McDonald's COO Talks Challenges, Opportunities

OAK BROOK, Ill. -- After losing its way early last decade, McDonald's Corp. has spent the past seven years posting financial performance almost as golden as its arches. The stock has whipped the S&P 500, market share has grown, and earnings have chugged along despite a brutal economy, The Chicago Tribune reported.

Don Thompson, the 47-year-old Chicago native who took over as McDonald's No. 2 and chief of operations in January, said he's looking to coax even more growth from the Oak Brook, Ill.-based burger giant, though the company faces plenty of challenges.

McDonald's gets 36 percent of its operating earnings from Europe, where currency translation issues and a shaky economy cloud the future. Around the world, it is relying on an ambitious plan to spark broader demand in its restaurants by introducing a spate of new products and redesigning its restaurants, according to the report.

Thompson, a 20-year company veteran, has kept a low public profile since moving up from his old job as president of U.S. operations. The Tribune recently caught up with him for a wide-ranging interview about how he plans to keep the momentum going.

Tribune: You've been on a world tour since your promotion in January. Why was that your first priority?

Thompson: Our business is in the restaurants. It's not in an office somewhere. That's where the activity takes place and that's where you can understand the different customer tastes and societal norms that are out there. I wanted to get out and see our teams and understand the relevance of how they do business and what things we might do from a corporate perspective to support them.

Tribune: Europe is a big focus of McDonald's investors at the moment because of the turmoil in Greece and elsewhere. Your May numbers there were strong. But what's your outlook?

Thompson: Well clearly we're still in the midst of a tough economic environment around the world. We have performed relatively well; we'll do better if the economy gets better. [But] until we see better employment [in the U.S.] it's going to be tough to see a sustainable change. Until we see some of the concerns relative to what potential austerity measures may come into play around the world, we won't really know what the future is going to bear. But, what we do know is that at McDonald's we've got to be there for our customers throughout this time period, and that's what our focus is: Great product, great food, great experience, great service, and we've been reinvesting in our brand by reimaging our restaurants around the globe. This year we'll do over 2,000 restaurants, 500 in the U.S. We're operating from a position of strength with our customers and we're well positioned for growth as we move forward.

Tribune: With the market so uncertain, especially in Europe, how difficult is it to know how much to emphasize value pricing vs. a more profitable mix of products?

Thompson: We have teams, very talented teams, in each one of the major countries throughout Europe. We've got some countries that are performing at the absolutely highest levels of the overall corporation -- I mean markets like the U.K. are just phenomenal performers. At the same time I've got markets like Germany that have fought through a very intense recessionary environment. So Europe is not this monochromatic scene, so to speak, just like the U.S. isn't. Cross the U.S. from one end to the other and there are some very different economic circumstances. So we have different programs for different focal points across the country. I think that the way we've introduced coffee in the U.S. and we're introducing McCafes all over Europe, the way we have continued to gain market share and reinvest at the same time -- that's what's making McDonald's a really special place for customers.

Tribune: Since 2003, McDonald's has emphasized store quality over growth. Does that emphasis still make sense?

Thompson: We've got to be able to focus on both. There was a time in our history when it was all about being bigger and, frankly, we let the same-store focus slip. Food quality, great service, the cleanliness of the restrooms and the lobbies is just as important today as growing a new site. It's even more important, frankly. Having said that, we do have markets around the world that are poised for growth. China's a good example, Russia is a good example. Some areas are going to focus more on reimaging the existing restaurants and reinvesting in those. Other areas are newer and may not have the same level of reinvestment need, so maybe there's more market growth. We don't have drive-thrus everywhere around the world in places that could really benefit from it. We don't serve breakfast all around the world and there are markets that will benefit from that. So one of the reasons I'm out and about is to understand the growth opportunities [in] each market.

Tribune: Are you worried that customers used to recession-inspired offerings like the $1 breakfast menu will have a hard time trading back up to new products like premium coffee?

Thompson: We will always have a need for value. It's interesting to note that back in 1955, we sold a 15-cent hamburger. If you look at the 89-cent hamburger and you discount inflation, that would be 11 cents in 1955. What we have been able to do is maintain value at all price tiers. We need it at the lower-level product tier. We need it in the midtier. We need it in our core extra value meals. And we need it in our premium chicken sandwiches, our premium salads. We need value up and down the menu board.

Tribune: How does the restaurant remodeling campaign fit into that?

Thompson: Here's the interesting thing about a reimaged restaurant: One neighborhood may not have the same disposable income as another neighborhood, but you still want a great experience. So we're not reimaging our restaurants just in affluent neighborhoods. We're reimaging all of our restaurants. I want every customer that comes into McDonald's to have an enhanced experience. I want every last one of them to feel like "Wow! Man, this is a great McDonald's. I didn't even realize this was McDonald's."

Tribune: So will it be done differently in different kinds of neighborhoods?

Thompson: We will look at the economic viability of any site regardless of where that site is situated. But then, having looked at that, we will talk to the franchisees about [the] several different styles that they can choose from and which style they think best suits their marketplace and customers. It's really based upon more than a geographic bet or what I'll call a disposable-income bet.

Tribune: You're taking over as COO after six years of strong performance. How do you keep the momentum going at a company that seems to be at the top of its game?

Thompson: Well, we're not at the top of our game. And none of us believes we're at the top of our game. We believe we've performed well but we also believe there's tremendous opportunity relative to what we need to do and how we need to continue to perform. I'll tell you, I've been around for 20 years at McDonald's and I have come into markets that were doing great and I've come into markets that were not doing so well. I've seen us [in] profitable times and I've seen us when our stock price was $12. When we embarked upon coffee in the U.S., [people asked] "Are you doing it at the right time? Is there truly a market?" The coffee business has been fantastic for us. They asked us about Angus in the U.S. "Are you sure you want to implement a $4 hamburger?" Our customers believe that sounds like a tremendous value relative to (the competition). So there's a lot of opportunity we still have.

Tribune: The COO has traditionally been seen as the heir apparent at McDonald's. Do you expect to run the whole company someday?

Thompson: I've been asked that question before. I've always said pretty much the same thing: I've never asked for a promotion at McDonald's. What I've tried to do is do the job that was put before me by our senior management team and the board the best that I absolutely could. And that's the same thing I'm doing now. There's a lot that I have to learn and a lot that I'm learning. [McDonald's Chief Executive] Jim Skinner is a fantastic coach relative to what's taking place with me and with this role. So if called upon to do something different? I've moved all over the country with McDonald's -- back and forth. I've been in a lot of cities and my family has been great to move along with me. So all I can say is I want to do what I'm doing right now well, and I want our company to do as well as we can do.

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