Although Mcdonald’S Earnings For The Fourth Quarter Of

CASESCASE15MCDONALD’S *Although McDonald’s earnings for the fourth quarter of2012 beat expectations, the world’s largest restaurant chainstated that it will continue to face considerable challengesin 2013. During 2012, the firm reported the first monthlysame-store sales decline in nine years, reflecting the effectof the shaky global economy (see Exhibits 1 and 2). OnJanuary 23, 2013, Chief Executive Don Thompson, whohad stepped into the job just six months before, told investors, “More specifically, growth in the informal eating-outindustry has been relatively flat to declining around theworld and we expect that to continue. ”1The dip in sales figures came as a surprise to mostanalysts, because McDonald’s had managed to show consistent performance since 2003, leading to a surge in operating profits and stock price over almost a decade. Mostof this could be attributed to the “Plan to Win,” which wasfirst outlined by James R. Cantalupo, who came out ofretirement to guide McDonald’s after overexpansion hadcaused the chain to lose focus. The core of the plan was toincrease sales at existing locations by improving the menu,refurbishing the outlets, and extending hours. In spite of management changes, McDonald’s hasremained committed to pushing on various aspects of this*Case developed by Professor Jamal Shamsie, Michigan State University, withthe assistance of Professor Alan B. Eisner, Pace University. Material has beendrawn from published sources to be used for purposes of class discussion. Copyright © 2013 Jamal Shamsie and Alan B. Eisner. EXHIBIT 1Income StatementsGo to library tab inConnect to accessCase Financials. A1234567Total revenueGross profitOperating incomeEBITNet incomeplan. The chain has continued to expand its menu over theyears, with more sandwiches and salads. It also started toadd snacks and drinks, two of the few areas where restaurant sales have still been growing in spite of the economicdownturn. Its addition of specialty coffee, ice-cold frappes,and fruit smoothies in its newly added McCafes has helpedboosted the average spent by each customer and lured themto its outlets for snacks during slower parts of the day. Nevertheless, McDonald’s is aware that it is facing arapidly fragmenting market, where consumers are lookingfor healthier and even more exotic foods. The chain is facing tougher competition from Burger King and Wendy’s,both of which have been adding to their menus and remodeling their outlets. At the same time, McDonald’s is alsolosing customers to chains such as Subway, Chipotle, andTaco Bell, which had not previously been viewed as strongcompetitors. Many analysts therefore believe that the chainmust continue to work on its turnaround strategy in orderto meet these challenges. Thompson has been monitoring pricing in order to makesure the menu stays affordable even though commodityprices have been rising. He believes that the chain was hurt byits increased emphasis on the Extra Value Menu that includeditems priced higher than a dollar. It has since shifted its focusback to the Dollar Menu, which has continued to generatealmost 15 percent of total sales. Steven Kron, an analyst withGoldman Sachs, emphasized the attractiveness of the firm’sBDec. 31, 201227,56710,8168,6058,5965,465CYear Ending*Dec. 31, 201127,00610,6878,5288,5055,503DDec. 31, 201024,0759,6377,4737,4514,946*Figures in millions of U. S. dollars. Source: McDonald’s. EXHIBIT 2Balance Sheets*Go to library tab inConnect to accessCase Financials. A1234567Current assetsTotal assetsCurrent liabilitiesTotal liabilitiesStockholder equity*Figures in millions of U. S. dollars. Source: McDonald’s. C88 CASE 15 : : MCDONALD’SBDec 31, 20124,92235,3863,40320,09315,294CYear Ending*Dec 31, 20114,40332,9903,50918,60014,390DDec 31, 20104,36831,9752,92517,34114,634affordable Dollar Menu: “When people are seeking value,these guys have a very powerful component. ”2Experiencing a Downward SpiralSince it was founded more than 50 years ago, McDonald’s has been defining the fast-food business. It providedmillions of Americans their first jobs even as it changedtheir eating habits. It rose from a single outlet in aChicago suburb to become one of the largest chains ofoutlets spread around the globe. But it gradually began torun into various problems which began to slow down itssales growth (see Exhibit 3). EXHIBIT 3 McDonald’s Milestones1948Brothers Richard and Maurice McDonald open the first restaurant in San Bernadino, California, that sells hamburgers, fries,and milk shakes. 1955Ray A. Kroc, 52, opens his first McDonald’s in Des Plaines, Illinois. Kroc, a distributor of milk shake mixers, figures he cansell a bundle of them if he franchises the McDonald’s business and installs his mixers in the new stores. 1961Kroc buys out the McDonald brothers for $2. 7 million. 1963Ronald McDonald makes his debut as corporate spokesclown, using future NBC-TV weatherman Willard Scott. During theyear, the company also sells its 1 billionth burger. 1965McDonald’s stock goes public at $22. 50 a share. It will split 12 times in the next 35 years. 1967The first McDonald’s restaurant outside the U. S. opens in Richmond, British Columbia. Today there are 31,108 McDonald’sin 118 countries. 1968The Big Mac, the first extension of McDonald’s basic burger, makes its debut and is an immediate hit. 1972McDonald’s switches to the frozen variety for its successful french fries. 1974Fred L. Turner succeeds Kroc as CEO. In the midst of a recession, the minimum wage rises to $2 per hour, a big costincrease for McDonald’s, which is built around a model of young, low-wage workers. 1975The first drive-through window is opened in Sierra Vista, Arizona. 1979McDonald’s responds to the needs of working women by introducing Happy Meals. A burger, some fries, a soda, and a toygive working moms a break. 1987Michael R. Quinlan becomes chief executive. 1991Responding to the public’s desire for healthier foods, McDonald’s introduces the low-fat McLean Deluxe burger. It flops andis withdrawn from the market. Over the next few years, the chain stumbles several times trying to spruce up its menu. 1992The company sells its 90 billionth burger and stops counting. 1996To attract more adult customers, the company launches its Arch Deluxe, a “grownup” burger with an idiosyncratic taste. Aswith the low-fat burger, it falls flat. 1997McDonald’s launches Campaign 55, which cuts the cost of a Big Mac to $0. 55. It is a response to discounting by BurgerKing and Taco Bell. The move, which prefigures similar price wars in 2002, is widely considered a failure. 1998Jack M. Greenberg becomes McDonald’s fourth chief executive. A 16-year company veteran, he vows to spruce up therestaurants and their menu. 1999For the first time, sales from international operations outstrip domestic revenues. In search of other concepts, the companyacquires Aroma Cafe, Chipotle, Donatos, and, later, Boston Market. 2000McDonald’s sales in the U. S. peak at an average of $1. 6 million annually per restaurant, a figure that has not changedsince. It is, however, still more than at any other fast-food chain. 2001Subway surpasses McDonald’s as the fast-food chain with the most U. S. outlets. At the end of the year it had 13,247stores, 148 more than McDonald’s. 2002McDonald’s posts its first-ever quarterly loss, of $343. 8 million. The stock drops to around $13. 50, down 40% from five years earlier. 2003James 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. 2004Charles H. Bell takes over the firm after the sudden death of Cantalupo. He states that he will continue with the strategiesdeveloped by his predecessor. 2005Jim Skinner takes over as CEO after Bell retires for health reasons. 2006McDonald’s launches specialty beverages, including coffee-based drinks. 2008McDonald’s plans to add McCafes to each of its outlets. 2012Don Thompson succeeds Jim Skinner as CEO of the chain. Source: McDonald’s. CASE 15 : : MCDONALD’S C89By 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 werecontinuing 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 chairmanJames R. Cantalupo, 59, who had overseen McDonald’ssuccessful 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. Theboard felt that it needed someone who knew the companywell and could move quickly to turn things around. Cantalupo realized that McDonald’s often tended tomiss the mark on delivering the critical aspects of consistent, fast, and friendly service and an all-around enjoyableexperience for the whole family. He understood that itsfranchisees and employees alike needed to be inspired aswell as retrained on their role in putting the smile back intothe McDonald’s experience. When Cantalupo and his teamlaid out their turnaround plan in 2003, they stressed gettingthe basics of service and quality right, in part by reinstituting a tough “up or out” grading system that would kickout underperforming franchisees. “We have to rebuild thefoundation. It’s fruitless to add growth if the foundation isweak,” said Cantalupo. 4To begin with, Cantalupo cut back on the opening ofnew outlets, focusing instead on generating more salesfrom its existing outlets. He shifted the company’s emphasis to obtaining most of its revenue growth from increasing sales in the over 30,000 outlets that were alreadyoperating around the world (see Exhibits 4 through 6). Inpart, McDonalds tried to draw more customers by introducing new products. And it seemed to be working. Thechain had a positive response to its increased emphasison healthier foods, led by a revamped line of fancier salads. The revamped menu was promoted through a worldwide ad slogan, “I’m loving it,” which was delivered bypop idol Justin Timberlake through a set of MTV-stylecommercials. But the biggest success for the firm came in theform of the McGriddles breakfast sandwich, which waslaunched nationwide in June 2003. The popular newoffering consisted of a couple of syrup-drenched pancakes, stamped with the Golden Arches, which acted asthe top and bottom of the sandwich to hold eggs, cheese,sausage, and bacon in three different combinations. EXHIBIT 4BThis decline could be attributed in large part to a dropin McDonald’s once-vaunted service and quality since itsexpansion in the 1990s, when headquarters stopped grading franchises for cleanliness, speed, and service. By theend of the decade, the chain ran into more problems becauseof the tighter labor market. McDonald’s began to cut backon training as it struggled to find new recruits, leading to adramatic falloff in the skills of its employees. According toa 2002 survey by market researcher Global Growth Group,McDonald’s came in third in average service time behindWendy’s and sandwich shop Chick-fil-A Inc. McDonald’s also began to fail consistently with its newproduct introductions, such as the low-fat McLean Deluxeand Arch Deluxe burgers, both of which were meant toappeal to adults. It did no better with its attempts to diversifybeyond burgers, often because of problems with the productdevelopment process. Consultant Michael Seid, who managed a franchise consulting firm in West Hartford, pointedout that McDonald’s offered a pizza that didn’t fit throughthe drive-through window and salad shakers that werepacked so tightly that dressing couldn’t flow through them. In 1998, after McDonald’s posted its first-ever declinein annual earnings, CEO Michael R. Quinlan was forcedout and replaced by Jack M. Greenberg, a 16-year veteranof the firm. Greenberg cut back on McDonald’s expansionas he tried to deal with some of the growing problems. Buthis efforts to deal with the decline of McDonald’s wereslowed down by his acquisition of other fast-food chainssuch as Chipotle Mexican Grill and Boston Market. On December 5, 2002, after watching McDonald’sstock slide 60 percent in three years, the board oustedGreenberg. He had lasted little more than two years. Hisshort tenure had been marked by the introduction of 40new menu items, none of which caught on big, and thepurchase of a handful of nonburger chains, none of whichhelped the firm to sell more burgers. Indeed, his critics saythat by trying so many different things and executing thempoorly, Greenberg allowed the burger business to continuewith its decline. According to Los Angeles franchiseeReggie Webb, “We would have been better off trying fewerthings and making them work. ”3Pushing for a TurnaroundNumber of OutletsGo to library tab inConnect to accessCase Financials. A123456720122011201020092008Source: McDonald’s. C90 CASE 15 : : MCDONALD’SCNumber of OutletsTotalCompany Owned6,59834,4806,43533,5106,39932,7376,26232,4786,50231,967DFranchised27,88227,07526,33826,21625,465EXHIBIT 5Distribution of OutletsGo to library tab inConnect to accessCase Financials. A123456U. S. EuropeAsia PacificAmericas*B201214,1577,3689,4543,501CDDistribution of Outlets2011201014,02714,0986,9697,1568,4248,8653,3173,391EF200913,9806,7858,4883,225200813,9186,6288,2553,166EF20097,0439,2734,3371,19020088,0489,9234,2311,290*Canada &amp, Latin America. Source: McDonald’s. EXHIBIT 6Breakdown of Revenues*Go to library tab inConnect to accessCase Financials. A123456U. S. EuropeAsia PacificAmericas†B20128,81410,8276,3911,535CDBreakdown of Revenues*201120108,5298,11610,8869,5696,0195,0651,3281,572*Figures in millions of U. S. dollars. †Canada &amp, Latin America. Source: McDonald’s. McDonald’s has estimated that the new breakfast addition has been bringing in about one million new customers every day. With his efforts largely directed at a turnaround strategy for McDonald’s, Cantalupo decided to divest thenonburger chains that his predecessor had acquired. Collectively lumped under the Partner Brands, these have consisted of Chipotle Mexican Grill and Boston Market. Thepurpose of these acquisitions had been to find new growthand to offer the best franchises new expansion opportunities. But these acquired businesses had not fuelled muchgrowth and had actually posted considerable losses inrecent years. Striving for Healthier OfferingsWhen Jim Skinner took over from Cantalupo in 2004, hefelt 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 U. S. These concerns werehighlighted in the popular documentary Super Size Me,made by Morgan Spurlock. Spurlock vividly displayed thehealth risks that were posed by a steady diet of food fromthe fast-food chain. With a rise in awareness of the high fatcontent of most of the products offered by McDonald’s,the firm was also beginning to face lawsuits from some ofits loyal customers. In response to the growing health concerns, one of thefirst steps taken by McDonald’s was to phase out supersizing by the end of 2004. The supersizing option allowedcustomers to get a larger order of French fries and a bigger soft drink by paying a little extra. McDonald’s alsoannounced that it intended to start providing nutritioninformation on the packaging of its products to inform customers about the calories, fat, protein, carbohydrates, andsodium that are in each product. Finally, McDonald’s alsobegan to remove the artery-clogging trans fatty acids fromthe oil that it used to make its french fries and announcedplans to reduce the sodium content in all of its products by15 percent. At the same time, Skinner was also putting out moreofferings that customers were likely to perceive to behealthier. McDonalds has continued to build upon itswhite-meat chicken offerings with products such asChicken Selects. It has also emphasized its new saladofferings. McDonald’s has carried out extensive experiments and tests with these, deciding to use higher quality ingredients, from a variety of lettuces and tasty cherrytomatoes to sharper cheeses and better cuts of meat. Itoffered a choice of Newman’s Own dressings, a wellknown higher-end brand. “Salads have changed the waypeople think of our brand,” said Wade Thoma, vice president for menu development in the U. S. “It tells people thatwe are very serious about offering things people feel comfortable eating. ”5McDonald’s has also been trying to include more fruitsand vegetables in its popular Happy Meals. It announcedin 2011 that it would reduce the amount of French friesand phase out the caramel dipping sauce that accompaniedthe apple slices in these meals. The addition of fruits andvegetables has raised the firm’s operating costs, as theseare more expensive to ship and store because of their moreperishable nature. “We are doing what we can,” said DanyaProud, a spokesperson for the firm. “We have to evolvewith the times. ”6CASE 15 : : MCDONALD’S C91The current rollout of new beverages, highlighted bynew coffee-based drinks, represents the chain’s biggestmenu expansion in almost three decades. Under a planto add a McCafe 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 itscustomers. “In many cases, they’re now coming for thebeverage, whereas before they were coming for the meal,”said Lee Renz, an executive who was responsible for therollout. 7Revamping the Outletsplatform across all U. S. outlets. The cost of installing thisequipment is running at about $100,000 per outlet, withMcDonald’s subsidizing part of this expense. Eventually, all McCafes will offer espresso-basedcoffee, gourmet coffee blends, fresh baked muffins, andhigh-end desserts. Customers will be able to consumethese while they relax in soft leather chairs listening tojazz, big band, or blues music. Commenting on this significant expansion of offerings, Marty Brochstein, executive editor of The Licensing Letter, said, “McDonald’swants to be seen as a lifestyle brand, not just a place to goto have a burger. ”10As part of its turnaround strategy, McDonald’s has alsobeen selling off the outlets that it owned. More than75 percent of its outlets are now in the hands of franchisees and other affiliates. Skinner is now working with thefranchisees to address the look and feel of many of thechain’s aging stores. Without any changes to their décor,the firm is likely to be left behind by other more savvyfast-food and drink retailers. The firm is pushing harderto refurbish—or reimage—all of its outlets around theworld. “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 foodtastes better. ”8The reimaging concept was first tried in France in1996 by Dennis Hennequin, an executive in charge ofthe chain’s European operations, who felt that the effortwas essential to revive the firm’s sagging sales. “We werehip 15 years ago, but I think we lost that,” he said. 9McDonald’s has been applying the reimaging concept toits outlets around the world, with a budget of more thanhalf of its total annual capital expenditures. In the U. S. , thechanges cost an average of $150,000 per restaurant, a costthat is shared with the franchisees when the outlet is notcompany owned. One of the prototype interiors being tested out byMcDonald’s has curved counters with surfaces paintedin bright colors. In one corner, a touch-activated screenallows customers to punch in orders without queuing. Theinteriors can feature armchairs and sofas, modern lighting,large television screens, and wireless Internet access. Thefirm is also developing new features for its drive-throughcustomers, which account for 65 percent of all transactionsin the U. S. They include music aimed at queuing vehiclesand a wall of windows on the drive-through side of the restaurant, allowing customers to see meals being preparedfrom their cars. The chain has even been developing McCafes insideits outlets next to the usual fast-food counter. The McCafeconcept originated in Australia in 1993 and has been rolledout in many restaurants around the world. McDonald’s hasjust begun to introduce the concept to the U. S. as it refurbishes many of its existing outlets. In fact, part of the refurbishment has focused on installing a specialty beverageEven though McDonald’s recovered from the drop inmonthly same-store sales, there were questions about thefuture of the fast-food chain. The firm was trying out avariety of strategies to increase its appeal to different segments of the market. Through a mix of outlet décor andmenu items, McDonald’s attempted to target young adults,teenagers, children, and families. In so doing, it had toensure that it did not alienate any one of these groups in itsefforts to reach out to the other. Its marketing campaign anchored around the catchyphrase “I’m loving it,” took on different forms in orderto target each of the groups that it was seeking. LarryLight, who was the head of global marketing at McDonald’s that pushed for this new campaign, insisted that thefirm had to exploit its brand through pushing it in manydifferent directions. The brand could be positioned differently in different locations, at different times of theday and to target different customer segments. In largeurban centers, McDonald’s could target young adults forbreakfast with its gourmet coffee, egg sandwiches, andfat-free muffins. Light explained the adoption of such amultiformat strategy by saying, “The days of mass-mediamarketing are over. ”11McDonald’s continued to expand its menu throughofferings that performed well in test markets. Its introduction of Cheddar Bacon Onion sandwiches representedan alternative to its traditional line-up of hamburger andchicken items. More recently, the chain tried out FishMcBites, using the same Alaskan Pollock as in its fishsandwiches. Nevertheless, the expansion of the menubeyond the staple of burgers and fries does raise somefundamental questions. Most significantly, it is not clearjust how far McDonald’s can stretch its brand while keeping all of its outlets under the traditional symbol of itsgolden arches. The long-term success of the firm may well depend onits ability to compete with rival burger chains. “The burgercategory has great strength,” said David C. Novak, chairman and CEO of Yum! Brands, parent of KFC and TacoBell. “That’s America’s food. People love hamburgers. ”12But Thompson was under pressure to take more aggressiveC92 CASE 15 : : MCDONALD’SMore Gold in These Arches?action to reenergize the world’s largest fast-food chain. Scott Rothbort, president of an asset management firm thathad invested heavily in McDonald’s, said that the verdicton Thompson’s performance was still pending: “What willbe the deciding factor is how he deals with some of theseshort-term setbacks. ”13ENDNOTES1. Jargon, J. 2013. McDonald’s issues cautious forecast. Wall StreetJournal, January 24: B4. 2. Adamy, J. 2009. McDonald’s to expand, posting strong results. WallStreet Journal, January 27: B1. 3. Gogoi, P. , &amp, Arndt, M. 2003. Hamburger hell. BusinessWeek, March3: 106. 4. Gogoi &amp, Arndt. 2003. Hamburger hell: 105. 5. Warner, M. 2005. You want any fruit with that Big Mac? New YorkTimes, February 20: 8. 6. Strom, S. 2011. McDonald’s trims its Happy Meal. July 27: B7. 7. Adamy, J. 2008. McDonald’s coffee strategy is tough sell. Wall StreetJournal, October 27: B3. 8. Paynter. B. 2010. Super style me. Fast Company, October: 107. 9. Grant, J. 2006. McDonald’s to revamp UK outlets. Financial Times,February 2: 1410. Horovitz, B. 2003. McDonald’s ventures beyond burgers to duds,toys. USA Today, November 14: 6B. 11. Economist. 2004. Big Mac’s makeover. October 16: 65. 12. Gogoi &amp, Arndt. 2003. Hamburger hell: 108. 13. Jargon, J. 2012. McDonald’s is feeling fried. Wall Street Journal,November 9: B2. CASE 15 : : MCDONALD’S C93

Originally posted 2018-07-06 17:53:17. Republished by Blog Post Promoter

Although McDonald’s earnings for the fourth quarter of

Question
CASES

CASE

15

MCDONALD’S *
Although McDonald’s earnings for the fourth quarter of
2012 beat expectations, the world’s largest restaurant chain
stated that it will continue to face considerable challenges
in 2013. During 2012, the firm reported the first monthly
same-store sales decline in nine years, reflecting the effect
of the shaky global economy (see Exhibits 1 and 2). On
January 23, 2013, Chief Executive Don Thompson, who
had stepped into the job just six months before, told investors, “More specifically, growth in the informal eating-out
industry has been relatively flat to declining around the
world and we expect that to continue.”1
The dip in sales figures came as a surprise to most
analysts, because McDonald’s had managed to show consistent performance since 2003, leading to a surge in operating profits and stock price over almost a decade. Most
of this could be attributed to the “Plan to Win,” which was
first outlined by James R. Cantalupo, who came out of
retirement to guide McDonald’s after overexpansion had
caused the chain to lose focus. The core of the plan was to
increase sales at existing locations by improving the menu,
refurbishing the outlets, and extending hours.
In spite of management changes, McDonald’s has
remained committed to pushing on various aspects of this
*Case developed by Professor Jamal Shamsie, Michigan State University, with
the assistance of Professor Alan B. Eisner, Pace University. Material has been
drawn from published sources to be used for purposes of class discussion.
Copyright © 2013 Jamal Shamsie and Alan B. Eisner.

EXHIBIT 1
Income Statements

Go to library tab in
Connect to access
Case Financials.

A
1
2
3
4
5
6
7

Total revenue
Gross profit
Operating income
EBIT
Net income

plan. The chain has continued to expand its menu over the
years, with more sandwiches and salads. It also started to
add snacks and drinks, two of the few areas where restaurant sales have still been growing in spite of the economic
downturn. Its addition of specialty coffee, ice-cold frappes,
and fruit smoothies in its newly added McCafes has helped
boosted the average spent by each customer and lured them
to its outlets for snacks during slower parts of the day.
Nevertheless, McDonald’s is aware that it is facing a
rapidly fragmenting market, where consumers are looking
for healthier and even more exotic foods. The chain is facing tougher competition from Burger King and Wendy’s,
both of which have been adding to their menus and remodeling their outlets. At the same time, McDonald’s is also
losing customers to chains such as Subway, Chipotle, and
Taco Bell, which had not previously been viewed as strong
competitors. Many analysts therefore believe that the chain
must continue to work on its turnaround strategy in order
to meet these challenges.
Thompson has been monitoring pricing in order to make
sure the menu stays affordable even though commodity
prices have been rising. He believes that the chain was hurt by
its increased emphasis on the Extra Value Menu that included
items priced higher than a dollar. It has since shifted its focus
back to the Dollar Menu, which has continued to generate
almost 15 percent of total sales. Steven Kron, an analyst with
Goldman Sachs, emphasized the attractiveness of the firm’s
B
Dec. 31, 2012
27,567
10,816
8,605
8,596
5,465

C
Year Ending*
Dec. 31, 2011
27,006
10,687
8,528
8,505
5,503

D
Dec. 31, 2010
24,075
9,637
7,473
7,451
4,946

*Figures in millions of U.S. dollars.
Source: McDonald’s.

EXHIBIT 2
Balance Sheets*

Go to library tab in
Connect to access
Case Financials.

A
1
2
3
4
5
6
7

Current assets
Total assets
Current liabilities
Total liabilities
Stockholder equity

*Figures in millions of U.S. dollars.
Source: McDonald’s.

C88 CASE 15 :: MCDONALD’S

B
Dec 31, 2012
4,922
35,386
3,403
20,093
15,294

C
Year Ending*
Dec 31, 2011
4,403
32,990
3,509
18,600
14,390

D
Dec 31, 2010
4,368
31,975
2,925
17,341
14,634

affordable Dollar Menu: “When people are seeking value,
these guys have a very powerful component.”2

Experiencing 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
Chicago suburb to become one of the largest chains of
outlets spread around the globe. But it gradually began to
run into various problems which began to slow down its
sales growth (see Exhibit 3).

EXHIBIT 3 McDonald’s Milestones
1948

Brothers Richard and Maurice McDonald open the first restaurant in San Bernadino, California, that sells hamburgers, fries,
and milk shakes.

1955

Ray A.Kroc, 52, opens his first McDonald’s in Des Plaines, Illinois. Kroc, a distributor of milk shake mixers, figures he can
sell a bundle of them if he franchises the McDonald’s business and installs his mixers in the new stores.

1961

Kroc buys out the McDonald brothers for $2.7 million.

1963

Ronald McDonald makes his debut as corporate spokesclown, 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 stumbles several times trying to spruce up its menu.

1992

The company sells its 90 billionth burger and stops counting.

1996

To attract more adult customers, the company launches its Arch Deluxe, a “grownup” burger with an idiosyncratic taste. As
with the low-fat burger, it 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, a figure that has not changed
since. It is, however, still more than at any other fast-food chain.

2001

Subway surpasses McDonald’s as the fast-food 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 earlier.

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 that he will continue with the strategies
developed by his predecessor.

2005

Jim Skinner takes over as CEO after Bell retires for health reasons.

2006

McDonald’s launches specialty beverages, including coffee-based drinks.

2008

McDonald’s plans to add McCafes to each of its outlets.

2012

Don Thompson succeeds Jim Skinner as CEO of the chain.

Source: McDonald’s.

CASE 15 :: MCDONALD’S C89

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 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
the McDonald’s experience. When Cantalupo and his team
laid out their turnaround plan in 2003, they stressed 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.4
To begin with, Cantalupo cut back on the opening of
new outlets, focusing instead on generating more sales
from its existing outlets. He shifted the company’s emphasis to obtaining most of its revenue growth from increasing sales in the over 30,000 outlets that were already
operating around the world (see Exhibits 4 through 6). In
part, McDonalds tried to draw more customers by introducing new products. And it seemed to be working. 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 worldwide ad slogan, “I’m loving it,” which was delivered by
pop idol Justin Timberlake through a set of MTV-style
commercials.
But the biggest success for the firm came in the
form of the McGriddles breakfast sandwich, which was
launched nationwide in June 2003. The popular new
offering consisted of a couple of syrup-drenched pancakes, stamped with the Golden Arches, which acted as
the top and bottom of the sandwich to hold eggs, cheese,
sausage, and bacon in three different combinations.

EXHIBIT 4

B

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 labor market. McDonald’s began to cut back
on training as it struggled 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.
McDonald’s also began to fail consistently with its new
product introductions, such as the low-fat McLean Deluxe
and Arch Deluxe burgers, both of which were meant to
appeal to adults. It did no better with its attempts to diversify
beyond burgers, often because of problems with the product
development process. Consultant Michael Seid, who managed a franchise consulting firm in West Hartford, pointed
out that McDonald’s offered a pizza that didn’t fit through
the drive-through window and salad shakers that were
packed so tightly that dressing couldn’t flow through them.
In 1998, after McDonald’s posted its first-ever decline
in annual earnings, CEO Michael R. Quinlan was forced
out and replaced by Jack M. Greenberg, a 16-year veteran
of the firm. Greenberg cut back on McDonald’s expansion
as he tried to deal with some of the growing problems. But
his efforts to deal with the decline of McDonald’s were
slowed down by his acquisition of other fast-food chains
such as Chipotle Mexican Grill and Boston Market.
On December 5, 2002, after watching McDonald’s
stock slide 60 percent in three years, the board ousted
Greenberg. He had lasted little more than two years. His
short tenure had been marked by the introduction of 40
new menu items, none of which caught on big, and the
purchase of a handful of nonburger chains, none of which
helped the firm to sell more burgers. Indeed, his critics say
that by trying so many different things and executing them
poorly, Greenberg allowed the burger business to continue
with its decline. According to Los Angeles franchisee
Reggie Webb, “We would have been better off trying fewer
things and making them work.”3

Pushing for a Turnaround

Number of Outlets

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Case Financials.

A
1
2
3
4
5
6
7

2012
2011
2010
2009
2008

Source: McDonald’s.

C90 CASE 15 :: MCDONALD’S

C
Number of Outlets
Total
Company Owned
6,598
34,480
6,435
33,510
6,399
32,737
6,262
32,478
6,502
31,967

D
Franchised
27,882
27,075
26,338
26,216
25,465

EXHIBIT 5
Distribution of Outlets

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Case Financials.

A
1
2
3
4
5
6

U.S.
Europe
Asia Pacific
Americas*

B
2012
14,157
7,368
9,454
3,501

C
D
Distribution of Outlets
2011
2010
14,027
14,098
6,969
7,156
8,424
8,865
3,317
3,391

E

F

2009
13,980
6,785
8,488
3,225

2008
13,918
6,628
8,255
3,166

E

F

2009
7,043
9,273
4,337
1,190

2008
8,048
9,923
4,231
1,290

*Canada & Latin America.
Source: McDonald’s.

EXHIBIT 6
Breakdown of Revenues*

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Case Financials.

A
1
2
3
4
5
6

U.S.
Europe
Asia Pacific
Americas†

B
2012
8,814
10,827
6,391
1,535

C
D
Breakdown of Revenues*
2011
2010
8,529
8,116
10,886
9,569
6,019
5,065
1,328
1,572

*Figures in millions of U.S. dollars.

Canada & Latin America.
Source: McDonald’s.

McDonald’s has estimated that the new breakfast addition has been bringing in about one million new customers every day.
With his efforts largely directed at a turnaround strategy for McDonald’s, Cantalupo decided to divest the
nonburger chains that his predecessor had acquired. Collectively lumped under the Partner Brands, these have consisted of Chipotle Mexican Grill and Boston Market. The
purpose of these acquisitions had been to find new growth
and to offer the best franchises new expansion opportunities. But these acquired businesses had not fuelled much
growth and had actually posted considerable losses in
recent years.

Striving for Healthier Offerings
When Jim Skinner took over from Cantalupo in 2004, he
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 U.S. 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 to inform 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 announced
plans to reduce the sodium content in all of its products by
15 percent.
At the same time, Skinner was also putting out more
offerings that customers were likely to perceive to be
healthier. McDonalds has continued to build upon its
white-meat chicken offerings with products such as
Chicken Selects. It has also emphasized 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 wellknown 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.”5
McDonald’s has also been trying to include more fruits
and vegetables in its 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, as 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.”6
CASE 15 :: MCDONALD’S C91

The current rollout of new beverages, highlighted by
new coffee-based drinks, represents the chain’s biggest
menu expansion in almost three decades. Under a plan
to add a McCafe 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.7

Revamping the Outlets

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.
Eventually, all McCafes will 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.”10

As part of its turnaround strategy, McDonald’s has also
been selling off the outlets that it owned. More than
75 percent of its outlets are now in the hands of franchisees and other affiliates. Skinner is now 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 is likely to be left behind by other more savvy
fast-food and drink retailers. The firm is pushing harder
to refurbish—or reimage—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.”8
The reimaging 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.9
McDonald’s has been applying the reimaging concept to
its outlets around the world, with a budget of more than
half of its total annual capital expenditures. In the U.S., the
changes cost an average of $150,000 per restaurant, a cost
that is shared with the franchisees when the outlet is not
company owned.
One of the prototype interiors being tested out by
McDonald’s has curved counters with surfaces painted
in bright colors. 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 wireless Internet access. The
firm is also developing new features for its drive-through
customers, which account for 65 percent of all transactions
in the U.S. 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 McCafes inside
its outlets next to the usual fast-food counter. The McCafe
concept originated in Australia in 1993 and has been rolled
out in many restaurants around the world. McDonald’s has
just begun to introduce the concept to the U.S. as it refurbishes many of its existing outlets. In fact, part of the refurbishment has focused on installing a specialty beverage

Even though McDonald’s recovered from the drop in
monthly same-store sales, there were questions about the
future of the fast-food chain. The firm was trying out a
variety of strategies to increase its appeal to different segments of the market. Through a mix of outlet décor and
menu items, McDonald’s attempted to target young adults,
teenagers, children, and families. In so doing, it had to
ensure that it did not alienate any one of these groups in its
efforts to reach out to the other.
Its marketing campaign anchored around the catchy
phrase “I’m loving it,” took on different forms in order
to target each of the groups that it was seeking. Larry
Light, who was the head of global marketing at McDonald’s that pushed for this new campaign, insisted that the
firm had to exploit its brand through pushing it in many
different directions. The brand could be positioned differently in different locations, at different times of the
day and to target different customer segments. In large
urban centers, McDonald’s could target young adults for
breakfast with its gourmet coffee, egg sandwiches, and
fat-free muffins. Light explained the adoption of such a
multiformat strategy by saying, “The days of mass-media
marketing are over.”11
McDonald’s continued to expand its menu through
offerings that performed well in test markets. Its introduction of Cheddar Bacon Onion sandwiches represented
an alternative to its traditional line-up of hamburger and
chicken items. More recently, the chain tried out Fish
McBites, using the same Alaskan Pollock as in its fish
sandwiches. Nevertheless, 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.
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,” said David C. Novak, chairman and CEO of Yum! Brands, parent of KFC and Taco
Bell. “That’s America’s food. People love hamburgers.”12
But Thompson was under pressure to take more aggressive

C92 CASE 15 :: MCDONALD’S

More Gold in These Arches?

action to reenergize the world’s largest fast-food chain.
Scott Rothbort, president of an asset management firm that
had invested heavily in McDonald’s, said that the verdict
on Thompson’s performance was still pending: “What will
be the deciding factor is how he deals with some of these
short-term setbacks.”13

ENDNOTES
1. Jargon, J. 2013. McDonald’s issues cautious forecast. Wall Street
Journal, January 24: B4.
2. Adamy, J. 2009. McDonald’s to expand, posting strong results. Wall
Street Journal, January 27: B1.
3. Gogoi, P., & Arndt, M. 2003. Hamburger hell. BusinessWeek, March
3: 106.

4. Gogoi & Arndt. 2003. Hamburger hell: 105.
5. Warner, M. 2005. You want any fruit with that Big Mac? New York
Times, February 20: 8.
6. Strom, S. 2011. McDonald’s trims its Happy Meal. July 27: B7.
7. Adamy, J. 2008. McDonald’s coffee strategy is tough sell. Wall Street
Journal, October 27: B3.
8. Paynter. B. 2010. Super style me. Fast Company, October: 107.
9. Grant, J. 2006. McDonald’s to revamp UK outlets. Financial Times,
February 2: 14
10. Horovitz, B. 2003. McDonald’s ventures beyond burgers to duds,
toys. USA Today, November 14: 6B.
11. Economist. 2004. Big Mac’s makeover. October 16: 65.
12. Gogoi & Arndt. 2003. Hamburger hell: 108.
13. Jargon, J. 2012. McDonald’s is feeling fried. Wall Street Journal,
November 9: B2.

CASE 15 :: MCDONALD’S C93