Skinner’s Toughest Challenge: His Succession

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Dow LeaderboardCEO Jim Skinner has done so much for McDonald’s (NYSE:MCD) shareholders since he took over in 2004 that they should shout “I’m lovin’ it” in unison at the company’s next shareholder meeting May 17. After all, the stock has quadrupled during his tenure, compared to a 24% return for the Dow during the same time frame.

But MCD, the Dow’s most dazzling performer in 2011, now faces looming challenges that Skinner’s stay-the-course management style might be ill-equipped to overcome. Skinner, who turns 68 this year and helped the company cope with the loss of two CEOs in just six months, might find his greatest legacy to be how well he has prepared his eventual successor to lead the global restaurant chain.

And when applied to McDonald’s, the word “chain” translates into “behemoth.” Skinner — a low-key, former Navy man whose first McDonald’s job was flipping burgers at the age of 16 — runs a global company of 33,000 restaurants (80% franchised) with 1.7 million employees in 119 countries. The company’s stock rose a whopping 31% in 2011, to an all-time high of over $102 — while increasing its dividend by 15%, which translates into a current yield of 2.7%.

But past performance is no guarantee of future results, and challenges loom large for McDonald’s. The company last Wednesday reported 7.5% global same-store sales growth in February. While most retailers would kill for those numbers, it was lower than the expected 7.7% to 8.2%. The biggest black eye: operations in Europe, where same-store sales grew only 4% instead of the expected 6.6%. Investors punished MCD’s miss by driving share prices down 3%.

Skinner’s own compensation took a hit to the tune of $1.2 million last year, as the CEO’s annual performance-based bonus was dialed back to $3.3 million.

“The global economy remains challenging with the recovery that is predicted to be slow and prolonged,” Skinner said in MCD’s fourth-quarter earnings conference call in late January. “Our industry still faces significant headwinds, including flat to slow growth, low consumer confidence and volatile commodity pressures.”

Still, Skinner remains committed to the “Plan to Win,” the back-to-basics approach developed by Skinner and two former CEOs — Jim Cantalupo and Charlie Bell. That approach scaled back expansion of new stores in favor of enhancing the value proposition at existing restaurants. The plan — which called for improvements in service, cleanliness, marketing and food taste — reversed the company’s flagging fortunes in the first year.

When Cantalupo left retirement to take over the CEO job from Jack Greenberg in 2003, MCD had reported the first loss in its history as a public company and same-store sales were falling through the cellar. So was its share price, slipping from around $48 in 1999 to under $12 in March 2003. Cantalupo righted the ship in record time.

But hours before his scheduled victory lap at the company’s 2004 shareholder meeting, Cantalupo suffered a fatal heart attack, leaving his second-in-command Bell in charge and elevating Skinner to Bell’s old job as president and COO. But within six months, Bell would leave the company to fight what would become a losing battle with colorectal cancer.

When the then 60-year-old Skinner took over as CEO, most observers thought he was simply a placeholder until the company’s CEOs-in-waiting Michael Roberts and Ralph Alvarez were ready to step up.

But Skinner surprised everyone by staying put and waiting turned out not to be the strong suit for Roberts and Alvarez. Roberts unexpectedly resigned from the No. 2 spot in 2006, leaving the president and COO job to Alvarez. In December 2009, Alvarez retired unexpectedly over chronic knee pain, elevating McDonald’s USA President Don Thompson to the No. 2 spot.

That makes Thompson, a former member of Northrop Grumman’s (NYSE:NOC) engineering management team (who MCD hired in 1990 to design robotic restaurant equipment), the odds-on favorite to succeed Skinner when he eventually does step down. Thompson moved into restaurant operations in 1994 and rose through the ranks rapidly — achieving the coveted position of president of McDonald’s USA in 2006.

Thompson, who in 2000 became McDonald’s first African-American division head, has a reputation as an innovator and brilliant communicator. He also headed groups that identified new markets and determined menu trends and other ideas that could take advantage of emerging opportunities in the U.S. and global markets.

Thompson is a strong believer in tailoring the restaurants and menu items to local tastes — such as the shrimp burger and tuna breakfast muffins McDonald’s introduced in Japan.

Skinner has been successful in staying the course that he, Cantalupo and Bell put in place with their turnaround strategy in 2003. But no business strategy is sufficient for all seasons. And while the quality over growth emphasis of the “Plan to Win” brought the company back from the edge, that’s not likely to be enough to fuel future brand dominance and robust shareholder returns.

Thompson understands that store quality and growth will need to go hand in hand if McDonald’s is to capitalize on global market opportunities. “We’ve got to be able to focus on both,” he told the Chicago Tribune in an interview.

One important area for growth will be Europe, a region that accounts for 40% of the company’s revenue. Breakfast will be a big opportunity for the region.

“We have a lot of room to grow,” Thompson said of Europe during McDonald’s last earnings call in January. “If you look at Europe in terms of the number of restaurants that we are serving breakfast, we have a long way to go.”

Bottom Line

Skinner and the “Plan to Win” — prioritizing quality over growth — have delivered great returns for McDonald’s during the past few years. But no successful business strategy lasts forever, and now might be the time to shift focus toward a more aggressive growth strategy — particularly in Europe and emerging markets.

McDonald’s, which wrote the book on successful leadership succession plans and boasts “a deep bench,” has prepared well for the changing of the guard. Skinner is doing his part in mentoring Thompson, who believes in strong expansion into markets like Russia and China that are poised for growth. It’s a good bet that Thompson could have just the vision the company needs to keep the win streak going.

As of this writing, Susan J. Aluise did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2012/03/mcdonalds-mcd-ceo-jim-skinner-succession/.

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