Mcdonald's Corporation Monday, November 4, 2019, 5:48 am. Chris Kempczinski walks into the new corporate headquarters for Mcdonald's located in the trendy west-loop section of downtown Chicago. This is his first day as the newly appointed CEO of Mcdonald's. Less than 24 hours ago, Mcdonald's board of directors announced the termi- nation of his predecessor Steve Easterbrook with immediate effect after disclosure of a relationship with a staff member in violation of company policy. Mcdonald's nine-story building is modern and symbolizes the company's future, not its suburban past. With open workspaces, modular furniture, and floor-to-ceiling glass, it looks more like a We Work location than a stodgy corporate headquarters. Yet, there is also an operational efficiency to the place; each level has a specific purpose, ranging from a live restaurant on the ground floor with menu items from Australia, Hong Kong, and France, to the test kitchens used for new product development, to the famous training facility for managers called Hamburger University. Just four years ago, Chris Kempczinski had joined Mcdonald's to be part of its global strategy team after leaving Kraft Foods. Just six months prior, in the spring of 2015, his predecessor Steve Easterbrook was appointed CEO of Mcdonald's. Easterbrook had promoted Kempczinski to president of Mcdonald's USA in October 2016. Jointly, they had worked hard to turn Mcdonald's around. As Chris Kempczinski pushed the elevator button to the CEO suite, he reflected on his last four years with Mcdonald's. In many ways, 2015 was the low point. Customers were confused by the complex menu offerings, distrustful of the quality of ingredients, frustrated at how long it took to get their food, and angry at the company's "exploitative" labor policies. ".According to analysts, "[then-CEO Thompson] got fatally behind the last couple of years" and "wasn't inspiring people the way he needed to be." The financial results painted the same picture. Net income in 2015 was at $4.53 billion, representing the company's second annual drop in "same-store" sales since 2002.4 By early 2015, Mcdonald's shares had dropped below their 2012 price point, while the overall market was up by 50 percent. Yet, with some $21 billion in sales (in 2019) and some 45,000 restaurants globally (thereof 27,000 in the United States), Mcdonald's remains the largest quick-service restaurant (QSR) chain. Chris knew that early results from the strategic initiatives that Easterbrook and he put in place were promising. As of the of fall 2019, Mcdonald's (normalized) share price had appreciated roughly double since March 2015, outperforming the Dow Jones Industrial index. However, traffic to restaurants in the United States continued toMcDonald's Leadership (2003-2015) From 2003 to 2004, leadership at Mcdonald's underwent a rapid string of CEO successions (due to untimely deaths) that would have crippled a company with a less talented executive bench. In 2004, Jim Skinner, previously the vice chairman in charge of introducing and implementing the company's "Plan to Win," was appointed CEO." In a saturated market, the main thrust of Skinner's plan was to shift from acquiring real estate to generating increased sales from existing restaurants." In the early 2000s, Mcdonald's was opening a new store somewhere in the world every 4.5 hours; under Skinner's watch, the pace slowed to just 50 to 100 new U.S. sites per year. To compensate, existing stores started to stay open longer, extending their hours into the late night and early morn- ing. By 2007, roughly 40 percent of Mcdonald's' locations were open nonstop, and some even experimented with staying open on holidays.".10 Skinner used the money saved on fewer new openings to revamp existing restaurants. The "new" Mcdonald's look utilized a gentler color scheme, replaced fiberglass and steel chairs with leather seating, eliminated fluorescent lighting, and added such amenities as flat-screen TVs, free Wi-Fi, live plants, piped-in music, and the occasionalfireplace. "Headquarters provided grants of up to $600,000 per site, with some projects costing as much as $1.5 million. By the time all of the renovations were completed, the company had invested over $1 billion in upgrading its stores. Skinner also refocused the company on cost cutting by improving operational efficiency, with the help of Don Thompson, Mcdonald's COO. In this role, Thompson spearheaded the successful McCafe campaign and seemed a natural selection to produce the next "McHit." By the time Don Thompson became CEO in 2012, most of the low-hanging fruit had already been plucked. Thompson graduated from Purdue University with a degree in electrical engineering, and was recruited to Mcdonald's to design robotics for food transport and control circuits for cooking equipment. His career focus changed from engineering to operations, working a wide range of jobs from fry cook to regional manager to under- stand the company's day-to-day activities. * Mcdonald's struggled with weakening sales under Thompson's reign (see Exhibit 2) despite his efforts to optimize the menu, improve the customer experience, and make Mcdonald's more accessible to a broader market base. Unable to produce the desired turnaround, Thompson retired in January 2015 to make room for new leadership. Mcdonald's Leadership (since 2015) Hailing from the United Kingdom, Steve Easterbrook was appointed as the CEO of Mcdonald's on March 1, 2015. Easterbrook came to the top spot having turned around the Mcdonald's UK and European operations, which were now among the best performing in the company. He had worked his way up to Mcdonald's top brand officer by 2010, then left to head two British restaurants (PizzaExpress Ltd. and Wagamama Ltd.), before returning to his former position in June 2013. Under Thompson, he subsequently assumed responsibility for corporate strat- egy and the restaurant solutions group. Exhibit 3 shows Mcdonald's' revenues by regions and market segments, (2013-2018). Given his low-key profile, observers were surprised when Steve Easterbrook also announced that Mcdonald's would move its headquarters from Oak Brook, where it resided in a custom-built campus for some four decades, to Chicago's West Town neighborhood in 2018. Easterbrook explained that Mcdonald's HQ was moving to be closer to the millennials they want as employees and as customers. In November 2019, Easterbrook was terminated by Mcdonald's board of directors after a relationship with a staff member in violation of company policy. The board appointed Chris Kempczinski as new CEO; previously serving as president of Mcdonald's USA since the fall of 2016.Strategic Initiatives since 2015 In 2015, then-CEO Easterbrook announced a turnaround plan to "reset and rebuild the business" with three priorities: driving operational growth, returning the brand excitement, and unlocking financial value. The company started refranchising its operations in an effort to drive more local accountability, ownership, and connection with the customer. With more vibrant local marketing and tighter operations, the franchisees would be more likely to win the customers' attention and wallet share. Easterbrook also streamlined the management structure, reducing the number of people in the chain of command to the CEO and flattening the organization. After initial gains and signs of improving profitability, Mcdonald's launched the Velocity Growth Plan in 2017 focused on the Experience of the Future (EOTF), digital, and delivery:" . Digital: Re-shaping our interactions with the customer-whether they eat in, take out, drive through, or order delivery.. Delivery: Bringing the Mcdonald's experience to more customers-in their homes, their dorm rooms, their workplaces, and beyond. Experience of the Future in the United States: Elevating the customer experience in the restaurants through technology and the restaurant teams who bring it to life. This strategic initiative was an aggressive technology upgrade to allow Starbucks-like interactivity to both smooth out operational waiting times and improve the customer experience. Initially, franchisees were hesitant to invest the hundreds of thousands of dollars required to upgrade with stand-alone kiosks, but they were bound by stringent franchising contracts and pressure from corporate headquarters. Initial signs have been promising with 8,500 res- taurants outfitted with the EOTF (Experience of the Future) kiosks where customers place orders for themselves. In Australia, and several other European markets where labor costs are generally higher than in the United States, over 40 percent of the in-store customers order from the kiosks.20 Mcdonald's Business Model Mcdonald's both owns and operates its own restaurants, as well as franchises them to others. The large major- ity of restaurants are franchised (85 percent), and Mcdonald's management has made it clear they expect that percentage to increase to 95 percent in the coming years. There are three primary franchise ownership structures: 1) conventional franchisee, 2) developmental license, and 3) affiliates. The specific conditions of the franchise agreement vary on the owner's experience, credit capac- ity, and the local legal environment. Franchisees can also vary considerably in size. The largest franchisee has a developmental license for 2,200 restaurants across Latin America and the Caribbean. On the other end of the spectrum, some franchisees own and operate a single location. Under a conventional franchise agreement, the company typically owns the land and building, and leases the loca- tion to the franchisee. The franchisee pays for "equipment, signs, seating and decor." As the equipment depreciates or new facilities or food preparation processes are required, the franchisee is expected to reinvest in the business. Mcdonald's also co-invests into specific strategic initiatives to motivate franchisees to adopt changes. Franchisees pay rent and royalties based on a percentage of sales, with specific minimum rent payments and initial fees paid upon opening a new restaurant or acquiring a new franchise. The typical franchisee lease is for 20 years. Under a developmental license, Mcdonald's does not contribute any capital. The company receives a royalty based on sale. This is often a broader franchising license given to larger organizations who might have the right to develop in a specific country, or a region of a country. Under the affiliate structure, Mcdonald's owns equity in a foreign entity, earns a royalty based on sale (like a developmental license), but records its share of net results in equity of earnings. The largest affiliate is in Japan, where they have 3,000 restaurants.Trends in the Quick-Service Restaurant Industry The U.S. quick-service restaurant industry is expected to reach $224 billion in 2020 (see Exhibit 4). Yet despite expectations for growth, several trends suggest challenges ahead.Economic Trends The U.S. economy continues to be strong, despite some headwinds such as an inverted yield curve and con- tinued trade tensions between the United States and China. In 2019, the tenth year of economic expansion, the unemployment rate in the United States was the lowest it has been in 50 years, while the stock markets reached record levels. These data present both good and bad news for the fast food industry. On the one hand, more custom- ers are working and have more money to eat out; on the other hand, customers with more disposable income are likely to "trade up" to higher quality and higher priced food options. Recent data on dining trends bear this out: For the first time ever, American spending on dining out exceeded grocery sales in April 2015. Yet at the same time, competition over "customer visits" is heating up in the fast food industry. Easterbrook said on a recent conference call, "While the absolute customer counts may stay more or less constant, customers have not been visiting us as often as they were historically." A closer look, however, reveals key differences among market segments. Older consumers (51 to 69 years of age) reported spending more on groceries and less on restaurant dining compared to recent years. The overall upward trend is due to the vast number of Millennials who view dining out as a social event and are more willing to pay for food outside of home. According to the Restaurant Association, Millennials tend to favor quick service, deli, and pizza joints over more traditional casual and high-end dining; ethnic foods are also viewed as new and interesting. Health Trends Health concerns are an increasingly potent threat for fast food restaurants. Some estimates peg the global obe- sity epidemic costs $2 trillion per year in health care costs, a figure roughly equivalent to Russia's gross domestic product." Approximately one-third of the world population ( 2.1 billion people) is considered overweight, mak- ing obesity the third largest human-caused economic burden. Obesity-related health care expenses in the United States total $663 billion annually." Beef still comprises the highest proportion (58 percent) of meat consumed in the United States, but health-conscious consumers are increasingly shifting toward poultry and other lean meats.27 In 2010, to support healthier food choices, The Patient Protection and Affordable Care Act ("Obamacare") stipu- lated that calorie counts must be displayed on all food service menus of chains with at least 20 units and that restaurants must provide additional nutritional information upon request. These trends place considerable pressure on a fast food company that depends on hamburgers for the main portion of its income. Mcdonald's has been sued (unsuccessfully) for making its customers fat and was featured in an unflattering documentary (Super Size Me), in which the protagonist claims that he grew increasingly ill and gained 25 pounds after eating only Mcdonald's food for one month.28Meanwhile, concerns over the increase in antibiotic-resistant bacteria have led to calls for the elimination of subtherapeutic antibiotic use in meat animals. Though banned in the EU and Canada, the United States permits farmers to administer small doses of antibiotics to livestock to increase weight gain. Mcdonald's recently fol- lowed in the footsteps of several of its competitors and announced its intent to stop selling chicken products from birds treated with antibiotics important to human health (non-human antibiotics are still permitted). Given that Mcdonald's claims to be the largest restaurant seller of chicken in the United States, this move is likely to rever- berate throughout the poultry industry. Changes in cattle production are likely to move much more slowly due to higher beef prices, the longer life span of cattle, and the fragmented nature of the beef industry. Moreover, besides ending the use of antibiotics in the chickens used, Easterbrook also decided to remove high- fructose corn syrup from McDonald's hamburger buns. He also laid out a 10-year plan to only use suppliers thatkeep chickens cage free. These moves could be potentially transformative for Mcdonald's, as chicken and eggs account now for roughly 50 percent of the menu items. "One reason for this high percentage level is Easterbrook's early decision to offer all-day breakfast, which was well-received in the U.S. market. Healthier menu items mean increased supply costs for restaurants, even as customers remain price sensitive. In 2018, Mcdonald's announced that Quarter Pounders@ would be cooked with fresh beef in all U.S. restaurants. 31 This was met with a strong customer response. Mcdonald's CFO boasted, "In the first half of 2019, we sold over 55 million more quarter-pound burgers compared to last year." While this has proven both popular and an assertive way to offset Wendy's position of "Never Frozen," it also incurs significant supply chain considerations and costs. Competition Traditionally, the main competition for Mcdonald's has come from other quick-service restaurants such as Wendy's, Burger King, and Yum! Brands' Taco Bell. Mcdonald's is roughly twice the size of its next largest global competitor (all three Yum! Brands combined), but has slightly fewer outlets."It controls almost half of the U.S. hamburger market, which is more than three times larger than the market share held by either Wendy's or Burger King. Burger King On August 26, 2014, Burger King merged with the Canadian restaurant chain Tim Hortons to form the world's third-largest quick-service restaurant chain, called Restaurant Brands International (RBI). The combined company has annual sales of $30 billion, with over 25,000 restaurants in approximately 100 countries. Besides Tim Hortons and Burger King, RBI also acquired Popeyes in 2017 for $1.6 billion." All of the restaurants are franchises. Wendy's Wendy's is the third largest U.S. burger chain, with more than 6,500 locations in 28 countries. Wendy's strives to differentiate itself as "a cut above" its competitors, with higher-quality food that is made fresh-to-order. They had revenues of $1.6 billion in 2018. Analysts offer several reasons as to why Wendy's has succeeded with this strategy while Mcdonald's has struggled. Not only is it easier for the smaller chain to implement short-term menu changes, but it has long specialized in custom-building sandwiches without compromising quick service.Fast Casual Boundaries between quick-service and other restaurant segments have become increasingly blurred. Fast-casual restaurants provide high-quality food without table service, in a distinctive atmosphere, at prices that are "low enough." Some observers describe fast casual restaurants as distinguished by the 10 F's: Full view preparation of food, Food quality, Fine ingredients, "Fitter" wholesome food, Fresh, First-rate decor, Fair price, Fast service, Friendly employees, and Flexible offerings. Due to this successful combination of higher quality and affordable prices, the fast-casual segment is one of the few areas in the restaurant industry that is experiencing steady growth. Combined fast-casual sales increased by double digits in the last few years, and is expected to continue into the near future. Even traditional sit-down restaurants are looking at ways to move into the fast-casual arena by offering selected scaled-down dishes that appeal to value-seeking diners. A sub-segment of the fast-casual restaurant industry is the premium burger segment, which grew 10 times faster than traditional fast food chains from 2008 through 2013." Customers have been flocking to burger chains such as Five Guys, In-N-Out Burger, Shake Shack, Smashburger, and Fatburger for higher-priced, higher-quality burgers, while fast food restaurants such as Mcdonald's, Burger King, and Wendy's have scrambled to counter with their own premium offerings. In 2019, Five Guys claims the title of the fastest-growing restaurant chain in the United States, with some 1,500 locations worldwide and revenues of $2 billion, holding 50 percent market share in the "better-burger" segment. Customers also have been known to wait in line for nearly an hour to get a Shake Shack burger and fries; the com- pany's shares proved to be just as popular in its January 2015 IPO, more than doubling in price from $21 to $45.90 on the first day of trading. In 2019, Shake Shack is trading at all-time highs with a market capitalization of $3.5 billion with revenues of $529 million. But much like the Arch Deluxe in the 1990s, Mcdonald's more recent efforts to compete in the premium seg- ment have fallen flat. Customers could not justify paying $4 to $5 for a one-third pound Angus burger when there were sandwiches on the Mcdonald's Dollar Menu for much less. The company discontinued the Angus Deluxe product line in 2013 after just four years. Other fast-casual restaurants such as Chipotle Mexican Grill, Panera Bread, and more recently even Starbucks, have taken away customers from Mcdonald's.Target Market Market research indicates that the typical American dines out about five times per week. One of the main reasons so many quick-service restaurants are focusing on new breakfast items is that the early morning meal is the least saturated. For every restaurant breakfast, the NPD Group estimates that the average American con- sumes 2.5 lunches and almost two dinners outside the home. Around 11 to 12 percent of these meals are eaten at Mcdonald's. A quick breakdown of a typical McDonald's franchise in a middle-class suburb of 25,000 residents provides additional market insight. Roughly one out of 16 or 1,500 people in town visit the local Mcdonald's over the course of a given day. Breakfast accounts for the largest proportion (30 percent) of sales, followed by lunch (24 percent); afternoon, dinnertime, and late night/early morning each account for another 15 to 16 percent of sales. The noon lunch hour is the busiest and most profitable time of day, bringing in $200,000 in revenues. Annually, the average franchise can be expected to bring in about $1.7 million in sales, with an operating profit of around $150,000. The three main target market segments for Mcdonald's are mothers, children, and young adults."Moms view Mcdonald's as a quick, easy, and affordable meal for families on the go, and they usually are the ones who bring the children. But with 17 percent of U.S. youth considered obese, fast food chains find themselves in an awkward position when marketing directly to children. In response to parental demands for healthier kid meal options, Mcdonald's reduced its Happy Meal@ calorie count by 20 percent by adding apples and halving the amount of french fries. Mcdonald's has reduced the sodium content of its food by 15 percent, and plans to make further reductions in calories, sugars, saturated fats, and portion sizes by 2020." Even this was not enough for a nine- year-old girl who publicly took then-CEO Thompson to task at a shareholders' meeting, accusing the company of tricking kids into eating junk food by using toys and cartoon characters." Other chains, such as Jack in the Box, have opted to eliminate toys from their kids' meals, while Taco Bell has dropped its children's menu altogether. The key demographic group for most fast food restaurants is comprised of young, single professionals who earn above-average incomes. These so-called "heavy users" frequent a given chain twice or more per week, providing a steady source of sales and profit. A recent study, however, indicated that Mcdonald's was not even in the top 10Current Challenges Menu As of 2019, Mcdonald's operates 37,000+ restaurants globally, with 14,300 of them in the United States. As with any restaurant, menu selection is critically important. One of Easterbrook's first major moves was to propose all-day breakfast in all U.S. restaurants, the company's biggest initiative in six years. Testing started almost immedi ately after he took office, with a rollout in fall 2015. Consumers had long been asking for all-day breakfast, but the company resisted because stores use the same equipment to cook both breakfast and lunch. All kitchens are now equipped with separate grills for cooking eggs and burgers, rolling carts and utensils to use just with eggs (to prevent contamination), and new toasters so that they can prepare both buns and muffins at the same time (they toast at different temperatures). The estimated cost for retrofitting each kitchen is $500 to $5,000, depending on existing equipment. To make things a bit more man- ageable, breakfast items will be made continuously during peak morning hours, but cooked-to-order during slower parts of the day. An internal Mcdonald's presentation projected that extending breakfast hours could increase sales by 2.5 percent per year.* Mcdonald's continually experiments with its menu to strike the right balance. More recently, Mcdonald's gave franchises more flexibility to offer locally relevant menu items, such as chorizo burritos in Texas and the Midwest, and mozzarella sticks in New York and New Jersey. Local restaurant operators can choose items from the company's global pipeline and adjust them as needed to suit local tastes. In 2019, Mcdonald's announced they would be offering a few international menu items in the United States. Sam Oches, an industry expert noted, "These are fairly easy to do, fairly easy builds. They might see it as . . . an easy marketing win without stretching the operations too much.""In a similar way, managers were granted more freedom to run their own promotions to increase store traffic." As with any innovation or change, not all experiments are successful. As a direct competitive response to the "better burger chains," Mcdonald's experimented with "Create Your Own Taste" tablets where customers design their own sandwich from over 30 choices of meats, toppings, and buns. They can only be ordered from inside the restaurant, cost $1.50 more than a Big Mac@, and take seven to eight minutes to prepare because the meat is cooked fresh. This presented a conundrum for a quick-serve restaurant that generates roughly two-thirds of its revenue from drive-through customers.* Franchises were unexcited about the additional cost and complexity this created in the restaurant. Unsurprisingly, this offering was soon discontinued.*The McDonald's menu has swollen to ever 121] items. many of which require specialized equipment and take more time to prepare. That represents a 1'5 percent increase from 2604 and is considerahiy more than the 33-item menu from 1991}. While a greater variety oi" menu options helps to draw new customers into stores, too many items stow down the order process. increasing employee stress and customer frustrations Complaints about speed of service have \"increased signicantly" in recent years, with the McDonald's service experience described as \"che- mic?\"I Currently, McDonald's is piloting a meatless burger in Germany. For McDonald's the question is whether the demand for a vegan-option, meatquhstute makes it warm the added complexity to the supply chain. Service Expectations Globally, Mcdonald's is well known for the ubiquity of its locations and consistency of its products. The Economist magazine publishes a "Big Mac Index" as a proxy for purchasing power parity when comparing the prices of the same hamburger across many different countries." Likewise, the Gartner consultancy consistently rates Mcdonald's as one of the best supply chains in the world." While these accolades point to a company that has succeeded at delivering a consistent product and experience to its global customers, the individual experience of customers has not been as promising. Because Mcdonald's is a quick serve restaurant that derives 65 percent+ of its revenues through the drive through, the speed of service is incredibly important. In a recent QSR survey, Mcdonald's U.S. drive-through ser- vice times were 273.29 seconds, which was slower than the vast majority of its other competitors." For Mcdonald's this is a particularly challenging task because it needs to balance the customers' baseline desire for consistency and low-cost with the operational challenges of introducing new menu items and improving the experience. To address these issues, Mcdonald's has been investing in digital, kiosks, and delivery services. While Mcdonald's was an innovator with the drive-through system, consumer preferences change over time. Increasingly, customers (esp. Millennials) want their food delivered. This takes the form of delivered groceries, but also restaurant meals. Some analysts estimate the restaurant-to-consumer market was over $13 billion in 2019.$2 While this used to be an evolving customer preference, it is now ubiquitous. In 2019, 9,000 Mcdonald's locations offered delivery capability via Uber Eats. With the onboarding of another delivery vendor, Doordash, more custom- ers' deliveries are expected. On an earnings conference call, the executive team noted that delivery constituted more than 10 percent of revenues in the UK and Spain. Digital. Customers are changing the way they want to experience Mcdonald's. While most Americans order Mcdonald's through the drive-through, others want to dine in, while others want their food delivered. Mcdonald's has started offering an omni-channel approach, meeting the customers where they want to be served. "To-go" cus- tomers can order their food in advance and choose between three modalities: drive through, curbside delivery, and walk-in. This gives the customer more control of personalizing their order, and has the added benefit of giving the company more information on the customers themselves." In a surprising announcement, Mcdonald's acquired Dynamic Yield, a technology firm specializing in per- sonalizing marketing campaigns for companies like IKEA, Urban Outfitters, and HelloFresh. It was the largest acquisition for Mcdonald's in more than 20 years. Anderson estimated it at $300 million." The investment thesis is to use machine-learning algorithms to suggest additional items. Easterbrook noted, "We're already seeing an increase in average check by improving our ability to offer customers what they are likely to want, with suggestions based on time of day, weather and items already in customers' orders."36Experience of the Future. This is how Mcdonald's describes the new dining experience currently available at 8,500+ Mcdonald's locations where there are digital display kiosks which allow customers to customize their meals to the condimental level (e.g., extra pickles, no mustard). Mcdonald's pays for 55 percent of the cost of the remodel. Easterbrook mentioned that, "We know the brand perception improves when restaurants are much more modernized."> Initial results are promising. In Canada, where all the locations have the kiosks, they reported that in year 2, approximately 27 percent of the orders were through kiosk versus walk-up with a live cashier. Mcdonald's believes that customers will become increasingly accustomed to self-checkout."While this reduces the burden on the ordering and payment processing, it can also create complexity in the kitchen. The EOTF conversions haveProduct Quality Another item on Easterbrook's to-do list is to improve public perceptions of the McDonald's brand. The size of McDonald's made it a convenient target. and more than a decade cl' negative press including the Emil book. Fort Food Nation. the 2004 documentary Super Size Me, and Jamie Oliver's lull \"pink slime\" expose has taken its tot].M In July Itilai. the Big Mac earned the dubious distinction of being Arnerica's worst hamburger, placing last out of 21 in a study by Consumer Reports.M McDonald's also ranked lowest among peers in the 2019 American Customer Satisfaction Index. Fast food restaurants overall dropped 1.3 percent from the previous year. while McDonald's was at for the last three years to hold the last spot.\" Easterbrook has declared improving food quality as one of his top priorities. to addition to curtailing antibiotic use in its [1.5. chicken supply. McDonald's is now selling dairy products from growth-hormone-l'ree cattle. The company has also pledged to examine its product ingredients and review its food preparation procedures. Its goal is to become more \"culinary inspired" and to simplify food labels by reducing the number of preservatives.\" There are still 1? ingredients in the french fries McDonald's serves in the United States, compared to just five in Great Britain.\" Easterbrook rebuffs McDonald's' naysayers with a media campaign highlighting positive news about the company's food and workers. The company has launched a video series entitled \"Our Food. Your Questions,\" demonstrating how McDonald's food items are made. Labor McDonald's has serious stafng issues. An internal report that found its way to the media showed that one out of every ve customer complaints was about \"rude or unprofessional employees."M According to a national survey of quick-service restaurants. McDonald's ranks next to last in \"friendliness.\" beating only Burger King. Part of the problem is that too many restaurants are understa'ed during peak breakfast and lunch hours. [t is hard to be friendly while work piles up and customers grow increasingly irritated at how long it takes to place and get their orders. The annual turnover rate in the fast food industry is bit percent. as frustrated workers seek to move on to less stressful and higher-pining jobs.\" It is too soon to tell whether McDonald's pledge to raise pay to at least $1 more per hour than the local mini- mum wage will be enough to attract and retain motivated workers. The company also granted employees the ability to accrue up to ve days of pd vacation annually after one year of employment. However. this new HR policy International Markets Like many U.S.-based global companies, Mcdonald's has most of its net-new growth from international mar- kets. The secular story that "consumers in emerging markets eat out more often as their income increases" is still intact. Furthermore, BMO Capital Markets, an investment bank, notes that the quick-service-restaurant (QSR) hamburger sales have an annual growth rate of 12-13 percent in China, and 21-22 percent in Russia, for the last 10 years. 70 In the second quarter of 2019, U.S. international growth was 6.6 percent reflecting positive results, "especially in the UK, France, and Germany."When Mcdonald's reports their financial and operational results, they further divvy up international results into "international," "high growth," and "foundational" markets (Exhibit 3). In the end, non-U.S. growth matters. Mcdonald's approaches these markets differently. In China and Hong Kong, the company recently sold an 80 percent stake in their 1,750 restaurants to Citic (a state-owned investment group) and the U.S. private equity firm Carlyle for $2 billion. They are currently looking for these partners to open an additional 1,500 stores in China, Hong Kong, and Korea. 72.73 Going Forward In 2019, the board of the National Owners Association (NOA), representing the franchisees, wrote a tersely worded letter to corporate Mcdonald's. NOA said, "Our U.S. Southeast markets' results should concern every- one. You may not have Chick-fil-as in your market, or to the degree they have them in the Southeast, but they are coming, and they don't discount. A chicken sandwich at Mcdonald's should be our top priority." Whereas Mcdonald's offers a bevy of menu options with increasing customization, Chick-fil-a has tripled in size in a mere 10 years, primarily focusing on chicken. Since taking the helm in 2015, former CEO Easterbrook was credited for aggressively investing for Mcdonald's future with digital, EOTF, and delivery. Net margins are up, but most of those gains are from increased pricing and cost-reduction, not increased growth. Mcdonald's newly appointed CEO Chris Kempczinski vowed in his first public interview to continue with the strategic initiatives that he had implemented over the last four years under his former boss, Steve Easterbrook. Yet, while Mcdonald's share price had almost doubled since spring 2015, growth in the United States was nonexistent (Exhibits 1 and 2). Chris Kempczinski must continue to address the challenges that Mcdonald's and the wider industry faces, including improving labor relations (with demands for $15-an-hour minimum wages), the increasing demand for healthier food options, an upgraded restaurant and technology experience, as well as faster delivery (both, onsite and offsite)