McDonald's revival recipe leaves investors hungry for more

McDonald's has pledged to restructure and cut costs in a long-awaited plan to revive flagging sales, but analysts questioned whether its new chief executive had done enough to catch up with a revolution in consumer tastes that he admitted it had failed to navigate.

"In the last five years, the world has moved faster outside the business than inside," Steve Easterbrook said in a 23-minute video on Monday. "I will not shy away from the urgent need to reset this business."

The British CEO, who took over from Don Thompson in March, said the plan to become a "modern, progressive burger company" acknowledged the reality that "our recent performance has been poor".

McDonald's sales have suffered in recent years as US consumers shifted from burgers and fries to food they perceive to be healthier. Mr Easterbrook said new marketing and menu items would highlight its use of fresher and more natural ingredients.

Analysts applauded the $300m in annual cost savings the company plans to deliver by 2017, and a restructuring that will allow it to focus on its most important markets. But shares traded down as much as 1.4 per cent following the announcement, which some analysts saw as sparse on details given the expectations that had been building since Mr Easterbrook's appointment.

Standard & Poor's also downgraded the company's credit rating from A to A- after it said it would ramp up share buybacks to return $8bn-$9bn to shareholders this year. S&P said it could cut the rating another notch if US and Chinese sales do not pick up.

"We think the big challenge will be wooing millennials and turning around [comparable] store sales," said Efraim Levy, analyst at S&P Capital IQ. Traditional fast-food joints like McDonald's are losing millennial consumers to so-called fast-casual restaurants like burrito chain Chipotle, which are growing two to three times as fast.

Under Mr Easterbrook's plan, the company will be reorganised into four segments, grouping markets with similar characteristics. The two biggest, each accounting for 40 per cent of revenues, are the US and "international lead markets" including Australia, Canada, France, Germany and the UK.

High-growth markets - China, Italy, Poland, Russia, South Korea, Spain, Switzerland and the Netherlands - account for 10 per cent of revenues, while the "foundational markets" segment includes about 100 other countries.

"Having clusters of similar markets run by a single person will create urgency and speed", Mr Easterbrook said, helping McDonald's remove layers of bureaucracy.

The company will also accelerate refranchising, bringing the total to 90 per cent of restaurants by 2018, from 81 per cent today, while opening 1,000 new restaurants a year.

"The business cannot ignore what customers are saying when the message is clear - we are not on our game," Mr Easterbrook said.

Mark Kalinowski, of Janney Capital Markets, wrote to investors that while the company had offered "broad commentary" and some details, it was not as much "as many had hoped for".

Mr Easterbrook had already announced a number of moves intended to revive the brand, including revamping the chain's complicated menu, new marketing campaigns and curbing the use of antibiotics in its chicken.

But the efforts have done little so far to lift sagging US same-store sales, which fell 2.6 per cent in the first three months of the year, the sixth quarterly sales decline in a row.

Some decisions seem to have backfired, including the move to raise wages for around 90,000 employees at McDonald's-owned restaurants, which has come under fire because it does not affect workers at franchisee-owned outlets.

The company has also struggled overseas, with same-store sales falling 0.6 per cent in Europe and 8.3 per cent in Asia in the first quarter. The company's image has been hit by a chicken nugget scandal in China, while objects including a human tooth and pieces of vinyl have been found in its food in Japan.

Mr Easterbrook previously led a turnround of the group's UK operations, and he said his home market would serve as a major market pacesetter for global plans.

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