McDonald's salad days: despite the death of two CEOs, the company has been able to dramatically remake its menu--and spur new sales.

When Jim Skinner was promoted to vice chairman of McDonald's in 2002 by newly appointed Chief Executive Jim Cantalupo, he was thrilled at the chance to help his old colleague try to revive their lifelong employer. They hatched what they called the "Plan to Win"--an attempt to restore consumer relevance to the wayward and faltering fast-food leader. And they enlisted a hotshot young protege named Charlie Bell who would see things through for the long term.

The trio succeeded in turning things around beginning in 2003. But Cantalupo died of a heart attack in April 2004 while attending a franchisee convention in Orlando. Then Bell, his 44-year-old successor, succumbed to colon cancer early this year.

Rather suddenly, Skinner, who at age 60 had been flirting with the idea of retirement just a few years earlier, instead found himself running one of America's most iconic brands. "If you look at the 2003 annual report, there's a picture of Jim, Charlie and me," says Skinner, in an interview at the company's low-slung, heavily forested headquarters campus in suburban Oak Brook, Ill. "People here felt it was a natural thing, and I think I had a number of people rooting for me, including the board of directors."

Since then, Skinner has been overseeing a renewal of the kind of financial dynamism that once made McDonald's a Wall Street darling. He is accelerating the exploration of new-product concepts such as premium coffee, and expanding service enhancements such as late-night hours. He is introducing new lines, including higher-priced and healthier offerings such as fruit salads and grilled chicken strips.

And while apparently preparing to hand over the company someday to Michael Roberts, who heads the U.S. division, Skinner has established internal talent development as a top priority--mindful of the importance of McDonald's having deep bench strength.

Skinner still faces challenges, including how to sustain the company's renewed momentum. But perhaps most important, Skinner's performance during the past year already has reassured McDonald's investors, franchisees, employees and other constituencies that he is maintaining the strategy and determination that turned the Plan to Win into a reality right from the start. "Jim Skinner will carry it on," says David Kolpak, an analyst for Victory Capital Management, a Cleveland-based securities firm that owns about 3.5 million shares of McDonald's stock. "He's there for his operational expertise and the thorough knowledge of the company he has developed over the years."

Focus, Focus

Four years ago, continuity was the last thing that anyone wanted to see out of McDonald's. Over the last half of the 20th century, perhaps no other company had become as synonymous with American fast food as McDonald's, and no other restaurant chain was as ubiquitous at home or abroad. But under former CEO Jack Greenberg, the company placed an overweening emphasis on opening new locations around the world--in the process, saturating markets and relaxing the performance demands on individual restaurants. The purveyor of Big Macs and fatty fries also became an easy synonym for America's growing struggle with obesity. And then Greenberg diluted the company's focus by acquiring other restaurant brands such as Boston Market.

After McDonald's posted its first-ever quarterly loss in late 2002 amid stagnating same-store sales, its hands-on board ushered out Greenberg. The average tenure of McDonald's CEOs was more than a decade, so the move was seismic enough even without directors completely upsetting things by seeking an outside chief. Instead, they plucked Cantalupo out of a brief retirement, installed the former head of international operations as the new CEO, and added Skinner and Bell to the turnaround team. "We decided to clear the decks and focus on customers and on doing what we did best," Skinner recalls, "and that is running McDonald's restaurants."

Back in 2001, under Greenberg, the company had rolled out a new kitchen system that emphasized customizing sandwiches, but Cantalupo's team junked the "Made for You" initiative because it was too complex for operators and forced consumers to wait for their food. The company broadened its menu and augmented margins by offering pricey new items that retailed for $3 and above; at the same time, both in the U.S. and abroad, McDonald's also went harder after bottom-feeding consumers with "value" menus.

Cantalupo and his team also began to fight back against health concerns and obesity-liability lawsuits by adding healthier new fare such as premium salads. And they revived a marketing identity that had become mushy (if not downright nondescript) with a new slogan hatched by a German ad agency--"Ich liebe es," or "I'm lovin' it"--and a much more aggressive embrace of the youth market.

Results began shimmering again: Over the past two years, McDonald's revenues have increased by 24 percent, a remarkable gain for a company that was considered moribund in an ever more competitive industry. This past August marked its 29th consecutive month of sales increases in U.S. stores that have been open at least one year, the gold standard of metrics for retailing. Same-store sales in the United States, which still account for about two-thirds of McDonald's business, rose by 9.6 percent last year, the biggest increase in 30 years. And over the past two years, company operating margins have increased 90 basis points while margins at franchised stores grew by 80 basis points.

Such was the strength of the turnaround plan that neither Cantalupo's sudden death nor Bell's relatively quick demise could derail it, and Skinner clearly was the best candidate to extend it. "He didn't have to kick a lot of tires and see what was where," says Andrew McKenna, nonexecutive board chairman of McDonald's since early 2004 and chairman of Morton Grove, Ill.-based Schwarz Paper. "Skinner hit the ground running. He understood the management structure of the company and its people and had a very good relationship with the board. He has a very precise way about him, which we respect, and he is decisive."

No Caretaker Role

Growing up in Davenport, Iowa, one of the Quad Citics on the Mississippi River, Skinner's first job, at age 16, was as a crew member at a local McDonald's. In 1963, he left home for a 10-year stint in the U.S. Navy and then became a McDonald's management trainee in Carpentersville, Ill. Skinner rose handily over the subsequent 34 years, eventually being named senior vice president of U.S. operations, and then heading the division covering Asia, the Middle East and Europe in the 1990s.

Finding himself in a CEO job he figured would never come to him, Skinner still resists the temptation to adopt a caretaker role. "Now we're in a phase where we're talking about becoming better at being better," he says. So Skinner has three priorities: sustaining the company's long-term growth; making healthfulness a credible imperative for the company; and further developing its executive bench. Skinner faces stiff challenges in each arena.

From the start, the main goal of Cantalupo, Bell and Skinner was to restore the value of the individual customer's experience--each time at each McDonald's. "We had spent the money on being bigger with little or no beneficial return," Skinner says. "The return is much greater when you grow same stores versus new-store growth." In fact, each 1 percent rise in comparable sales delivers McDonald's roughly $100 million more in operating income."

So the trio began replacing the once-touted Made for You program, which was costly and hated by franchisees, with what Skinner calls a "bridge" operating platform that combines elements of Made for You with the company's traditional "grill-direct" food-preparation system, in which sandwiches have been preprepared.

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McDonald's also created both higher and lower new price points to improve margins, making space for "premium" items such as salads and strips of chicken for about $4, and a new trio of chicken sandwiches for about $3.50 each. Customers aren't taken aback by seeing such pricey fare on the menu, Skinner insists, "because of some of the other choices we give them, including everyday affordability." McDonald's lower-priced menu is headlined by $1 items, which include the McChicken, a processed-meat sandwich. "This strong value program has been the linchpin of our revitalization in the United States," Skinner says.

Skinner understands that seemingly minor elements can have big effects in a formula as precise as the one practiced by McDonald's. For example, by deciding to package Newman's Own dressings with its new premium salad line in 2003, "McDonald's said in one stroke that these are going to be quality salads," says Ron Paul, president of Technomic, a Chicago-based restaurant-consulting firm. And now Skinner is pushing other margin expanders such as extended store hours, the creation of a McDonald's gift card, and the possibility of having remote call centers handle restaurants' drive-through orders.

But further gains may be tougher. Already, McDonald's global same-store sales growth slowed to an average of just 3.8 percent a month through August of this year following a torrid rise of 6.9 percent in stores worldwide in 2004. Some highly anticipated new products, such as fruit and walnut salads, haven't gained as much traction as they'd hoped, franchisees say.

And competition looms larger than ever. That's why the chain has been testing premium coffee (think "Starbucks-fighter") in several stores and why, next year, McDonald's plans to roll out toasted sandwiches to compete with offerings by sandwich chains such as Quiznos and Subway.

Not everyone is a fan of the strategy. "You can't just continually roll out new products," grouses Richard Adams, president of Franchise Equity Group, a San Diego-based independent organization of McDonald's franchisees. "This business is built on simplicity."

The desire to return to traditional strengths also was behind the team of three's reversal of Greenberg's path of acquiring other brands. Skinner recently quipped to securities analysts that there are now just "two people" managing properties such as Boston Market and Chipotle Mexican Grill, and they're located a mile away from headquarters. In fact, McDonald's announced in September that it plans an initial public offering of a minority stake in Chipotle next year.

At the same time, Skinner continues to champion the once-laughable notion that McDonald's can be a healthy place to eat. Jokes about poor nutrition were one thing, but the stakes rose precipitously in 2002 when a lawsuit (eventually deemed frivolous by the courts) charged McDonald's with complicity in America's childhood obesity epidemic. Then, the 2004 independent film Super Size Me accused McDonald's of poisoning customers with fattening junk food. (McDonald's says it discontinued super-sizing last year as part of an effort to encourage "more balanced lifestyles," and that the movie's timing was purely coincidental.)

But McDonald's has yet to eliminate artery-clogging trans fats from its French fry oil--a move announced back in 2003 by Cantalupo, perhaps in an overanxious attempt to improve the company's nutritional credentials. "Making commitments on that got us in trouble," Skinner concedes. "We're still working hard on it and doing the best we can, but we absolutely must have no dilution of the taste of our products."

Yet, overall, faced with taking a defensive posture on the issue of health or going on the offensive, the team of three chose the latter. So the company introduced the lineup of three salad varieties, promoted milk and fruit in place of soda and fries in its kids' meals, and for a time last year offered an "adult" Happy Meal that included a bottle of water and a pedometer. Such actions have helped re-engage what Skinner calls "captive moms" who before might have only grudgingly stopped at a McDonald's to appease their kids.

Already, many consumers and even the news media no longer reflexively cast the company as McOgre when it comes to nutrition and health. But can Skinner retain this new aura over the longer term? He does have his die-hard true believers. "McDonald's taught America and the world to eat breakfast," says Ken Harris, managing director of Cannondale Associates in Evanston, Ill., a consumer-goods consulting firm that is working with McDonald's. "If they can do that, they can teach America and the rest of the world about healthy eating."

Some detractors agree that McDonald's could make a difference in America's overall nutritional standards, but not without a much more profound change of heart. "They're still killing thousands of people a year with what they're selling," says Walter Willett, a renowned nutrition researcher at Harvard University. "Instead of asking every time if you want fries, their people should be asking, 'Do you want diabetes?'"

But at the very least, says Kolpak, the analyst from Victory Capital Management, McDonald's will "continue to offer [healthier] products because they're an effective shield from a PR standpoint--and maybe, down the road, from a legal-liability standpoint. For those reasons, I don't think Jim Skinner is all that concerned with how these products actually sell."

Skinner also is prioritizing the further development of McDonald's executive talent worldwide. "We consider that vital not just for the CEO role but for all senior roles," says McKenna, the board chairman. For Skinner, this has included giving a prominent role to senior vice president and chief financial officer Matthew Paull as well as working in tandem with Roberts, a 55-year-old erstwhile colleague of Bell who became president when Skinner became CEO.

Recently, McDonald's marketing chief and European president have left the company, providing more turmoil near the top. Noting the cooling this year of sales momentum in the U.S., some believe it won't be long before the new management team will be tested, just as Cantalupo, Bell and Skinner were in 2003. "The promote-from-within culture at McDonald's creates a level of homogeneity that works very well in times of unexpected crisis," says Tierney Remick, global managing director of consumer markets for Korn/Ferry International in Chicago. "The challenge is the next time bumps occur, will this new team have the expertise or vision to lead the company out of it?"

For right now, at least, Skinner seems to be providing the right solutions to fix McDonald's once-ailing strategy--and the leadership required to reburnish those Golden Arches.

RELATED ARTICLE: Q & A

Customers Make Choices

When Jim Skinner became CEO of McDonald's in November 2004, he was taking over a company stunned by the sudden death of one leader and reeling from the terminal illness of the next. Here are excerpts from a conversation:

Q: Did the board look outside before promoting you?

I don't think they came close to doing that at all. Any time you're looking at filling a top position in McDonald's, in the majority of the cases you'll come to the conclusion that we have inside candidates who will be able to deliver more effectively than someone from the outside. It's a very unique business. So CEO Management 101 doesn't necessarily leverage the best results over the long term for a company like McDonald's.

Q: What was the biggest immediate challenge in your transition?

I had to communicate that a leadership change doesn't mean a strategy change. I was so closely connected to Jim [Cantalupo] and Charlie [Bell] that it was no surprise internally. But externally, everyone wanted to hear what the new guy was going to do. We had to go out of our way to reassure people that I got it--and that this was the way we were still headed.

Q: What are the basics of the "Plan to Win" that was launched in early 2003 and that you're still executing?

We're focusing now on being better rather than bigger. If you're in the restaurant business, you focus on five things: people, products, price, promotion and place. You want to be the customer's favorite place and way to eat and drink. So you have to have great food, great service, all of those things that are relevant to customers today that cause them at the moment of their experience to believe that they made a great choice.

And we're very disciplined on where we spend money for new-store growth now. For instance, we're spending money on China. You don't get a high incremental return on your invested capital, but the market opportunity is so big there. We haven't stopped opening new restaurants; we're still opening 350 to 400 a year [globally].

Q: Why is promoting "balanced lifestyles" one of your personal priorities?

The average customer eats at McDonald's three times a month. I wanted to look at this as an opportunity--not just as moving out of the target zone. We want people to come to McDonald's and feel good about the choices on the menu and about how they can be part of a balanced, active lifestyle. We've communicated the importance of physical activity, as well--not to be prescriptive, but to provide an opportunity for people to feel good about their behavior.

Q: How far can McDonald's take this advocacy of nutrition and health?

The sky's the limit, because it's about providing choices to customers, and transparent information about those choices. But we also have to remember who we are: We have a core customer group out there, and we don't want to abandon them because they also feel good about the choices they make in our restaurants.

The Arches Get Back Some Shine

           ($ Billion)
                                        Worldwide number of
           Revenues      Net Income     restaurants at year-end

2000       $14,243       $1,977         28,707
2001       $14,870       $1,637         30,093
2002       $15,406         $893         31,108
2003       $17,140       $1,471         31,129
2004       $19,065       $2,279         31,561

Source: Company reports

Note: Table made from bar graph.