Why McDonald's Wins in Any Economy - Fortune Management

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Why McDonald's wins in anyeconomyAugust 23, 2011: 5:00 AM ET

Thanks to Jim Skinner's no-nonsense leadership, the global restaurant juggernaut is doing

better than ever.

By Beth Kowitt , writer-reporter

FORTUNE -- J im Skinner, CEO of McDonald's, is inspecting the kitchen of

one of his restaurants in Oak Brook, Ill.,

with the rigor many of his peers might

reserve for financial reports. He

examines the food-preparation area as

he explains, in great detail, the "review

of the hash browns" that McDonald's

initiated a few years ago -- and

admonishes me to not touch anything.

"Unless you feel like you want to have a

job," he adds. McDonald's, after all, is

one of the few places hiring these days.

Skinner isn't a micromanager. He's

simply intensely focused on theefficiency and performance of

McDonald's (MCD) 33,000 restaurants

worldwide and the enormous, complex

infrastructure that supports them, a

managerial trait that has resulted in

nothing short of a Golden Age for the

Golden Arches. Since Skinner, 66,

became CEO in 2004, the company

has delivered an annual growth rate of

5%, with revenue topping $24 billion

last year. Same-store sales, a closely

watched industry metric, have climbed each of the seven years of his tenure, and in that time the

stock has returned more than 250% -- even after the ear ly-August equities selloff -- vs. 16% for the

S&P 500 (SPX). [Click here to read our 2005 story about how McDonald's got CEO succession

right.]

If you haven't been in a McDonald's lately, you might assume that the company simply has been the

beneficiary of the struggling economy in the U.S. and elsewhere in the world, and that

cost-conscious consumers are flocking to fast-food eateries instead of s it-down restaurants. But to

post the kind of impressive numbers McDonald's has -- and to weather the current turmoil -- Skinner

has had to find ways to attract new diners while retaining the hard-core Big Mac-and-fries crowd.

And so today, along with burgers and shakes, you can stroll into a McDonald's and pick up a snack

wrap or a fruit smoothie or a decent latte (much to Starbucks' chagrin), all of which translates into

higher sales per location. Last year average per-store sales jumped to $2.4 million, from $1.6

million in 2004.

Now think of all the things that have to go right to pull off that kind of global transformation: Test

kitchens need to churn out winning recipes (no more McPizzas!), the company must line up

suppliers who can handle big orders, the crews have to be trained to prepare new items, and

marketers must figure out a way to sell them -- all while fending off the food police who, not withoutmerit, dog the company about the nutritional value of its fare. Luckily for McDonald's, Skinner is an

operations whiz who has turned the restaurant giant into a well-oiled machine, insisting on planning

and accountability throughout the company -- even hash browns are subject to review. "McDonald's

has been an execution wonder," says UBS analyst David Palmer. That's why Fortune has named

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y McDonald's wins in any economy - Fortune Mana... http://management.fortune.cnn.com/2011/08/23/why-mcdon...

f 6 24-08-2011 02:09



Skinner visiting a McDonald's restaurant in Oak Brook, Ill.

Skinner to the starting lineup of our first Executive Dream Team, an all-star roster of top-performing

executives.

Yet few at McDonald's ever expected the publicity-shy Midwesterner, who never graduated from

college, to become CEO. "I've been a walk-on in everything; nobody was thinking, 'Get the little guy

from Davenport, Iowa,'" says the 5-foot-6 Skinner, who rarely talks about himself in interviews. His

transition from supporting player to team captain in November 2004 came under tragic

circumstances: Former CEO Jim Cantalupo died of a heart attack that year, and Cantalupo's

successor, Charlie Bell, resigned as he underwent treatment for cancer after just seven months on

the job. He died in January 2005.

But Skinner's leadership has been utterly self-assured -- it i s as though the walk-on had been

quietly practicing for his big shot all along. Employees and analysts say he's guided by a zeal for

satisfying customers, even if it comes at the expense of his own ideas and preferences. A few

years ago the company did extensive tes ting on new coffee-cup lids and rolled out a vers ion that

consumers liked -- and that Skinner, who happens to drink a lot of coffee, really didn't. Rather than

overrule the masses, Skinner came up with his own solution: He keeps a stash of the old lids on

hand.

From the kitchen up

If Skinner seems as though he knows his way around a McDonald's kitchen, it is because he once

worked in one, as did 40% of the company's executives. (Amazon (AMZN) CEO Jeff Bezos and Top

Chef Richard Blais did too.) At age 16 he got a job at McDonald's in Davenport. "I was in a family

where, if I wanted to have any spending money, I had to work," says Skinner, whose father was a

bricklayer. It was 1962 and employees still peeled, blanched, and sliced potatoes for French fries.

After six months behind the counter, he

left Iowa behind for the Navy, serv ing on

the aircraft carriers Midway and

Oriskany. (He briefly overlapped with

Oriskany veteran John McCain.) The

hallmarks that came with spending nearly

a decade in a highly disciplined,

execution-driven environment became

classic Skinner. He met his future wife,

Kathleen, during his last year in the

service -- they're still married 42 years

later -- and decided it was time to settle

down. He landed at McDonald's as a

restaurant manager trainee after a Navybuddy encouraged him to apply.

Skinner earned a reputation as a loyal McDonald's man, one who always did his homework but

never felt the need to show it off. Denis Hennequin, who until 2010 served as the company's head

of Europe, says the future McDonald's chief would eventually earn the nickname "Jim Skipsdinner"

for his preference for having a quiet bite in the hotel once business was finished rather than attend

an official meal for the sake of appearances. "Some people have an ego that makes them need to

be seen even if it's not necessary," says Hennequin, now CEO of hotel operator Accor. "Jim is not

like that." Several former executives described Skinner as having no tolerance for bureaucratic

double talk, one noting that he has a "good crap detector." (None of this is to say he's humorless. In

fact, he's rather funny. Ask him about one of his favorite shows, Two and a Half Men, and he'll offer

his thoughts on how he would write Ashton Kutcher into the sitcom.)

He proved to be insightful too, backing his executives publicly even if he didn't always agree with

their tactics. Claire Babrowski, who worked for McDonald's for almost 30 years, remembers, as amanager in the North Carolina region, running into a difficult franchisee who wasn't operating his

store the way the company liked. (To this day, 80% of McDonald's restaurants are operated by

independent owners.) To top it off, he would never wear a tie -- standard practice at the time for

franchisees. Skinner was her boss, and during a visit a ll parties met to hash out their issues. "For

some reason I got off on the tie thing, which was so the least of it," Babrowski says. Skinner didn't

stop her, instead turning to the franchisee to ask him how hard it would be to put on a tie. "Later at

night Jim took me out to dinner, and he's like, 'Really? The tie?'"

In 1992, McDonald's promoted Skinner to work in its international business, bringing Big Macs and

fries to 60 new markets, including parts of Europe, Africa, and the Middle East. By the time he

came back to domestic operations he had worked in every region of the world.

Skinner returned to the U.S. business in 2002 to a McDonald's that was floundering. The company

was hooked on expansion; in 2001 i t was opening more than three restaurants a day. The quality

of the food and serv ice had deteriorated as a result, along with the stock price and profits.Long-time McDonald's man Jim Cantalupo came out of retirement to run the company and elevated

Skinner to vice chairman. The new executive team implemented a back-to-basics turnaround

strategy -- the Plan to Win -- with a focus on growth through increasing sales at existing stores

rather than by opening new locations.

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In April 2004, Cantalupo and his management crew traveled down to Orlando for the company's

owner-operator convention. In the early morning hours the day Cantalupo was to give his remarks,

a victory speech of sorts, he had a heart attack and died in the room next to Skinner's. That same

day the board named the young, charismatic Charlie Bell as the company's new leader. But less

than a month later Bell was diagnosed with colorectal cancer. While he and the company were at

first optimistic about a recovery, he stepped aside in November. "The bizarre paradoxical thing was

that in the midst of first losing Jim [Cantalupo] and then Charlie being ill, we were performing better

than ever," says former McDonald's executive Mats Lederhausen. "It was surreal."

The board looked to the 60-year-old Skinner to become the company's new CEO at one of the

most delicate moments in its history. "The fact that it was Jim, at least from my point of v iew, was a

comfort," Babrowski says. To the outside world, Skinner was relatively unknown, which heattributes to always being a good No. 2. "Good No. 2s don't usurp their boss's authority," he says.

"They don't go around trying to take credit."

Rather than shake up the already unsettled company by implementing a new approach, the

no-drama Skinner came in on a platform of continuity, stressing that leadership change doesn't

mean strategy change. "He understood that he didn't need to rebrand the company in his own

image," says Jeffrey Sonnenfeld of the Yale School of Management. "He didn't need to imprint his

persona."

Keeping the streak going

Under Skinner, McDonald's has become so successful that it now has a challenge only a few

companies, such as Wal-Mart (WMT), face. How do you continue to grow a behemoth? Every day

64 million people in 118 countries (Bosnia was just added to the list) eat at its restaurants, which

generate revenue that trumps Starbucks (SBUX), KFC, Pizza Hut, and Taco Bell (YUM) combined.

From 2008 through 2010, McDonald's was responsible for 90% of the sales growth of the U.S.

fast-food and fast-casual industry, according to research firm Technomic. Every month that the

company ups its same-store-sales figures, which it has done for the past 99, the harder it is to lap

its numbers year to year.

The fact that fast food is a somewhat

cyclical business makes McDonald's

sales streak all the more impressive. But

Skinner doesn't think McDonald's should

experience serious ups and downs based

on seasons or swings in the economy.

He's constantly te lling shareholders and

analysts that the company's success

doesn't hinge on consumers trading downwhen times are tough; when customers

have more to spend, they'll spend it at

McDonald's, he says.

To entice consumers to buy more -- and

more often -- McDonald's under Skinner

has pursued what the fast-food industry

calls "platforms" rather than one-hit

wonders. (Chicken is a platform;

McNuggets are the product.) McCafé,

McDonald's beverage platform featuring

coffee drinks and smoothies, has added

about $125,000 in sales per store and is

the company's biggest launch in 35

years. As McDonald's has put its major flops of the past far behind (ever try the

McLean or the Arch Deluxe?), the

company has gained permission from

consumers to branch out into products

you'd never expect to see on the menu

board a decade ago -- oatmeal, for

example. Geographical divisions have

even gotten better at sharing ideas

around the globe. McCafé originated in

Australia, and now Chicken McBites, another Aussie staple, is being tested in the U.S.

Despite having more than 100 items on the menu, Skinner, perhaps more than anyone else at

McDonald's, has never lost sight of the fact that the company's roots go back to the burger

business. In the late 1990s and early 2000s McDonald's started acquiring stakes in brands like

Chipotle (CMG). Those investments diversified the company but barely caused a blip in earnings.When Skinner became CEO, he sold them all off in their entirety in order to keep the focus on the

core. "Because you're good with hamburgers, you think you can do pizzas or rental cars or an IT

business or sell your know-how," says former executive Hennequin. McDonald's has been guilty of

this too -- it once opened Golden Arch hotels in Switzerland. "Jim is always the guy that takes us


f 6 24-08-2011 02:09



back to 'What difference is this going to make for the hamburger business? Is that going to help? If

that's not going to help, forget it .'"

Today McDonald's is better than ever at figuring out what will or won't work on the menu board, a

testament to the discipline Skinner has instituted. Every new item that ends up on customers' trays

has to have a strong business case that examines its profitability, the capital it requires, and how it

can be built out nationally. McDonald's has about 40 products at different stages in the pipeline,

and some, like the Angus Burger, can take over four years to hit the market. Products that meet the

company's business-case requirements have a 90% chance of going national. During the testing

phase, the company may even try out different prices by market to ensure a new launch is adding

incremental sales rather than stealing share from an existing item.

McDonald's buying power

Take the snack wrap, which came about when restaurants started to see a plateau in sales volume

of its Chicken Selects. McDonald's executive chef, suppliers, and franchisees got together at

headquarters to figure out how to ramp up the turn of the crispy chicken strips. After chefs, food

scientists, suppliers, and members of the menu-management team and advertising agency weighed

in on how to define the product and pricing, the snack wrap had to pass muster with 150 to 200

consumers in focus groups. It then went into a four- to six-week operational test in a handful of

restaurants to determine if changes needed to be made in crew positioning or equipment.

McDonald's had mastered the bun, but with the snack wrap, the menu-development team had a lot

of work to do operationally around tortillas: What was the right packaging? How do you get them at

the right temperature for the customer? What's the right amount of flexibility in the tortilla?

Snack wraps made it to market in 2006, 18 months after executives began discussing them. One of

the fastest launches the company has ever had, it accomplished what McDonald's has increasingly

tried to do: hit another price point on the menu and offer some food news that gives customers a

reason to go back into its stores. The process also helped McDonald's realize the potential of the

snacking market -- the growing segment that wants to nibble between meals -- and the chance to

increase traffic between mealtimes. An added bonus: The product team then took the same formula

for the snack wrap and applied its tortilla know-how at breakfast to create the McSkillet Burrito.

Both products use the same tortilla, so the kitchen isn't further complicated with another ingredient.

Skinner likes a new hit product as much as the next guy, but, he says, at this point in McDonald's

history another breakout blockbuster is unlikely. Growth these days is about scaling and executing.

Hence the operational zeal, which has evolved into a strategy that places a relentless focus on the

stores. Whenever his people travel on business, he wants them checking out the local McDonald's.

Robbie Hofmann, president of McDonald's supplier North Side Foods and a friend of Skinner's for

30 years, says that whenever they travel together, Skinner always coerces him into stopping for

coffee at the nearest McDonald's, where he spends the next half hour chatting with the crew --

after he's secured one of his back-up lids for his drink, of course.

Skinner knows the restaurants are the only place the cash register rings. Headquarters can cook

up any idea it wants, but if it overly complicates the kitchen, the product won't fly. This doesn't

always endear him to his finance executives, to whom he's been known to say, "I want to remind

you that it's a lot harder to make money than it is to count it!" At one time the company floated the

idea of putting deli sandwiches on the menu. The deal killer? The crew couldn't get it done in 55 to

60 seconds. "We talk about hospitality, we talk about friendly relationships, but we live in a world of

speed today," Skinner says. McDonald's customers at the drive-through don't want to be chatted

with, and they don't want to wait two minutes for a turkey sandwich.

Don't be afraid of your No. 2

There was a time when the idea of "Hamburger U," McDonald's training facility, used to elicit titters,

but to Skinner, who didn't graduate from college or earn an MBA, management training is no joke.

He created a leadership institute a year after he became CEO. One nine-month leadership program

brings together top-performing executives to work on addressing big issues for McDonald's.

Funding for another program, for all new officers, comes out of Skinner's own budget.

This push for talent development may be Skinner's greatest legacy at the company, which has

700,000 employees in the U.S. alone, thanks in part to its April "national hiring day" spree of

62,000 workers. He requires that all executives train at least two potential successors -- one who

could do the job today, the "ready now," in McDonald's parlance, and one who could be a future

replacement, the "ready future." One could speculate that this redundancy might have to do with the


f 6 24-08-2011 02:09



Skinner in company garb in the mid-1970s

way Skinner came into his current position. Every year the

executive team, including Skinner, reviews the top 200

positions in the company and the feeder pool, which means

it ends up looking at about 400 people. "We talk about all of

them," says HR chief Rich Floersch.

Skinner doesn't show much sympathy for employees who

can't handle the thought of having a subordinate right behind

them who's capable of tackling their job at any moment.

"That's always a danger, and some people can't live with

that," Skinner says. "I always like to say that my goal is to

surround myself with people smarter than I am. I'm not afraidof it." And Skinner seems to practice what he preaches: At

analyst meetings and on calls, he regularly defers to his No.

2, Don Thompson, who moved into his current job as chief

operating officer in 2010.

Skinner isn't exempt from having a "ready now," and Thompson is widely believed by analysts to be

his heir apparent. McDonald's doesn't have a mandatory retirement age, and the 66-year-old

Skinner won't say when he plans to make the move. He does offer one lighthearted hint: "People

always ask me when I'm going to retire," he tells me. "I say, 'When I run out of lids.'"

This article is from the September 5, 2011 issue of Fortune.

Posted in: CEOs, Charlie Bell, Chipotle, fast food, Jim Cantalupo, Jim Skinner , Leadership, McDonald's, restaurants

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