For the exclusive use of |. Guilloty, 2019. Ho024 ar76ss06s McDonald’s (in 2013): How to Win Again? FEBRUARY 24, 2013. Don Thompson lookss! over the 2012 Annual Report that way to be relemsed 0 MeDonuli’s shareholders the next dy, This year had beew « disappointment compared to the company’s past success, In 2011, McDonald's had outpertormed nearly all of is competiors wile ring the economic reconery ‘roms a deep ecenosnic recession. Intact, MeDoual’s was the number-one periorraing stock in the Dow 30 with 347 percent total shareholder return! But in 2012, MeDonald’s dropped to number 30 in the Dow 30 with a ~10.95 percent setuen. The company went from first to last in just {2 brief months (see Exhibit 1). As Thompson ead the report, he wondered! how MeDonald’'s could win again This was not good news for Don Thompson, who became Chiet Executive Officer (CEO) in July of 2012 He replaced the popular Jim Skinner, who had been with the company for aver 40 years, Skinner had guided MeDonald’sthevugh the list decade with his “Plan ro Win.” which sas fondamental to MeDonald’s coutinued rowth in a challenging economic environment. Breaking from MeDenald's historical emphasis on new store growth, Skinner emphasized the importance of improving the food, service, and atmosphere at existing stores? Instead of accomulating realestate. he modernized McDonald's restaurants to create a tore cafe a and introdaced new menu items hat appealed to a more diverse customer base.” ‘Thompson, who served as Chief Operating Otficer (COO) and President of MeDonald’s USA under Skinner, had successfully implemented the firsts lan to Win.” Now as CEO, his job was to build upon Skinner's success and continu to foster McDonald's garth by focusing on three statesic goals: (1) optimizing and evoly ing the menu: (2) modernizing the customer experience; nd (3) broadening aovessibility tothe brand Thompson knew that carly results were well below expectations. In October 2012, McDonald's sales growth dropped by 1.8 percent, the first monthly decline since 24K)3 Anmusl systemeaide sales grenth in 201? barely ‘ct the minimum 3 percent gout, sshike operating income growth was just | percent (compared to a goal of 6 {© 7 percents.” Sales declined yet again in Tanbary and February of 2013,’ Despite stock prices at relative highs, ‘MeDonald’s was struggling o convince its cash-strapped customers to purchase more food, Which Was hamper. ing the company’s fee cash flows. Meanwhile, the weak global economy was dragging down its meager gains in domestic sales * When the dollar was relatively weak, it had been at asset for the company to generate almost 70 percent of ies revenues from overseas,” but the dollar's current sirength made MeDonild’s trademark products leven more expensive for its international consumers. In addition, the company faced tough competition on multiple fats. Traditional quick-service competitors such as Burger King. Wendy's, und Taco Bell had stikingly similar strategic plans: to modernize their architecture and improve their menus. Initial reports indicated ther efforts were working, even as MeDonald’s struggled to ‘wvitalize its brand image. Sandwick places such as Subway were well positioned in the health segment, whereas Starbucks and Dunkin" Donuts were formidsble competitors inthe “specialty coffee wars” Semv-upscale. fast casual restaurants such as Panera Bread and Chiporle were also taking a cut ofthe fstfood market, with better In Cot BA 10 ge in T eh or crc teauen’ fh Aran Day Recta 05 : ™ ‘Wsocument atone or use ont yee Guy 2019,For the exclusive use of I. Guilloty, 2019. ‘McDonald's 2613): How i» Wie Aga? tasting options that were sill timely and affordable enough, Premium burger chains such as Five Guys ancl ‘Califoria's In-N-Ouc Barger were actively redefining burger quality and value." ‘Thompson's main response thus far had been to reassure investors that MeDonak’s was focused on the long. term, despite these more immediate setbacks: We romain statically focused on the glo growth proities that Help us Peter serve our eustomers. While dhe ‘ora eating a ke emsns challenging anal scmarmic uncertainty is pressuring Sansumes speming, We" continuing 1ociferentnt the McDonhi's experience by uniting consumer insights, inovaion and execution He just hoped the company’s efforts would be sufficient fr him to sil have his job by this time next year. A Brief History of McDonald’s MeDomiald’s was stated by the MeDonald brothers in 1940 in San Bemordino, California, By limiting the menu to burger. fries, and drinks. Dick and Mac McDonald were able to emphasize quality and seartine thei operations. AS a result. the popularity of the restaurant grow quickly, und Uke brothers started Franchising MeDonald’s to nearby locations. Aletted to their success when the McDonalds placed a large order for eight smulti-mixers, Ray Kroe joined the brothers in 1954. Together they founded the McDonald's Corporation in 1955, ‘ith the vision of establishing MeDooald’s franchises dhroughout the United States. Kroc bought out the bro ‘rs’ shares in 1961, the same year that he founded the now infamous Hamburger University (graduates receive a bachelor’s degeec in Hammburgctology). He continued his plan for rapid expansion throughout ihe 1960s and 1970, establishing more than 700 new MeDonald’s restaurants," In 1965. the company beld its frst public offer- ing, debuting at $22.50 per shae.'* roc desribed his management philosophy as o three-legged sto: one leg was the parent corporation. the second leg Was the franchisees, and the third was MeDomald'ssapplicrs, His motto became, “In business for Yourself, but not by yoursel as he built an eve larger network of store owners and an integrated supply can management system." Many sew rena items, sch asthe Big Mac and Egg MeMoffin, were devcloped bythe franchisees. Kroc encouraged his local owners to be entrpreneurial as long as they maintained the company’s four main principles: quality, rice, cleanliness, and value, Because of the volume of MeDonal’s business, Kroe found many supply partners willing to adhere to his high standards ‘The company opencd is fs ntemationa Tocations i 1967 in Canada and Puerto Rico. The frst MeDonal’s stores Japan and Europe followed shortly thereafier i 1971." Meanie, Kroc cnvinued un ad new items {he restaurant's meno. Alter ihe succes ofthe Big Mac (196). the quater poutne dette in 1973, andthe Eg, MeMutfin in 1975. foll breakfast menu was asailable by 1977. The frst Happy Meals—complete with a circus ‘wagon theme—arrived in 1979,"" The company’s firs divest opened in Sierra Vist, Arizona, in 1975 to serve soldiers stationed wt nearby pos, andthe idea quiely prea! io othe locations Competition heated up in the “burger wars of the 1980s as Burger King and Wendy's tried to steal market share from McDonald's, Despite their advances, MeDonald's continued to expand globally into more than 30 countries. Even more new products were introduced, such ay Chicken McNuggcts in 1983 and fresh salads in 1987, Ar the same time, McDonald’ used eifciency and technological advances such as microwaves to gain ‘operational advantages over its competitors. When Ray Kink passed asay on Taruary 14. 1984, he lft bebind sprawling McDonald's empire with more than 7,500 restauranis worklwide.” He slayed involved in corporate affsies up until the end, visitng the San Diego office almost daily in his wheelchair.” Three euts later, Feed Turner his long-time colleague and successor as CEO, likewise stepped down and lef the company in the capable hhands of Michael Quinlan, As the frst McDonalds CEO to have comploted an MBA, Quinlan was a savvy busi ‘ness man who continued t9 grow the company ageressively both at home and abroad. "Wis documents tsa ous nay Wate Gly n 2019For the exclusive use of I. Guilloty, 2019. MeDonal’ (2013 Ha to Win Again? Events in the 1990s finally slowed MeDonala’s rapid paee of domestic expansion. though the company’s nvernationat locations nearly dewbled w 114 Fear 1991 t0 1998, Several af the newer locations required unique adaptations, which McDonald's proved increasingly willing to make: Kosher menus in Istvel, Halal menus in Arab countries. and lamb patties for non-beef-eating India?" At home, however, the company was plagued bby multiple fated attempts w add new menu items such as pizza, fried chicken, fajtu, and pusta. The Arch Deluxe sandwich linc, targeted to adulis, was similarly short-ived, When Jack Greenberg became CEO in 1998, ie quickly took corrective action, announcing a geagraphic reorganization, anew: food preparation system (Made For You"), ané MeDonal's first jab cuts ever. all while serappins plans for numerous store openings. Tastead, he diversified the conapany's pertfalin hy haying eifferent restaurant chains such as Chipotle Mexican Cll, Donatos Pizza, Boston Market. snd Aroma Cafe coffee shops. These purchases were later divested when McDonald's strategy shied yet again in the eaely 2000s rom 2003 t0 2004, McDonald's leadership underwent a rapid string of successions that would have crippled ‘a company with a less talented executive bench. Greenberg stepped down amidst Financial woes in 2003, yield- ing the reins to Jim Cantalupo, wha died suddenly of a heart attack che next year. The heard immediately named (Charlie Bell wo the head position after Cantalupo’s death, only for Bello be diagnosed with colorectal cancer and relinguish the post after just afew months in office, This lef Jim Skinner, previously Vice Chairman, in charge of intadueing and impleinenting the company's "Plan to Win” stating in late 2004," He wanted to focus the ‘S—People. Products, Price, Place, an Promotion-—believing that MeDonald's success was not {dependent on one pradues or initiative but on focused execution aod ianovation.” Skinner's new strategic mind- set Was reflected in the company’s “i'm lovin’ it” advertising campaign, which [colured healthier and hhiher-quotity foods such as whice-meat chicken and salads, Nutrition facts were placed on all food items. Even Ronald MeDonald was givcn a mece slimmed-dowm look, Al he Satie lime, realty Were edesigned 1 pro mate a more modern experience for the custome, company on $ ‘Thompson's rise w the yop at McDonald's is un unlikely story. Thompson, McDonald's frst black CEO. was First hired by defense contmewr Northrup Grumman, ater graduating from Purdue University with an electrical engi veering degree. Aer a cold call fromm a recruiter at MeDonald’s, wh ‘Thompson intially chought was calling from competing defense coractor MeDonnell Douglas, Thompson joined McDonalds to desig robotics for food trans: port ark! control cits for cooking exipment. He Seon changed his career fics fromm engineering to operations, ‘working a wide range of jobs from fry cook to regional manager in ode to understand the company’s day-4o-day activities Alter several key leadership postions, he became COO in 2010. As COO, Thompson was the diving ogee behind the successful MeCafe campaign, which introduced hot and iced espresso drinks, real uit smoothies, and caraame! mochas to MeDonald’s menu lineup," When fim Skinner retired later that same year, Thompson was the obvious choice of successor. He inleited a global enterprise with 34,000 locations that serve nearly 69 milion cus- omers in 118 countries on any given day." which unfortunately was starting to show signs of problems once again ‘Trends in the Quick- jervice Restaurant Industry Despite expectations fer growth, the economic ends forte quick-service industry suggest challenges ahead, ECONOMIC TRENDS ‘The U.S. quick-service restaurant industry grew by 12 to 1$ percent from 2007 through 2012, and is expected to grow another 22 percent to seach a value of $224 billion in 2017 (see Exhibit 2) ‘Yet despite its overaitpositive trajectory, the quick-service restaurant industry faces several challenges. The slow pace of recovery from the ceanomie recession continues to exert a negative influence on discretionary income and consumer spending habits. With naemployment rates still hovering around 8 percent (and another This docnens autroze ruse ely ta Glyn 2013For the exclusive use of |. Guilloty, 2019. [MeDenal’sa 2013: Ha Wia Agaie? 15 percent of te population underemployed), people are eating out less™ and looking for inereased quality and walae when they do Venture oatside the home For meals. tna survey of ponple who hud eaten at a fast-food restrain the past month, 36 percent of respondent indicated they were spending less compared fo Ist Yea, 46 percent indicated their spending levels remsined comparable, and only 17 pervent reported an increase 18 °° Moreover. a large proportion (0 percent of these patrons ate rdeting exclusively Grom the value it 3, esiomers ithe lowest income category tend 10 purchase single value men 25K w $49 9K income bracket piece together meals fom de value mie, completely avoiding the higher-priced options. ‘tems, while those in tn act, value forthe moncy (59 peccnt) appears fo be the primary determinant of restaurant saleton, fo lowed by comenience (53 percent) and only then by taste of foo (50 pervent), as shown in Exhibit 4 HEALTH CONCERNS Acthe same tine, customers are lovking for healthier mend items. White beet stil comprises the highest pro- portion (58 percent) of meat consumed in the United States, consumer preferences are shifting toward poultry and other lean meas.”” The gluten-free movement is pressing restaurants to offer more items forthe 30 percent of Americans who are gluten igolerant” The Patient Protection anki Afordable Cae Act. which was signcd into thw in March 2010, ipulates that calorie counts must be displayed on all food service menus of chats with at feast 20 units. and that restaurants mast provide additional nutitional information upon request” ATL ofthese trends place considerable pressure on a fast-foed industry tha is sill dependent cm hamburgers forthe main postion ofits income. MeDonaldls has tually been soe tansuccessfll) for making it customers fat and was featured in an unfatering docinoentary (Super Sice Me), ia whic Morgen Spurock gained 25 pounu after eating only MeDonals’s food for one month INCREASING SUPPLY COSTS Healthier and more diverse menu items mean increased supply costs for restaurants, even as customers remain very price sensitive, In addition, fuel costs started esing in the first half of 2012, making it mote expensive 10 rise sgricultaral products and transport det (& market. This was further compondea by a severe drought later the same year, which prompted the USDA to pronounce the corn crop a disaster” Not only is comt one of the main products Used to feed bon atte and chickens, but corn oil, meal, and other byproducts are a significant compo- nent of many grocery tems.** The resulting price increases for supplies ranging fom bread lo eggs to meat are sqeceving already tight operating margins. Beef prices ae expected to inerease another 4 10 5 percent in 2013. 25 farmers reduce their hetds t control their own cosis of production? Current Competitors Traditionatly, MeDonald’s main competition has come from other quick-service restauranis such as Wendy's, ‘Burger King, and Yum! Brands’ Tacu Bell. MeDonald’s is roughly twice the size of its uext Largest global compet tor all three Yum! Brands combined), but has slightly fewer stores.“Tc conteols almost half of the U.S, harnburger ‘market, which is more than three times larger than the market share held by either Wendy's or Burger King." Yet, cach of these competitors’ stock outperformed MeDonald’s in 2012, a worrying tend for the company’s lature WENDY'S ‘Wendy's recently suporseded Burger King as the mumberswo burger chain with more than 6,500 locations counties.” Wendy’s strives to differentiate itself as “a cut above" its competivors, with higher-quality food that is made fresh-to-order.™ Its current strategy is to focus on Tongccerm brand development by redesigning its 4 “i oer aero seen by ete Gully 2019For the exclusive use of I. Guilloty, 2019. 013): Haw to Win Again? stores. offering an expanded menu including breakfast, and a new advertising campaign. At a price tag of up to $700,000 per sore, the remodeling was estimated to Cox the cormpany $225 million in capital expenditures ia 2012 alone. The good news for Wendy's is thatthe physical upgrades appeurw be asouvited With am inereave in ‘same-store sales of 5 to 25 percent (ic the stores are generally recouping their expenses)."! Recent additions to ‘Wendy's uncuu sucls ay its sea-salt French fries, a new collection of salads, and Dave's Hot 'N Juicy burgers have proven quite popular: helping co generate several consecutive quarerly sales increases for the corporation.** The ‘company’s decision to sell 425 company-owned stores 1 franchisors, reducing the level of corporate ownership from 22 percent to 15 percent, has also been preeted warmly’ by investors, causing its stock to ally." BURGER KING Burger King is curently the third-largest quick-service estaurent chain inthe United States based on sales vol ume, Itwas acquired by peivate equity fim 3G Capital in 2010, taken private an then went public again in mid 2012, Chaniges made by the new ewsnership appear co be postive, asthe company reported 64 percent growth in Sales daring its first quarterback on the stock narke«""The chain boasts some 12,700 outlets in 73 eountres, with ‘see 60 percent ofits restasrants concerteated in the United Stas: only § percent of Burger King restaurants are company owsned ** Burger King likewise continues to aggressively attack McDonald's market share, by adding a ‘ariety of new menu items sd modernizing is stores TACO BELL Taco Bell (a division of Yum! Brands) is the most widely recognized Tex-Mex option in the quick-service ory. with approximately $.800 restaurants (80 percent of which are Franchises) 10 the United "a sing of food contamination and quality issues from 2006 through 201 1, the company’ hus started ‘orehound. posting # 13 percent inenease in same-store sales in the sevond quarter of 2072, Taco Bell's leadership ‘credits its vomeback to the uecessful iatzodustion of is new, healthicr Cantina Bell prodict line and the popul “Doritos Locos Tacos.” Its currently experimenting with breakfast options in several states, with @ nationwide ned for 2014." The chain plans to double its revenues fiom $7 billion to S14 billion over t SUBW! petitor that challenges McDonald's dominance is Subway. Known for its healthier menu items and fresh ingredients. Subway recently surpassed McDonald's in the nunnber of total Festaurante (39.618 globally, includ 5,936 in the United States)" The chain has become a popular lunebiime destination for many Americans who value convenience but do nol Want to compromise theit health. For chose ‘customers who might still crave an occasional ground beef fix, however, Subway is testing a new line of Ai Melt sandwiches in limited markers." In 2012, Subway’ sales totaled $18.1 billion: Subway’s c sions that the chain could expand to 100,000 locations by 2090." founder envi Ta the meantime. boundaries between quick-service and other restaurant segments have become increasingly blurred. Fasieasual restaurants provide high-quality food without rable service, in a comfortable atmosphere at prices that are “low enough.” Due to this successful combination of high quality and relatively low prices, the fastcasual segimeut is one of the few areas in the restaurant incustry that iy expetienci sendy grow. Restaurants such as Paneru Bread und Chipotle are changing the expectations of customers, which is casing traditional fast-food chains to change as well. Even tiaditional sitdowsn restaurants are looking at ways to move into the fast-casual arena by offering selected scaledalown dishes that appeal to value-seeking diners. A sub-segment of the fastccasual restaurant industry isthe premium burger segment. Customers have been locking to burger chains such as Five Guys, [n-N-Out Burger, Shake Shack, Smashburger, and Fathurger for Inigher-priced. higher-quality burgers, while fastfood joints such as McDonald's, Burger King. and Wendy's s “hs dovaar seu tas ey ht Gy 2019For the exclusive use of |. Guilloty, 2019. MeDonald's in 2013) How to Win Again? have scrambled to counter with their own premium offerings. But much like the Arch Deluxe in the 1990s, MeDonald’s one-third pound Angus barger was short-lived, Customers could not justify paying S4 to $3 for a sagle burger tin there were sandwiches on McDonald's Dellar Menu for much less." I light ofthe rising ‘of beet the company has decided to offer thece new Quarter Pounders wih Whole grain buns as wel as non-beet items like the brand new chicken MeWrap instead.” STARBUCKS ‘McDonald's expansion into specialty coffee drinks with the MeCafé line meane that it also competes with more ‘waditional coffee shops such as Starhacks and Dunkin’ Donuts. Starbucks answered the introduction of MeCafeé bby distributing its Seattle's Best brand to other quick servioe restaurants such as Burger King and Subway, as well asby adding new food offerings."” DUNKIN’ DONUTS Dunkin’ Donuts, which has served coffee for more than 60 years, recently made a filed bid to trademark its brew as the "Best Coffee in America” It plas to triple ts presence to 15,000 shops and is likewise expanding its war breakfast options to compete more effectively.” As voiTee shops sell more food und restaurants dispense ty coffees, competition between these once distinct marker segments is becoming much more intense Target Market “Market research indicates thatthe typical American dines out five times per week, One of the main reasons so many quick-service testautants are focusing on new breakfast tems i hat the early morning mea! isthe east trated. Porevery restaurant breakfast, the NPD Group estimates thatthe average American constmes 2.5 lunches and almost 2 dinners ouside the omme,”* Around 11 to 12 percent ofthese meals are eaten at MeDonald's."7* A quick breakdown of atypical McDonald's franchise ina middle-class subs of 25,000 residents provides additional market insight. Roughly 1 out of 16 o¢ 1.300 people in town visit the local MeDonald’s over the course of a yiven day. Breakfast accounts for the largest propeation (30 perc percent; afternoon, dinnertime, and late nightlearly momning each account for another 15 to 16 persent of sales The noon lunes hour fs the busiest znd most profitable rime of day, bringing th $200,000 in evenues.”” Annually the average franchise can be expected fo bring in about $1.7 million in sales, with an operating profit of around $8150.000." af sales, followed by tunch 2 MeDonald’s three main target market segments are mothers, children, und young aus.” Moms view McDonald's a a quick, easy and affordable meal (or families onthe go, and usually are the ones who bring the children, But with 17 percent of U.S. youth considered obese, fas-food chains find thennselves in an awkward position when marketing directly to children. To response to parental demands for healthier kid meal options, MeDonald’s has already reduced its Happy Meal calorie coast by 20 percent hy sing apples and halving the amount af Pench fries. MeDonali’s has also premised to reduce the sodium conten af its food by 15 percent ‘by 2015, and to mnake further reductions in calories, sugars, saturate fats, and postion sizes by 2020.” Even this ‘Was not enough fora 9-year-ol ge who publiely tock CEO Thompson to task ata recent shareholder’ meeting accusing the company of tricking kis into cating junk lood by using toys and cartoon characters" Other chai Such as Jack in the Box, have opted 10 eliminate toys from their kids’ meals"! while Taco Bell has dropped its ‘tildren's menu altogether” However, the key demographic group for most fast-food restaurants is comprised of young, single profession- als sho earn above-average incomes, These so-called "heavy users” feequent a given chain ice or mote pet week, peoviding a steady source of sales and profi." Unfortunately, a recent study indicated that McDonald's “hs document auhorzod lr seen yaa Guay 2019For the exclusive use of I. Guilloty, 2019. McDonald 31 Hw to Win Agate ‘was not even inthe cop 10 of the 18-t0-32-year-old age group's favorite restaurants. Instead, millennials are more likely to eat at fost-cosual restaurants that emphasize ingredient quality and demonstrate an xwareness of social issues steh as environmental sustainability. Transparency i also important to young. adults. Restaurants such as ‘Chipotle and Paners Bread are known for demonstrating opeaness about thei food sourcing and preparation,” ‘whereas McDonald's has been plagued by perceived deceptions. Vegetarians raised an uproar once it was discoy- cred that McDonald's had continued to use a small amount of beef tallow as flavoring when cooking its French {ies Tt was also forced to discontinue making burgers out of “boneless lean beef trimmings" mixed with ammo: ‘ium hydroxide. afer Jamie Oliver exposed the company’s use of “pink slirte” on national television, “Plan to Win” fier McDonald's ended 2002 wih its frst quarterly loss exer” CEO Jim Skinner introduce his original “Plan to Win,” based on the three pillars of “brand ditection. freadom within a framework, and measureable mil stores.” The plan was focused on four goals: fo atract more customers, to convince customecs to purchase more ‘often, to inerease brutal loyally. and so become more profitable. Skinner further distinguished five Ps—People, Prost, Place. Price. ana Promotion as estential to McDonald's efforts in achieving these goals." Ina saturated marke, the main thrust of Skinner's plan was co shifi from acquiring expensive real estate 10 generating increase sates from existing restaurants Inthe early 2000s, MeDonald’s was opening a new store somentere in the world every 45 hours: under Skinner's watch, the pace slowed to just 50 0 100 new U.S. sites Ber year."To compensate, existing stores started to stay open longer, extending their hours into the late night and early morning. restaurant in Gamer, Noth Carolina, sa its aul revenues se by 45 percent ($30,000) when itconverted to heing open 2417." By 2007, oughly 40 percent of McDonalds locations were open nonstop," in subsequent years, some even experimented with staying open on holidays" Among other things. Skinner used the money saved on ahorted new’ openings Lo revamp existing restaurants. ‘The “now” McDonald’ took utilized a gentler color scheme, replaced fiberglass and stel chairs with leather seat ing, cfiminated fluorescent lighting, and added such amenities as flat-screen TVs, free Wi-Fi ive plants, piped ‘nusic.and the occasional ieplac.”* Headquarters proved grants af np to $600 000 per site, with seme projects, vosting as much as $15 billion.” By the time all ofthe renovations are completed in 2015, the company will have invested over S1 billion in the hope that “niver-looking stores attract more business." Ac the sume time, Skin seit McDonald’ chefs hack tothe drawing board to reseazch new menu possibili- ties more in Kine h cartons health ends. The company tad grown lax in is product development efforts. as evidenced by its $100 mition Arch Deluxe enistake”” and other failures such as the MePizza, MeHotDog, and MeSalad Shaker” McDonald's also lagged significantly behind its competitors in purging trans fats from its Fecipes, in apparent disdain of consumer preferences.” Uader Skinner, the company took the time 0 conduct extensive marker research and developed a nev passion for numbers. Potential new memt items had th pass a series of tests before they could move om to the MeXt slage of development, bused on an analysis oftheir sales margins, costs, and time and ease of production. "®' This more rigorous anproacit led tothe development of the ‘Oven Selects” sandwiches," a southern-styl fried chicken biscuit for breakfast" and of course, the McCafé bine of eotfees, smoothies, and wtler beverages. °° ‘The other hal? of the equation involved cost iting by improving operational efficieney. Adamant that MeDonald’s would not make its burgers smaller just to save money, Skianer directed his executives to find more ‘ereative ways to increase margins. So, the company cut travel, held meetings at Hamburger University instead of expensive hotels, and increased personal usage fees on company vehicles, Whea McDonald's COO leagned that Imajor networks were cutting their advertising rates for straggling car manufacturers. he renegotiated for a better deal, Meanwhile, the company continued to invest in timse- and cost-saving technologies sach as more efficient rive-through windows and computer systems that enable slores to price items according 10 local demand and income level." ‘Ths documents auth er use ony Kee Gtr 2018For the exclusive use of I. Guilloty, 2019. McDonals in 2013) How to Win Aza? The Current Challenge ‘As Don Thompson looked over the results from the past year, he realized that most ofthe low-hanging fruithad already been plucked, Neither he inctemental gains from the temaining store oderniations nor convincing the text of the franchisees to remain open for longer hotrs would be enowgh to offset the troubling. downward te in profitability (see MeDonala’s financial dats in Exhibit 5). Instead, be would have @ fovas on optimizing the 1 co Keep pace With evolving consumer preferences, improving the cusoaper experience So that dhey Would come back agai. and making McDonald's more accessible to a broader market base.'°° Fie, it was clear t9 Thompson that MeDonale’s needed a "MeHit""® Personally, he was pinning his hopes ‘onthe universal launch of the MeWrap ehieken sandwich in 2013. The MeWrap's predecessors frst peared in Europe as early as 2004. as variations of «chicken rol-up and kebab meat wrapped in 2 trtlla US. versions of the sandvwich were esied locally as early 35 2010, but it had taken three more years to perfect the recipe, conduct a thorough market analysis. and streamline the production process. The kitchens had explored ingredients as diverse as hoisin sauce, goat cheese, and shrimp, but vltimately abandoned them in favor of flavors with more ma appeal: swect chili, creamy garlic, and ranch, ‘They added one new vegetahle—the cucumber—ro MeDonle’s repettoire. which required finding companies that could reliably supply the six million pounds of pew produce that would be needed each year Markel rescatchers teed names such ss the “Grande Wrap” and “Fresh Garden Wrap." only to discard them for the more recognizable “MeWrap.” Inside the restaurans, they had to figure cut howe to steam the tomilas and where to place the sauce, all while ensuring that x rained employee coukd assemble the sandwich in 60 seconds or less. Despite public protestations to the contrary, McDonald's was clearly looking to the MeWrap as a “Subway buster" that would lore the millennials back into is stores." And indeed, a recent survey showed that 22 percent af young diners would choose Subway over McDonald's if its stores didnot cary the McWrup.!°"1F McDonald's could noc reeaprure the young adult market segment with this and other new, healthy menu options, them i risked losing an entire generation of restaurant-goet, Second, the company had serious service and stain ists that needed to be addressed it it was to improve ‘customer loyalty. An internal report that found its way tothe media showed that one out of every five customet ‘complaints was about “nie or unprofessional employees"! According to 4 natin survey of quick-service restaurants, MeDonald’s was ranked next to last in “frenlines,” beating only Burger King. Complaints about speed of service also “had increase significantly over the past six months,” with the McDonald's service experi ribed a “chaotic.” Customers currently piaed thee order wth a cashier and then Waited of othe side ashi pled the ordered items together or took cate of the next person in line. laving cashiers doubling as order gathorers was inelficient and vonsibuted to increased waiting limes. Drive-tough patrons did Got fare rmuch beter, The averaze service time for a McDonald's drive-through was 188,83 seconds, which lagged behind rival Wendy's average by almost a minute, Part of the problem was that too many restaurants were understaffed dang peak breakfast an lunch hots. Stressed-out employees struggled to take care of both the veieles lined up in the drive-through and tong Lines of dine-n customers within the tore owas had tobe friendly while work was piling up and while customers grew increasingly irritated at how tong took to place and get their orders. Because ‘mployees were only trained co handle afew specific duties, there was title extra help available for anyone who fell behind, Consequently, ne annual camover rae in the fast-food industry was 60 percent, as Frustrated workers paying, jobs." sought to move on to less stressful, not to mention h ‘Third, McDonald's had to continue co draw in brand new customers if it was to maintain its historical rato of Fevenue growth. To Thompson, appealing to a broader market base meant reaching out to new segments in cur- ‘tent markets 2s well as strategically selecting which new global markets to enter Yet this was perhaps the most challenging task of all. T customers were not already altracted by McDonalds cassie combination of convenient food at @ good price, what would it take to lure them inte its stores? More importantly, was i¢ something that MeDonald’s could afford co offer? Realistically, the only places the company could add new stores were in devel- ‘oping markets such 4s the Asia Pacific. Midile East_and Affica regions (see Exhibit 6 for a comparison of number fof MeDonal’s locations worldwide’, but these areas came with their ovn unique xet of risks." Traditional bus ness wisdom suggested that global companies fare better than their comestic counterparts in part because they “hs document sauherizad tse ely yee Guy 22018,For the exclusive use of I. Guilloty, 2019. Mona's in 201: Ho to Win Actin? can diversity their exposure across malipe financial markets. However. the extent of McDonalds iacemational presence had in some ways iacreased its vulnerability lo the recent recession, raising the question of whether was perhaps getting to0 big fo be safe in roday’s modern, global economy. Me Thompson knew that addressing all ofthese issues would come with a tremendous inerease in complex ity and cost, "ata time when margins were already tight. MeDonal’s “upscale” eateries now had 145 items on the menu. including sx diferent types of MeWraps.!"* While a greater variety of menu options Was Necessary 0 dtraw new customers into sores, too many items slowed down the oud fliliment proves, increasing employee jred a near logistical miracle to ensure that six inition pounds of cucumber could be found and delivered on time (034.000 restaurants in 118 countries." The need for such Standardized processes and equipment vied with franchisees” deste for greater autonomy so that they could respond better to local demands. If Une days of mass market appeal were truly over, how could & restaurant franchise such as McDonald's build and sustain a coherent strategic identity? Mr. Thompson was no longer sure that price and convenience were enough to sustain MeDonale’s sprawling empire into the future, He looked at the “Plan to Win" poster hanging on his Wall ad thought, “How ean we win again? stress and customer frustrations. Adding oae new ingredient re Ts documents etoredo se oly lee Glyn 2010For the exclusive use of I. Guilloty, 2019. MaDe i201 Ho to Wia Azan? EXHIBIT 1 McDonal's Stock Performance, January 2012-March 2013 0 | a a - sem BurgerKing 6 — sar 200 0 Yum Brands —Woensy's ° ——Medora's % Change in Stock Price gEB23 23282288 i Tine L EXHIBIT 2 U.S. Quick Service Restaurane Sales and Fan Chart Forecast (in $ billions) ae Best case (bn) oan 4 8230 Mie forecast) ze S224 | 2 Werst ote fn) a0 Mor 2 oan 5 i904 on 7 S183 3 10 wm Confidence intervals 00% | i Ba 20% | 2007 2008 2n09 2040 2011 2012 20va 2014 2015 2016 2017, Ml 70% oe tsi} 0% -etual Forecast Searce: Min: tue oe Raa of Lahr Sin Cosas Experi Suey, 0 haved rue oly by ote Gully in 2010For the exclusive use of I. Guilloty, 2019. [McDonald's 2013: Ha to Win Again? ENHIBIT 3 Polar/Value Menu Behavior, by Houschold Income, May 20) ‘When you ake oth dla en, wich fhe owing a yoy Bo Household Income Level: ‘AL $U5K —S25K~AB9K —S5OK-749K _S7SK-OROK STOOR Base: ts aged 18+ wit Irtemet satcess. wha rave boon to. fa-food restaurant nthe past mort and oro ‘he dotarvalve ren 1088 1g 28 2s mas » % % * % % ‘Order dlaalue menu opin wih the Aotetvaive mens tems 8 “0 2” % ide dtvaue mers apion alone um 2% ~ 3 om Orde dotvalue menu option nadtion ‘ma conte mest 19 8 a 2 18 (rder dtr value menu option with other ‘equiarmeng tens, not cami meals and fot ater eoitaralve mana tems 2» Co » wo oure: Mise ip asc acento 63676 EXHIBIT 4 Quick Service Seluetion Paciors, by Age. May 2012 baer quik sec hd dosnt ei ell, which he lowing are iment Al 16-26 8k ASS SS Base: eduts aged 18~ with tee access wo have ben oa fast-food restaurant i the ast month a a a % % 8 % 8 ew ‘Best valu fort money so 8 & 2 mo converience sk mB Best tasting food twat Frosh food 6 8 © 8 4 © 8 Speco kind of sandichbutper realy ice ee ee Dolor men % 4mm ood variety foo and beverage ote D % 6 2 wm Heath ood D 9 © 3 M & ‘Combo mea offerings hat ke 2 6 me lll egy to customize my oder ea dete secre Ha te a elas tt 9 Epa Se-serve fountain beverages Mo BBO Goad cotee " 7 0 8 8 ono Fro WiFi TaRee EME 5 5 er Online ordering oan orde-n-atverce fate 4 5 7 3 3 eis Programsoterngs that demonstrat itis enironmentiy spans 4 6 5 3 3 2 2 Source: Mie rr “his documents eueraes or ue arty by hata Gey 2018.For the exclusive use of |. Guilloty, 2019. [McDonald's 2013: How to Win Again? EXHIBIT $ McDonald's Financial Data (in $ millions, except FPS data) Fiscal Year 208 ano ote Cash and shorter invasiments 2083 psu ase 2886 eceivable-ttal 331 4ire 18351375 lnveniories-ota 12 mee ‘rope, an. an ecipmen-tota ret 20,055, 22061 228 R677 Depreciation, depletion, and amortization (accumatec) 10,898 12472 12.903 13.814 ‘Assets 29,402 31975 32.980 95,387 ‘Accounts payable-trade 520 oe ost 18 Long-term debt vo,t86 1gq7 12138 13.683 atest 15078 taut 18600 20,098 Stockholders enuty- ttt i330 anes 14200 15.208 Sales (pa) BER RMS 27005 77587 Cost of goods so iar 127m 3ZRT gO 15,849 ‘Selig, general, and atin expense ne a er Ineame taxes 125 20st 208214 Income betoreeatrannary Hens asia 49% 5803 5.485 Netineome (oss) 43134551 49885802 5485 amings per share (basi excusing exacrdinary ems sas 47 gh Enring pr snare (site) excluding exraorcinary toms B71 458 aT 88 Soar: Copa, EXHIBIT 6 Number of MoDonald’s Outlets in Selected Countries ‘country # o1MeDonal’s us 13381 apa 3998 Canada 11400 Germany 128 u 1280) ina 850 Soute: Auton depitin of dt fom Tndes Ma Bog tp. /17EP inh 2 "This doctors aumorzea truss ely hate Glyn 2010,For the exclusive use of |. Guilloty, 2019. “MeDonald’s 2013: Haw to Wha Ags? Endnotes | Mebonatas 17 Aaa Report Wp ot y/o 2, *MoDonali’ seeks way to keep sizzling” The Wall Stee: Journal, March 10, 2000. 3, *McDonal’s aches repair of “boken! serve" The Wall Svet Srna Apt 10,2013 4. MeDonales. Dut Thompsons. apt ty(GHISAD. 5. “MeDonald’s fst monty sales drop in a deca” USA Today: November 8.2012 6, Motos 2012 10K, bopthuswk cofGTY BSL “MeDonal's fish Motes flounder, New proc ine docin't hook consumer Forbes, March 12, 2003, § “MeLenale's—Shuazes might otfer even better value than its value men.” Seeking Alpha uly 232013, htp bit Iyftgpsse 9. ° MaDe hi Ip. syMoQae. nf expansion plano Asia: Analysts mined in olooks.” Medill Reports Chica, June 8, 2012, 10. *MeDonald’s: State growth means a ate shat you won't love” Fores, Jassry 2 1. MeDonala's~Share might offer ever beter value dn is value mem.” Seeking Alpha, July 23 2013, hip bie IyHlopsPs 12, MeDonale’s, The Rey Keoe tory pio iyxtw Pm 13, MeDonal Vs Atenas sors bya Nhe 14, MeDonal’s, The Ray Kroe sony Is tis 26, MeSpotin, “A brie! history of MeDesild'” epi. ieW Kaji 37. MeDonal’s, MePomal's aston 18, MeSpotight, A baer hasory of McDonald's” 1. MeDonals, MeDonal's sor 20, MeDona's, The Ray Krve sors 21, MeSpotight “A bie tory Menai’ iow MePonalt’s copes with intematonal uses” Sategi Create, May 1.2013, hp ity /H9XCHO. ‘Why the French secretly kine the golden arches Sloe, August 9 2013, hupislateme/I RRA 24, "MeDonae’s CEO: Faster food ahead” Chicago Dritne,Sanary 20, 208. 25, “Brand vei Dict NS6yRH ion: Background tothe wmaeound at MeDonal'.” Fanci Ties Press, Pebruary 18, 2009, up 26, “How McDemil’s gor CEO succession right" CNN Money August 25,2011 27. MeDonali's, 2003 Aimaal Report, ip/go0 gVK Wwe, 28, "MeDomal’sfovn” its turnaround" The Mester Foo, October 8 2008, hapitay/TepcOko. 28, "Now MeDonald's CEO saps tc to his roots” Chieaga Tribune, March 28,2003. 3 “his decument i aumonzed freely by bee Gully 2018For the exclusive use of I. Guilloty, 2019. [MeDowalas a 2013: He to Win Again? 30, “McDonald's next CEO: Dass Thompson, the mu teint MoCafé" Daily: Face, March 22,2012, hap faa id GSjAoH, BM. MeDonals, MeDonal’s stem, hpi y/QEAHS), 52. Mino, Market sce ond forse pli ISANAPEAU, 33. “Whats cating MeDonald's” BusinensWeck, November 28,2000, 4. Mintel fare drivers. topo APE 25, Mintel, Changes fas fod spending, batt yf RAPE. 36, Mintel, Dolly mene asage, hipfdety/18ApEIUL Mintel. Pend apc ans, tpt tyt ADE 38 Mi leh Quick sevice sefvton factors. ep RADU. 29, Daniel, C. R.A. J Cross C, Kosbnick, an R Sina (2011), “Trends in net const nthe Unie States.” Public Heaith Notion. Ubi $13 58S 40. “WO ends for 2018 ON, January 2013, apo I HOzene AN. Mintel Trad applications, baptbiy!HON2N6, 42. "Big Mac's makeover” The Exommist. October 14,2004 43, Mint, Marke drivers. ‘Rising com prices and your grocery bill” Marke Wore, July 18, 2012, 5, Mime, Marker divers $5, “Big Mac's make ve The Economist, Octobe 14. 2008, 57. “Up night” Business Wook, Febmusey §, 2007 48, Mintel Quik serie restaurants US Septem 2012, Selected compunie, bap it |y/1 SVB 49, Wendy's The Wendy's Company, bp oiyitg 50, Wid Mintel. Insights and opportuites: Quick service restauranis-US-Sepiombor 2012, btplityN}YVAACS. "Wendy's sees big growth plans or 2012." Marker We, Bary $0, 2012, Pep/on mkcwnetgwtPm. “The Wendy's Company repre 2012 second-quarter esl.” Wendy's, August 2112 pi ty SVGabh SS "Wendy's pass prof, il ell mare restaurants to fanchisees* Fores, Joly 013, 55. Mintel, Quick service resuwrnns-US-Sepremhor 2012, Selected companies 56, “Burger King franchise CEO Jean Tomgeto alls MeDunsht’s bsiness challenges” AL.com, June 25.2013, pit IyitzaLq, 57. Mine, Quick service recauraits-US-September 2012, Selected companies 58. “Burger King's steategy: Cut cons, sll ec” The Wil (Cheat Sheet, Febevary 18,2013, mi LTE. 59, Mintel, Quick service revawronte-US-Sepsumber 2012, Selected companies. 60) “Taco Hell names marketing chief Brian Niccl president announces new CMO; Ad Age, May 14.2013. poi IyGoDeow “ ‘The cocimantc ator for te cyt Glyn 2048For the exclusive use of I. Guilloty, 2019. Meni’ n 2013 Ha to Win Azan? 6, “How to make w McHit” Business Heck, July 8-14, 2015, (62. Mintel Quick service esauranis-118-Septembor 2012. The lines contmue o blur benveen Segments and within se. ments, iy SN Fr 63. “low to make a Medlin” Busnoceliek (64, “lO trends for 2013," OSR, Sansary 201% hp it 1Ovenz 65. “12 for 12> QSR, Devvmber 2012. hep Mit LSVHZRC. 6, “How to as 4 MoH” BusinessWeek (67. "MeDonal’s eaves Angus buger sit res 9 even declining sales” Time, May 10,2012 (68, “Three new Quarter Pounders to place MeDaoalds Angus barges” San Jore Merawy News, May (4, 2013 69, “How to wake 4 MetHit” Bsnestteek 70, “Burger King a Set * Best Coles to menu." Assuciaed Press, Feb 16,2010 74, “Durkin’ Donuts ys claim to “best cote in Amnesia tadsmnk,” Tie Rast Globe. October 4, 2082 “Up ll night” asinessWeek. February 5, 2007 73, tod 74, “Big Mac's makeover” The Economist, October 14,2004 75. McDonald’, Getting ta Brow ws, hip bitIy/3ni7EX. 76, “Upall aight” BusinessWeek 77, “Big Mae's maheoset” The Beomomist, 78, "Big Mac's makeover” The Beonimist, 78. °MeDonald’s ims its Happy Med)” The Mer Hark Times. July 2 200 0, “int wie scolded Meonate's CED aot pressed with his nse" ABC New, May 28,2013 81, “McDonald's trims its Happy Meal” The New York Ties 82. “Taco Bell will doy kid's meal” CNN Money. Inly 28.2013 83, “Up all night" Hasiness tek, 84 “Moons ines volley at undersround” compett Vato! Finance, Match 27,2013 85, “McDonald's o sete suits on beet allow in French res” The New York Fines, Mach 9, 2002 46, "MeDonali’s anaourees cn fon slime” in burger” ABC News, Februnry 1, 202 87, “Up all igh” RusinessBek; 88, “Brand revitalization: Backaround tothe turnaround at MeDonali'” Finan Times Press, February 18,2008, hg! DcvIbseyRH 89. “Big Mac's makeover” The Economist. 90. “Up al night.” BusinessWeek, February §, 2007 3 ma 92. Bi “Wis document suerte ttt Gay 018For the exclusive use of I. Guilloty, 2019. ‘Mena’ 2013: Hay to Win Again? 93, °Who cas st MeDemlt's on Chnstmas.”Honmborg Businesmmeek, Dosember 18, 2012 44, "MeDonald’s to look tke Stuck” Mefineson Post, Mav 9, 2011 95, “Up all night” Busine eck 6, *MeDonald’s to Louk like Starbucks.” Muti Pst, May 9 2015, 97. “How 0 make a MeHi,” BusinessWeek om. hia 99, “McDonali's Fries, hold th tans-fa" CAS News, Februnny 1, 2009 100. “Up al night" BusinessWire OL, “Big Mts’s maksovee The Economist, 102, Up al night BusineseWeek, 15, MeDionald’s, MeCté: Wha gnes mt utdng a brand within brand? August 2, 2012. pb SO THX 1M, “MeDioalssecks way to esp siting The Wal Siret Jornal 198. McDonalds, Don Thompson, March 27,2013. hpi VGISAD. 106, “How i make a MeHti usiner eek 17. tie 108, “McDonald's ites volley at underaroun” compete” Yakov! Foxe. 109. MeDomalds tackles repair of "beoken” servi.” The Wal Steet Jowrnet. April 10, 2013, 110. "MeDuonalds tackles rept of “aken service,” The Wall ieet Journal UL, *MeDonal's shifting expansion pan .o Asta: Analysts mixed in autlook” Mbit Reports Chicago, Sune 6, 2012. opicy/MoQee. 112. Big Mte'c makeovar” The Economist, 113. low ta make a MEH” BusinessWeek HI. MeDonals, Getting ro owas 11S. “Big Mac's makewer” The Feumumis, Qetober 14,2008, "ms octet sharon ye Geiay 2018