Move To Chicago Shows Difficulty Of Easterbrook's Second Act

| About: McDonald's Corporation (MCD)


McDonald's is moving from suburban Oak Park to West Town Chicago, buying out hundreds of managers.

CEO Steve Easterbrook wants to make the chain relevant to people who can eat anything.

Fresh patties, real butter, bigger franchisees and less debt.

McDonald's (NYSE:MCD) CEO Steve Easterbrook's first act was simple. All-day breakfast was both popular and profitable.

His second act is not going to be so simple. McDonald's, the product of the suburbs, must become relevant to growing cities where choices are abundant. Thus, the company's move into the City of Chicago from Oak Brook.

The reason for the move can be seen in McDonald's financial performance, which has been going nowhere fast even as the stock has gone up 40%. The 2015 revenue figure of $25.4 billion was down nearly 8% from the $27.44 billion achieved under predecessor Don Thompson. Operating margins dropped, and revenue was down year over year for the first quarter of 2016 as well. Easterbrook has actually been pleasing investors the old-fashioned way, cutting costs and dropping failed operations.

But cut-to-grow won't last much longer. McDonald's has to find a way to connect with younger consumers who are more urban, and less car-centric, than their parents were. Thus, the move to the former site of Oprah Winfrey's Harpo Studios.

The new offices are 20 miles, but a world away from suburban Oak Brook. Motorola (NYSE:MSI), Kraft Heinz (NASDAQ:KHC), ConAgra (NYSE:CAG) and Gogo (NASDAQ:GOGO) have also moved Intown. The new digs are surrounded by high-end restaurants. The former rundown ghetto is now called West Town.

The new location also represents the problem McDonald's must solve. How can it gain share where the choices are abundant, not limited as they are in suburbs and on Interstates? How can the company create a menu, and a message, that will appeal to people who can eat anything? How can McDonald's be seen, again, as making food and not Styrofoam boxes?

Even the possibility of minimum wage protesters on the doorstep may prove bracing when facing this problem. Easterbrook himself faced it soon after taking over the company's UK operations a decade ago by debating Fast Food Nation author Eric Schlosser on TV. Within four years, after tinkering with the menu, adding more locally-sourced ingredients and healthier choices, and renovating stores, Easterbrook turned that ship around.

There's another feature of the move. Moving from Oak Brook is part of a plan to cut $500 million in general expenses by the end of next year, with hundreds of top managers offered buyouts. Easterbrook is also refranchising 2,800 company-owned stores, many in car-load lots to deep-pocketed corporations rather than the dedicated mom-and-pop teams on which the company made its reputation.

The food is changing, too. Butter and fresh meat are in, margarine and frozen patties are out. Chemicals are coming out of the McNuggets and new versions of the Big Mac are on the drawing board.

The idea is to offer good food fast rather than fast food, alongside a faster dining experience for take-out customers and a more comfortable one for those who dine in.

While one former executive charged higher wages would force the company to turn to robots, Easterbrook told in his annual meeting his decision to set wages at company-owned stores at $1/hour above the local minimum is being rewarded with lower turnover and higher customer satisfaction.

All this is the easy part, the superficial changes that any executive can make. What Easterbrook will be judged on will be whether he can reduce the company's debt through restaurant sales, increase sales volumes while holding the line on prices and get the top line growing again.

My guess is he can, and after some aging stockholders dump their shares amidst the current market slowdown, the stock will be on my buy list.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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