6,258) (3,268) (2,204)
Table Summary: Table divided into two columns compares equity of Mc Donald’s from
2016 to 2018. Column1notes the account heads. Column 2, year ending, is further divided
into three sub-groups as: December 31, 2018; December 31, 2017; and December 31,
2016.
Sources: Annual Report. McDonald’s Corporation, 2018; Annual Report. McDonald’s Corporation, 2019.
EXHIBIT 3 Breakdown of Revenues ($ millions)
2018 2017 2016
U.S. $7,666 $8,006 $8,253
International Lead Markets 7,600 7,340 7,223
High Growth Markets 3,989 5,533 6,161
Foundational Markets & Corporate 1,770 1,941 2,985
Table Summary: Table divided into four columns compares revenue of Mc Donald’s based
on the market division. Column 1 notes the types of markets. Columns 2 to 4 are marked
from left to right as: 2018; 2017; and 2016.
Source: Annual Report of McDonald’s Corporation, 2018.
EXHIBIT 4 U.S. Customer Satisfaction Index for Selected Chains
Yea McDonald Burge Wendy’ KF Tac Chipotl Chick Paner Subwa
r ’s r s C o e -fil-A a y
King Bell Mexica Bread
n Grill
201 69 76 77 77 74 79
87 81 80
8
201 69 77 76 78 76 79 87 82 81
7
201 69 76 76 78 75 78 87 81 80
6
201 67 72 73 73 72 83 86 80 77
5
201 71 76 78 74 72 – – – 78
4
201 73 76 79 81 74 – – – 83
3
Table Summary: Table divided into ten columns compares data of various brands
representing number of satisfied customers. The column headers are marked from left to
right as: year, Mc Donald’s, Burger King; Wendy’s; KFC; Taco Bell; Chipotle; Mexican
Grill; Chick-fil-a ; Panera bread; and Subway.
Source: American Customer Satisfaction Index (ACSI).
Over the years, McDonald’s response to this growing competition was to expand its menu
with snacks, salads, and new drinks. From 33 basic items that the chain offered in 1990, the
menu had grown by 2014 to 121 items. The greatly expanded menu led to a significant
increase in costs and longer preparation times. This forced the firm to increase the prices of
many of its items and to take more time to serve customers, moving it away from the
attributes that it had built its reputation upon. “McDonald’s stands for value, consistency, and
convenience,” said Darren Tristano, a restaurant industry consultant.4
The fast food chain has been through a similar crisis before. Back in 2002 and 2003,
McDonald’s had experienced a decline in performance because of quality problems as result
of rapid expansion. At that time, the firm had brought James R. Cantalupo back out of
retirement to turn things around. He formulated a “Plan to Win,” which has been the basis of
McDonald’s strategy over the last decade. The core of the plan was to increase sales at
existing locations by improving the menu, refurbishing the outlets, and extending hours. This
time, however, such incremental steps might not be enough.
Pulling out of a Downward Spiral
Since it was founded more than 50 years ago, McDonald’s has been defining the fast food
business. It provided millions of Americans their first jobs even as it changed their eating
habits. It rose from a single outlet in a nondescript San Bernardino, California to become one
of the largest chain of outlets spread around the globe. But it gradually began to run into
various problems that began to slow down its sales growth (see Exhibit 5).
EXHIBIT 5 McDonald’s Milestones
1948 Brothers Richard and Maurice McDonald open the first restaurant in San Bernadino,
California, that sells hamburgers, fries, and milkshakes.
1955 Ray A. Kroc, 52, opens his first McDonald’s in Des Plaines, Illinois. Kroc, a
distributor of milkshake mixers, figures he can sell a bundle of them if he franchises
the McDonald’s business and install his mixers in the new stores.
1961 Six years later, Kroc buys out the McDonald brothers for $2.7 million.
1963 Ronald McDonald makes his debut as corporate spokes clown using future NBC-
TV weatherman Willard Scott. During the year, the company also sells its 1
billionth burger.
1965 McDonald’s stock goes public at $22.50 a share. It will split 12 times in the next 35
years.
1967 The first McDonald’s restaurant outside the U.S. opens in Richmond, British
Columbia. Today there are 31,108 McDonald’s in 118 countries.
1968 The Big Mac, the first extension of McDonald’s basic burger, makes its debut and is
an immediate hit.
1972 McDonald’s switches to the frozen variety for its successful French fries.
1974 Fred L. Turner succeeds Kroc as CEO. In 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.
1975 The first drive-through window is opened in Sierra Vista, Arizona.
1979 McDonald’s responds to the needs of working women by introducing Happy Meals.
A burger, some fries, a soda, and a toy give working moms a break.
1987 Michael R. Quinlan becomes chief executive.
1991 Responding to the public’s desire for healthier foods, McDonald’s introduces the
low-fat McLean Deluxe burger. It flops and is withdrawn from the market. Over the
next few years, the chain will stumble several times trying to spruce up its menu.
1992 The company sells its 90 billionth burger, and stops counting.
1996 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 also falls
flat.
1997 McDonald’s launches Campaign 55, which cuts the cost of a Big Mac to $0.55. It 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.
1998 Jack M. Greenberg becomes McDonald’s fourth chief executive. A 16-year
company veteran, he vows to spruce up the restaurants and their menu.
1999 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 Market.
2000 McDonald’s sales in the U.S. peak at an average of $1.6 million annually per
restaurant. It is, however, still more than at any other fastfood chain.
2001 Subway surpasses McDonald’s as the fastfood chain with the most U.S. outlets. At
the end of the year it had 13,247 stores, 148 more than McDonald’s.
2002 McDonald’s posts its first-ever quarterly loss, of $343.8 million. The stock drops to
around $13.50, down 40% from five years ago.
2003 James R. Cantalupo returns to McDonald’s in January as CEO. He immediately
pulls back from the company’s 10–15% forecast for per-share earnings growth.
2004 Charles H. Bell takes over the firm after the sudden death of Cantalupo. He states he
will continue with the strategies that have been developed by his predecessor.
2005 Jim Skinner takes over as CEO after Bell announces retirement for health reasons.
2006 McDonald’s launches specialty beverages, including coffee-based drinks.
2008 McDonald’s plans to add McCafés to each of its outlets.
2012 Don Thompson succeeds Skinner as CEO of the chain.
2015 Thompson resigns because of declining performance and is replaced by Steve
Easterbrook, the firm’s chief branding officer.
2016 McDonald’s opens restaurant in the 120th country; the first McDonald’s restaurant
opens in Astana, Kazakhstan, on March 8, 2016.
2017 Global McDelivery Day is celebrated on July 26 to support the global launch of
McDelivery with UberEATS.
2019 Steve Easterbrook is replaced due to poor judgement in a personal relationship with
an employee and Chris Kempczinski, president of the USA business unit is named
CEO.
Table Summary: Table divided into two columns summarizes expansion of the Mc
Donald’s brand from 1948 to 2019. Column 1 notes the year. Column 2 represents the
corresponding milestones.
Source: The McDonald’s Story: Timeline; McDonald’s Leadership. McDonald’s Corporation.
This decline could be attributed in large part to a drop in McDonald’s once-vaunted service
and quality since its expansion in the 1990s, when headquarters stopped grading franchises
for cleanliness, speed, and service. By the end of the decade, the chain ran into more
problems because of the tighter labour market. McDonald’s began to cut back on training as
it struggled hard to find new recruits, leading to a dramatic falloff in the skills of its
employees. According to a 2002 survey by market researcher Global Growth Group,
McDonald’s came in third in average service time behind Wendy’s and sandwich shop
Chick-fil-A Inc.
By the beginning of 2003, consumer surveys were indicating that McDonald’s was headed
for serious trouble. Measures for the service and quality of the chain were continuing to fall,
dropping far behind those of its rivals. In order to deal with its deteriorating performance, the
firm decided to bring back retired vice-chairman James R. Cantalupo, 59, who had overseen
McDonald’s successful international expansion in the 1980s and 1990s. Cantalupo, who had
retired only a year earlier, was perceived to be the only candidate with the necessary
qualifications, despite shareholder sentiment for an outsider. The board had felt that it needed
someone who knew the company well and could move quickly to turn things around.
Cantalupo realized that McDonald’s often tended to miss the mark on delivering the critical
aspects of consistent, fast, and friendly service and an all-around enjoyable experience for the
whole family. He understood that its franchisees and employees alike needed to be inspired
as well as retrained on their role in putting the smile back into McDonald’s experience. When
Cantalupo and his team laid out their turnaround plan in 2003, they stressed upon getting the
basics of service and quality right, in part by reinstituting a tough “up or out” grading system
that would kick out underperforming franchisees. “We have to rebuild the foundation. It’s
fruitless to add growth if the foundation is weak,” said Cantalupo.
In his effort to focus on its core business, Cantalupo sold off the non-burger chains that the
firm had recently acquired. He also cut back on the opening of new outlets, focusing instead
on generating more sales from its existing outlets. Cantalupo pushed McDonald’s to try to
draw more customers through the introduction of new products. The chain had a positive
response to its increased emphasis on healthier foods, led by a revamped line of fancier
salads. The revamped menu was promoted through a new world-wide ad slogan “I’m loving
it,” which was delivered by pop idol Justin Timberlake through a set of MTV style
commercials.
Striving for a Healthier Image
When Jim Skinner took over from Cantalupo in 2004, he continued to push for McDonald’s
to change its image. Skinner felt that one of his top priorities was to deal with the growing
concerns about the unhealthy image of McDonald’s, given the rise of obesity in the United
States. These concerns were highlighted in the popular documentary, Super Size Me, made by
Morgan Spurlock. Spurlock vividly displayed the health risks that were posed by a steady
diet of food from the fast food chain. With a rise in awareness of the high fat content of most
of the products offered by McDonald’s, the firm was also beginning to face lawsuits from
some of its loyal customers.
In response to the growing health concerns, one of the first steps taken by McDonald’s was to
phase out supersizing by the end of 2004. The supersizing option allowed customers to get a
larger order of French fries and a bigger soft drink by paying a little extra. McDonald’s also
announced that it intended to start providing nutrition information on the packaging of its
products. The information was easy to read and would tell customers about the calories, fat,
protein, carbohydrates, and sodium that are in each product. Finally, McDonald’s also began
to remove the artery-clogging trans fatty acids from the oil that it used to make its French
fries and subsequently announced plans to reduce the sodium content in all of its products by
15 percent.
But Skinner was also trying to push out more offerings that are likely to be perceived by
customers to be healthier. McDonald’s has continued to build upon its chicken offerings
using white meat with products such as Chicken Selects. It has also placed a great deal of
emphasis upon its new salad offerings. McDonald’s has carried out extensive experiments
and tests with these, deciding to use higher quality ingredients, from a variety of lettuces and
tasty cherry tomatoes to sharper cheeses and better cuts of meat. It offered a choice
of Newman’s Own dressings, a well-known higher-end brand. “Salads have changed the way
people think of our brand,” said Wade Thoma, vice president for menu development in the
U.S. “It tells people that we are very serious about offering things people feel comfortable
eating.”
McDonald’s has also been trying to include more fruits and vegetables in its well-known and
popular Happy Meals. It announced in 2011 that it would reduce the amount of French fries
and phase out the caramel dipping sauce that accompanied the apple slices in these meals.
The addition of fruits and vegetables has raised the firm’s operating costs, because these are
more expensive to ship and store because of their more perishable nature. “We are doing
what we can,” said Danya Proud, a spokesperson for the firm. “We have to evolve with the
times.”
The rollout of new beverages, highlighted by new coffee-based drinks, represented the
chain’s biggest menu expansion in almost three decades. Under a plan to add a McCafé
section to all of its nearly 14,000 U.S. outlets, McDonald’s has been offering lattes,
cappuccinos, ice-blended frappes, and fruit-based smoothies to its customers. “In many cases,
they’re now coming for the beverage, whereas before they were coming for the meal,” said
Lee Renz, an executive who was responsible for the rollout.
Refurbishing the Outlets
As part of its turnaround strategy, McDonald’s also been selling off the outlets that it owned.
More than 80 percent of its outlets are now in the hands of franchisees and other affiliates.
Skinner began working with the franchisees to address the look and feel of many of the
chain’s aging stores. Without any changes to their décor, the firm was likely to be left behind
by other savvier fast food and drink retailers. The firm is in the midst of pushing harder to
refurbish—or re-image—all of its outlets around the world. “People eat with their eyes first,”
said Thompson. “If you have a restaurant that is appealing, contemporary, and relevant both
from the street and interior, the food tastes better.”
The re-imaging concept was first tried in France in 1996 by Dennis Hennequin, an executive
in charge of the chain’s European operations, who felt that the effort was essential to revive
the firm’s sagging sales. “We were hip 15 years ago, but I think we lost that,” he
said.10 McDonald’s has been applying the re-imaging concept to its outlets around the world,
with a budget of more than half of its total annual capital expenditures. In the United States,
the changes cost as much as $650,000 per restaurant, a cost that is shared with the franchisees
when the outlet is not company owned.
One of the prototype interiors that was tested out by McDonald’s has curved counters with
surfaces painted in bright colours. In one corner, a touch-activated screen allows customers to
punch in orders without queuing. The interiors can feature armchairs and sofas, modern
lighting, large television screens, and even wireless Internet access. The firm is also trying to
develop new features for its drive-through customers, which account for 65 percent of all
transactions in the United States. They include music aimed at queuing vehicles and a wall of
windows on the drive-through side of the restaurant allowing customers to see meals being
prepared from their cars.
The chain has even been developing McCafés inside its outlets next to the usual fast food
counter. The McCafé concept originated in Australia in 1993 and has been rolled out in many
restaurants around the world. McDonald’s has been introducing the concept to the United
States as part of the refurbishment of its outlets. In fact, part of the refurbishment has focused
on the installation of a specialty beverage platform across all U.S. outlets. The cost of
installing this equipment is running at about $100,000 per outlet, with McDonald’s
subsidizing part of this expense.
The firm has planned for all McCafés to offer espresso-based coffee, gourmet coffee blends,
fresh baked muffins, and high-end desserts. Customers will be able to consume these while
they relax in soft leather chairs listening to jazz, big band, or blues music. Commenting on
this significant expansion of offerings, Marty Brochstein, executive editor of The Licensing
Letter said: “McDonald’s wants to be seen as a lifestyle brand, not just a place to go to have a
burger.”
Rethinking the Business Model
In response to the decline in performance, McDonald’s is testing a number of new concepts,
including a kiosk in some locations that allows customers to skip the counter and head to
tablet-like kiosks where they can customize everything about their burger, from the type of
bun to the variety of cheese to the many, glossy toppings and sauces that can go on it. The
firm has plans to gradually expand the concept to more locations, but franchises are
concerned about the costs, which can run up to $125,000 per restaurant to make the required
changes. “Customization is not McDonald’s historic strength,” said Mark Kalinowski, an
analyst at Janney Montgomery Scott.
Dubbed the “Create Your Taste” platform, McDonald’s was hoping to attract more younger
customers who may be moving away from frozen processed food that is loaded with
preservatives. But it realized that there were considerable risks involved with making such a
change. The burgers would be priced higher at $5.49, could take seven minutes to prepare,
and could only be ordered from inside the store and eventually brought to your table.
Franchises complained that this could not be offered to drive-through customers that make up
about 70 percent of the chain’s business.
Furthermore, such a change ran counter to the image for inexpensive and fast food that
McDonald’s has worked hard to build over the years. Easterbrook has subsequently shifted to
a more efficient and less expensive format called “Signature Crafted Recipes” that would
allow both in-store and drive-through customers to choose a bun and one of four sandwich
types. McDonald’s is hoping that such a push toward more customizations would bring more
customers into their outlets, bringing the U.S. counter/drive-through customer ratio closer to
50/50, up from the current 30/70.
McDonald’s has also been working to simplify its menu, reducing the number of “value
meal” promotions, groups of items that together cost less than ordering items individually. It
has tweaked its “dollar menu” replacing it with “dollar value and more” raising the prices for
many items as part of a bid to get each customer to spend more. But McDonald’s had
introduced these bargain menus because its prices had risen over the years, driving away
customers to cheaper outlets. Consequently, as much as 15 percent of the chain’s sales had
been coming from its “dollar menu” where everything cost a dollar.
Over the past year, McDonald’s saw a slight jump in U.S. sales after launching an all-day
breakfast at most of its locations. The franchises had to be convinced to invest about $5,000
to add food preparation space in order to offer breakfast along with the regular lunch or
dinner items. However, sales from the all-day breakfast have begun to flatten out, with a
gradual decline in sales from customers who were coming in throughout the day to order
breakfast.
More Gold in These Arches?
In spite of all the changes that have been made by Easterbrook, sales growth for McDonald’s
has continued to be sluggish. The firm does, however, believe that sales will rebound in the
United States as well as in foreign markets. In order to provide a boost to its operations in
China and Hong Kong, McDonald’s announced a deal with Citic, a state-owned
conglomerate and the Carlyle Group, a private equity firm. “China and Hong Kong represent
an enormous growth opportunity for McDonald’s,” Easterbrook said in a recent news release.
“The new partnership will combine one of the world’s most powerful brands and our
unparalleled quality standards with partners who have an unmatched understanding of the
local markets.”
McDonald’s has also been trying to grow by reaching out to different customer segments
with different products at different times of the day. It has tried to target young adults for
breakfast with its gourmet coffee, egg sandwiches, and fat-free muffins. It attracts working
adults for lunch, particularly those who are squeezed for time, with its burgers and fries. And
its introduction of wraps has drawn in teenagers late in the evening after they have been
partying. Restaurant analyst Bryan Elliott commented: “They’ve tried to be all things to all
people who walk in their door.”
Above all, McDonald’s is concerned about the findings of a recent survey that showed only
20 percent of millennials had even tried a Big Mac. It is also aware that despite its efforts to
diversify its menu, 30 percent of sales come from just five items: Big Macs, hamburgers,
cheeseburgers, McNuggets, and fries. It has managed to increase traffic during the late-night
hours, but this may be hurt by their recent announcement that they would offer a more limited
sample of their full menu between midnight and 5 am.
Above all, the expansion of the menu beyond the staple of burgers and fries does raise some
fundamental questions. Most significantly, it is not clear just how far McDonald’s can stretch
its brand while keeping all of its outlets under the traditional symbol of its golden arches. In
fact, industry experts believe that the long-term success of the firm may well depend on its
ability to compete with rival burger chains. “The burger category has great strength,” added
David C. Novak, chairman and CEO of Yum! Brands, parent of KFC and Taco Bell. “That’s
America’s food. People love hamburgers.”