Financial Services

Corporate turnarounds are never easy. Factoring in variables such as the economy, strategy execution as well as competitive issues, turnarounds are rarely linear and will frustrate impatient investors as the impact of new strategies can take years before bearing fruit.

Consider the case of hamburger giant McDonald’s Corp. Flagging sales, a bloated product line, misguided marketing efforts and increased competition have taken a toll on the company in recent years. A new CEO, Steve Easterbrook, was installed earlier this year following the retirement of Don Thompson in March.

Some lessons can be learned as McDonald’s communicates its turnaround strategy:

Timing is everything. Mr. Easterbrook wasted little time in unveiling his strategy. In May of this year, he announced his initial approach which included reorganizing the company into four segments and plans to refranchise 3500 locations by the end of 2018. According to Easterbrook, “Our new structure will be supported by streamlined teams with fewer layers and less bureaucracy, and our markets will be better organized around their growth drivers, resource needs and contributions to the Company’s overall profitability. McDonald’s new structure will more closely align similar markets so they can better leverage their collective insights, energy and expertise to deliver a stronger menu, service, and overall experience for our customers.”

Provide measurable yardsticks. In announcing his plan, Easterbrook also provided financial goals, which include delivering approximately $300 million in net annual G&A savings, most of which will be realized by the end of 2017, in connection with the Company’s organizational restructure, refranchising strategy, and more stringent discipline around spending throughout the organization; and a return of $8 to $9 billion to shareholders in 2015 and to reach the top end of its 3-year $18 to $20 billion cash return to shareholders target by the end of 2016.

Details. Most likely due to competitive reasons, McDonald’s was less forthcoming about its plans for its menu which is need of streamlining. Given that the menu is one of the most visible parts of the company’s story, the lack of details surrounding the company’s menu may be problematic for some investors. However, the company has indicated that it plans to cut eight items from the menu, taking Extra Value Menus to 11 items from 16, and placing less emphasis on variations of core products. Given local preferences, the company will have further work to do in rationalizing its menu.

Expect a divided audience. Analysts’ views of the company’s plans were somewhat mixed with many agreeing that the plan will take some time before its effects are felt. Some others believe that McDonald’s is a “show me” story and might have been looking for more dramatic and sweeping changes at the company.

Turnarounds can be difficult to execute and don’t occur overnight, particularly given the size of an enterprise such as McDonald’s. Continuous updates on progress against the goals outlined are critical to demonstrating the validity of the strategy and supporting investor confidence.

-Scott Tangney

thought leadership

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