Is McDonald’s Turnaround Plan Working?

McDonald’s (MCD) announced its turnaround plan on May 4, 2015. The plan focuses on structural changes, menu simplification, and fixing the public perception about its food.

McDonald’s (MCD) turnaround plan, which went into effect on July 1, 2015, will take several months to yield results as far as the company’s performance goes. Nonetheless, the 2Q15 earnings call offered a few updates on some plan-related developments.

As the next quarter rolls out, the company will report according to these four segments:

• US market – the United States
• International Lead Markets – Canada, France, UK, Germany, and Australia
• High-Growth Markets – China, Russia, South Korea, Poland, Italy, Spain, the Netherlands, and Switzerland
• Foundational Markets – remaining ~100 markets

According to McDonald’s CEO, Steve Easterbrook, this new structure took only two months from inception to execution and will improve McDonald’s “efficiency and effectiveness.” As a result of this restructuring, the company incurred $45 million in severance charges during the quarter.

The Consumer Discretionary Select Sector SPDR (XLY) invests 4% of its portfolio in McDonald’s.

The various markets will require different strategies due to different tastes and preferences among their customers. For example, in the US, the customer trend is moving toward fast-casual formats along the lines of Chipotle Mexican Grill (CMG), Shake Shack (SHAK), and Panera Bread (PNRA). These chains focus on food quality.

In Australia, people like to personalize their menus, so the company will cater to that preference. Elsewhere, it will be something different.

With its new structure in place since July 1, management was able to provide a few positive updates on its progress during the quarter:

• Having determined that customers prefer to customize orders in Hong Kong and Australia, the company is now implementing more options in this regard.
• The McDonald’s restaurant experience was relaunched in Germany, along with new offerings. Same-store sales growth in this market turned positive for the first time since 2012.
• The company is implementing two-lane drive-throughs and faster service to improve convenience in the Canadian market.
• The company is focusing on “value, service, and menu” in the US market, with the hope it can turn around the three-year decline in same-store sales.

These are just some of the key changes stemming from the new structure. It will take time for these changes to show up in the bottom line, considering the size and scale of McDonald’s.

The first two segments contribute 80% of McDonald’s revenue. We’ll discuss developments in these two markets in more detail, next.