CASES

CASE 28
McDONALD’S IN 2019*
On November 3, 2019, the McDonald’s board of directors experiences for our customers,” former CEO Steve
dismissed Steve Easterbrook over violations of company Easterbrook said in a statement.2
policy regarding a relationship with an employee and McDonald’s has been trying to attract more customers
named Chris Kempczinski the new CEO. Kempczinski had to its restaurants by offering more customized products that
experience at Kraft Foods and PepsiCo prior to joining are also healthier. It has removed high fructose corn syrup
McDonald’s in 2015, most recently as president of the USA from its buns, changed from the use of liquid margarine to
business unit.1 real butter, decided to use chicken that has been raised
In March 2019, McDonald’s, the largest restaurant without antibiotics, and to make use of cage-free eggs. Mike
chain, announced it will acquire artificial-intelligence Andres, former president of McDonald’s USA explained
startup Dynamic Yield, a company focused on personaliza- why the firm has decided to make these changes: “Why take
tion and decision logic technology. Access to this technol- a position to defend them if consumers are saying they
ogy will allow the firm to update instantaneously its don’t want them?”3
drive-through menus based on factors such as time of day, These changes are expected to address some of chal-
weather, and trending menu items. McDonald’s plans to lenges that McDonald’s has been facing in many markets,
roll out the updated drive-through menus across the United including in the United States, where it has almost 15,000
States during the year. “With this acquisition, we’re expand- of its 38,000 mostly franchised restaurants. It has lost a lot
ing both our ability to increase the role technology and data of ground with consumers, especially millennials, who are
will play in our future and the speed with which we’ll able defecting to traditional competitors like Burger King and
to implement our vision of creating more personalized Wendy’s as well as to new designer burger outlets such as
Five Guys and Shake Shack. Changing tastes are also re-
sponsible for the loss of customers that are lining up at fast-
* Case prepared by Jamal Shamsie, Michigan State University, with the
assistance of Professor Alan B. Eisner, Pace University. Material has been
casual chains such as Chipotle Mexican Grill and Panera
drawn from published sources to be used for purposes of class discussion. Bread, which offer customized ordering and fresh ingredi-
Copyright © 2019 Jamal Shamsie and Alan B. Eisner. ents (see Exhibits 1 to 4).

EXHIBIT 1
Income Statement Year Ending
($ millions)
Dec. 31, 2018 Dec. 31, 2017 Dec. 31, 2016
Total Revenue $21,025 $22,820 $24,622
Operating Income 8,823 9,553 7,745
Net Income 5,924 5,192 4,687

Source: Annual Report of McDonald’s Corporation, 2018.

EXHIBIT 2
Balance Sheet Year Ending
($ millions)
Dec. 31, 2018 Dec. 31, 2017 Dec. 31, 2016
Current Assets $ 4,053 $ 5,327 $ 4,849
Total Assets 32,811 33,803 31,024
Current Liabilities 2,973 2,890 3,468
Total Liabilities 39,069 37,071 33,228
Shareholder Equity (6,258) (3,268) (2,204)

Sources: Annual Report. McDonald’s Corporation, 2018; Annual Report. McDonald’s Corporation, 2019.

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 EXHIBIT 3
2018 2017 2016 Breakdown of
U.S. $7,666 $8,006 $8,253 Revenues ($ millions)

International Lead Markets 7,600 7,340 7,223

High Growth Markets 3,989 5,533 6,161
Foundational Markets & Corporate 1,770 1,941 2,985

Source: Annual Report of McDonald’s Corporation, 2018.

EXHIBIT 4 U.S. Customer Satisfaction Index for Selected Chains

Burger Taco Chipotle Panera

Year McDonald’s King Wendy’s KFC Bell Mexican Grill Chick-fil-A Bread Subway
2018 69 76 77 77 74 79 87 81 80
2017 69 77 76 78 76 79 87 82 81
2016 69 76 76 78 75 78 87 81 80
2015 67 72 73 73 72 83 86 80 77
2014 71 76 78 74 72 – – – 78
2013 73 76 79 81 74 – – – 83

Source: American Customer Satisfaction Index (ACSI).

Over the years, McDonald’s response to this growing San Bernardino, California to become one of the largest
competition was to expand its menu with snacks, salads, chain of outlets spread around the globe. But it gradually
and new drinks. From 33 basic items that the chain offered began to run into various problems that began to slow down
in 1990, the menu had grown by 2014 to 121 items. The its sales growth (see Exhibit 5).
greatly expanded menu led to a significant increase in costs This decline could be attributed in large part to a drop in
and longer preparation times. This forced the firm to in- McDonald’s once-vaunted service and quality since its ex-
crease the prices of many of its items and to take more time pansion in the 1990s, when headquarters stopped grading
to serve customers, moving it away from the attributes that franchises for cleanliness, speed, and service. By the end of
it had built its reputation upon. “McDonald’s stands for the decade, the chain ran into more problems because of the
value, consistency, and convenience,” said Darren Tristano, tighter labor market. McDonald’s began to cut back on
a restaurant industry consultant.4 training as it struggled hard to find new recruits, leading to a
The fast food chain has been through a similar crisis be- dramatic falloff in the skills of its employees. According to a
fore. Back in 2002 and 2003, McDonald’s had experienced 2002 survey by market researcher Global Growth Group,
a decline in performance because of quality problems as McDonald’s came in third in average service time behind
result of rapid expansion. At that time, the firm had brought Wendy’s and sandwich shop Chick-fil-A Inc.
James R. Cantalupo back out of retirement to turn things By the beginning of 2003, consumer surveys were indi-
around. He formulated a “Plan to Win,” which has been the cating that McDonald’s was headed for serious trouble.
basis of McDonald’s strategy over the last decade. The core Measures for the service and quality of the chain were con-
of the plan was to increase sales at existing locations by tinuing to fall, dropping far behind those of its rivals. In
improving the menu, refurbishing the outlets, and extending ­order to deal with its deteriorating performance, the firm
hours. This time, however, such incremental steps might decided to bring back retired vice-chairman James R.
not be enough. ­Cantalupo, 59, who had overseen McDonald’s successful
international expansion in the 1980s and 1990s. Cantalupo,
Pulling out of a Downward Spiral who had retired only a year earlier, was perceived to be the
Since it was founded more than 50 years ago, McDonald’s only candidate with the necessary qualifications, despite
has been defining the fast food business. It provided mil- shareholder sentiment for an outsider. The board had felt
lions of Americans their first jobs even as it changed their that it needed someone who knew the company well and
eating habits. It rose from a single outlet in a nondescript could move quickly to turn things around.

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 EXHIBIT 5 McDonald’s Milestones
1948 Brothers Richard and Maurice McDonald open the first restaurant in San Bernadino, California, that sells hamburgers, fries, and
milkshakes.
1955 Ray A. Kroc, 52, opens his first McDonald’s in Des Plaines, Illinois. Kroc, a distributor of milkshake mixers, figures he can sell a
bundle of them if he franchises the McDonald’s business and install his mixers in the new stores.
1961 Six years later, Kroc buys out the McDonald brothers for $2.7 million.
1963 Ronald McDonald makes his debut as corporate spokesclown using future NBC-TV weatherman Willard Scott. During the year,
the company also sells its 1 billionth burger.
1965 McDonald’s stock goes public at $22.50 a share. It will split 12 times in the next 35 years.
1967 The first McDonald’s restaurant outside the U.S. opens in Richmond, British Columbia. Today there are 31,108 McDonald’s in
118 countries.
1968 The Big Mac, the first extension of McDonald’s basic burger, makes its debut and is an immediate hit.
1972 McDonald’s switches to the frozen variety for its successful French fries.
1974 Fred L. Turner succeeds Kroc as CEO. In the midst of a recession, the minimum wage rises to $2 per hour, a big cost increase for
McDonald’s, which is built around a model of young, low-wage workers.
1975 The first drive-through window is opened in Sierra Vista, Arizona.
1979 McDonald’s responds to the needs of working women by introducing Happy Meals. A burger, some fries, a soda, and a toy give
working moms a break.
1987 Michael R. Quinlan becomes chief executive.
1991 Responding to the public’s desire for healthier foods, McDonald’s introduces the low-fat McLean Deluxe burger. It flops and is
withdrawn from the market. Over the next few years, the chain will stumble several times trying to spruce up its menu.
1992 The company sells its 90 billionth burger, and stops counting.
1996 In order to attract more adult customers, the company launches its Arch Deluxe, a ”grown-up” burger with an idiosyncratic taste.
Like the low-fat burger, it also falls flat.
1997 McDonald’s launches Campaign 55, which cuts the cost of a Big Mac to $0.55. It is a response to discounting by Burger King and
Taco Bell. The move, which prefigures similar price wars in 2002, is widely considered a failure.
1998 Jack M. Greenberg becomes McDonald’s fourth chief executive. A 16-year company veteran, he vows to spruce up the
restaurants and their menu.
1999 For the first time, sales from international operations outstrip domestic revenues. In search of other concepts, the company
acquires Aroma Cafe, Chipotle, Donatos, and, later, Boston Market.
2000 McDonald’s sales in the U.S. peak at an average of $1.6 million annually per restaurant. It is, however, still more than at any
other fastfood chain.
2001 Subway surpasses McDonald’s as the fastfood chain with the most U.S. outlets. At the end of the year it had 13,247 stores,
148 more than McDonald’s.
2002 McDonald’s posts its first-ever quarterly loss, of $343.8 million. The stock drops to around $13.50, down 40% from five years ago.
2003 James R. Cantalupo returns to McDonald’s in January as CEO. He immediately pulls back from the company’s 10–15% forecast
for per-share earnings growth.
2004 Charles H. Bell takes over the firm after the sudden death of Cantalupo. He states he will continue with the strategies that have
been developed by his predecessor.
2005 Jim Skinner takes over as CEO after Bell announces retirement for health reasons.
2006 McDonald’s launches specialty beverages, including coffee-based drinks.
2008 McDonald’s plans to add McCafés to each of its outlets.
2012 Don Thompson succeeds Skinner as CEO of the chain.
2015 Thompson resigns because of declining performance and is replaced by Steve Easterbrook, the firm’s chief branding officer.
2016 McDonald’s opens restaurant in the 120th country; the first McDonald’s restaurant opens in Astana, Kazakhstan, on March 8, 2016.
2017 Global McDelivery Day is celebrated on July 26 to support the global launch of McDelivery with UberEATS.
2019 Steve Easterbrook is replaced due to poor judgement in a personal relationship with an employee and Chris Kempczinski,
president of the USA business unit is named CEO.

Source: The McDonald’s Story: Timeline; McDonald’s Leadership. McDonald’s Corporation.

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 Cantalupo realized that McDonald’s often tended to new salad offerings. McDonald’s has carried out extensive
miss the mark on delivering the critical aspects of consis- experiments and tests with these, deciding to use higher qual-
tent, fast, and friendly service and an all-around enjoyable ity ingredients, from a variety of lettuces and tasty cherry to-
experience for the whole family. He understood that its matoes to sharper cheeses and better cuts of meat. It offered
franchisees and employees alike needed to be inspired as a choice of Newman’s Own dressings, a well-known higher-
well as retrained on their role in putting the smile back into end brand. “Salads have changed the way people think of our
McDonald’s experience. When Cantalupo and his team brand,” said Wade Thoma, vice president for menu develop-
laid out their turnaround plan in 2003, they stressed upon ment in the U.S. “It tells people that we are very serious
getting the basics of service and quality right, in part by re- about offering things people feel comfortable eating.”6
instituting a tough “up or out” grading system that would McDonald’s has also been trying to include more fruits
kick out underperforming franchisees. “We have to rebuild and vegetables in its well-known and popular Happy Meals.
the foundation. It’s fruitless to add growth if the foundation It announced in 2011 that it would reduce the amount of
is weak,” said Cantalupo.5 French fries and phase out the caramel dipping sauce that
In his effort to focus on its core business, Cantalupo sold accompanied the apple slices in these meals. The addition
off the non-burger chains that the firm had recently ac- of fruits and vegetables has raised the firm’s operating
quired. He also cut back on the opening of new outlets, fo- costs, because these are more expensive to ship and store
cusing instead on generating more sales from its existing because of their more perishable nature. “We are doing
outlets. Cantalupo pushed McDonald’s to try to draw more what we can,” said Danya Proud, a spokesperson for the
customers through the introduction of new products. The firm. “We have to evolve with the times.”7
chain had a positive response to its increased emphasis on The rollout of new beverages, highlighted by new coffee-
healthier foods, led by a revamped line of fancier salads. The based drinks, represented the chain’s biggest menu expan-
revamped menu was promoted through a new world-wide ad sion in almost three decades. Under a plan to add a McCafé
slogan “I’m loving it,” which was delivered by pop idol ­Justin section to all of its nearly 14,000 U.S. outlets, McDonald’s
Timberlake through a set of MTV style commercials. has been offering lattes, cappuccinos, ice-blended frappes,
and fruit-based smoothies to its customers. “In many cases,
they’re now coming for the beverage, whereas before they
Striving for a Healthier Image were coming for the meal,” said Lee Renz, an executive
When Jim Skinner took over from Cantalupo in 2004, he who was responsible for the rollout.8
continued to push for McDonald’s to change its image.
Skinner felt that one of his top priorities was to deal with
the growing concerns about the unhealthy image of Refurbishing the Outlets
­McDonald’s, given the rise of obesity in the United States. As part of its turnaround strategy, McDonald’s also been
These concerns were highlighted in the popular documen- selling off the outlets that it owned. More than 80 percent
tary, Super Size Me, made by Morgan Spurlock. Spurlock of its outlets are now in the hands of franchisees and other
vividly displayed the health risks that were posed by a affiliates. Skinner began working with the franchisees to ad-
steady diet of food from the fast food chain. With a rise in dress the look and feel of many of the chain’s aging stores.
awareness of the high fat content of most of the products Without any changes to their décor, the firm was likely to
offered by McDonald’s, the firm was also beginning to face be left behind by other savvier fast food and drink retailers.
lawsuits from some of its loyal customers. The firm is in the midst of pushing harder to refurbish—or
In response to the growing health concerns, one of the re-image—all of its outlets around the world. “People eat
first steps taken by McDonald’s was to phase out supersiz- with their eyes first,” said Thompson. “If you have a restau-
ing by the end of 2004. The supersizing option allowed cus- rant that is appealing, contemporary, and relevant both
tomers to get a larger order of French fries and a bigger soft from the street and interior, the food tastes better.”9
drink by paying a little extra. McDonald’s also announced The re-imaging concept was first tried in France in 1996
that it intended to start providing nutrition information on by Dennis Hennequin, an executive in charge of the chain’s
the packaging of its products. The information was easy to European operations, who felt that the effort was essential
read and would tell customers about the calories, fat, pro- to revive the firm’s sagging sales. “We were hip 15 years ago,
tein, carbohydrates, and sodium that are in each product. but I think we lost that,” he said.10 McDonald’s has been ap-
Finally, McDonald’s also began to remove the artery-­ plying the re-imaging concept to its outlets around the world,
clogging trans fatty acids from the oil that it used to make with a budget of more than half of its total annual capital
its French fries and subsequently announced plans to re- expenditures. In the United States, the changes cost as much
duce the sodium content in all of its products by 15 percent. as $650,000 per restaurant, a cost that is shared with the
But Skinner was also trying to push out more offerings franchisees when the outlet is not company owned.
that are likely to be perceived by customers to be healthier. One of the prototype interiors that was tested out by
McDonald’s has continued to build upon its chicken McDonald’s has curved counters with surfaces painted
offerings using white meat with products such as Chicken in bright colors. In one corner, a touch-activated screen
Selects. It has also placed a great deal of emphasis upon its ­allows customers to punch in orders without queuing.

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 The interiors can feature armchairs and sofas, modern sandwich types. McDonald’s is hoping that such a push to-
lighting, large television screens, and even wireless Internet ward more customization would bring more customers into
access. The firm is also trying to develop new features for their outlets, bringing the U.S. counter/drive-through
its drive-through customers, which account for 65 percent customer ratio closer to 50/50, up from the current 30/70.
of all transactions in the United States. They include music McDonald’s has also been working to simplify its menu,
aimed at queuing vehicles and a wall of windows on the reducing the number of “value meal” promotions, groups of
drive-through side of the restaurant allowing customers to items that together cost less than ordering items individually.
see meals being prepared from their cars. It has tweaked its “dollar menu” replacing it with “dollar value
The chain has even been developing McCafés inside its and more” raising the prices for many items as part of a bid to
outlets next to the usual fast food counter. The McCafé con- get each customer to spend more. But McDonald’s had intro-
cept originated in Australia in 1993 and has been rolled out duced these bargain menus because its prices had risen over
in many restaurants around the world. McDonald’s has the years, driving away customers to cheaper outlets. Conse-
been introducing the concept to the United States as part of quently, as much as 15 percent of the chain’s sales had been
the refurbishment of its outlets. In fact, part of the refur- coming from its “dollar menu” where everything cost a dollar.
bishment has focused on the installation of a specialty bev- Over the past year, McDonald’s saw a slight jump in
erage platform across all U.S. outlets. The cost of installing U.S. sales after launching an all-day breakfast at most of its
this equipment is running at about $100,000 per outlet, locations. The franchises had to be convinced to invest
with McDonald’s subsidizing part of this expense. about $5,000 to add food preparation space in order to of-
The firm has planned for all McCafés to offer espresso- fer breakfast along with the regular lunch or dinner items.
based coffee, gourmet coffee blends, fresh baked muffins, However, sales from the all-day breakfast have begun to flat-
and high-end desserts. Customers will be able to consume ten out, with a gradual decline in sales from customers who
these while they relax in soft leather chairs listening to jazz, were coming in throughout the day to order breakfast.
big band, or blues music. Commenting on this significant
expansion of offerings, Marty Brochstein, executive editor
of The Licensing Letter said: “McDonald’s wants to be seen
More Gold in These Arches?
as a lifestyle brand, not just a place to go to have a burger.”11 In spite of all the changes that have been made by Easter-
brook, sales growth for McDonald’s has continued to be
sluggish. The firm does, however, believe that sales will re-
Rethinking the Business Model bound in the United States as well as in foreign markets. In
In response to the decline in performance, McDonald’s is order to provide a boost to its operations in China and
testing a number of new concepts, including a kiosk in Hong Kong, McDonald’s announced a deal with Citic, a
some locations that allows customers to skip the counter state-owned conglomerate and the Carlyle Group, a private
and head to tablet-like kiosks where they can customize ev- equity firm. “China and Hong Kong represent an enormous
erything about their burger, from the type of bun to the va- growth opportunity for McDonald’s,” Easterbrook said in a
riety of cheese to the many, glossy toppings and sauces that recent news release. “The new partnership will combine
can go on it. The firm has plans to gradually expand the one of the world’s most powerful brands and our unparal-
concept to more locations, but franchises are concerned leled quality standards with partners who have an un-
about the costs, which can run up to $125,000 per restau- matched understanding of the local markets.”13
rant to make the required changes. “Customization is not McDonald’s has also been trying to grow by reaching
McDonald’s historic strength,” said Mark Kalinowski, an out to different customer segments with different products
analyst at Janney Montgomery Scott.12 at different times of the day. It has tried to target young
Dubbed the “Create Your Taste” platform, McDonald’s adults for breakfast with its gourmet coffee, egg sandwiches,
was hoping to attract more younger customers who may be and fat-free muffins. It attracts working adults for lunch,
moving away from frozen processed food that is loaded with particularly those who are squeezed for time, with its burg-
preservatives. But it realized that there were considerable ers and fries. And its introduction of wraps has drawn in
risks involved with making such a change. The burgers teenagers late in the evening after they have been partying.
would be priced higher at $5.49, could take seven minutes to Restaurant analyst Bryan Elliott commented: “They’ve
prepare, and could only be ordered from inside the store and tried to be all things to all people who walk in their door.”14
eventually brought to your table. Franchises complained that Above all, McDonald’s is concerned about the findings
this could not be offered to drive-through customers that of a recent survey that showed only 20 percent of millenni-
make up about 70 percent of the chain’s business. als had even tried a Big Mac. It is also aware that despite
Furthermore, such a change ran counter to the image for its efforts to diversify its menu, 30 percent of sales come
inexpensive and fast food that McDonald’s has worked hard from just five items: Big Macs, hamburgers, cheeseburgers,
to build over the years. Easterbrook has subsequently shifted McNuggets, and fries. It has managed to increase traffic
to a more efficient and less expensive format called “Signa- during the late-night hours, but this may be hurt by their
ture Crafted Recipes” that would allow both in-store and recent announcement that they would offer a more limited
drive-through customers to choose a bun and one of four sample of their full menu between midnight and 5 am.

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 Above all, the expansion of the menu beyond the staple 3. Strom, S. 2016. In a shift, McMuffins with real butter. New York Times,
of burgers and fries does raise some fundamental questions. August 3, p. B2.
4. The Economist. 2015. When the chips are down. January 10, p. 53.
Most significantly, it is not clear just how far McDonald’s
5. Pallavi, G. and M. Arndt. 2003. Hamburger hell. BusinessWeek,
can stretch its brand while keeping all of its outlets under March 3, p. 105.
the traditional symbol of its golden arches. In fact, industry 6. Warner, M. 2005. You want any fruit with that Big Mac? New York
experts believe that the long-term success of the firm may Times, February 20, p. 8.
well depend on its ability to compete with rival burger 7. Strom, S. 2011. McDonald’s trims its Happy Meal. New York Times,
chains. “The burger category has great strength,” added July 26, p. B7.
­David C. Novak, chairman and CEO of Yum! Brands, par- 8. Adamy, J. 2008. McDonald’s coffee strategy is tough sell. Wall Street
Journal, October 27, p. B3.
ent of KFC and Taco Bell. “That’s America’s food. People 9. Paynter, B. 2010. Super style me. Fast Company, October, p. 107.
love hamburgers.”15 10. Grant, J. 2006. McDonald’s to revamp UK outlets. Financial Times,
February 2, p. 14
ENDNOTES 11. Horovitz, B. 2003. McDonald’s ventures beyond burgers to duds, toys.
1. PRNewswire, 2019, McDonald’s Corporation Announces Leadership USA Today, November 14, p. 6 B.
Transition, https://www.prnewswire.com/news-releases/mcdonalds- 12. Tabuchi, H. 2015. McDonald’s Chief Promises Turnaround in a
corporation-announces-leadership-transition-300950405.html, Restructuring. New York Times, May 4.
November 3.; Grothhaus, M. 2019, Who is Chris Kempczinski 13. Tsang, A. and W. Sui-Lee. 2017. McDonald’s China operations
Mcdonald’s new CEO?, Fastcompany, https://www.fastcompany. to be sold to locally led consortium. New York Times, January 9, p. B1.
com/90426246/who-is-chris-kempczinski-mcdonalds-new-ceo-5-things- 14. Kowitt, B. 2014. Fallen Arches: Can McDonald’s get its mojo back?
you-need-to-know, November 4. Fortune, December 1, p. 110.
2. Taylor, K. 2019. McDonald’s makes $300 million deal to sell things 15. Jargon, J. 2012. McDonald’s is feeling fried. Wall Street Journal,
like Amazon does. Business Insider, March 30. November 9, p. B2.

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