ATTN: Prof Dan

Running head: McDonald’s Case Study 1

McDonald’s Case Study 13

McDonald’s Case Study

McDonald’s Case Study

Table of Contents………….………………………………………………………………………2

Abstract……………………………………………………………………………………………3

Introduction……………………………………………………………………………………..3-4

Background

History…………………………………………………………………………………..4-5

Industry Analysis………………………………………………………………………..5-6

Business Functions

Marketing Strategy……………………………………………………………………...6-8

Operations Strategy…………………………………………………………………......8-9

Technology…………………………………………..……………………………….....8-9

Ethics…………………………………………………………………………………..9-10

Competitive Analysis

Porter’s Five Forces Model…………………………………………………………..11-13

SWOT Analysis………………………………………………………………………14-16

PEST Analysis………………………………………………………………………..17-19

Recommendations

Customer Service……………………………………………………………………..20-21

Empower Franchisees…………...……………………………………………………22-23

Be Competitive……………………………………………………………………….24-25

Conclusion

References

Abstract

There have been challenges for the fast food industry in recent years that have been pressuring profit margins. From rising food costs, economic recession and changing perceptions about health, many fast food franchises have been feeling some heat. Modern society is on the go, and there is plenty of demand for a quick bite at all times of the day. The industry as a whole has proven robust enough to withstand these challenges, though some players have done better than others. One of the leaders in the fast food industry, however, is not doing so well: McDonald’s. The McDonald’s Corporation has spread across the globe, and emerging markets are one of the fastest growing areas in the industry. But the McDonald’s is not without its challenges, especially in the United States. The purpose of this case study is to identify specific areas where McDonald’s is having issues and provide recommendations to address these areas.

Introduction

Over the past decade I have watched which was once a leading corporation in the fast food restaurant industry go from bad to worse. I have identified three possible reasons for the decline. The first reason is the sudden influx of millennials. Generally speaking, millennials love food and dining out, and yet their preferences—customizable options, transparency, and fare that’s healthier, more sustainable, and altogether superior compared to any cheap cookie-cutter fast food joint—are the exact opposite of what McDonald’s is known for. The second, is the increase in competition. McDonald’s is not the primary fast food alternative anymore. Competitors such as Wendy’s, Burger King, and yes, even Taco Bell, have surpassed McDonald’s in key areas such as customer service and menu variety. The third, is the lack of innovation or energy in McDonald’s current marketing strategy. While McDonald’s is still focused on promoting cheap toys for their next Happy Meal offer, their competitors are increasing their market presence with promotion deals with corporate giants like the National Football League (NFL) and Major League Baseball (MLB).

Background

In 1954, Ray Kroc visited a restaurant in San Bernardino, California that had purchased several Multi-mixers. There he found a small but successful restaurant run by brothers Dick and Mac McDonald, and was stunned by the effectiveness of their operation. They produced a limited menu, concentrating on just a few items—burgers, fries and beverages—which allowed them to focus on quality and quick service. Kroc pitched his vision of creating McDonald’s restaurants all over the U.S. to the brothers. In 1955, he founded McDonald’s System, Inc., a predecessor of the McDonald’s Corporation, and six years later bought the exclusive rights to the McDonald’s name. By 1958, McDonald’s had sold its 100 millionth hamburger. The number of McDonald's restaurants grew to 100 by 1959 and 500 by 1963. The company went public in 1965 and its shares were listed on the New York Stock Exchange. Today, the McDonald's Corporation (McDonald's or 'the company') is one of the world's largest foodservice retailing chains. The company is primarily known for its burgers and fries, which it sells through 36,258 restaurants in 119 countries. McDonald's operates in the US, Europe, Asia Pacific, and the Middle East and Africa. It is headquartered in Oak Brook, Illinois and employed about 420,000 people as of December 31, 2014. The company recorded revenues of $27,441.3 million during the financial year ended December 2014 (FY2014), a decrease of 2.4% compared to FY2013.The operating profit of the company was $7,949.2 million in FY2014, a decrease of 9.3% compared to FY2013.The net profit of the company was $4,757.8 million in FY2014, a decrease of 14.8% compared to FY2013.  In 2014, the chain had 14,350 restaurants in the United States, and 21,908 in international locations.

Industry Analysis

The fast food industry, also known as Quick Service Restaurants (QSR), has been serving up tasty morsels for as long as people have lived in cities. The modern system of fast food franchising is believed to have started in the mid 1930’s when Howard Johnson franchised his second location to a friend as a means to expand operations during the Great Depression. As cars became commonplace, the drive-thru concept brought explosive growth to the idea of food-on-the go. “Fast Food” was added to the Merrion-Webster dictionary in 1951 and U.S. fast food companies are now franchised in over 100 countries. In the U.S. alone there are over 200,000 restaurant locations! Revenue has grown from $6 billion in 1970 to $160 billion last year, an 8.6% annualized rate.

Fast food franchises focus on high volume, low cost and high speed product. Frequently food is preheated or precooked and served to-go, though many locations also offer seating for on-site consumption. For stands, kiosks or sit-down locations, food is standardized and shipped from central locations. Consumers enjoy being able to get a familiar meal in each location, and menus and marketing are the same in every location. There have been challenges for the fast food industry in recent years that have been pressuring profit margins.

The industry as a whole has proven robust enough to withstand these challenges, though some players have done better than others. Over the last decade there has been increased focus on the quality of food served in fast food restaurants. Typically highly processed and industrial in preparation, much of the food is high in fat and has been shown to increase body mass index (BMI) and cause weight gain. Popular books such as Fast Food Nation and documentaries like Super-Size Me have increased public awareness of the negative health consequences of fast food. Fast food companies have responded by adopting healthier choices and have had some measure of success, but the shadow of bad press still hangs over the industry. Market saturation is also a relevant issue in the fast food industry today, at least in the U.S. Although there is a McDonald’s franchise in almost every town, it usually sits in a row with several competitors. With so many competitors which offer similar products there are fewer customers per location. Increasingly fast food restaurants are also losing market share to fast casual, a relative newcomer in the restaurant space.

Marketing Strategy

McDonald's is one of the well-established global brands. It is the world's largest quick-service restaurant brand. The company's 36,258 restaurants in 119 countries have reinforced the brand identity of McDonald's. McDonald's sells its products at various affordable price points. The company's brand equity can be gauged by the fact that on an average McDonald's serves nearly 69 million customers every day. Also, McDonald's consistently ranks among the top most brands in several brand surveys. In 2015, the company was ranked among top 50 brands in the world’s top 500 brands list by an industry source specializing in brand valuation. In addition, McDonald's was featured in the list of world’s most valuable brands 2015 released by a business magazine. Further in 2015, the company was ranked among top 15 brands in the top 100 most powerful brands by an industry source which maintains a continuous brand benchmark tracking system. The strong brand portfolio has enabled the company to sustain its leadership in the fast food chain industry. McDonald's has created strong brand equity over the years with its brand’s slogan ‘i'm lovin' it’, which is well-recognized among its customers. Therefore, strong brand recognition enables the company to consolidate its market share both through new restaurant openings as well as product extensions the company to consolidate its market share both through new restaurant openings as well as product extensions. According to their 2015 SWOT Analysis, McDonald’s lists their brand image and marketing as a strength. All kinds of companies acknowledge that customers are the core of their activity, that customers are the company’s most valuable asset. A company can survive only when it can retain its old customers and attract new ones. Therefore, the company should be structured and managed around the customer (Tălpău & Boşcor, 2011, p. 51). McDonald’s guides its activity by promising their customers: quality, service, cleanliness and value, abbreviated to “QSCV”. No matter how strong and successful a company is, ignoring the market’s needs and changes can eliminate even market leading businesses. McDonald’s finally understood this, so this is why it is now trying to change its marketing strategy from being a product-oriented company to becoming a customer-oriented company. The company began to implement its new marketing strategy by announcing: “at McDonald's, we are committed to listening to our customers and to being open and direct about the facts surrounding our people, our food, and our restaurants” (McDonald’s Corporation). But still, its mission was to “Promote Diversity and Inclusion among our Employees, Owner/Operators and Suppliers who represent the diverse populations McDonald's serves around the globe” (McDonald’s Corporation). This shows that in reality the center of its activity is still not the customer, but diversity and inclusion. From making decisions and simply announcing changes to actually putting them in practice is a huge step and is not easy to achieve.

Another focus of the McDonald’s marketing strategy is to brand globally and think locally. An aspect of its global branding is its choice of partners. McDonald’s allies itself with major universally recognized brands, such as Coca-Cola and Disney. McDonald’s and Disney came together in 1997, and this mutually beneficial global alliance has them sharing everything from films to food. Another way McDonald’s brands globally and thinks locally is its sponsorship of a variety of global and national sporting events. Internationally, McDonald’s sponsors both the Olympics and the World Cup. The global nature of the events allows McDonald’s to produce an international campaign and get their brand out to an estimated 2 million viewers. McDonald’s has garnered a reputation for innovative and effective marketing campaigns, often aimed at a specific demographic. Arguably the most noteworthy example is the Happy Meal, with its bright colored packaging and the toy included making McDonald’s the most popular eatery amongst children. McDonald’s complemented this with a fantasy world known as McDonaldland, which was home to characters with whom children could quickly identify, such as Ronald McDonald, Grimace, Mayor McCheese and the Hamburglar. This was taken a step further in the 1990s when a video game known as M.C. Kids was released (it was called McDonald Land in Europe), in which the game’s characters enter the imaginary world and attempt to recover Ronald McDonald’s magical bag, which has been stolen by the Hamburglar. By attracting children to its restaurants at a young age, McDonald’s is aiming to make them customers for life. It is a strategy that has come in for much criticism. The fact that it pushes fast food to young children is deemed by some to be unethical, with the city of San Francisco banning the inclusion of toys in Happy Meals. To McDonald’s credit, it has responded to the criticism positively, and has to a great extent abandoned the use of McDonaldland and its associated characters in its promotional material. However, Ronald McDonald can still be seen in a limited number of adverts, and often still appears as a toy in Happy Meals. Its slogan ‘I’m loving it’ has been translated into many languages including Arabic, Chinese, German, French, Portuguese, Russian, Spanish and Ukrainian.

Operations Strategy

McDonald's is the world's leading global food service retailer with over 36,000 locations serving approximately 69 million customers in over 100 countries each day. More than 80% of McDonald's restaurants worldwide are owned and operated by independent local business men and women. The Company operates and franchises McDonald’s restaurants, which serve a locally-relevant menu of quality food and drinks sold at various affordable price points in more than 100 countries. McDonald’s global system is comprised of both Company-owned and franchised restaurants. McDonald’s franchised restaurants are owned and operated under one of the following structures - conventional franchise, developmental license or affiliate. The optimal ownership structure for an individual restaurant, trading area or market (country) is based on a variety of factors, including the availability of individuals with the entrepreneurial experience and financial resources, as well as the local legal and regulatory environment in critical areas such as property ownership and franchising. We continually review, and as appropriate adjust, our mix of Company-owned and franchised restaurants to help optimize overall performance. The business relationship between McDonald’s and its independent franchisees is of fundamental importance to overall performance and to the McDonald’s Brand. This business relationship is supported by an agreement that requires adherence to standards and policies essential to protecting our brand.

The Company views itself primarily as a franchisor, with the vast majority of McDonald’s restaurants (approximately 80%) owned and operated by independent franchisees. Franchising enables an individual to own a restaurant business and maintain control over personnel, purchasing, marketing and pricing decisions, while also benefiting from the strength of McDonald’s global brand, operating system and financial resources. One of the strengths of this model is that the expertise gained from operating Company-owned restaurants allows McDonald’s to improve the operations and success of all restaurants while innovations from franchisees can be tested and, when viable, efficiently implemented across relevant restaurants.

Directly operating McDonald’s restaurants contributes significantly to our ability to act as a credible franchisor. Having Company-owned restaurants is essential to providing Company personnel with a venue for restaurant operations training experience. In addition, in our Company-owned and operated restaurants, and in collaboration with franchisees, we are able to further develop and refine operating standards, marketing concepts and product and pricing strategies that will ultimately benefit relevant McDonald’s restaurants.

Under a conventional franchise arrangement, the Company owns the land and building or secures a long-term lease for the restaurant location and the franchisee pays for equipment, signs, seating and décor. The Company believes that ownership of real estate, combined with the co-investment by franchisees, enables us to achieve restaurant performance levels that are among the highest in the industry. Franchisees are also responsible for reinvesting capital in their businesses over time. In addition, to accelerate implementation of certain initiatives, the Company frequently co-invests with franchisees to fund improvements to their restaurants or their operating systems. These investments, developed with input from McDonald’s with the aim of improving local business performance, increase the value of our Brand through the development of modernized, more attractive and higher revenue generating restaurants.

The Company’s typical franchise term is 20 years. The Company requires franchisees to meet rigorous standards and generally does not work with passive investors. The business relationship with franchisees is designed to assure consistency and high quality at all McDonald’s restaurants. Conventional franchisees contribute to the Company’s revenue through the payment of rent and royalties based upon a percent of sales, with specified minimum rent payments, along with initial fees paid upon the opening of a new restaurant or grant of a new franchise. This structure enables McDonald’s to generate significant levels of cash flow.

Under a developmental license arrangement, licensees provide capital for the entire business, including the real estate interest. The Company does not invest any capital under a developmental license arrangement. The Company receives a royalty based upon a percent of sales as well as initial fees upon the opening of a new restaurant or grant of a new license. We use the developmental license ownership structure in over 70 countries with a total of 5,228 restaurants. The largest developmental licensee operates approximately 2,100 restaurants in 19 countries in Latin America and the Caribbean.

Finally, the Company also has an equity investment in a limited number of foreign affiliated markets, referred to as “affiliates.” In these markets, the Company receives a royalty based on a percent of sales and records its share of net results in Equity in earnings of unconsolidated affiliates. The largest of these affiliates is Japan, where there are nearly3,100 restaurants.

 

▪	Supply Chain and Quality Assurance

The Company and its franchisees purchase food, packaging, equipment and other goods from numerous independent suppliers. The Company has established and enforces high quality standards and product specifications. The Company has quality centers around the world designed to ensure that its high standards are consistently met. The quality assurance process not only involves ongoing product reviews, but also on-site supplier visits. A quality leadership board, composed of the Company’s technical, safety and supply chain specialists, provides strategic global leadership for all aspects of food quality and safety. In addition, the Company works closely with suppliers to encourage innovation, assure best practices and drive continuous improvement. Leveraging scale, supply chain infrastructure and risk management strategies, the Company also collaborates with suppliers toward a goal of achieving competitive, predictable food and paper costs over the long term. Independently owned and operated distribution centers, approved by the Company, distribute products and supplies to McDonald’s restaurants. In addition, restaurant personnel are trained in the proper storage, handling and preparation of products.

Operations Strategy

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Technology

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Ethics

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Recommendations

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Conclusion

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