Strategy & Operations » How McDonald’s recaptured the market

Being the world’s largest restaurant chain doesn’t grant you immunity from stalling sales and flatlining figures. Instead, it creates legacy structures that can be hard to break, causing the business to slide further as it digs its heels in.

Luckily, for McDonald’s, the opposite has now happened. From a softening in sales and a dip in customer loyalty, the mega-chain recently announced its strongest global comparable sales and guest count results in more than five years, achieving 45 consecutive quarters of growth.

This positive Q2 result comes at a time when the restaurant and bars industry is suffering from a multitude of pressures, including rising rents, climbing labour costs and cautious consumer spending. Visa announced in June that consumer spending has fallen annually for the first time in nearly four years since September 2013.

In the midst of all this is John Park, CFO of McDonald’s UK, whose career rose under the mentorship of Steve Easterbrook, the unlikely accountant-turned-CEO, and Paul Pomroy, now CEO of McDonald’s UK.

As Financial Director arrives to interview Park, we prepare ourselves for an army of PRs, but are pleasantly surprised when only two meet us and introduce us to John, a constantly-smiling, bespectacled man who greets us with enthusiasm.

Far removed from the image of a slick executive in a global corporation, John is warm and chatty as he talks about how McDonald’s has turned itself around.

“When I joined back in 2003 the business had kind of flatlined a little bit. We’d had amazing growth through the 80s and 90s and then the business had started to soften and we needed to change.

“I don’t think there was one magic answer back then as to what turned the business around. If anything it was probably listening to our customers and having an absolute focus on what our customers were telling us and asking of us as a brand and as a business.

“They wanted great tasting food, in a modern contemporary environment, at great value, served by great people, with great hospitality.

“It was the basics that we needed to get right. But at the heart of that we needed to invest.”

And invest they did. President and CEO of McDonald’s, Steve Easterbrook, has created a three-pronged Velocity Growth Plan, made up of delivery, digital and something called Experience of the Future.

Part of the whopping £600 million investment into Experience of the Future (EOTF) is to scrap the red and yellow plastic décor globally synonymous with the brand, provide table service, install digital kiosks to place orders from and put iPads on the dining tables.

The restaurant we hold the interview in has a row of these digital kiosks at the entrance, while the dining areas display ‘table service’ signs above them and iPads stick out of the desks to keep the little ones occupied.

The self-order kiosks will speed up service during peak times. Image credit: Daniel Lynch

“We needed to invest in our physical footprint. We had to change from red and yellow plastic that everyone grew up with at McDonalds and we had to refurbish our restaurants” explains Park.

“Our franchisees had to put in a significant amount of investment to refurbish our restaurants. That really kickstarted our trajectory.

“You fast forward to today and the whole environment’s very different and we have to keep listening to our customers, we have to keep evolving. Customer tastes change all the time.

“So fast forward to today and we’re a long way now through our latest refurbishment programme. We’re calling it Experience of the Future.

“It’s more than just reinvesting in our dining areas. We’ve changed the way we serve our customers and the way we prepare our food. It’s one of the biggest changes we’ve had in the 40-odd years we’ve been in the UK.”

This big change in how they serve their customers is fuelled by an investment in McDonald’s kitchens, to allow for food to be freshly prepared to order, rather than batch cooked, a bold move for the fast-food giant that is known for its speed and high volume.

This innovation has led to the creation of three new burgers that sit in their own range – which will be the first permanent addition to the McDonald’s menu in 20 years.

The driving force behind the Gourmet Signature Collection is the need to compete with fancy burger chains like Five Guys and Shake Shack. So confident of this new line is Park, that he gets the Financial Director team into the McDonald’s kitchen for us to make our own burgers. As we sample the brioche-bunned 100% Irish and British beef burgers, Park explains why this product offering is doing so well.

Financial Director reporters, Shereen and Alia, sample the new product

He is quick to point out that price and value are where McDonald’s excels in the food market and this is what makes them different: “We’re now looking at a signature burger, a gourmet thicker burger. It really plays to gourmet burger chains that are very fashionable at the moment.

“The gourmet burger market has opened up an opportunity for us but we can play in that at a great value that only McDonalds can play.

“You can order a gourmet burger for £6.50 or £7.00 for a meal, compared to £14 or £15 that you might pay somewhere else.”

This low price is a strategic business driver and according to BDO’s predictions for the industry in the coming year: “Never has it been truer said that chasing turnover is vanity, and decisions over discounting, special offers and menu engineering will be a key part of strategic thinking.”

McDonald’s new Gourmet Signature Collection

McDonald’s UK CEO, Paul Pomroy, has confirmed the business’s confidence in the new product offering, announcing: “We’ve had a great customer reaction to the pilot, so from next month, we will start to roll out Signature nationwide in our Experience of the Future restaurants.”

McDonald’s is also trying to enter the digital world in a big way. At a speech Easterbrook gave to the Boston College Chief Executives Club in February, he talked about companies like Uber, Netflix and Airbnb disrupting traditional businesses and said: “In and amongst that somewhere, was, I thought, a warning signal, that we are in a very traditional business, and you might as well expect it to get disrupted and there’s a really good chance that technology will be part of the disrupting mechanism.

“So the attitude was do you wait to get disrupted or do you try and become the disruptor within the industry and lead that and anticipate it and move before you get caught?’

Although the mega-chain’s entrance into the digital world has come late compared to other fast-food outlets, with digital accounting for over 60% of Dominoes orders, and KFC partnering with JustEat, McDonald’s is not playing catch up, but sprinting to the front.

Prioritising customer convenience, the burger joint is investing heavily in its mobile order-and-pay capabilities. While other F&B titans, like Starbucks, already offer this service, Easterbrook has more ambitious plans: “We are on track to make mobile order and pay available in 20,000 restaurants worldwide by the end of 2017, including our 14,000 restaurants in the US.”

If McDonald’s achieve this, they will be the first major fast-food chain to offer mobile ordering in all their US restaurants, a possibility that saw Wells Fargo upgrade its rating on the stock from market perform to outperform.

The chain has also recently partnered with Uber to offer food deliveries to customers. This is a shrewd step in the right direction, as high street spending in the UK saw a -5.3% annual decline, while online spending was up by 6.9% year-on-year.

Financial Director interviews John Park

Pomroy said “Convenience remains a fundamental of the McDonald’s customer experience; it’s early days for McDelivery, but we are seeing pleasingly strong initial results, and are scaling fast with over 160 restaurants now live since we launched in June.

“Serving our customers in a way that suits them – whether that’s in-store, drive-thru, using our app which is now in 250 stores, or delivery, will be key to our momentum and continued success moving forward.”

It appears that the overhaul of McDonald’s image and service is working. The chain is on a huge upward sales trajectory, when only two years ago the business was failing to meet Wall Street earnings estimates and had seen same-store sales falling.

Investors have changed their tune from Easterbrook’s inception in 2015, when shares dipped 1% after he gave his now infamous 23-minute long speech on his ‘turnaround blueprint’ for McDonald’s.

At the time, Standard and Poors downgraded the company from A to A- after Easterbrook unveiled plans to change the business segments.

Today the fast-food behemoth is thriving in an industry dominated by health-food trends and millennials demanding health-conscious, locally sourced and ethical products, with shares having risen more than 60% since 2015, and a comparable sales increase of 6.3% – led by continued momentum in the U.K. – within the International Lead business segment.

Park is genuinely enthused about the changes, and has every reason to be.

“There’s so much going on at McDonalds, we’re so excited. We’ve had 44 quarters of consecutive sales growth since turning round the business” the CFO tells me.

“Not just 11 years but 44 consecutive quarters of like-for-like sales growth.

“I think the exciting thing is that momentum is stronger now than it’s ever been through that 11 years. I think the outlook for the next three or four is more exciting than it’s ever been.”

Despite this excitement, Park is realistic and says: “In the market we operate in, things don’t stand still, so we have to stay close to our customers.

“We do a huge amount of consumer research, customers are at the centre of the planning processes that we have each year.

“I also think central to us, our franchisees don’t allow us to be complacent. We have a franchised business, 75% of our restaurants are owned and operated by franchisees, so we have 160-odd independent business men and women up and down the country, who have put their own money and time into the business, and they want to see the business continue to grow.

“I’m not sure we’d have had the 11 years of success without that franchise structure and that hunger to continue to evolve and develop.”

 

Watch the video interview with John Park here . Subscribe here to get the new videos straight into your inbox.

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