Bells are ringing at McDonald’s (NYSE:MCD). The party’s over.
If you didn’t know there was a party going on, you’re not alone. But Wall Street knew. It included a cash bar at the top of the company’s new Chicago offices and a sexually charged culture.
Everything was fine, however, until it started impacting the stock in August.
McDonald’s shares peaked at around $220 and were trading near $190 when former CEO Steve Easterbrook was fired in early November, replaced with McDonald’s USA head Chris Kempczinski. Chief People Officer David Fairhurst also left the company.
Since then, McDonald’s has recovered almost half the loss. It opened for trade Jan. 7 at $199.60 per share. Whether Kempczinski can recreate Easterbrook’s results without the fun times is now the question.
Et Tu, Ronald?
Easterbrook compiled a fantastic record after replacing Don Thompson in 2015.
During his tenure the shares more than doubled, and the dividend rose about 50%. The company moved from suburban Oak Park, the restaurants were renovated, new menu items were introduced and profitable breakfast items came in all day. Easterbrook also sold items that had been launched in other countries as an “international menu” after trying them out at the headquarter restaurant.
But all that came at a cost, mainly paid by female staffers. Easterbrook, a divorced father of three, partied hard, and so did his senior leadership team.
The challenge for Kempczinski, a 51-year old marathon runner and Catholic, is to keep Easterbrook’s results while losing the booze. There was a lot of executive turnover after the move, so many people brought in by Easterbrook are still working at the company.
Kempczinski surveyed 1,000 employees and held a succession of meetings with franchisees in the U.S. and Europe after taking the reins. In a memo to employees, he said his culture will focus on opportunity, community and solutions, promising to “scale for good.”
He said he will evaluate his entire team based on those cultural touchstones, and anyone who doesn’t measure up will leave.
The Hard Work
The next steps for Kempczinski will be harder.
Black franchisees are leaving over cash flow disparity. The company must respond to the challenge posed by “meatless meat” from Beyond Meat (NASDAQ:BYND) and Impossible Foods.
The franchisees Easterbrook brought in were corporate owners who purchased restaurants in large blocks, not the mom-and-pop operators of the previous generation. Some chafed under Easterbrook’s demands to invest heavily, while corporate profitability rose from 20% of revenue to 30%. The party was in Chicago and not on the front lines.
McDonald’s also continues to face the charge that it’s making plastic food. Rival Yum! Brands (NYSE:YUM) has bought its own hamburger chain, through its acquisition of Habit Restaurants (NASDAQ:HABT). Other fast food operators like Restaurant Brands International (NYSE:QSR) have stepped up their game with things like the Popeye’s chicken sandwich.
The Bottom Line on McDonald’s Stock
Easterbrook’s strategies worked. Kempczinski needs to come up with a new strategy to keep financial momentum going.
The recent troubles made McDonald’s a decent income stock, with a yield of 2.5%, but investors are looking to maintain the 20% annual returns in a crowded market.
Early in this century McDonald’s tried to launch a host of new food formats. A pizza chain called Donatos didn’t work out — McDonald’s eventually sold the chain back to its original owner. The spinoff of its Chipotle Mexican Grill (NYSE:CMG) did.
Making McDonald’s offices family friendly is easy. Choosing a new, more profitable path is going to be harder. Steve Easterbrook is going to prove a tough act to follow. It’s time for investors to do their own McDonald’s reset, and wait to see Kempczinski’s plan before getting back in.
Dana Blankenhorn is a financial and technology journalist. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in QSR.
