McDonald’s CEO Chris Kempczinski On Corporate Innovation

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McDonald’s CEO Chris Kempczinski On Corporate Innovation
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The following is the unofficial transcript of a CNBC interview with McDonald’s CEO Chris Kempczinski from the CNBC Evolve Global Summit, which took place today, Wednesday, June 16th. Video from the interview will be available at cnbc.com/evolve.

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Interview With McDonald's CEO Chris Kempczinski

Carl Quintanilla: Chris, we're always grateful when you make time for us. It's great to see you again. Thanks so much for this today.

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Chris Kempczinski: Yeah, my pleasure. Thanks, Carl.

Quintanilla: I was thinking about you and the company and sort of corporate adaptation and evolution and innovation. And I was thinking back to the conversations we had in the very early days of the pandemic, where information was very scarce, there was very little context, it was highly emotional, and you were having to make a lot of very tough decisions very quickly. And I wonder when you look back now, in hindsight, when you think about that period, were you operating through some kind of planning matrix or was it truly fly by the seat of your pants? How do you describe that period now?

Kempczinski: It was all of that. it was incredibly confusing just to get your arms around everything that was happening and it was changing in 120 countries where we operate in real time. And I think, you know, the reality is, nobody was prepared to have to deal with a situation of this magnitude. I think in my case, one of the things I wanted to do at the beginning is I just laid out some principles. So as opposed to trying to anticipate every decision to just provide the organization with a set of principles that would use – that I wanted them to use for how to go about making decisions. So started with we're all in this together. And we needed to have that mentality that we all need to help each other through this. Franchisees, suppliers, the company etc. Second for me was we're going to lead by example, which means we're not going to ask the crew to go to places that we wouldn't ourselves be willing to go to, we're not going to ask of others things that we aren't willing to do. We're going to be transparent, we're going to say what we do know what we don't know. We are absolutely going to be making decisions for the long term so, let's not get caught up in the short term here and now. And we've got to say a true to our purpose. We have to be here to feed and foster communities. And so I just I laid out those principles for the organization as a framework to then think about the decisions that they needed to make in real time in the markets. And I think that served us pretty well. Over time as things started to evolve, we got a better handle around things, but in the beginning it was just providing some broad brush parameters.

Quintanilla: And then – you're right. We did get to that period where it became very clear that quick service, especially, was going to be hit with a wave of demand. And I wonder at what point did you realize that because of that, you were going to be able to be aggressive even as lots of other companies in this country at least we're having to hunker down, raise debt, raise cash.

Kempczinski: Certainly we came into this pandemic in a very strong position. We had had several years of strong growth in the U.S. business. We had a very strong position from a balance sheet standpoint. And so, I think the biggest thing for us was to first get the franchisees to understand that we were going to be here to support them, that they were all going to get through this. And that's why, back in April, one of the things that we did, we injected about a billion dollars of liquidity into our system to be able to get the franchisee mindset to orient away from worrying about, “am I going to be able to pay, you know, my mortgage or pay my loan that's due this month?” To get them out of worrying about that. And to think about longer term, how do we position ourselves. And so, once we had that sort of behind us, I think we did recognize that the pandemic offered us a number of opportunities. One was to simplify our menus. We had to do simplicity in our menus, both out of necessity, because we just didn't have as many people able to work in the kitchen. But I also think there was an opportunity there where we saw the power of our core menu. You know, one of the interesting things that happened is in the pandemic, people started going and wanting their familiar favorites. They were less interested in experimenting and much more interested in our core, so, getting re-grounded in that from a business standpoint. And then, we're so fortunate in our business to have drive-thru at 95% of our restaurants and to see how that became such a go-to service channel for customers as they were dealing with the pandemic – I think those two things together, all of a sudden, it’s this mindset switch from being, you know, one of defensive to really being much more aggressive.

Quintanilla: See, I think that's fascinating because it was your competitive advantage, more drive-thrus than anybody else, better engineering  I'm sure you would argue than anybody else and you streamlined to your core and you focused in on delivery and digital. Dine-in is not one of the D’s you talk about much. And I would never expect you to say that dine-in is dead, but long term is that a fade?

Kempczinski: I think dine-in is always going to be here. Eating is such a social experience and dine-in is a part of that social experience. So, I think dine-in is here to stay. It varies also around the world. You know in Europe, our dine-in business is the majority of the business. Here in the U.S., dine-in is about 25% of the business. So, I think it also depends a little bit on the cultural context. In Europe, we are certainly planning on dine-in becoming again the dominant form of how a customer experiences McDonald's. I think in the U.S., we may see dine-in take longer to recover. I think the three D’s that you referenced – digital, drive-thru and delivery – those are going to be elevated for a sustained period of time, not just in the U.S., but around the world. But we know and we're certainly expecting that dine-in is also going to be an important part of the McDonald's experience.

Quintanilla: You know, some of us are old enough to remember when you sold more beef than chicken. I remember my first McNugget. I think I was 10 or 11-years-old. And I wonder, as you think about changing diets over the long term, where you think plant-based is going to end up. One of the marketing chiefs of Impossible Foods was on the radio the other day and she said that “five to ten years from now people will say remember when we used to eat meat made from animals? How weird is that?” Or how weird was that I guess is what her point is. I wonder if you think that's overselling it or if there's the germ of a possibility in there.

Kempczinski: You know, you never know. I love when I get asked these types of questions. Ray Kroc had a great quote, he's said about a similar type of question in terms of what was McDonald's going to be selling in five or 10 years. He said, “I don't know. But I do know we're going to be selling more of it than anybody else.” And that's a little bit of my attitude when it comes to plant-based, or chicken, or beef, which is what we follow the customer. So, wherever the customer wants to go, we're going to evolve our menu to meet those needs. And if that means that plant-based becomes the dominant thing that people are eating in the future, then our menu is going to reflect that. To the degree that plant-based doesn't have that sort of uptake and, you know, it remains more of what you see today, then our menu is going to reflect that. But I think, I've said, you know, we do recognize that plant-based is a long term trend, but I think what we've seen over in history as well is these things tend to take quite a while to play out. These are not things, in our experience, that happen overnight. So I think, perhaps, the Impossible CMO that you referenced maybe was a little optimistic about how quickly these sorts of consumer trends happen.

Quintanilla: Right. Well, they're on a maybe faster time schedule than some others. Speaking of long-term shifts, wages, of course. It's been remarkable year on that front. There was the argument made the other day and I know you've recently made some announcements about raising wages by an average of 10% for tens of thousands of employees. Some argue that because $15 is sort of now a benchmark of sorts – not just at McDonald's, but at Amazon, Costco and Starbucks – that the so-called fight for 15 has been essentially won. Do you think that's true?

Kempczinski: I think what's happening is that you're seeing that a great economy is very helpful to growing employee wages. And I think many of the changes that are happening from a wage standpoint are happening because of companies like McDonald's needing to compete for the best talent. So, I think, you know, what you're seeing here is the benefit of that. You know, our move that you referenced around paying $15 an hour by 2024, which is the timeline that we laid out, is because of our need to stay competitive. And when you have Walmart and Amazon, Target that you referenced, all moving to $15, certainly that's a talent pool that we're competing with. So, you know, we respond to where the market is moving and I think there's also been, you know, the topic about whether there needs to be, you know, change in the federal minimum wage. We have always said that we're happy to have that conversation. Ultimately, that's a policy question for lawmakers to make. But I think there there's no doubt that 7.25 in this day and age is not what you should be paying or need to be paying to be competitive in the marketplace. Whether that's mandated through legislation or whether you just let, you know, kind of free market capitalism rule the day, wages are going up because the economy is strong.

Quintanilla: Yeah, speaking of issues that are either lead through policy or activist pressure, I'm thinking of all the things that CEOs are being asked to weigh in on in this modern era. Whether it's voting rights, or wages or benchmarks on diversity and inclusion. Does that ever make you uncomfortable? Do you think that you're being asked to address things that you really weren't hired to address, you were hired to run a business?

Kempczinski: I think, you know, part of it is to recognize that the role of corporations in society I think has evolved over the last call it 20-30 years and it's evolved for a number of reasons. I think one is that, you know, other institutions like the federal government are less respected and less viewed as being problem solvers. And so, one of the consequences of that is that corporations are being asked to stand in where in the past, other institutions played a bigger role in this. I think second is you're seeing whether it's from employees or customers that they are making decisions about where to work, who to be patronizing based on, “does that corporation reflect the values that are important to me?” And so, I think both of those in combination have required corporations to become a little bit more clear about what they stand for. I think if you're a consumer company even more so. If you are a global consumer company, even more so. And so, I think for McDonald's, you know, what we've tried to think through is how and when do we speak out. I was asked about this at our annual shareholders meeting and what I said is quite simply when we think about it, we think about it first, does it directly impact our business? So, is this something about either the corporation or the industry that we compete in? Or does it go to our set of values that we believe – we have five values that are central to what we stand for at McDonald's that have endured over time. And if it's an area that we think you know directly impacts our business or our values and where we think our voice can be helpful, we will speak out. It’s why we spoke out on Black Lives Matter. It's why we’ve spoken out on climate change. It's why we spoke out on what happened at the Capitol on January 6th. And it's why we have not spoken out on a whole host of other topics. So, I think, you know, what's going on today, it doesn't make me uncomfortable, but I think you just have to be very clear about where does your corporation see a role to speak and when does it know to stay quiet. And ultimately, you know, we are a non-political organization. We don't pick sides. We just have to stay true to who we are and that'll work itself out from a political standpoint through the democratic process.

Quintanilla: You've got the added complexity of a franchisee relationships or operator relationships and you've either got to coax, or cajole, or convince a lot of independent small business owners – some of whom have been with you for generations by the way – to see things the way you see them. When we hear about turmoil – and it's been going on as long as McDonald's has been around – between corporate and franchisees, what do people not usually understand when they see headlines about franchisee relations that are frayed?

Kempczinski: Yeah, I think the biggest thing is to recognize in the U.S. we have 2000 franchisees, globally we have 4000 franchisees. And our franchisees reflect the society that we live in. It actually goes back to how McDonald's was founded. McDonald's – the idea behind being a franchise business is we wanted a diverse set franchisees that reflected the communities that they served, that reflected society. And so, just as society itself has, you know, had an even greater focus on lots of different points of view, lots of different discussions and ways that those come about, it's no surprise that same dynamic plays out in our system as well. And so, I think, you know, what I would say to anybody who's, you know, noticing that or reflecting on it is, you know, we have the same types of conversations, the same dynamic in our system that exists in society at large. I think what I get so gratified though about with our system is that we ultimately are able through that discussion to come together to find solutions and ultimately, it makes us better. I think, you know, McDonald's is a great example of where diversity of thought actually leads to a better business, leads to a better system. And I hope, you know, maybe others can learn from that. So, from my vantage point, that would be the big thing for people to recognize.

Quintanilla: Finally, Chris, I know you are a graduate of Harvard of Business School where the case study method is quite famous. And I wonder, in your ten years so far, has there been an episode where if you were writing a case study for the class of 2021 or ‘22 or ‘23 at McDonald's, what would it be?

Kempczinski: Great question. I think, you know, to me maybe what it would focus on is leadership and culture. Because at HBS, there's a lot of discussion certainly about, you know, the tax and accounting and strategy. But so much of what I've seen comes down to culture and strategy or culture and communication. And what we've been through in the last call it 18 months or so, has just highlighted for me how important a strong company culture is and how critical it is for voters to be able to communicate and be out in the front of their organization. And so, I think having that be a nice little add to the curriculum. Also, you know, those end up being a little more fun cases to read. As I remember reading some of the cases on accounting were not exactly page turners, so, you know, find something fun to talk about.

Quintanilla: Well, Chris, it's been remarkable to watch the company pivot around all these curveballs you've gotten in the last year and a half and we will continue to watch McDonald's with interest. We appreciate your time. As always, thanks so much.

Kempczinski: Great. Thanks, Carl.

 

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Jacob Wolinsky is the founder of ValueWalk.com, a popular value investing and hedge fund focused investment website. Jacob worked as an equity analyst first at a micro-cap focused private equity firm, followed by a stint at a smid cap focused research shop. Jacob lives with his wife and four kids in Passaic NJ. - Email: jacob(at)valuewalk.com - Twitter username: JacobWolinsky - Full Disclosure: I do not purchase any equities anymore to avoid even the appearance of a conflict of interest and because at times I may receive grey areas of insider information. I have a few existing holdings from years ago, but I have sold off most of the equities and now only purchase mutual funds and some ETFs. I also own a few grams of Gold and Silver

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