McDonald’s CEO Jim Skinner-R&I’s 2007 Executive of the Year
McDonald’s CEO Jim Skinner’s relentless focus on improving customers’ dining experiences has revitalized the world’s largest foodservice brand.
By Scott Hume, Editor-in-Chief -- Restaurants & Institutions, 12/1/2007
2004-present: Vice chairman and CEO, McDonald’s Corp. 2004: Vice chairman (responsible for Asia, Middle East, Africa, Latin America, McDonald’s Japan Ltd.) 2002-2004: President, McDonald’s Restaurant Group 2001-2002: President and COO, McDonald’s Europe/Asia/Pacific 1997-2001: President, McDonald’s Europe 1995-1997: Executive vice president, international relationship partner, Central Europe, Middle East, Africa and India 1992-1995: Senior vice president, relationship partner, Central Europe, Middle East, Africa and India 1971-1992: After joining McDonald’s as a restaurant manager trainee in Carpentersville, Ill., Skinner moved up through a succession of posts, including director of field operations, marketing manager, regional vice president and senior vice president/zone manager.
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McDonald’s CFO Matthew Paull bluntly assessed the chain’s market position during an October earnings call. "We are financially stronger than anybody else we compete with," he said.
What was arresting about Paull’s confident assertion (offered by him in explaining why McDonald’s attracts high-quality franchisees) was not that it is true, but that only a few years ago, the Oak Brook, Ill.-based company’s status was so much the opposite.
Five years ago, the McDonald’s brand was declining into irrelevance with consumers, demonized in the documentary film "Super Size Me" and the book "Fast Food Nation," criticized by some nutritionists and written off by Wall Street. Today, McDonald’s is, indeed, stronger—with consumers, Wall Street and, yes, even some nutritionists—than its competitors.
For the quarter ended Sept. 30, 2007, McDonald’s reported a global comparable-store sales increase of 6.9% (its 18th consecutive quarter of same-store sales gains), record company revenues of $5.9 billion (up 7% over the previous year) and operating income of $1.525 billion (up 18%).
Burger King, the No. 2 burger chain, reported a 5.9% increase in comparable sales for the equivalent quarter, its best performance of the year. Wendy’s continued to struggle, reporting a 0.2% gain, and Sonic’s same-store increase was 3.1%.
The scope and speed of McDonald’s turnaround is testimony to the wisdom of the company’s strategic plan and the disciplined focus of the man who has spent the past four years ensuring that the plan continued to work. That man, McDonald’s Corp. Vice Chairman and CEO Jim Skinner, is the choice of R&I’s editors as 2007 Executive of the Year.
"There will be business-school cases written about McDonald’s," says Larry Miller, restaurant analyst at RBC Capital Markets in Atlanta. "Future executives will be learning about McDonald’s turnaround."
Succession and Success
What they will learn is that McDonald’s didn’t merely revitalize its own faltering brand; it "reinvented the fast-food business, globally," by redefining the category’s possibilities, says Chris Muller, professor and director of the Center for Multi-Unit Restaurant Management at University of Central Florida’s Rosen College of Hospitality Management (and author of the R&I's "Starters" blog).
The turnaround began in December 2002, when McDonald’s warned Wall Street that it likely would report a loss for the fiscal fourth quarter, the first loss in the company’s then-47-year history. "It was pretty dire," Miller says of McDonald’s position at the end of 2002. "The company was trading at its asset value. Basically, the land [under McDonald’s restaurants] was worth $10 or $12 [a share], and that’s where the company was trading. The business was essentially worth zero.
"The investment community had pretty much priced McDonald’s down to bankruptcy at that point."
Chairman-CEO Jack Greenberg stepped down and was succeeded on Jan. 1, 2003, by Jim Cantalupo, who had retired as company president earlier in 2002. Cantalupo’s "Plan to Win" strategy called for renewed focus on the "5 Ps" of store operations (People, Products, Place, Price and Promotion) and a slowed-expansion "better not just bigger" approach. Cantalupo was just beginning to put that strategy in place when he died of a heart attack in April 2004. McDonald’s Corp. President Charlie Bell took on the additional title of CEO, but he would step down in December 2004 after being diagnosed with the colon cancer that took his life two months later.
It fell to the then-60-year-old Skinner, one of the Plan to Win’s architects, to pull together a stunned and sad McDonald’s system, to not let it lose momentum or faith and to refocus it even more sharply on the plan and on winning. A veteran of more than 30 years with McDonald’s (he joined the company in 1971 as a management trainee in Carpentersville, Ill.), Skinner was a known and respected executive whose promotion signaled no immediate or abrupt shift in strategic direction. His many years of experience overseeing overseas operations made him an ideal candidate to manage a global revitalization.
"It was tumultuous time —people just couldn’t believe it" when Bell’s illness was disclosed, Skinner said in an interview with R&I. "We lost two CEOs and I lost two very good friends. I had a lot of people look to me for stability."
Simplicity and Execution
Four days into his tenure as CEO, Skinner gathered several dozen of McDonald’s top executives and outlined a course he believed would not just continue but also accelerate the brand’s revitalization.
"I had three goals: long-term sustainable growth; talent management and leadership development; and promoting balanced, active lifestyles, which meant trying to be part of the solution to those things that were problems not only for McDonald’s image but for society as a whole," Skinner says.
Skinner’s success in meeting those three initial goals only partly defines his leadership. The restaurant marketplace has changed since 2004, and Skinner has augmented and adjusted McDonald’s strategies during his tenure at the top. Among his achievements:
- Reversing the multibrand strategy and divesting the Chipotle and Boston Market chains to focus on the core brand.
- Reducing the percentage of company-owned stores around the world to 22% from 27% to free corporate capital for brand enhancement.
- Leveraging Starbucks’ impact on the coffee market by building McCafe into a powerful presence overseas and by introducing Premium Roast Coffee. To leverage its advantage of having nearly 14,000 domestic locations, McDonald’s is testing espresso-based beverages and gearing up to take on convenience stores by testing bottled soft drinks and sports drinks (see "Destination: Beverages" below).
- Upping investments in remodeling McDonald’s restaurants around the world.
- Fighting back against the "McJob" stigma—and boosting crew morale—with advertising promoting McDonald’s career opportunities.
- Carefully refining its three-tier menu (Dollar Menu, core items and premium items) while pushing "local relevance" on menus around the world.
- Building the brand in China through emphasis on drive-thru units and an affordable, three-protein menu.
These steps have been the result not of big dreams but of focused attention on understanding the brand. Few have been innovations, but Skinner has gotten the job done, patiently succeeding not by doing anything as revolutionary as inventing an iPhone but simply by knowing whom to call.
"Long-term sustainable growth means listening to customers and being focused on the restaurants," Skinner says. And if that sounds unimaginative, he is fine with that.
"I look at [the business] one hamburger at a time, one store at a time—the best way to stay focused on what you do is to keep it simple," he says. "The attitude we have is to make it real in the restaurants, to make sure everyone is aligned around that one idea.
"Look, we don’t need rocket science," he says. "We need simplicity, execution."
Simplicity, focus and execution were precisely what McDonald’s needed in 2004, many observers say, and they are precisely what Skinner has delivered, to the surprise of many who doubted the brand’s strength and his resolve. "The truth of it is that Skinner has done more than I thought he would do," says RBC analyst Miller. "He has been very impressive relative to the expectations the investment community initially had for him. He’s a little more bulldog than show dog."
Be Relevant, Not First
Skinner says that an often-overlooked element in McDonald’s turnaround has been development of "a much more robust consumer-insight process" than the company had five years ago. "That pays dividends," he says. "Our customers are the critics we’re concerned about."
And consumers often were critical when McDonald’s sought their input as the turnaround strategy was put in motion. "We heard that we had taken our eyes off the fries, so to speak, relative to the front counter and the drive-thru; the delivery of operations excellence," Skinner says. "We also heard, of course, that we were seen as a big part of the crisis relative to the obesity problem in the world.
"And you had [critics] saying the McDonald’s brand is passé, that we couldn’t make a comeback because consumers are going in a different direction and that McDonald’s has not lived up to the promise relative to customer relevance."
Relevance is the important conceptual cornerstone Skinner and his management team added to the Plan to Win. Skinner says that winning requires that McDonald’s be "our customers’ favorite place and way to eat and drink."
Relevance doesn’t require innovation. Although it invented the breakfast sandwich, McDonald’s recent menu makeover has relied far more on adopting and adapting menu products available and consumer-validated elsewhere than it has on developing truly new products. McGriddles pancake sandwiches are an exception, a truly new idea that has expanded breakfast drive-thru sales.
Wendy’s was out in front on salads. The third-pound Angus Burger McDonald’s continues to test is a response to big burgers available at Carl’s Jr. and other West Coast competitors, and the Southern Style Chicken biscuit sandwich also in test answers offerings from Chick-fil-A and others in the Southeast. The McSkillet breakfast burrito (with steak or sausage) echoes Jack in the Box’s Sirloin Steak & Egg Burrito and similar items. The Premium Roast Coffee line, of course, answered Starbucks and others.
But McDonald’s continues to be more interested in customer relevance than in menu pioneering. Ralph Alvarez, promoted by Skinner last year to McDonald’s chief operating officer, told analysts in an April 2007 earnings call that "our greatest success is when we give our customers what they are already getting in the marketplace that we have not offered them and if we can deliver those [products] at McDonald’s price and McDonald’s speed.
"If you look at the type of products that we are testing," Alvarez continued, "they are products that are already in the marketplace, already have consumer appeal. What we have to figure out is can we deliver them within our operating system? Also, does the customer believe that McDonald’s has credibility to sell them?"
Breakfast All Day?
Chicago-based researcher Technomic Inc. says its most recent study finds that 44% of consumers would like to see breakfast foods available all day. But McDonald’s operating system’s limitations stand in the way of offering the breakfast menu all day, Skinner says.
The "Made For You" equipment package that former CEO Greenberg rolled out beginning in 1998 allowed McDonald’s to stop precooking and holding burgers and other items, a procedure that Burger King, Wendy’s and other competitors ridiculed in television ads. Many McDonald’s franchisees reportedly fought the mandated investment, but it allowed the chain to update its menu and improve service speed and was one of Greenberg’s major achievements as CEO.
A modular Flexible Operating Platform (FOP) is the next-generation system, and although it may allow for McMuffins to be available at midnight, it isn’t ready yet.
"The ability for us to sell breakfast all day is complicated by the equipment and the large amount of business we do on regular [nonbreakfast] items," Skinner says. "Cinnamon Melts are available all day, but if you’re looking at core breakfast items like egg entrées, that’s an equipment problem."
Skinner says he was "delighted" by the extensive media coverage of his off-hand suggestion at an analyst meeting earlier this year that the FOP might open the door to all-day breakfast service. "It was a great consumer insight for us," he says of the headlines. "McDonald’s may someday serve breakfast all day, but we’re a long way from being able to do that."
McDonald’s treads very carefully when it comes to breakfast because of the daypart’s strong sales—estimated to account for as much as one-third of the $2.1 million average annual U.S. unit sales—and profit margins. The addition of Premium Roast Coffee has helped make breakfast margins even stronger, Alvarez says.
The daypart—a $40 billion market in the United States, according to Technomic—is so crucial that Alvarez says the company makes real-estate decisions based in part on securing what he calls the "breakfast side of the road."
"As you know," Alvarez told analysts earlier this year, "when people are going to work, they will not make a left-hand turn and get out of the traffic pattern."
Cracking the Code
McDonald’s does not have dinner-specific menu items, likely because larger entrées such as pizza always have proved to be difficult for drive-thru service. Still, Skinner says the chain continues to look at evening-meal possibilities.
"We’ve worked on dinner in different tests and capacities ever since I’ve been around, and that’s 30-some years," he says. "We continue to look at it, and we’ve got a few tests [in the field]. It’s something that could be important for us if we crack the entrée code at dinner for takeaway and eat-in.
"We haven’t cracked this yet, but we continue to look at it."
The Premium lines of entrée salads and chicken sandwiches have been McDonald’s primary answers to fast casual’s quality challenge (as well as an answer to calls for more-healthful foods). Checks for meals that include the Asian, Caesar, Bacon Ranch or Southwest salads reportedly average more than $8, squarely in the fast-casual range.
What McDonald’s has that fast-casual concepts do not is healthy business at the low end of the price spectrum, and the chain guards that business carefully. "Everyday affordability" is McDonald’s term for its broad appeal. Maintaining it means balancing higher- and lower-price items.
The chain likes to see about 55% to 60% of sales increases coming from guest-count increases, with average-check increases accounting for the remainder. Having a majority coming from higher checks is not the goal. "It’s important to keep guest counts up when you have [premium products] in the pipeline, CFO Paull told analysts in October.
McDonald’s Dollar Menu gives the chain broad affordability, balance and elasticity. The Dollar Menu—on which the Double Cheeseburger is the top seller—accounts for less than 14% of sales, Alvarez says, adding that similar discount menus grab as much as 25% to 28% of some competitors’ sales. So McDonald’s maintains its appeal with teens and low-income consumers without falling into the discount trap that hurt it and other quick-service chains so badly in the 1990s.
"In the U.S. market, with the economy the way it is, it’s OK to have a bit more guest-count increase," Skinner says. "We want to have people visit our restaurants. They’re strapped; the economy is tough for everybody. The subprime [mortgage-default] problem hasn’t helped, but it hasn’t hurt McDonald’s the way it has for other parts of the restaurant industry.
"It’s an opportunity for us because of our everyday affordability," he says. "It’s going to be extraordinarily important for us to maintain the Dollar Menu."
This past summer, when consumer confidence slumped and consumers tightened their spending, McDonald’s increased advertising for the Dollar Menu and specially priced (but still high-profit-margin) soft drinks to keep up customer traffic.
Stay with Execution
What all the strategies and initiatives of the past years ultimately come down to is focusing on improving the brand, its products and its customers’ experiences.
"I give very high marks to Skinner and his team," says New York City-based restaurant researcher and consultant Malcolm Knapp. "They’re very focused and they’re staying a step ahead. They’re exploiting every opportunity and niche they’ve got, and they’ve got their franchisees behind them. And they’re making money."
It sounds like an unassailable position, but Skinner says he most fears complacency. "My job is to make sure we have our people focused on those things that are most important to the customer on a daily basis and who are not too creative because as soon as we get into that and forget what got us here, we’ll lose on the execution side."
"Strategies are easy to define," he says of his three-year effort to revitalize the brand. "Execution is not so easy."
Destination: Beverages
McDonald’s has learned from Starbucks not only that consumers will pay more for a good cup of coffee but also that beverages can be "destination" products. Consumers go to Starbucks or a gas-station convenience store specifically to get a beverage.
McDonald’s Combined Beverage Initiative (CBI) plan to broaden the chain’s beverage lineup encompasses espresso-based drinks such as cappuccinos and lattes as well as sweet tea, smoothies, frappes, bottled sports and soft drinks and more. Last month, the company told analysts that specialty coffees will be introduced domestically throughout 2008 and into 2009, with other CBI elements such as smoothies and bottled beverages coming into stores late in 2009.
If all elements of the CBI become standard, they have the potential to increase domestic per-store sales by $125,000 (or an incremental 4.5% to the $2.2 million average unit volume), according to Don Thompson, McDonald’s USA president. Between 1,300 and 1,500 U.S. stores had some part of the CBI plan in test at the end of the third quarter of 2007.
Getting some franchisees to accept the CBI could be difficult, just as McDonald’s found with the Made For You operating system, and for the same reason: cost. Thompson told analysts last month that espresso machines and other CBI equipment cost about $25,000. Total remodeling costs to accommodate CBI elements could be as much as $75,000 per store. Jan Fields, COO of McDonald’s USA, told analysts that the company won’t say how much of per-store CBI investment costs the company will shoulder for its franchisees.
CEO Jim Skinner insists that capturing a higher share of the $60 billion U.S. beverage market is a must for McDonald’s, not a maybe. "We’re convenient; we should have a beverage initiative that delivers on customers’ expectations relative to what they can buy at a McDonald’s," Skinner says. "If you go into a McDonald’s and buy an entrée and then go around the corner and get the beverage choice you want, there is something wrong with that.
"We have to have resealable bottles. We have to have the opportunity for the full cadre of coffee offerings," he says. "This is the 21st century; we’ve got to get that done."
• McD’s Turns Up the Heat Under Specialty-Coffee Test
Healthy Lifestyles
McDonald’s has not only defused much of the criticism directed at its "unhealthful" menu, but also it has turned adversity into an opportunity.
"Five years ago, you would never have bet that anyone, let alone 22-year-old women, would ever choose to go to McDonald’s for a salad," says Chris Muller, professor and director of the Center for Multi-Unit Restaurant Management at University of Central Florida’s Rosen College of Hospitality Management. "They created a whole new customer base."
Rather than deny any responsibility for the obesity problem, McDonald’s offered to be part of the solution without accepting that it had to be the total solution. The chain has added more better-for-you menu choices (salads, grilled chicken, yogurt and, for kids, fresh fruit), added nutrition information on packaging and invested in programs promoting physical activity.
"We right-sized the problem," CEO Jim Skinner says. "You realize that people eat at McDonald’s maybe three times a month, so 87 times they eat somewhere else. You have to keep in perspective not just how big a problem it is but also how big a difference we can make relative to the problem. But we can be part of the solution around menu choice and make a difference in people’s lives."
Talent Shows
"Talent management and leadership development" was one of three main goals Jim Skinner says he set when he became McDonald’s CEO in 2004, and he has put a new face in every top corporate position, creating his own team top to bottom. And he says that of all he has done as CEO, he is most proud of what he has achieved in realigning the leadership.
"Talent management is getting people in the right places," he says. "It’s not that we necessarily had people out of place but that we didn’t make the best and highest use of people in the organization in the best places."
As an example, he points to his naming of Tim Fenton as president of McDonald’s operations in Asia, the Pacific, the Middle East and Africa. Fenton has extensive background opening and overseeing McDonald’s overseas operations but most recently was president of McDonald’s USA’s East Division.
Last year, Skinner promoted Ralph Alvarez (shown) to McDonald’s President and COO from president of McDonald’s North America (succeeding Mike Roberts, who retired). "Ralph Alvarez is the best restaurateur in the business," Skinner says. "He gets it and keeps it real."
In 2005, Dennis Hennequin became the first European to be named president of McDonald’s Europe. Hennequin began his McDonald’s career as an assistant store manager.
"McDonald’s has a strategic advantage: As a global brand, it is tapping [management] talent all over the world, and they have a larger talent pool than anyone else," says Malcolm Knapp, a New York City-based restaurant researcher and consultant.
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