Shakeup under the Golden Arches
Over the past year, McDonald's Corp. (MCD ) has struggled with food scares in Europe that have turned consumers away from burgers, a strong dollar that keeps depressing foreign earnings, and stale toy promotions that no longer excite Happy Meal sales at home. Now, the world's biggest restaurant chain has another problem on its tray: Turmoil in the executive suite.
A week and a half after reporting its second consecutive quarter of falling profits, McDonald's announced on Apr. 30 that its No. 2 executive -- Vice-Chairman and President James R. Cantalupo, 57 -- plans to retire within the year. Cantalupo is the second senior-management veteran to disclose his departure in two months. On Mar. 7, Chief Financial Officer Michael L. Conley, 53, said he'll retire by yearend, after 27 years with Mickey D. "The company feels like it's at a little bit of a crossroads," comments Allan F. Hickok, an analyst with U.S. Bancorp Piper Jaffrey. "They've got to figure out what to do next, because what they're doing today clearly isn't working well."
And the game of musical chairs resumes May 1. Sources inside the Oak Brook (Ill.) company say Alan D. Feldman, 49, the company's third-highest-ranking officer, is leaving his post as president of McDonald's 12,800-unit U.S. operation. A spokeswoman for McDonald's declined to comment on Feldman's status, saying only that the fast-food company planned to issue a press release on May 1 with more management news.
MADE FOR WHO?
Feldman has had his share of critics lately. A relative newcomer who joined McDonald's in 1994 after a stretch with Pizza Hut Inc., he has been responsible for the company's new cooking system, dubbed Made For You. The new equipment was designed to permit kitchen crews to make sandwiches according to customers' specifications as the orders come in, which would take away rival Burger King's "Have It Your Way" advantage. With the new system in place, outlets also could customize their own menus, adding new sandwiches to meet local tastes.
But the gear cost McDonald's more than $180 million to install across the U.S. and Canada. Meanwhile, consumer surveys suggest that Mickey D's menus have become too complicated and service times are no faster than before. And McDonald's burgers still rank toward the bottom in customer taste tests. "You think you can tell if your Quarter Pounder was assembled in 27 seconds or 32 seconds?" questions analyst Hickok. "Made For You is a complete yawn."
As if that's not enough, another member of the McDonald's inner circle, General Counsel Jeffrey B. Kindler, is effectively already a part-timer. Kindler, an executive vice-president who ranks as the fourth-best-paid officer at the company, is now dividing his time between McDonald's, where he retains his legal obligations, and the company's new Boston Market subsidiary in Golden, Colo., where he's chief executive officer.
The only man apparently staying put is the boss, Jack M. Greenberg, 58, who took over as chief executive in 1998 and chairman in 1999, after serving as the company's vice-chairman and as chairman of McDonald's USA.
McDonald's characterized Cantalupo's leaving as the natural last chapter in a long career. "In terms of his decision, Jim has been thinking about this retirement time-frame for some time," Greenberg said in a statement. The company also noted that Cantalupo would remain on its board and that he has pledged to work with his successor to ease the transition.
Joseph T. Buckley of Bear, Stearns & Co. also cautions against reading too much into Cantalupo's exit. Buckley observes that Cantalupo, who started at McDonald's in 1974 and was promoted to vice-chairman in 1999, had been given financial incentives to stay on for three years after the company chose Greenberg over him for the top job, and that he was now free to go without losing his money. "The timing isn't the greatest," Buckley acknowledges, coming as McDonald's still hunts for a new CFO. But, he adds: "I think it's coincidence."
SLICING INTO PROFITS.
Other analysts, however, pointed out that Cantalupo has been directly responsible for McDonald's foreign operations and that these businesses have been disappointing shareholders steadily for the past few years. Admittedly, much of the latest sales and earnings shortfall has been out of Cantalupo's control. Anxiety over mad-cow and foot-and-mouth disease have ruined sales in McDonald's biggest European markets: Germany, Britain, and France. First-quarter sales in Germany, for instance, were down 10% from a year earlier.
The robust dollar also has been slicing into McDonald's results. The company estimates that it would have netted $22 million more in the first quarter alone if the dollar hadn't appreciated against the euro and other foreign currencies as it did. And the restaurant company warned on Apr. 19 that it will miss out on an additional $30 million in profits this year if the dollar continues to trade at such high values against other currencies.
But Cantalupo must share the blame, according to other analysts and investors. During his tenure -- he was named president of McDonald's international segment in 1987 -- the company has been on an expansion kick, adding 1,200 to 1,600 outlets abroad every year. The pace, which works out to opening a new site every 6 to 8 hours, day in, day out, today puts McDonald's far ahead of any competitor, with 15,000 restaurants in 119 foreign lands. It had 2,350, when Cantalupo took charge of the operations. And Cantalupo has signaled no let up. Indeed, he recently told analysts McDonald's would continue to open at least 1,500 outlets annually over the next few years.
Many of these new stores are not paying their way, however. Damon Brundage of Raymond James figures that McDonald's pretax return of its foreign assets has slid from 14.8% in 1996 to 12.8% in 2000. The slippage isn't due only to new markets, where even Cantalupo has conceded that McDonald's lacks economies of scale. In Europe, Brundage calculates that the company earned a 14.7% return on incremental capital it invested in 1996. Last year, it lost 9% on its incremental investments in Europe.
Many big investors have been making the same complaint, as they've watched McDonald's share price slide since late 1999. "Our feeling is that new-unit growth overseas is too aggressive," gripes Timothy M Ghriskey, senior portfolio manager at Dreyfus Corp., which owns 2.8 million McDonald's shares. "They're cannibalizing the business."
Brundage now suspects that McDonald's is reevaluating its overseas expansion plans -- just as Greenberg braked expansion in the U.S. soon after taking control to soothe grumbling franchisees. And that change of course, Brundage adds, may be why Cantalupo chose to announce his leaving a year in advance.
Even with the addition of roughly 200 outlets a year, domestic sales have been increasing by just 3% to 4% a year. One reason: McDonald's has relied on promotions, such as its annual Beanie Baby giveaway, to boost sales, and after years of the same toys and games, these gimmicks are falling flat with customers.
In the company's latest conference call with analysts on Apr. 19, CFO Conley disclosed that McDonald's would alter its marketing strategy to accent its food instead. With the comings and goings at the top, it apparent that's not the only change in the works under the Golden Arches.
By Michael Arndt in Chicago
Edited by Beth Belton