McDonald's Says Its Restaurants Got Too Complicated

McDonald's Corp. Chief Executive Don Thompson said that the fast-food chain has lost relevance with some customers and needs to improve its menu offerings and provide better value.

On Thursday, McDonald's reported flat sales and earnings for the fourth quarter. Same-store sales slipped 0.1%—marking a second quarterly decline in 2013—weighed down in part by a steeper-than-expected 3.8% drop during December in the U.S., McDonald's biggest market.

After nearly a decade of outperforming other restaurant companies, McDonald's has struggled lately. Franchisees and executives have said the company's more complicated menu—after years of adding items to suit broader tastes—has slowed service and turned off customers, while failing to attract lots of new business.

Mr. Thompson said 2013 was a challenging year and that while he expects improvement in 2014, January is shaping up as another sluggish month, with same-store sales likely to be flat.
"The key is going to really be to re-establish the trust of customers," Mr. Thompson told investors on a conference call. "That means basic execution at a restaurant level, marketing engagement at a much stronger level and also to make sure that our menu is relevant."

Mr. Thompson became CEO in July 2012, succeeding Jim Skinner, who had overseen eight years of strong sales growth and a roughly 188% run up in the McDonald's stock that transcended the global economic downturn. Since then, however, sales have been soft: Same-store sales last year edged up just 0.2%, the slowest annual gain since 2002, when global same-store sales fell 2.1%. And the share price rose only 10% in 2013, compared with 25% for the Dow Jones Industrial Average.

McDonald's executives say they have learned from their mistakes of the past year and are moving to correct them. The company rolled out numerous menu items in quick succession, creating a bottleneck in the kitchens. They also rolled out products that were too expensive for many consumers, including chicken wings that were priced far above competitors' offerings, leaving the chain with approximately 10 million pounds of unsold wings, according to a person familiar with the matter.

"We overcomplicated the restaurants and didn't give restaurants an opportunity to breathe," Tim Fenton, McDonald's chief operating officer, said during Thursday's call. "We need to do fewer products with better execution."

The chain is revamping its kitchens to include expanded prep tables to give employees more space to assemble food. It also plans to add more employees at peak hours and during weekends.
Mr. Thompson said the marketing needs to reflect efforts to improve its menu. McDonald's on Wednesday announced the appointment of Deborah Wahl, formerly chief marketing officer of home builder PulteGroup Inc., to be its new chief marketing officer for McDonald's USA.
"We've got to make sure that the food is relevant and that the awareness around McDonald's as a restaurant that prepares fresh, high quality food is strong and pronounced in our marketing and our messaging," Mr. Thompson said.
 

For 2014, McDonald's is budgeting for $3 billion in capital expenditures, which will cover up to 1,600 new restaurant openings and the refurbishing of more than 1,000 existing locations. The company also expects to return about $5 billion to shareholders through dividends and share repurchases.

In the latest quarter, same-store sales in the U.S. fell 1.4%, while in Europe they grew 1%, as strong performance in the U.K., Russia and France was partially offset by Germany. The Asia/Pacific, Middle East and Africa region's same-store sales fell 2.4%, reflecting weakness in Japan and relatively flat performance in China and Australia.

For 2014, McDonald's is budgeting $3 billion in capital expenditures, which will cover up to 1,600 new restaurant openings and the refurbishing of more than 1,000 existing locations. The company also expects to return about $5 billion to shareholders through dividends and share repurchases.

—Ben Fox Rubin contributed to this article.