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The Honolulu Advertiser
Posted on: Sunday, May 10, 2009

McDonald's great executive cheese decision


By Mike Hughlett
Chicago Tribune

Hawaii news photo - The Honolulu Advertiser

Don Thompson

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CHICAGO — Don Thompson is a man of science, an electrical engineer who once designed radar jamming systems, but recently, his biggest problem was a simple piece of cheese.

McDonald's most popular U.S. sandwich, its $1 double cheeseburger, was barely profitable for its franchisees. And as head of the McDonald's U.S. operations, it was Thompson's job to find a solution that wouldn't alienate cash-strapped consumers.

The answer: Raise the double cheeseburger's price to $1.19, but also launch a new double cheeseburger with less cheese, for $1.

The great cheeseburger compromise appears to have worked, and it's the kind of innovation that has kept Oak Brook, Ill.-based McDonald's Corp. on a roll despite an ugly economy, analysts said.

Now, the 46-year-old Thompson has a bigger challenge: completing the rollout of one of the fast-food giant's biggest — and riskiest — U.S. product launches, the McCafe specialty coffee offensive.

"This is a big deal and all eyes are on McDonald's," said Steve West, an analyst at Stifel Nicolaus. "If it fails, it will be an embarrassment and will fall right at ... (Thompson's) feet. It's not his idea, but it is his to execute. He could live or die by that sword."

Thompson notes that the coffee blitz is only a part, albeit a big one, of McDonald's U.S. strategy. But when Thompson graduated from college in 1984, he didn't envision he'd one day be figuring out ways to peddle caramel cappuccino.

Growing up in Indianapolis, he was attracted to engineering. "In eighth grade, my math and science was always pretty good," he said. Thompson signed up for a summer engineering program at Purdue University aimed at lower-income students. He got hooked.

Eventually he would earn a degree in electrical engineering from Purdue, and then land a job in the Chicago-area office of Northrop Corp. It was a homecoming of sorts.

Thompson had lived on Chicago's near North Side until sixth grade, when his grandmother, who raised him, moved to Indianapolis. "As my grandmother would tell it, 'We moved so you would not succumb to certain influences,' " he said. The neighborhood was getting rougher. "I guess she had some concerns I might be a knucklehead."

At Northrop, Thompson designed radar jamming systems for fighter planes. One day in 1990, he got an unsolicited call from a recruiter for a job involving robotics. Thompson was intrigued — until he realized the pitch came from McDonald's, not defense contractor McDonnell Douglas.

"Imagine now, someone calling me up, six years after being in the defense industry, saying, 'Would you like to come and work for a hamburger company?' My comment back was, 'Maybe you've got the wrong guy.' "

But after chatting with a McDonald's engineer who once worked for Bell Labs, a citadel of engineering, Thompson accepted a job that year. After a few years in the McDonald's engineering department, he switched to restaurant operations, then worked his way up the management ranks.

In August 2006, Thompson was named president of McDonald's USA, which makes up 34 percent of revenues — a little less than Europe — but still is the greatest source of operating earnings, at 48 percent.

Since he took over, U.S. operations — like the overseas units — have been riding a wave of prosperity. And Thompson has played a key role in sustaining the momentum.

"I think he's a really solid leader and the results speak for themselves," said Larry Miller, an analyst at RBC Capital Markets.

The economy, which is prompting some people to trade down from higher-end restaurants, also poses challenges for McDonald's. Restaurant companies are in the midst of a "value war," Miller said, trying to reel in recession-battered customers with low-price deals, from $5 footlongs at Subway to 89-cent nachos at Taco Bell.

In the midst of this fight, McDonald's found itself under intense pressure from franchisees to raise the price of the double cheeseburger, the anchor of its dollar menu. Franchisees, who run about 85 percent of the firm's roughly 14,000 U.S. restaurants, were increasingly having trouble making money on it as ingredient costs spiked.

The conundrum, said Thompson: "It's a very tough economy and customers are looking for value, so the last thing you want to do is raise a price."

The solution, one hotly debated by franchisees and company executives, was to offset a price hike on the classic double cheese by creating the McDouble, a $1 double burger with one fewer slice of cheese.

"It was a huge decision," Thompson said.

But analysts and company executives all say it's been a success since implemented in December: McDonald's hasn't lost customers or cheeseburger sales.

Jim Skinner, the company's chief executive, said Thompson did a bang-up job on the cheeseburger project, which involved a lot of collaboration with franchisees.

"Don has done a great job holding the course on value," Skinner said.