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Should Investors Be Worried That McDonald's Just Ousted 3 Top Executives?

By Rich Duprey - Apr 11, 2017 at 5:15PM

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The executive shuffle is a warning that things are not going well at the Golden Arches.

As the McDonald's (MCD 1.12%) comeback stalls, the fast-food chain just overhauled its management team, ousting three executives in a shakeup that suggests CEO Steve Easterbrook's initiatives to transform the chain into a "modern, progressive burger company" aren't moving as fast or as well as expected.

As new faces come in to oversee marketing, menu, and digital technology, investors should worry that McDonald's will see the gains it's already made evaporate.

Family enjoying a meal at McDonald's

Image source: McDonald's. 

Shake, rattle and rolling heads

Last week, McDonald's booted its chief marketing officer. She had been critical in promoting the rollout of all-day breakfast last year, which was credited with launching the turnaround that saw the restaurant chain post higher comparable sales in 2015 for the first time in three years. But last quarter, comps fell again, suggesting there were limits to how enduring the all-day breakfast menu could really be in luring customers back.

The CMO will be replaced by an executive at Pepsico (PEP 1.31%), though Coca-Cola has been the burger joint's exclusive drinks partner for decades. Also gone are the vice presidents of the U.S. menu and digital technology.

All three areas have been cited by McDonald's as key components of its transformation as it pledged to update and upgrade all 14,000 or so U.S. restaurants with new self-service kiosks, mobile ordering and payments, "smart" menu boards to recommend food choices based on the weather, home delivery, and even table service. It also recently announced it would use fresh beef to prepare its signature Quarter Pounder sandwich in most restaurants.

The strategy hasn't borne fruit yet. After comparable sales finally turned positive in the third quarter of 2015, they proceeded to stay in the black for five straight quarters, suggesting the turnaround was real. But they turned negative again in the fourth quarter, and it was fully evident McDonald's efforts to lure customers back were failing. It has been unable to achieve greater customer traffic for four consecutive years, and it says it's lost some 500 million transactions since 2012 as a result.

Chart showing rise and fall of McDonald's U.S. comps and guest counts

Data source: McDonald's quarterly SEC filings. Chart by author.

Not sustainable

And that's despite Burger King and Wendy's (WEN 0.52%) posting higher quarterly comps for years. The restaurant industry itself may be experiencing a slowdown, and fast food is falling with it after having been one of the few areas notching consistent gains, but it means McDonald's growth was merely an aberration.

Although comps are usually used as an indicator of organic growth because they tend to strip out revenue gains achieved simply from opening new stores, same-store sales are also determined by pricing and product mix. A company can record higher comps even though it has fewer customers, so long as those customers are paying higher prices or buying more expensive products. That's what's happened at McDonald's, and it's not an indication of success if you're still losing customers.

Still, investors should be worried about the shakeup because it suggests deeper troubles brewing beneath the surface. The executive positions are key to overhauling McDonald's operations as it seeks to win back customers, and if the restaurant feels the need to make wholesale personnel changes now, it means the efforts thus far aren't having the desired impact.

A steak, egg, and cheese biscuit from McDonald's breakfast menu

Image source: McDonald's.

The moves also come as McDonald's saw its chief field officer and senior VP in charge of customer experience retire last year, along with a new U.S. president taking over on January 1. And just two weeks ago, it created a new position of global VP for media and customer relationship management.

A full plate

While all-day breakfast has become the symbol of McDonald's turnaround, it's not really in line with Easterbrook's new message of better-for-you food, and as noted, breakfast at 4:00 p.m. only goes so far in bringing in customers. The mobile ordering app has also been slow to launch, and while the measured rollout helps ensure it avoids the problems other chains have experienced when launching mobile order and pay, it still means McDonald's is way late to the game. It will likely be the end of the year before it unveils it nationally at all its stores.

Between the self-order kiosks and the mobile order and pay options, McDonald's is slowly trying to eliminate the upward spiral in labor costs it inflicted on itself by hiking the minimum wage it pays its employees, increases that narrowed its profit margin gains.

Easterbrook and McDonald's have finally begun paying attention to the value end of their menu, and that represents hope for real change since it's the sweet spot of its customer profile. Whether the executive changes will also mean a change in direction again remains to be seen, but so much executive shuffling should serve a cautionary note to McDonald's investors who have thus far ignored any signs of trouble at the fast-food leader.

Rich Duprey has no position in any stocks mentioned. The Motley Fool owns shares of and recommends PepsiCo. The Motley Fool has a disclosure policy.

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Stocks Mentioned

McDonald's Corporation Stock Quote
McDonald's Corporation
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Pepsico, Inc. Stock Quote
Pepsico, Inc.
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The Wendy's Company
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