Steve Easterbrook, 47, has been promoted from within to become the new chief operating officer of McDonald’s (NYSE: MCD) in the United States. He used to serve the Golden Arches as its U.K. and Europe head and replaces Don Thompson as CEO. Could he turn the fate of the world’s biggest burger chain around, which has suffered recent onslaught from competition and falling customer satisfaction?
He has his work cut out for him. Between 2013 and 2014, McDonald’s revenue dropped by 2.4%. In January, global sales fell by 1.8%. In the fast food business, global sales is one of the most important parameters for judging the financial health of the business. But as a slight silver lining, Easterbrook’s appointment as CEO did encourage McDonald’s stock to jump, which stands at up by 5% since last year.
From frying pan to first in line
Easterbrook has promised investors a change in the business momentum for the burger chain. Details of what exactly constitutes this change are still unclear; combined with the fact that he is relatively unknown in the U.S., investors are looking to get to know him better at the biannual U.S. franchisees and managers meeting in Las Vegas scheduled for later this week. Taking a call on Thompson’s proposed "Create Your Taste" venture, which franchisees term as expensive and ineffective, may as well be one of Easterbrook’s first decisions as CEO. The venture which allows customers to customise their order through a kiosk at the sales counter, distracts and diverts from the drive-through. Drive-through forms 70% of McDonald’s profit model.
Market analysts also advise Easterbrook to take a closer look at the burger chain’s extensive menu. He is advised to cut down some items, for the ease of the customer. Franchisees may also be looking for a pay hike and more control over locations. Market gurus think Easterbrook should look to improve executive compensation by tying it to franchise profitability. And letting top franchise operators fight it out for the best and most number of locations.
Apart from franchisee relations, Easterbrook will need to pay attention to wage earning employees. Fast food chain employees are protesting low wages and demanding wage hikes in the U.S. In December 2014, fast food employees from across 190 cities of the U.S. called a nationwide strike demanding higher per hour pay. Walmart (NYSE: WMT) and TJX Companies (NYSE: TJX) are forced to respond positively and raise wages to $9 an hour across stores nationwide.
Meaty role
Over the last couple of years, customers have raised questions about the ethics of the meat industry. McDonald’s was also called to action to certify that its meat was ethically sourced. The fast food giant, in response, announced plans to ensure only verified sustainable beef in its patties by 2016. Again, no details of how McDonald’s will go about doing this are forthcoming. "It’s both McDonald’s challenge and opportunity. When you look around, you see that’s what the forward-thinking businesses are claiming, and McDonald’s can make a big turnaround by leading with antibiotic stewardship," Jonathan Kaplan, program director, Food and Agriculture, National Resources Defense Council, told ABC News.
Eating the competition
But Easterbrook’s biggest challenge doesn’t come from within, but from outside the Golden Arches. McDonald’s is facing the fiercest competition to date in the U.S. from Panera Bread Co. (NASDAQ: PNRA) and Chipotle Mexican Grill Inc. (NYSE: CMG) and what is fast growing from regional to national fast food chain, Chic-fil-A. These rising upstarts are ruthlessly and effortlessly stealing business away from McDonald’s. The burger mogul has suffered a two year sales slump because millennials want something new and different. Easterbrook will have to shore up the market share that McDonald’s could likely lose to this newfound competition. What’s interesting is that a meal at Chipotle, Shake Shack Inc. (NYSE: SHAK), Five Guys, Whole Foods Market, Inc. (NASDAQ: WFM) and El Pollo Loco (NASDAQ: LOCO) would cost you twice as much as a McDonald’s meal. These restaurants spend more of their revenue on acquiring ingredients, too. It seems fresh food is replacing fast food. Easterbrook better have his ear to the ground.
