After fewer than three months at the helm of the company, McDonald’s CEO Chris Kempczinski will address investors and analysts during the first earnings call of his tenure on Wednesday. The pressure is on.
Kempczinski replaced Steve Easterbrook in November after the company announced that it had cut ties with its former CEO. Easterbrook violated company policy when he engaged in a relationship with an employee, which the company described as consensual.
The abrupt transition left some investors initially uneasy about the company’s future, and McDonald’s stock sank the day after Easterbook left. Easterbrook, who became CEO in 2015, helped significantly increase McDonald’s value during his tenure thanks to an aggressive turnaround plan.
“Anytime there’s change, especially when you’re transitioning away from an executive that’s had a lot of success, there’s nervousness,” said Peter Saleh, a restaurant analyst with BTIG. Kempczinski has started off his tenure by addressing employees directly during town halls around the world and meeting with corporate officers, among other things. “This is a people business and it’s really about all of you,” he told workers.
The stock has rebounded since McDonald’s named Kempczinski CEO, and is beating the overall market. But in his new role, he faces a unique set of challenges. Fast food companies are increasingly using technology to become more efficient, gather data about customers and increase sales. Kempczinski needs to ensure McDonald’s is keeping ahead of its competitors.
Plus, he has to maintain good ties with McDonald’s franchisees, which own and operate about 93% of the company’s locations. And he has to grapple with employees’ allegations of racism at the company and sexual harassment in franchise locations.
Finding his footing, facing these challenges and impressing investors might not be easy for the new CEO. And with disappointing results in the third quarter, he has a lot to prove.
Introducing a new leader
In early January, Kempczinski began to make some changes.
In a message to employees obtained by CNN, he outlined a plan to increase and sharpen McDonald’s focus on technology. He created a new digital customer engagement team, led by the company’s first-ever chief digital customer engagement officer. Kempczinski also formed a Digital Advisory Council, made up of leaders from across the company, to work with the team and make sure it’s making progress toward company goals.
The new team focuses on the technologies McDonald’s uses for ordering, personalization, payments, loyalty and delivery.
Kempczinski hopes that the two initiatives will ensure that McDonald’s is getting a return on its major tech investments, including the purchase of two tech companies.
He “was effectively the co-author of a lot of the technology blueprints the company’s rolled out the last couple of years,” said R.J. Hottovy, a consumer strategist for Morningstar. Many of those efforts were announced when Easterbrook was still in charge.
Kempczinski has to “put his own stamp” on McDonald’s digital strategy, Hottovy added.
In a recent note, Hottovy described Kempczinski as an “underappreciated leader,” adding that the tech strategies he championed should help boost growth for McDonald’s, and make it a good bet for investors this year. Since Kempczinski became CEO, the stock has risen about 9%, outpacing the S&P 500, suggesting investors are optimistic about his strategy.
There are other ways for Kempczinski to stimulate growth. Franchise operators have been calling on McDonald’s to sell a premium chicken sandwich to compete with the likes of Chick-fil-A and Popeyes. McDonald’s has responded by testing out one sandwich in two cities and rolling out two breakfast chicken sandwiches nationally for a limited time. Investors will be looking for updates on that front, Saleh said.
Those efforts should please franchise operators, but some of those technological advances required franchisees to invest in upgrading their restaurants, which put a strain on the relationship between them and management, including Kempczinski.
Franchisee relations under the spotlight
In March 2017, McDonald’s announced its “velocity growth plan,” a whirlwind effort to keep current customers coming back and to attract new ones with more menu items and renovated restaurants.
The effort was worth it. During the company’s 2017 investor meeting, Kempczinski said that customers were spending more money at renovated stores. He pushed franchisees to get on board with the new store designs and technology.
“The faster you go, the more partnering [from McDonald’s] you get,” he told franchisees. The company offered financial assistance to franchisees making the changes.
For franchise operators, the strategy meant an upfront investment in upgrading their restaurants with no guarantee that they would earn that money back. The aggressive approach strained Kempczinski’s relationship with operators, according to Hottovy. In 2018, McDonald’s franchise operators formed their first-ever advocacy group, the National Owners Association.
Company leaders speak regularly with franchise operators, and have been flexible with deadlines in response to feedback.
In December, Business Insider published a troubling report about a large cash-flow gap between black franchise operators and their white counterparts, who out-sell black operators by hundreds of thousands of dollar a year on average.
“It is among our top priorities that all McDonald’s franchises in all communities have the opportunity to prosper, grow and achieve their business ambitions,” a company spokesman said in response to the report. “These efforts are rooted in our core belief that diversity and an inclusive and respectful McDonald’s makes us stronger. McDonald’s is proud to create opportunities for entrepreneurship, economic growth and mobility in communities across the country.”
Good relations with franchisees are important to the success of the company.
“McDonald’s is only as good as the health of their franchisees, and so you want to see them continue to be happy,” Hottovy said. Of all the negative coverage hitting the brand, the Business Insider story “was probably the most concerning from a financial standpoint,” he said.
About a month after the report was published, two black executives sued McDonald’s, alleging racism at the corporate level.
“Our actions are rooted in our belief that a diverse, vibrant, inclusive and respectful company makes us stronger,” the company said in response to the allegations. “While we disagree with characterizations in the complaint, we are currently reviewing it and will respond to the complaint accordingly.”
McDonald’s added that nearly half of its US corporate officers are people of color.
On top of those allegations, McDonald’s has faced a series of lawsuits from workers.
Lawsuits and complaints
McDonald’s and its franchise operators have been hit with a number of high-profile lawsuits over the past several years. As the new CEO, Kempczinski is now ultimately responsible for determining how to respond.
Internally, the new executive has promised to double down on the company’s values. He’s solicited feedback from employees and met with managers. But the company still must address lawsuits alleging toxic culture at the restaurant level.
In November, a former employee filed a class action sexual harassment suit against McDonald’s with the help of the American Civil Liberties Union and the Time’s Up Legal Defense Fund. The suit alleged that McDonald’s “creates and permits a toxic work culture from the very top.” The plaintiffs are seeking at least $5 million in damages, as well as better protections from the company.
In response to the lawsuit, McDonald’s said in a statement at the time that it “is demonstrating its continued commitment to this issue through the implementation of Safe and Respectful Workplace Training in 100% of our corporate-owned restaurants.” The company added that it is “encouraged by the partnership and commitment,” from franchise groups — which aren’t required to follow such corporate policies — to train staff according to corporate regulations.
For years, the Fight for $15 and a union have been helping workers file complaints and lawsuits against McDonald’s alleging wage theft, sexual harassment in restaurants and other issues. Last year, presidential candidates and high-profile activists like Padma Lakshmi aligned with workers who spoke out against the company, bringing renewed attention to complaints against McDonald’s, according to the group. And there’s no reason to expect a slowdown in 2020.
“As we’ve talked to more and more workers over the course of the past seven years, there have been more workers that want to be part of this,” said Allynn Umel, organizing director of Fight for $15. “We imagine that it will get only stronger.” If more suits do come, Kempczinski will have to decide how to respond.
McDonald’s has settled some longstanding lawsuits, like a 2013 class action alleging wage theft. With regard to that case, McDonald’s said “we take our responsibility as an employer seriously and are deeply committed to the fair treatment of all of our employees,” noting that it “continuously” rolls out trainings and offers resources at company-owned restaurants to “promote continued compliance with all wage and hour laws.” The company has also settled other similar cases.
Easterbrook responded to earlier harassment suits by noting that McDonald’s started working with the anti-sexual violence organization RAINN in 2018 to help clarify its sexual harassment policies and reporting methods. It has also conducted manager and operator trainings last fall, opened a hotline and more.
Many of the lawsuits and complaints are aimed at McDonald’s franchisees. McDonald’s only dictates policy for its relatively few corporate-owned stores. Franchises are encouraged to follow the same rules and procedures, but are not required to do so.
Because of that, investors may not be too concerned about the lawsuits. Saleh predicts that they won’t be prioritized during the earnings call with analysts Wednesday.
Even though the lawsuits may not make much of an impact on McDonald’s bottom line, they could eat away at its reputation. And they could make it harder for McDonald’s to recruit talent in a tight labor market.
“That’s one of the biggest challenges in the restaurant space,” Hottovy said. “This could make employee recruitment and retention more difficult.”
Like many fast food chains, McDonald’s is getting creative in its attempts to attract workers and convince them to stay. The company partnered with AARP to attract older workers and recently launched an app intended to help employees grow their careers within the company.
