Will you even recognize McDonald's (NYSE:MCD) after CEO Steve Easterbrook completes his transformation of the fast food king? While he's seemingly hoping diners say "no," investors may have a different opinion.
Easterbrook's tenure at the restaurant will be defined by his oft-quoted statement that he wanted to turn McDonald's into a "modern, progressive burger company," laden with all the baggage such terms come with.
It's true that McDonald's was a huge, lumbering beast, a global operation doing business in more than 100 countries that after decades of doing things a certain way, became complacent and sclerotic. Easterbrook has appropriately shaken things up, though it doesn't mean every action he's taken is the right one. The changes he's made include:
- Raising employee wages at company-owned restaurants.
- Introducing new, fresh ingredients like "artisanal" breads and a "Create Your Taste" personalization program.
- Introducing all-day breakfast, something customers have been clamoring for for years.
- Launching the McPick 2 menu that gives customers a choice of any two items for $2.
Some of these ideas have angered its franchisees, such as the pay hikes, which immediately pressured them to follow suit, even though they're suffering from falling sales and profits. But others were just common sense, like all-day breakfast. While there were some logistical issues with introducing it, other chains like IHOP and Sonic have successfully managed the mix.
Others initiatives, like the McPick 2 menu, are strategically smart. Where Wendy's (NASDAQ:WEN) and Burger King also offer a discount menu bundle, they don't give customers a choice; the included items are predetermined. Also, McDonald's doesn't include fries and a drink in its package but instead require customers to order these higher-margin items separately. That could be a double-edged sword, as it might also rankle customers who have to ultimately pay more to get a whole meal, but it serves to protect its bottom line.
Yet there are even more changes under way -- big changes. McDonald's already changed its packaging, doing away with the clown smile and substituting, big bold lettering that wraps the company name and golden arches in a haphazard way around the bags and boxes. It's definitely a bold, more modern look, but it's also the one with the least importance; customers don't buy its burgers because of the company logo.
Of greater import might be the changes coming to the look of its restaurants. In December it opened in Hong Kong what it calls McDonald's Next, what CNN called "an evolved version of the brand that strives to be 'modern and progressive,'" substituting cafe styling for the more familiar cafeteria experience.
The new look is in keeping with Easterbrook's grandiose plans to transform McDonald's image. Along with the ambient lighting and sleek stainless-steel counters, there's trendy offerings of quinoa, premium coffee, and salad bars. And though such concept restaurants tend to have limited impact, sort of like a concept car that looks great at a car show but never sees production, McDonald's may actually be rolling out these designs more broadly.
BuzzFeed News said its U.S. franchisees can update their restaurants to one of several different styles, with McDonald's helping to finance the cost of the upgrades. Included are style books with names like Allegro, Origin, and Wood + Stone. It's just the kind of upgrade unveiled at the Hong Kong outlet that could make its appearance here i nthe States if franchisees buy in.
Will they, though, is the question. The upgrades are expensive, an average of around $700,000 in 2014, and even with McDonald's picking up part of the cost (estimated to be around 40%), franchisees have balked at lower-cost items that don't offer much of a return. Because the restaurant actually derives some 60% of its revenue from the drive-thru window, how fancy the interior is may not matter.
Steve Easterbrook has sought to change how the public views McDonald's, and though a number of initiatives seem on the money, many more seem to miss the mark. The gains its stock has made over the past six months may not hold if all these moves don't produce more than a single quarter of improvement.