McDonald’s: A Long Way to Go BRETT BURNS, ELLIE GARDNER, ASHLING GRIFFIN, ROSS HOGAN JANUARY, 4 2016 Takeaways

Recommendaon

Implementaon Plan

Risks & Migaon Agenda

Company Analysis

Industry Analysis

Alternaves

Recommendaon

Implementaon Plan

Timeline

Budget

Risks & Migaon Problem Statement

Due to a bifurcaon in the tradional customer base and each group’s changing preferences, McDonald’s needs to act quickly to not lose themselves and not lose both bases. Reality Check

Our customers are changing in a way we can’t completely match

However, we can harness what we do well and ensure we don’t lose what has brought success for so many decades SWOT

Strengths Weaknesses • Synonymous with • Synonymous with Fast Food Fast Food • Consistency • Size of company • Convenience

Opportunies Threats • Changing customer • Rise of fast casual palates restaurants • High Growth • Changing Markets demographics The Changing Customer

Upper • Health Middle Conscious Middle Class Class Lower Middle • Price and Value Class

Millennials: Image-Conscious

Fast-Casual Customizable Quality Company Image

Poor Unhealthy McDonalds Quality Ingredients

Previous Aempts: Increased Wait Time Expanded Menu Offerings: Customers Dubious • Healthy about Quality • Premium Why Easterbrook’s Plan Wasn’t Enough

• USA Franchising • Internaonal Structure Lead • Growth • Foundaonal Create your Own Taste

Target Company Rather than Customers Further Complicate Menu

We Sll Must Address our Image Problem and Target Customers Effecvely Internaonal Situaon Sales Declining Abroad by 3.3%

China Quality Problems India Pulled Best-selling Products Japan Growth in Sales, Legal bale Russia Government Backlash L. Am Economic Crisis decreases sales Europe Changing Tastes Erode Sucess Compeve Posioning • McDonald’s • Habit Burger • Wendys • In and Out • Taco Bell • Shake Shack

Cost Taste

Speed Quality

• McDonald’s • Panera • Chipotle • Chick Fil A Perceptual Map Quality

Habit & Panera Five & Chick Guys Chipotle Fil A

Affordability

McD

Yum Brands Industry Life Cycle

Mature Stage: • Stable/Declining Margins • Established Players • Focus on Costs and Efficiency Stakeholders

Customers

Employees McDonalds Franchisees

Shareholders Financial Performance

Quarterly Earnings + 7.2% 2500 - 2.7% - 5.9% + 9.0% 2000 - 9.3% 1,849 1500 1,202 1000

500

0 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015

Operang Income Net Income % Change in Revenue Financial Performance

Total Revenues by Region (2014) Revenues (2014) 5% 32% 23% 34%

40% 66%

US Company-Operated Europe APMEA Franchised Revenues Other Countries & Corporate Financial Performance

Percent Change in Guest Percent Change in Revenues Count from Prior Year from Prior Year 0.00% 0.00% -0.50% -1.00% -1.00% -1.50% -2.00% -2.00% US -3.00% US -2.50% Europe Europe -3.00% -4.00% APMEA APMEA -3.50% -5.00% -4.00% Other Other -6.00% -4.50% -5.00% -7.00% Profit Margin

Net Profit Margin (%) 20 19.5 19 18.5 18 17.5 17 16.5 16 2012 2013 2014 Net Profit Margin (%) Cost Control

Operang Costs as % of Sales 71.5 71 70.5 70 69.5 69 68.5 68 67.5 2012 2013 2014 Operang Costs as % of Sales Analysis Recap

Declining Increased Customer Reduced Profitability Costs visits

Changing Customer Previous Fast Casual Preference Failed Entry s Acons Crical Success Factors Same Stores Sales Growth

Profits/Shareholder Returns

Brand Image

Customer Service

Franchisee Sasfacon Alternaves

Change Value Integrated Return to Roots Proposion to Strategic Plan be Healthier Analysis of Alternaves Return to Roots Healthier Value Integrated Proposion Strategic Plan Sales Growth

Profits

Brand Image

Customer Service

Franchisee Sasfacon

Level of Risk Implementaon Plan

Streamline Menu

Improve Customer Service

Iniate a Brand & Markeng Campaign

Strengthen Supply Chain

Focus on Growth Markets

Effecve Change Management Streamline Menu

Efficiency is crucial for QSRs

Too many opons & too much customizaon hurts this

Have taken 2 steps forward and 1 step back Streamline Menu

Rule of Thumb: Limit menu size

Allow for customizaon, but don’t focus on it • Not a core competency Use ingredients that can be mulpurpose Menu

Accommodang Menu will have everyone is not staples & some feasible and healthy offerings sustainable Customer Sasfacon

Poorly Long Wait Times Mistakes Prepared Food

Employee Streamline Manager Training Engagement Preparaon and Selecon • Central to Change • Improve Customer Techniques • Improve Adaptability Service • Improve Efficiency Employee Engagement Training • Standardize from HQ Opportunies for Promoon • Employee Value Proposion Onboarding Overhaul • Increase retenon • Improve readiness to work in high turnover workforce Manager Training

Communicaon Training • Enable effecve management of employees • Improve ability to connect with customers Business Skills • Improve Business Acumen • Increased Engagement Streamline Preparaon Techniques

Rearrange Kitchens • Improve speed and morale Evaluate Equipment

Make Kiosks Oponal • Dependent on manager preference Standardize Ingredients Brand & Markeng Campaign Emphasize value proposion • Consistent quality • Affordability • Convenience and availability • Speed and service “Back to basics” • Return to what McDonald’s does best Brand & Markeng Campaign

• TV / Radio • Social Media Channels • Internet • Print

• Internal markeng team Means • Outsourced consulng experse

• Market research and analysis • Data aggregaon Targets • Who is our customer? What do they need? Brand & Markeng Campaign

Middle Class Families Millennials

• Emphasize • Family • Influencers price point themed TV • Sponsors • Convenience commercials • Use of technology Focus on Growth Markets

Brand Image is Growth Potenal Changeable • Address previous • Capture issues Customers Earlier • Implement in the Industry changes to ensure Lifecycle quality • Establish Image Aggressively Focus on Growth Markets

Product • Idenfy Customer Base Offerings • Ensure Appropriate Offerings

• Disposable Income Locaon • Large Untapped Populaons • Rising Middle Class

Careful Selecon • Ethical Record of JV Partners • Engage Legal Advice Supply Chain

Fully Integrated • No surprises, no waste Supply Chain • Quality management of inputs

Vet Suppliers • Source responsibly for Quality • High quality & anbioc free meats

Allow for • Ties in with Brand & Markeng transparency Supply Chain

Can’t allow issues with key ingredients • Develop conngency plans for shortages Reducon of ingredients • Less strain on SC costs Change Management

Sure fire way to fail is to mismanage change

Get everyone on board • Communicate Why’s & How’s

Empower Managers & Employees • Show Execuves are sensive to concerns about change Timeline Year Year Year Year Year 0 1 2 3 4+ Brand Image/Markeng Campaign Customer Service Iniaves Expansion in High Growth Markets Change Management

Assess Success of Changes Supply Chain Revamp

Expansion of Foundaonal Markets Budget

Dollars in thousands ($000) 0 – 2 Years 2 – 4 Years 5 + Years Markeng / Brand 20,000 10,000 10,000 Campaign Focus Market 15,000 5,000 - Research Supply Chain 10,000 8,000 - Restructuring Staff Training / HR 1,000 500 500 Pro Forma Income Statement

$ in millions, except per share data 2014 2015 2016 2017 Revenues 27,441 28,813 30,254 31,766 Operating Costs (19,492) (19,593) (20,573) (21,601) Operating Income 7,949 48,406 50,826 53,368

Net Income 4,758 5,763 6,353 6,671

Net Margin 0.17 0.20 0.21 0.21 Earnings per share - Basic 4.85 5.87 6.48 6.80 Key Performance Indicators

Customer • Decreases in wait mes Sasfacon • Posive growth in guest count (+3%) Same-Store Sales • 5% increase in revenues Growth

Profitability • 20% net margins

• Favorable recepon to brand and markeng Brand Identy campaign

Franchisee • Posive growth in store traffic Sasfacon Risks & Migaons

Risks Migaons

• Lack of response • Undertake to menu changes adequate research or brand campaign in customer tastes • Supplier instability and preferences • Compeve • Reserve suppliers pricing pressure • Market awareness Thank You! Q&A Appendix Takeaways Implementaon Plan Problem Statement Focus on Growth Markets Reality Check Streamline Menu SWOT Customer Sasfacon The Changing Customer Employee Engagement Company Image Supply Chain Internaonal Situaon Brand & Markeng Campaign Why Easterbrook’s Plan Wasn’t Enough Change Management Compeve Posioning Timeline Perceptual Map Budget Financial Performance Risks & Migaons Crical Success Factors Conngency Plan Alternaves African Expansion Pressing Concerns

Q1 2015 vs. Q1 2014 • Revenue declined 11% • Q1 2015 Profit declined 32% • Same Store Sales decline 2% Conngency Plan

Ancillary Brand

• Acquire a premium burger restaurant • Acquire a fast casual restaurant outside of burger market Implement delivery services where necessary and where feasible

If minimum wage increase in US or abroad, ordering kiosks will become more important. African Expansion

Currently, not the highest growth potenal

Fastest growing populaon

• By 2050 1/5 of world will be from Africa • Over 2/3 of this populaon will be in Urban areas • Expanding middle class

Heavy investment in infrastructure African Expansion Consideraons

Sourcing Availability of food in Africa will become always a an issue concern

Migaon Develop relaonships with farmers Plan

Invest if outlook will be insufficient for needs