The Key Was What McDonald's Turnaround Plan Didn't Say (MCD)

By Markets Fool.com

McDonald's CEO Steve Easterbrook revealed his plans for the company on Monday. What was built up as a revolutionary overhaul of the burger chain instead was more notable for what it failed to say.

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Rather than a reinvention of a company in decline, Easterbrook's presentation was short on specifics and filled with platitudes in what was ultimately a big yawn-fest. It's stock fell nearly 2% on the day.

Righting a sinking ship
Few, including Easterbrook, would argue that McDonald's doesn't need a new direction. Month after month, the restaurant operator watches same-store sales fall. Comps are an important retail metric because they show a company's organic growth from selling more goods and services at existing locations and not from opening more stores.

Yet for 14 of the last 17 months, comparable sales have been flat or down, and just about the only way McDonald's was able to post positive growth in any of those periods was when it was giving away its coffee for free.

Turning around an operation as vast as McDonald's global empire is not easy and it won't occur overnight, but Easterbrook promised he'd be "challenging conventional wisdom on multiple fronts" when he refused to divulge any secrets during the earnings conference call in April 22. But with several jarring moves announced recently -- raising the minimum wage of employees at company-owned stores, closing 700 underperforming stores, and eliminating chicken from its menu that was raised with antibiotics -- the company had sparked speculation (and hope) that it would make even more radical shifts.

Would the Create Your Taste personalization menu that's met resistance from McDonald's franchisees be jettisoned in favor of a new, simpler menu? Would the burger joint refranchise even more restaurants than already planned? Would the value meal end of its menu get greater support?

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A new day was promised for the burger king, but McDonald's CEO Steve Easterbrook failed to deliver the goods. Photo: Mike Mozart.

A nothing-burger
Nah, not really. Instead of giving franchisees, investors, and even the restaurant's patrons a road map to where he was taking the company, Easterbrook instead put off much of what would happen until 2017 or later. He talked of being customer-centric, appropriately aligning the business with where it earned its money, unlocking growth, and something about "optimize today and shape tomorrow," but offered few concrete ideas.

What he essentially promised was more of the same that has so far failed to gain any traction for the restaurant operator. In short, he said nothing investors could immediately put to use.

For example, Easterbrook in a webcast promised to not offer "sweeping talks of millennials as if they're one single group with shared attitudes,", but also said creating artisanal chicken sandwiches would be part of its future. There's a dissonance there, a disconnect with who McDonald's real customer is.

A tone-deaf performance
While promising to listen to his customers more through the creation of "digital hubs" to give them more of what they're looking for, Easterbrook proved he can't begin to hear them because he doesn't know who they are.

What Easterbrook did reveal includes the following:

  • A reorganization of corporate structure into four market segments: U.S., international lead, high-growth, and foundational.
  • Refranchising 3,500 stores by end of 2018, going from 81% franchised to 90%.
  • Test delivery in New York City.
  • "Be forensic in approach to financial management" to generate $300 million in annual savings, with most coming by the end of 2017.
  • Return $8 billion-$9 billion to shareholders this year and reach the top end of its three-year goal to return $18 billion-$20 billion in cash to shareholders by the end of 2016.
  • Open 1,000 restaurants a year.

Easterbrook says he wants to "break down old paradigms" and "make bold moves," but his presentation didn't offer any of that, and certainly nothing that couldn't have been shared with investors and analysts during the conference call. He promised more to come, but he still needed to deliver Monday and he failed to do that.

The proposals seem like steps in the right direction, but they appear hesitant and many analysts believe far more radical change is needed.

Supersizing franchisees
For example, the refranchising of 3,500 stores by the end of 2018 is an acceleration of its prior proposal to refranchise 1,500 stores by 2016, but bringing the company to just 90% franchised in three years means it still carries heavy costs and puts it far behind the competition. Burger King parent QSR International is 99% franchised, while Wendy's is currently 85% franchised but plans to make the company 95% franchise-owned by the middle of 2016.

Indeed, Easterbrook reiterated McDonald's is committed to running its own restaurants in certain markets where it believes it can provide leadership for the company.

Easterbrook is correct: McDonald's ought to be able to leverage its global brand and achieve the growth investors are looking for while satisfying the desires of its customers for fresh, hot, and good food. Unfortunately, he really didn't deliver on how he would achieve those twin goals and restore McDonald's to its leadership position.

There was a big build-up in anticipation of this week's announcement and McDonald's stock sagging under the disappointment indicates investors shouldn't expect any turnaround soon.

The article The Key Was What McDonald's Turnaround Plan Didn't Say (MCD) originally appeared on Fool.com.

Follow Rich Duprey's coverage of all the restaurant industry's most important news and developments. Hehas no position in any stocks mentioned. The Motley Fool recommends McDonald's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.