5 problems McDonald's new CEO must fix

Can McDonald's (MCD) be fixed? That's the question haunting the company as CEO Don Thompson stepped down Thursday.

Thompson was in the top spot for less than three years, not much time for a chief executive to make a dent. But the company's board couldn't sit there as sales plunged, particularly in the all-important U.S. market. Ultimately, the CEO has to take the fall when business stalls.

Now, chief brand officer Steve Easterbrook will become CEO, and he has a tall order ahead: make McDonald's relevant again. If he can do that, the sales slump will reverse and the stock price will be reinvigorated.

But how to do it? That's a riddle Thompson could not solve. McDonald's is a complex company, too massive and too entrenched to adapt to change easily. And yet Easterbrook must begin an overhaul that makes sense and sees results. Shareholders are losing patience and the competition is always on the move.

Here are five problem areas that Easterbrook must fix at McDonald's:

1. Playing it both ways. This may be the key issue at the chain. Critics say that McDonald's can't make healthy food and that it can't attract millennials. But that's not necessarily true. The company has an army of market researchers, business development executives and food scientists. McDonald's could easily push out customized, gourmet food at a high price point and ramp up the marketing to draw in younger people and more health-conscious eaters.

But that's not the problem. The real issue is attracting two groups of diners without alienating either one. The first group is McDonald's core audience, the folks who love the chain for what it is and who don't want to see change. Many of them can't afford higher prices. This group is tremendously important, and is why McDonald's continues to be the No. 1 fast food chain by a wide margin.

The second group includes those who think McDonald's isn't healthy or tasty enough. These are the customers who drive past the Golden Arches to Five Guys, Panera (PNRA), Chipotle Mexican Grill (CMG). They need a reason to come back to McDonald's, and so far they aren't motivated.

Easterbrook will have to walk a fine line to satisfy both of these groups.

2. McDonald's lacks an "it" menu item. When was the last time McDonald's had a blockbuster menu item on its hands? Analysts tell The Wall Street Journal it hasn't happened since 2003, when the McGriddle pancake sandwiches debuted.

Fast-food chains need a menu boost now and then to drive excitement. Look at how the Doritos Locos Tacos turned around Taco Bell's U.S. business. And Wendy's (WEN) Pretzel Bacon Cheeseburger was a huge hit for the company. Chipotle is making a big deal of its new vegetarian Sofritas.

McDonald's tried chicken wings, which were an overpriced flop. It canceled its Fruit & Walnut Salads. Its experiments with other items have slowed down drive-thru service and unnecessarily complicated the kitchens at its restaurants.

In other words, when was the last time you've heard anyone say, "Let's go to McDonald's to try the new (fill in the blank)?" That just doesn't happen anymore.

3. Appeasing the franchisees. McDonald's franchisees have been in a foul mood lately. That much was apparent in the latest franchisee survey by Janney Capital Markets analyst Mark Kalinowski. He got an earful about what needs to change from the franchisees who work in the trenches every day.

About 80 percent of McDonald's 14,300 U.S. restaurants are franchised. The franchisees' business outlook was significantly below what Kalinowski usually sees, MarketWatch reports. They also said their relationship with the company was below average.

"We are going in so many directions at once it makes my head spin," one franchisee said in the survey. Another said morale is at the lowest in more than 20 years. "From an operator's perspective, the financial future looks grim," another added.

Franchisees are the foundation on which McDonald's operates, and Easterbrook needs to mend fences with them soon.

4. Foreign markets are losing steam. McDonald's efforts to expand globally have been set back by one scandal after another in recent years. In China, an undercover television investigation last year claimed a company vendor was supplying expired meat. That was a blow to the chain, which until then had developed a reputation for using quality ingredients.

The company has also run into problems in Japan, where it recalled Chicken McNuggets nationwide after a customer found a piece of vinyl in his. A few weeks earlier, McDonald's had to ration french fries nationwide because a contract dispute with U.S. dock workers delayed potato shipments.

McDonald's was very popular in Russia until it got caught up in the political tension between the country and the U.S. Russian officials began questioning the quality of food at the company's restaurants, with 200 out of 440 becoming the subject of a government probe last fall, The Financial Times reports. Nine restaurants were closed at the time, but have since reopened.

And in Latin America, the company that operates McDonald's restaurants has seen slumping sales. Restaurants in Venezuela ran out of potatoes and began serving fried flatbreads instead.

5. Beating the competition. McDonald's didn't have much competition on a nationwide level years ago. But it's a whole new world now, with rivals constantly upping their game when it comes to quality and taste.

Now, there are places like Habit Burger Grill (HABT), a chain that scored the top ranking on a recent Consumer Reports reader survey for best burgers. The California chain has expanded to Arizona and New Jersey, and is planning to move into Florida and Nevada soon.

Cult favorite In-N-Out has three ingredients in its french fries - potatoes, salt and oil -- compared with 19 in McDonald's. Another favorite, Shake Shack (SHAK), will start trading on Friday in an initial public offering that values the chain at about $750 million.

And don't forget about Five Guys, Whataburger and even Sonic (SONC), which has seen its stock price soar 75 percent over the last year. McDonald's also has to deal with the rising fast-casual chains that are gobbling up diners' business?

Can McDonald's stand out in that crowded field? That's what Easterbrook will need to find out.