McDonald's new CEO Chris Kempczinski must prove himself in these critical areas

Brian Sozzi

The new guy atop the Golden Arches has some proving to do, numerous insiders tell Yahoo Finance.

On Sunday evening, McDonald’s announced that Chris Kempczinski has been appointed permanent CEO and has gained a seat on McDonald’s (MCD) board of directors — both a vote of confidence in his leadership potential. He was previously president of McDonald’s U.S.

This follows news that CEO Steve Easterbrook was removed due to “poor judgment involving a recent consensual relationship with an employee.” A source familiar with the situation tells Yahoo Finance the process on the Easterbrook matter was thorough and seen through by McDonald’s board of directors.

McDonald’s declined to make Kempczinski available to Yahoo Finance for an interview. A McDonald’s spokeswoman declined to share any details on Easterbrook’s ouster beyond the press release.

In a statement to Yahoo Finance, Easterbrook’s lawyer said “Mr. Easterbrook is deeply grateful for his time at McDonald’s and continues to believe in the Company’s future. He acknowledges his error in judgment and supports the Company’s decision. He will not be commenting further at this time.”

McDonald’s stock fell 2% in early trade on Monday.

Kempczinski joined McDonald’s in September 2015, hired by the well-regarded restaurant industry veteran and Easterbrook.

In this Thursday, Nov. 17, 2016, photo, Chris Kempczinski, incoming president of McDonald's USA, speaks during a presentation at a McDonald's restaurant in New York's Tribeca neighborhood. Artisan burger buns, cage-free eggs and table service are some of the changes McDonald’s is promising in the U.S. as it scrambles to update its image and win back customers. (AP Photo/Richard Drew)

One McDonald’s insider tells Yahoo Finance Kempczinkski is known internally as a very detailed oriented executive. What is unclear is if Kempczinski could pullback from the details and assume more of the leadership role needed to lead and inspire a restaurant giant such as McDonald’s, the insider says.

In that regard, despite McDonald’s vote of confidence in putting him on the board — Kempczinski must show he can rally the troops at the global restaurant powerhouse, much how restaurant industry lifer Easterbrook did.

Meanwhile, Kempczinski has to mend fences and forge a stronger relationship with a countless number of McDonald’s franchisees. Another McDonald’s insider tells Yahoo Finance Kempczinski has ruffled the feathers of U.S. franchisees given his focus on data-driven decisions around investments and menu strategy. McDonald’s franchisees have long prided themselves on being relationship oriented and going with their gut on what works for their markets.

Franchisee relationship is key

Veteran restaurant analyst Howard Penney of Hedgeye Risk Management echoed the concerns of the McDonald’s insiders regarding Kempczinski’s mixed relationship with franchisees — which are the lifeblood of the Golden Arches.

“You need a strong relationship with the franchisees. Now you have the guy that is causing all the anxiety running the company,” Penney added.

Another McDonald’s insider points out the international business barely knows Kempczinski. He will have to move quickly to forge relationships with overseas franchisees and get up to speed on local market trends, the insider notes.

By and large, Wall Street appears to be sticking with McDonald’s in the face of the leadership transition. There hasn’t been a slew of downgrades by analysts, more a wait and see approach.

“Our franchisee discussions highlight concern around the changes/uncertainty, while the leadership transitions come at a pivotal point in US franchisee-franchisor relations. Today’s news likely adds uncertainty to investors’ list of concerns, which already include: decelerating US comps, negative EPS revisions, & US breakfast competition, against the backdrop of valuation re-ratings across QSR,” UBS restaurant analyst Dennis Geiger said in a note to clients. Geiger maintained his Neutral rating on McDonald’s stock.

Lauren Silberman at Credit Suisse also maintained her Outperform rating on McDonald’s.

“We expect shares could be under modest pressure tomorrow as Easterbrook was highly regarded in the investment community and among franchisees, and potential concerns of franchisee sentiment regarding new leadership,” said Silberman. “But MCD has a talented bench, we expect management and the Board to have a like-minded strategy, and view momentum as sustainable despite Easterbrook’s departure.”

Brian Sozzi is an editor-at-large and co-anchor of The First Trade at Yahoo Finance. Follow him on Twitter @BrianSozzi

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