Rewarding performance, or luck? McDonald’s and Pepsico

by Adam Hartung | Apr 19, 2009 | Uncategorized

"McDonald's CEO's compensation rose 44%" was the Crain's Chicago Business headline.  In this era of focus on CEO pay, the question should be whether this is pay for performance?  Yes, McDonald's has seen its business do relatively well the last year – but was that really due to the CEO?  Or did an incoming tide simply raise the McDonald's boat? 

The last year has generally been tough on restaurants.  But McDonald's competes in a narrow part of the market focused on cheap.  Like Wal-Mart, McDonald's is a huge corporation but its sales are closely tied to the performance of markets driven by low price.  It wasn't long ago (less than 8 years) that McDonald's was shutting stores around the globe because performance was so poor.  The company felt it had too many McDonald's.  So it sold Chipotle and other assets to raise the money for closings and buying back equity shares to hold off a corporate attack.  And it spent money to improve the marketing in stores, including refocusing on quality.  As a result, when the economy fell apart (globally) McDonald's was in the right place at the right time. 

There was nothing prescient about the decision-making at McDonald's.  Quite to the contrary, the decisions taken were all about Defending the old Success Formula regardless of where the marketplace was headed.  In fact, the toughest decision made during the last 18 months was whether to keep 2 pieces of cheese on the double cheeseburger or not.  And its decision to raise the price on the 2-slice burger while launching another 1-slice burger to remain priced at $1 was considered a big innovation by home town newspaper Chicago Tribune ("Launch time at McDonald's").  Fortunately, the biggest recession in 70 years has encouraged people to go down-market, to McDonald's, and thus helped the company maintain sales and profits.  Whether McDonald's will hold onto these gains or see them go back out with the receding tide when the economy improves is entirely unclear.

On the other hand, PepsiCo has taken a much more aggressive approach to growth in its soft drink business.  Chairman and CEO Indra Nooyi has never been the kind of executive to back off from pushing for change.  As a Boston Consulting Group Manager she ruffled many feathers amongst the conservative leadership in her efforts to make partner – to the point they recommended she find a career elsewhere.  And, never looking back, she went on to greatly exceed the expectations of her former bosses by rocketing through Motorola and later PepsiCo all the way to the top position.  Her willingness to Disrupt and implement White Space has created significant growth for the companies where she worked.

Now she's brought in Massimo D'Amori as the new head for Pepsi's soft drink business, and he's shown no hesitancy to follow her lead in Disrupting the moribund brands as detailed in the BusinessWeek article "Blowing up Pepsi."  Rather than waiting for the recession to recover, he's dived into the brands changing everything from packaging to logos.  He's personally been involved in the Disruptions, making sure people know that he sees now, while Coke is moving slowly and sales should be soft, to reposition Pepsi's beverage products in order to attract new customers and grow!  As the new head of brands said, it's time to "rejuvenate, reengineer, rethink, reparticipate."  When the economy caused weak performance quarters the anwer became "retool and reteam;" including changing more people on the senior team.

Will all this Disruption work? We know that White Space has flourished, so Disruption has taken hold.  Will the White space provide a faster growing and more profitable Pepsi beverage division?  We know that everything from logo design to bottles have been tested, tried and are being improved upon.  The early results look good, but it's still too early to tell if Pepsi has caught Coke flat footed.  But what we can be sure about is that Pepsi is doing everything it can to take advantage of the changing environment in order to be #1 in beverages – including vitamin water, sports drinks and juices  as well as traditional soft drinks. 

When talking about McDonald's and Pepsi it might all seem like much 'ado about nothing.  What's the big deal?  But reality is that size alone does not make either company immune to failure.  All businesses, no matter size or age, have to adapt to changing markets or risk becoming obsolete.  Polaroid invented instant photography, but has become nothing more than an historical name.  Last week the Wall Street Journal reported how "Vultures vie in auction for remains of Polaroid."  From 21,000 workers at its peak in 1978, the company has fallen to a mere 70 – and to a brand value of only $80million.  This sort of failure can happen to any company.

When we look into 2035, which, if either, McDonald's or PepsiCo is likely to be the next Polaroid?  We'd like to think neither.  Yet, history indicates that McDonald's constant unwillingness to move from Defending & Extending its hamburger business puts it at risk.  Of what?  Maybe the next Mad Cow disease.  Or the next diet craze.  Or the next economic shift that leads customers out of their stores and somewhere else to eat.  Or perhaps a "perfect storm" of all 3. McDonald's D&E management depends upon the future looking much like the recent past for the company to succeed.  It is not really preparing for a different future.  And that cannot be said for PepsiCo – where under Ms. Nooyi's leadership we see a company obsessing about competition while working passionately to position itself for future markets and future customers needs.  Pepsi's willingness to Disrupt and use White Space bodes very well for the likelihood of turning around the recent growth stall, and creating longevity for the company, its investors, employees and vendors.