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Weekly UpdatesThe recession has been the graveyard of many CEO reputations. So it may come as a welcome surprise that some leaders have not only survived but boosted their company's performance the old-fashioned way--they earned it--through sticking to steady if unglamorous organic growth. Last February, a committee of his peers met at the NYSE and chose Jim Skinner, 64, CEO of McDonald's, to be the 2009 Chief Executive of the Year (see sidebar, p. 53) for transforming an iconic brand by rebuilding its purpose, strengthening its internal talent and realigning that talent with a return to the company's fundamental principles. In doing this, Skinner and his senior team had to rethink much of what had been proven successful since the days when founder Ray Kroc and his ideas suffused the organization.
In November 2004, Skinner, who began his career with McDonald's in 1971 as a trainee in Carpentersville, IL, became CEO at a critical time. Former CEO Jim Cantalupo had died of a heart attack earlier that year. His successor, Charlie Bell, was diagnosed with colon cancer and stepped down shortly after due to failing health. As he relates in the following interview with CE editor-in-chief J.P. Donlon, Skinner felt his first order of business was to restore confidence and rethink direction. He had worked with Cantalupo and Bell to create a "Plan to Win" strategy, which called for jettisoning noncore businesses that proved a distraction for the company and concentrating on existing restaurants and franchisees. "We took our eyes off the fries," Skinner drolly observes. Rather than growing as it had for 48 years by building new restaurants, the company focused on operating existing restaurants better. In addition, the company rethought its menu offerings, introducing more fruits, vegetables and chicken items into its traditional mix and delivering more nutrition information to help guide customers accordingly. Stung by criticism that McDonald's and other fast-food groups contributed to growing obesity in America--the 2001 best seller Fast Food Nation and the 2004 documentary Super Size Me had tarnished die industry's image--the company, under Skinner's direction, also promoted physical activity programs for kids and adults and sponsored local youth sports teams.
As a result, McDonald's has been revitalized. The company was one of only two DJIA stocks that ended 2008 with a gain. (The other was Wal-Mart.) Last year it outperformed other restaurant competitors such as Burger King Holdings, Wendy's International and Yum Brands, which operates Pizza Hut, Taco Bell and KFC. Since Skinner took the CEO job, McDonald's total sales have increased from $50.1 billion in 2004 to $70.1 billion in 2008, up 41.1 percent. Net income increased by 81.3 percent, from $2.3 billion to $4.3 billion. Yet the total number of restaurants systemwide grew by a modest 4.8 percent, from 30,496 in 2004 to about 31,967 by year-end 2008. Average sales per restaurant jumped from $1.6 million to $2.2 million during this period, producing more cash flow for existing franchisees and more volume for suppliers. At a time when many companies are over-leveraged to engineer growth, the Oak Brook, IL, firm maintains a strong credit rating.
Jim Skinner is the antithesis of the imperial CEO. No Davos World Economic Forum appearances for him. "At McDonald's, we cook burgers--not books," Skinner told an industry group. Born in Davenport, IA, he left home to join the Navy at 16 and served as a radar operator on the carriers USS Oriskany and USS Midway. (He served two tours in the Gulf of Tonkin,) Both his bricklayer father and chief petty officer Ernest L. Wagner, with whom he served on the Oriskany, were strong influences on his life. "Jim helped us create a common understanding of what we could accomplish," says Gloria Santona, the company's general counsel. "He's pretty much a hands-off boss who doesn't look over your shoulder," says McDonald's CFO Pete Bensen, "but he has high expectations." Rick Floersch, who defected from Kraft five years ago to become McDonald's chief human resources officer, points to Skinner's advancement of leadership development programs arid his priority of "putting people in the right place" as contributing factors to the high scores in the company's employee commitment surveys. "Jim is extremely empowering," he adds. "You always know where you stand with Jim, personally and professionally," adds COO Ralph Alvarez, who is widely believed to be first in line to succeed Skinner. Others in food retailing have taken note of the McJuggernaut. "There's a lot to admire about McDonald's," says Tom Greco, CEO of the bakery cafe chain Bruegger's Bagels. "From site selection to operations, they are very disciplined, but not at all bureaucratic."
Realizing that McDonald's, like any iconic brand company, is not recession proof, Skinner and his team are big believers in the system, provided the system continues to adapt. This is why 34 percent of McDonald's restaurants in the U.S. are now open 24 hours a day. Since 2002, it has bought more chicken than beef worldwide. As part of a revitalization program, it's introducing a number of sleek new restaurants with wide-screen televisions and Wi-Fi connections. Alvarez cites other experiments, such as self-service kiosks where customers can order electronically. So far it's working. Going forward, however, Skinner and his team are very much aware that they may need to guard against an even bigger challenge--overconfidence.
What was behind McDonald's change in its strategy when you became CEO?
In 2002 we faced a terrible year--not the worst in our history but it was not good. Our stock price in the fourth quarter of '02 ended up at an all-time low. Our brand was being attacked on many fronts and we were doing a lot of things to chase growth that were not specific to the core. By "core" I mean the McDonald's branded restaurant customers. At the time, we had spent about $4.5 billion in the previous four years on new stores and we had zero incremental income growth. That was a formula for disaster over the long term and yet this is how our company grew for the previous 48 years. The goal was to open new restaurants and penetrate the world. We were in 118 countries and we were in every market where we were capable of having access to the world's wealth. The strategy to grow by penetrating new markets or expand in the existing markets proved to yield diminishing returns. At the same time we were pursuing growth in other noncore brands, such as Boston Market, Chipotle and Pret a Manger, a sandwich chain in London where we had about a third ownership.
We're out of all those businesses now.
Let me put this in context: By focusing on the core, 1 percent same store sales gain worldwide meant $500 million improvement, with $100 million going straight to the bottom line, as compared to new store openings, which weren't coming out at the necessary rate. By the time they were accretive to the bottom line, it was clear we were better off focusing on existing restaurants. Today, the number is $600 million top line and $145 million on the bottom line. It was evident that we had to shift strategies to be better versus being bigger. We didn't coin that phrase in 2003, that came later, but we knew we had to get back to the core. McDonald's business model is a three-legged stool: franchisees, suppliers and company people. If any one leg--particularly the franchise leg--is not successful, as [founder] Ray Kroc said from the beginning, then we're not successful.
The way 1 look at the business is that if the franchisees make money all other things will be fine. Unfortunately, at the time our franchisees were disgruntled. They were accepting new restaurants even though it added an incremental $25,000 to $30,000 cash flow drain and demanded a lot more work. This made it important for us to retrench and revisit the business model that allowed us to be successful for the first 48 years. So we created two plans. One, to revitalize the financial side of the business we needed to cut new store growth to save capital. We cut new store openings from over 2,000 to about 200, more or less. Then we had to reduce the cost of doing business in the organization--the G&A. This required an attitude shift in the organization, a focus on being better at delivering to our customers in our restaurants and focusing on our existing restaurants, as compared to building new ones. This wasn't easy to do because you couldn't get a meeting around here without people talking about trying to get 4 or 5 percent top line growth from new stores. Forget about whether they were accretive or not.
Second, we developed an operating plan to deliver a better experience for our customers, This was our "Plan to Win," which was in itself not profound, but the alignment of the plan with our internal communication system was critical. We had to become our customers' favorite place to eat and drink. To do this we developed the tenets--the five P's [principles]--that animate our people. These relate to how to behave and what we have to do to deliver at the front counter and drive-through to improve the customer experience. Later, when we created the "I'm loving it" campaign, we used it to build a framework to take the idea worldwide.
And how has the strategy performed around the world?
The beauty of it is that it is scalable wherever we place our bets. We'll be some-where around 2 percent growth overall--at one time we enjoyed 10 percent growth in emerging markets. Some countries are having tough economic times just like die U.S. but our business model continues to allow us to operate from a position of strength. We're in these markets for the long haul. In China, for example, we'll be opening 175 new restaurants and about 1,100 to 1,200 around the world. This will probably net 700 or so new locations after you factor for closings and relocations. So we should be close to 32,000 in total, systemwide.
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