News broke today that another key executive is leaving McDonald's (MCD +0.75%). This time, Chief Creative Officer Marlena Peleo-Lazar is exiting the company after 14 years. Widely considered the brains behind the iconic "I'm lovin' it" campaign, Peleo-Lazar's exodus follows other high-profile departures. The questions for investors is whether they stop lovin' the Golden Arches as an investment.
McDonald's other departures
McDonald's C-suite appears to be in a state of disarray. This is especially true in its beleaguered U.S. division. First, U.S. division president Jan Fields left in 2012 after the company posted its first monthly sales drop in nearly a decade; she was replaced by Jeff Stratton, who retired within two years. .
Stratton's tenure was hallmarked by the Mighty Wings' campaign that was widely considered a disappointment. McDonald's U.S. sales -- and company sales overall -- have continued to underwhelm. On a total revenue basis, a figure McDonald's uses for both franchised revenue and sales at company-operated restaurants, in fiscal 2013 year-over-year U.S. sales growth came in at .42% -- less than the rate of inflation.
The company's overall sales reached a paltry 1.9% during that period on the "strength" of its European operations that reported a 4% increase. The new U.S. branch president, Mike Andres, lately the CEO of Logan's Roadhouse, has his work cut out for him.
What's going on in the U.S.?
Losing two U.S. division presidents and now the U.S. creative chief points toward CEO Donald Thompson being unsatisfied with the company's performance in its home market. However, playing musical C-suite chairs might not be the way to solve the problem. Many of McDonald's problems are more structural in nature: Changing tastes and demographic trends are making the fast-food giant increasingly irrelevant.
First, the company faces customers who are skeptical regarding the quality of its food. Fellow Fool Rick Munarriz reported that Consumer Reports ranked McDonald's dead last on taste among 21 leading burger chains. Many millennials are shunning McDonald's for higher-quality fast-casual restaurants such as Chipotle and Panera.
Next are the politics of the fast food. Recent employee upheaval over low wages and scant opportunities for advancement have turned fast-food restaurants into a political hotbed, with some consumers avoiding these companies all together.
Even those that have no problem with low wages from these employers have noticed slower service at McDonald's and an unwelcome trend in employee friendliness. The Wall Street Journal reported that one in five McDonald's customer complaints are related to friendliness issues, a figure the company reported as increasing.
Can McDonald's change the trend?
In a weird way, there's opportunity in this departure. Multiple analysts assert that overhauling McDonald's' marketing without fixing operations would only be putting a bandage on its operational inefficiencies. Those inefficiencies include a sprawling menu, unmotivated employees, and flare-ups between franchisees and corporate headquarters.
But even if management can fix those issues, without a commitment to quality food it is fighting a demographic tide. Another Wall Street Journal article reported that in late August the percentage of people in the US age 19-21 who visited McDonald's last month fell 12.9% from the beginning of 2011. The research firm providing that data, Technomic, also pointed toward fewer families with kids going to McDonald's. That's ominous, because brand affinity is decided early; if children defect to other brands, McDonald's will have to work harder to convert them in the future.
Final thoughts
McDonald's is struggling, and things could get worse before they get better. Management at large and successful businesses are in many cases unable to take necessary steps without incurring the wrath of shareholders. The end result is a rudderless company that can't make changes until it is too late.
If McDonald's wants to avoid a long, protracted decline, the company should focus on streamlined operations, properly selecting and motivating employees, and committing to quality food. Those things won't be easy, or even successful, in the short run, but they offer the best opportunity for long-term success.
