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McDonald’s Emphasizing Margins over Growth

When the late Jim Cantalupo became CEO of McDonald’s on January 1, 2003, he inherited a company in trouble. De- spite efforts to expand the number of its restaurants and to diversify into new formats through acquisition (in May 2000, for example, the company had purchased the bank- rupt Boston Market chain), declines in same-store sales were wreaking havoc with company margins. Between 1999 and 2002, the company’s EBITDA margin declined by nearly a third; total shareholder return was negative for three years in a row.

A 30-year veteran of McDonald’s, Cantalupo’s plan was to take the company back to its roots. He sold off recent ac- quisitions and stopped adding to the number of McDon- ald’s restaurants worldwide. Instead, he focused the com- pany’s resources on a goal of improving same-store sales and driving margins for both the restaurant operators and McDonald’s.

The company emphasized its original customer proposi- tion of service, value, and cleanliness. Stores invested in delivering accurate orders, hot food, and clean restrooms. The Dollar Menu became more visible and a higher share of incremental sales. And the company introduced new of-

Sooner or later, even a well-functioning cash machine needs to find some way to improve its rate of growth.

The Portfolio Migrator

Sometimes, quite successful companies can face a situa- tion in which opportunities for further growth are limit- ed. The businesses a company finds itself in have largely played themselves out. There are few opportunities to grow at an adequate return, even through the innovation of new products or business models. In such situations, a company has to take a more disruptive path: to restruc- ture the entire portfolio and redefine where it wants to play in the future. In other words, it needs to become a portfolio migrator.

Unlike acquisitive growth (which is primarily a matter of buying companies, not selling them), portfolio migration involves both acquisitions and divestitures. It is not enough just to acquire promising new businesses; it is also essential to get rid of the legacy businesses in the portfolio whose value creation potential has run its course. Other-

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ferings to appeal to key customer segments—salads for health-conscious “moms” and specialty coffee drinks.

These efforts had a dramatic impact on value creation. Since 2003, the company has been able to grow its EBITDA margin to the point at which, in 2008, it was slight- ly higher than it had been ten years earlier, before the start of the decline. What’s more, McDonald’s generated so much cash that it allowed the company to greatly in- crease its direct cash payouts to shareholders and debt holders. Between 2004 and 2008, this combination of mar- gin improvement and increases in cash returned to inves- tors and debt holders accounted for a full 16 percentage points of TSR—almost 70 percent of the company’s total average annual TSR of 23 percent during this period.

As a result, McDonald’s also generated more TSR than all but one company in our entire retail sample. This achieve- ment is even more extraordinary when one considers the fact that McDonald’s is by far the largest company in this year’s retail top ten. The company’s market capitalization is more than double that of the next biggest company on the list, and it accounts for about half of the total market capitalization of the entire U.S. restaurant industry.

wise, a company runs the risk of ending up with a bimod- al portfolio made up of businesses that attract very differ- ent types of investors and may see its multiple punished as a result. Portfolio migrators refashion the mix of their business portfolio over time through a steady series of ac- quisitions and divestitures that move them into new and more promising businesses and markets.13

Portfolio migrators tend to be large established compa- nies in relatively mature sectors of the economy, oen with complex portfolios made up of multiple businesses. A classic example on our sustainable-value-creators list is the German power-and-gas company E.ON (21). E.ON is the product of the June 2000 merger between two Ger- man conglomerates, Veba and Viag. By a rapid and ongo- ing series of acquisitions and divestitures, the combined company has transformed itself into a focused and dy- namic leader in European power and gas. (See the side- bar “E.ON: Migrating to Greener Pastures.”)

13. See Managing for Value: How the World’s Top Diversified Companies Produce Superior Shareholder Returns, BCG report, December 2006.


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