How McDonalds Lost Its Way

Larry, can you set a bit more context just for us to dive into McDonalds here, what was actually going wrong at the time?

McDonalds was a financially driven company. It was a finance company that happened to make hamburgers. It wasn’t a hamburger company that happened to make money. The focus wasn’t on the customer experience, it was on the Wall Street experience. The metric wasn’t sales, share, favorability, brand strength. It was stock price. That led to some seriously bad marketing decisions. I’ll just highlight one. The number one driver of sales was not sales per store. It was number of stores. Increasing distribution became the number one driver of sales. At the annual planning meetings, it wasn’t how do we increase the sales of an individual store or an individual franchisee? It was how many stores will we open up this year to meet our financial objectives? You started to develop a business model that was a real estate model, not a fast food restaurant model. Eventually, you ran out of places to build new stores. Then since the focus wasn’t on existing stores, it was on new stores, existing stores sales started to decline. You couldn’t open new stores fast enough to compensate for the decline of sales at existing stores. That’s when the business cratered in 2002.

When you say cratered, how substantial were these declines in activity?

It was substantial. I don’t remember the sales decline, but most dramatic number that people focus on, the stock was 45 in 2001. It was 13 in 2002.

The market had lost confidence in the strategy of the business.

The market lost confidence, franchisees lost confidence, employees lost confidence, as usual, what happens, your best talent leaves because they can easily get a job at another company. You had a talent decline, you had franchisee morale was terrible. It was inevitable. If you don’t focus on the business you have or the way I like to say it, love the customer you have more than the customer you don’t have.

How were customers responding?

Customers were going somewhere else because they (McDonalds) weren’t focused on the existing stores. They weren’t focused on quality innovations. I think they had introduced over a period of time, over 20 new products without one single success. The new products were there to generate awareness, keep us in the news. They weren’t marketing driven new products that were designed to satisfy customer needs and wants.