At McDonald’s, an abrupt change in leadership has investors wondering what’s next

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Over the weekend, McDonald’s unexpectedly announced a swift change in leadership.

Steve Easterbrook, who became CEO and president in 2015, was fired by the board for engaging in a “consensual relationship with an employee.” He was immediately replaced in both roles by Chris Kempczinski, who was most recently president of McDonald’s USA.

The management shakeup threw investors for a loop. Before his disgraceful departure, Easterbrook was lauded for ushering McDonald’s into a period of growth. He took over when sales were falling and the stock was underperforming compared to the market. Over the course of his four-year tenure, the company’s stock price more or less doubled and sales improved. Uncertainty around his exit drove shares of McDonald’s down about 3% on Monday.

As the leader of McDonald’s USA, Kempczinski participated in a lot of the decisions that fueled the company’s turnaround. He has been the “heir apparent” to Easterbrook since joining the company in 2015, said Morningstar analyst R.J. Hottovy.

But he has also largely stayed out of the public eye. With such a sudden shift, investors don’t know what to expect.

“Chris Kempczinski is such an unknown factor,” Hottovy said. “Any time you have an abrupt leadership change and an unknown quantity …. it is going to make investors uneasy.”

To gain their trust, Kempczinski has to assure investors that he will continue Easterbrook’s successful initiatives. He’ll also have to make sure ties between leadership and franchisees are strong. And to really make an impression, he’ll have to figure out a way to bring more customers into restaurants.

Plus, investors will look “for Chris to set his own vision,” said Hottovy.

To figure out how Kempczinski may move forward, stakeholders can look at what he’s done so far.

Franchisee tensions

Kempczinski played a key role in some of the company’s more successful initiatives, like using fresh instead of frozen beef in quarter-pounders. And he helped develop the company’s so-called Velocity Growth Plan, which the McDonald’s began to implement in 2017.

The aggressive growth strategy expands the company’s digital capabilities, reaches more customers through delivery and renovates restaurants to improve customers’ in-store experience.

Speaking during the company’s 2017 investor meeting, Kempczinski noted 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.

Though that pressure may have helped improve customer satisfaction, it put a strain on some franchise operators. For them, the initiative meant pouring funds into an expensive new project with unknown results at an aggressive speed.

In 2018, McDonald’s franchise operators formed their first-ever advocacy group, called the National Owners Association.

“There’s been some friction with Chris,” said Hottovy. “He had a reputation for being hard on the franchisees, at times.”

McDonald’s leaders often describe the business as a “three-legged stool.” One leg represents suppliers, another employees, and the third franchisees. For McDonald’s to succeed, Kempczinski has to make sure that third leg doesn’t wobble.

Focus on traffic

Both franchise operators and investors can agree that to continue to compete, McDonald’s will have to increase customer visits to restaurants. Traffic at US restaurants was down in the third quarter, reflecting a continuing trend.

In a July email to fellow owners, the NOA board wrote that despite efforts to improve the drive-thru and increase efficiency in stores, “we are still losing guest counts,” adding that “this continues to be a concern.”

Boosting traffic could set the new CEO apart from his predecessors, said Peter Saleh, a restaurant analyst at BTIG.

“Mr. Kempczinski’s legacy will hinge on his ability to generate traffic growth in the US, which neither of his two predecessors were able to achieve,” Saleh wrote in a note on Monday.

Franchise operators think that menu innovation is the way forward. In a July note, the board recommended the addition of a premium chicken sandwich to the menu, one that would be able to compete with Chick-fil-A’s popular food.

“A chicken sandwich at McDonald’s should be our top priority,” they wrote. “JFK called for a man on the moon. Our call should be a category leading chicken sandwich.”

On that, the franchisees and Kempczinski may agree.

“He really does have a good eye for menu innovation,” said Hottovy. And his leadership could “be a way to re-energize people and get them focused more on traffic.”

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