030530 It's Back to Basics For McDonald's

OAK BROOK, Ill. -- Few executives have been called out of retirement by a former employer to tackle a more daunting task than the one now staring Jim Cantalupo in his McFace: resuscitating Ronald McDonald.

When the 28-year McDonald's veteran stands in front of the company's shareholders for the first time as CEO at the annual meeting here on Thursday, he won't unleash any big ideas -- like, say, bringing back the 15-cent hamburger. But he's going to make a strong case for his plan to revive the chain by bringing back the rest of the old McDeal: clean restaurants, hot food and fast, friendly service.

Will that be enough? The fast-food behemoth has fallen so far so fast that its multibillion-dollar brand image is near the bottom rung of fast-food-dom. But in his view, if the basics aren't fixed, nothing else matters.

''You should see the letters I receive,'' says Cantalupo, in a rare, extended interview in his office. ''I get hundreds, no, thousands'' from customers asking what happened to the old McDonald's. ''That is not McDonald's . . . ,'' he says, without finishing the sentence.

It just about tears his guts out. And it's ripped into the bottom line. A humbled McDonald's announced its first-ever quarterly loss in January. Same-store sales in the USA fell for 14 consecutive months before finally eking out a small gain in April. Its stock recently slipped to its lowest point in nearly a decade. Standard and Poor's just downgraded its corporate credit ratings. And in a national survey last year of 50,000 consumers, McDonald's ranked dead last overall among all 70 top fast-food chains measured.

The challenge that Cantalupo faces is enormous. ''He's got to evolve the concept and ensure it's relevant to consumers, but at the same time deal with a company whose greatest strength has been its consistency,'' says Ron Shaich, CEO of Panera Bread, the fast-growing chain of casual restaurants.

But Cantalupo, a former vice chairman who is widely credited with spearheading McDonald's international expansion into 118 countries, is not a proponent of major change. He doesn't think he needs to turn Ronald McDonald on his head to fix the problem at home. He believes the solution is as basic as living up to the company's 48-year-old founding principles of good grub at a decent price served quickly and with a smile. ''Those are the greens fees,'' he says. ''Unless you execute (those basics) you go nowhere.''

Just a small improvement in that execution, he estimates, could bring $3 billion in new sales. A big improvement could result in many billions more. And once the basics are fixed, McDonald's can really start cooking again, he says.

Hero, or else outta there

If he's right, Cantalupo could emerge as McDonald's greatest CEO since corporate founder Ray Kroc. He could become a fast-food legend whose name restaurant-industry executives whisper in the same breath as those of Kroc, KFC's Colonel Harland Sanders and Wendy's Dave Thomas.

But if he's wrong, Cantalupo could be out the door within 18 months -- about the time he's said it will take his plan to show results.

One analyst thinks his time frame may be a bit optimistic. ''He's going to see if he can put his imprint on the company,'' says Allan Hickok, analyst at U.S. Bancorp Piper Jaffray. ''But it would be silly to think he can impose meaningful reform in less than a couple of years.''

Cantalupo, 59, who retired from McDonald's at the end of 2001 and then briefly consulted for the burger giant, was rushed back out of retirement in January to clean up the mess in Oak Brook. Since that time, the Chicago native has begun methodically to undo many of the initiatives that his predecessor, Jack Greenberg, was putting in place before he was forced out in late December.

He's modified the costly new cooking system that was supposed to improve the quality of McDonald's food -- but mostly left customers cooling their heels in line. He's slashing restaurant growth after decades of expansion.

He's scrapped a $1 billion technology project that was supposed to integrate McDonald's worldwide. And he's cool to growing other restaurants' brands under McDonald's ownership -- even hiring Morgan Stanley to help the company figure out if it should unload its so-called partner brands, including Chipotle and Donatos.

A member of the 'old guard'

Most of this is change by subtraction. Critics say that may be his weakest link.

As a member of McDonald's ''old guard,'' he doesn't appear to be an agent of innovative change, says Richard Adams, a franchisee consultant.

''You want us to sell shoes?'' asks Cantalupo, bristling at the criticism. ''Is that change enough?''

Across the hallway from Cantalupo is the man some say one day may be the biggest kick-in-the-pants change agent that McDonald's has ever seen. That's 42-year-old Charlie Bell, whom Cantalupo handpicked as his president and chief operating officer -- and presumed heir.

Bell may be the fastest-rising executive in McDonald's history. When he was 15, he was hired as a crew person in Australia -- mopping floors and hauling trash. By age 19 he was Australia's youngest store manager. At 27 he was a vice president, and by 29 he was a board member in Australia. Now, insiders say, he could be CEO by 45.

Bell downplays that prospect. ''I take every job at McDonald's as if it's going to be my last,'' he says.

It's Bell who turned McCafe coffee shops into a stunning success in Australia. McCafes are now the largest coffee shop brand in Australia and New Zealand.

But a poorly planned pilot McCafe in Chicago -- which Bell had nothing to do with -- failed to create a buzz and was closed last year. Even then, with prodding from Bell, Cantalupo has agreed to test 10 domestic McCafes later this year in San Jose, Calif., and Raleigh, N.C. If they're a hit, they could expand quickly.

Perhaps no one is watching all this with more interest than Brad Blum, the new CEO at Burger King who came there from his vice chairman post at Darden Restaurants (parent of Olive Garden) about the same time that Cantalupo was elevated to CEO at McDonald's. Although the two have never met, Cantalupo and Blum are in an odd race that can have only one winner.

''We come from very different places and look at the industry in different ways,'' says Blum, who some say may ultimately try to bring more of a casual dining feel to Burger King. ''The way we differentiate ourselves from each other could be good for the customer.''

Cantalupo is old school. A shelf in his office prominently displays a dated, black-and-white photo of himself embracing founder Kroc.

It was during Kroc's era that Cantalupo was hired from Arthur Young -- where Cantalupo once worked as a McDonald's auditor. He was hired as controller. ''Ray never asked about profits,'' Cantalupo recalls. ''He only asked about sales and customers.''

Early on, Cantalupo was pegged as a star. He was directed to go the operations route so he could see how the company worked. In 1985, he was overseeing the operations of all McDonald's in the Northeast. By 1987, he was president of McDonald's International.

Because Cantalupo now is running the show, Ed Renzi is buying McDonald's stock for the first time in six years. Renzi was McDonald's domestic president back in the mid-1990s and had sold off most of his McDonald's shares.

The one reason he's buying again: Cantalupo. ''He's the guy for whom you'd gladly saddle up your pony, grab your sword and go to battle with,'' Renzi says.

Goal: Make every diner happy

Hard to believe that just a handful of months ago, Cantalupo was retired to his home in Lake Geneva, Wis., spending most of his days buzzing around on his motorboat.

Now, he's steering the world's biggest fast-food company -- with 46 million customers each day.

The trick is making each one happy. And getting folks like Randy Meacham, a 51-year-old Atlanta resident, to come back. Meacham grew up loving McDonald's, but now, he says, he won't set foot in one -- not even with his two grandkids. ''McDonald's has gotten itself into a situation where the employees are incompetent, the restrooms are dirty and the patrons aren't happy,'' he says.

Cantalupo badly wants to win back Meacham's business. ''I've heard too many stories like his,'' he says. But he also wants to attract new customers -- especially women. That's where the new salad entrees come in.

While he may appear to be old school, the new salads are garnering Cantalupo a reputation as a bit of a renegade. For years, it was assumed that the true test of a great McDonald's leader was proof that ketchup flowed through his veins.

''Now,'' Cantalupo says, ''there's some salad dressing, too.''

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