MCD – Adding complexity to the system

The NY Times ran an article over the weekend that highlights MCD’s recent success against the backdrop of both a struggling economy and restaurant industry. Specifically, the article points out that the company has delivered 55 consecutive months of global same-store sales growth and that MCD shares increased nearly 6% in 2008 when the stock market lost a third of its value. The article attributes much of MCD’s outperformance to the company’s turnaround efforts which began in 2003 and focused around the then CEO James Cantalupo’s “Plan To Win.” This plan shifted the company’s strategy and focused largely on improving in-store operations and growing same-store sales performance rather than relying on aggressive, new unit growth to drive sales. It was a back-to-basics strategy that worked to improve the customer’s experience by refreshing MCD’s existing store base and by upgrading the quality of the food being offered.

Prior to this turnaround period, the article reported that “McDonald’s was struggling to find its identity amid a flurry of new competitors and changing consumer tastes. The company careened from one failed idea to another. It tried to keep pace by offering pizza, toasted deli sandwiches and the Arch Deluxe, a heavily advertised new burger that flopped. It bought into non-burger franchises like Chipotle and Boston Market. It also tinkered with its menu, no longer toasting the buns, switching pickles and changing the special sauce on Big Macs. None of it worked.”

The WSJ ran an article in mid December about the best CEOs of 2008 and included MCD’s CEO Jim Skinner among its list. This article also pointed out that the company’s success stems from the fact that it “has done a terrific job of improving what it does at its existing locations, improving the food, improving service, expanding the menu, expanding hours. They've stuck to their knitting and made their existing stuff better and it's paid off."

I would agree with the conclusions of both of these articles that MCD has improved its performance by focusing on initiatives within its four walls, which resulted in higher returns. The company had lost its focus on what made it great by failing to execute on a store-level basis as it tried to expand its menu and store base in every direction. This misdirected growth and subsequent return to basics strategy which has enabled MCD to outperform formed the basis of what I like to call sustainability or “Shrink to Grow.” SBUX is undergoing a similar turnaround now as it closes underperforming stores and refocuses on the customer’s in-store experience.

I would argue that MCD’s current specialty coffee launch is a shift away from the basics and will prove to be a distraction for the company. The specialty coffee program is the most expensive new product initiative in the history of the company, costing the company about $100,000 per restaurant to implement in the U.S., as MCD has to revamp its current drive-thru configuration to accommodate the beverage equipment. I don’t think the beverage strategy will drive the top-line numbers that most are expecting. At the same time, it will increase the complexity of the system.

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