Fired McDonald's CEO admits relationship 'mistake'

McDonald’s Corp. fired Chief Executive Officer Steve Easterbrook because he had a consensual relationship with an employee, losing the strategist who led the company’s charge into online ordering and delivery.

The burger chain’s board voted Friday to terminate Easterbrook, 52, after investigating the relationship, which violated company policy, according to a statement Sunday. McDonald’s policy doesn’t allow the CEO to have a relationship with anyone in the company. Chris Kempczinski, who runs U.S. operations, was promoted to president and CEO.

“This was a mistake,” Easterbrook said of his actions in an email sent to employees. “Given the values of the company, I agree with the board that it is time for me to move on.”

McDonald’s shares fell as much as 2.9% in New York Monday, hitting its lowest point since April. The stock had almost doubled since Easterbrook took over in March 2015, more than twice the gain in the S&P 500 Index, giving the company a market capitalization of $147 billion.

Easterbrook was seen as relentless in his push to capture a new generation of customers who would be willing to order through smartphone apps, pay online, and choose to have food delivered to home or work instead of venturing into outlets. To stress urgency, he tied executives’ compensation to the speed and breadth of the delivery rollout, and worked with vendors including UberEats.

His strategies are paying off: same-store sales, a key metric of success, recovered with the arrival of all-day breakfast, and he axed poorly selling items and added new ones while creating lower priced value menus to draw in diners.

“You can make a very strong argument that Easterbrook was the best CEO in the restaurant industry,” said Michael Halen, who covers the sector for Bloomberg Intelligence.

He is eligible for 26 weeks of severance pay - equal to about $675,000 based on his annual salary of $1.35 million - and 18 months of health benefits, according to filings on Monday. He also signed nondisclosure and noncompete agreements and will keep some options and equity awards. Kempczinski, meanwhile, will receive a base salary of $1.25 million with a target annual bonus of 170% that amount.

Will Slabaugh, an analyst with Stephens Inc. said Easterbrook’s departure will likely “come as a fairly significant negative for investors, given his history of impressive and consistent global results,” including turning around the core U.S. business and driving stock gains.

However, he cited Kempczinski’s established relationship with franchisees and past involvement in strategy and development as a positive for the incoming leader.

His relationship with restaurant owners will be crucial, because Easterbrook’s changes caused some franchisees to chafe at the expenses being pushed down from the corporate headquarters in Chicago.

McDonald’s independent group of franchisees, the National Owners Association, didn’t immediately reply to requests for comment. Store owners are scheduling a private conference call to discuss how to respond and protect the brand, according to a person familiar with their plan who asked not to be identified.

“Large public companies are less likely to tolerate such behavior because of reputational risk concerns,” said Yuen Teen Mak, a professor at NUS Business School in Singapore wrote in an email. “The nature of the business may also be a factor -- after all, their target customers are families and children.”

Kempczinski, who’s also joining McDonald’s board, is taking over a behemoth chain, with more than 38,000 locations in 100 countries, including 14,000 in the U.S.

He’ll have to contend with stagnant customer traffic across the restaurant industry. Growth has been fuelled in recent quarters by higher prices, but chains have struggled to bring in larger volumes of diners. Competition has intensified as consumers eat out less and buy more prepared foods from grocery stores.

Best performers

In recent quarters, McDonald’s has been one of the industry’s best performers, with same-store sales rising 5.9% globally in the latest quarter, more than analysts had projected.

It hasn’t been quite as easy in its home market, where heavy discounting by rivals and more competition at breakfast has made it harder to get customers in its doors, resulting in a slowdown in customer traffic last quarter. But those who do come in are spending more and more, keeping the company on comfortable footing.

The company has sought to renovate its image by remodeling its locations -- but franchisees have complained about the high costs associated with changes like building a wall to hide the kitchen operations behind the cash registers. In 2018, it slowed the pace of remodels, letting operators complete them by 2022 instead of the initial goal of 2020.

The improvements have also included self-ordering kiosks and even extra drive-thru lanes in some locations. While the company’s fundamentals are solid, the CEO change could presage additional disruption, Piper Jaffray analyst Nicole Miller Regan said in a note.

“Our experience leads us to take a more cautionary view, noting the potential lack of momentum and time involved in formalizing a new team,” she said.

Follow WP on Facebook, LinkedIn and Twitter

Copyright Bloomberg News