Case: McDonalds The Hamburger Price Wars

1. How serious is McDonalds U.S. situation? Why is the company

having problems?
McDonalds U.S. situation is rather bad as the sales declined in the first
three quarters of 2002 with strong competitive pressure and low consumer
satisfaction. Looking at its financial performance in 2002 (Table A), it can
be observed that McDonalds SG&A had increase disproportionately in Q3
which resulted in lower operating income. Even though McDonald prides
its success in its simple formula QSCV, it was not performing up to
consumers expectations (i.e. consumers perceived McDonald to be of
lower quality, service and cleanliness as compared to other fast-food
chains). Moreover, McDonald is also struggling with its pricing decisions
because they have not find a price structure that is feasible across
different states.
Mostly, McDonald is having problems due to the way it communicates its
offer it looks at Promotion, Pricing and Product separately without looking
at the big picture. Its price structure and promotional effort (such as
Campaign 55) were not effectively communicated to its consumers of the
value that McDonald is offering. McDonald lacked a clear strategy which
resulted in poor tactical moves.
2. What is the rationale for Value Meals? Super-sizing? What is the
rationale for the dollar menu?
The rationale for Value Meals and Supersizing was to increase the
perceived value of its product offerings. With the product bundling and the
option to super-size being priced in a way that seems more valuable to the
consumers as opposed to an a la carte item, McDonald hope to help its
consumers make the decision of choosing the Value Meals and the option
to Supersize. In McDonalds perspective, the idea of Super-sizing option
makes perfect sense as the cost of the extra servings are minimal yet
seems like a great value to consumers. On top of that, Super-sizing also
appeals to consumers who talk thin and eat fat by giving them an option
to buy more food yet not appear as gluttons.
The rationale for the dollar menu was to increase sales and customer
counts by simplifying its price structure and matching up with its
competitors such as Wendys and Burger King. Given that consumers were
bought into the idea of buying fast-food items for a dollar, they were also
expecting the same from McDonald.
3. To assess the relative contribution of the Value Menu to
restaurant revenues and gross margins, please make the
following assumptions. How reasonable are these assumptions?
a. In the third quarter of 2002, the average McDonalds
restaurant had sales of about $400,000;

Reasonable as each restaurant is assumed to be identical due to the

franchise system (however, location-specific factors such as
convenience, traffic and visibility of the restaurant were ignored).
Average sales per restaurant = 5,359 mio/13,447 mio = 398,528
b. The overall gross margin per restaurant was 66 percent;
Reasonable as each restaurant should be incurring similar cost
under the franchise system. It was also stated in the case that
storewide margin was 66%.
c. Extra Value Meals accounted for 50 percent of McDonalds
revenues;
Not reasonable. Even though Extra Value Meals accounted for
almost half of all menu transactions at McDonalds, it may not have
accounted for 50 percent of revenue due to the differences in price
charged for an Extra Value meal as opposed to an a la carte item.
d. The average price of an Extra Value Meal is $4.00;
Not reasonable as each value meal is perceived to have different
value to consumers. Furthermore, the average price of $4.00 was
calculated based only on the prices of the four popular value meal
(Table D) which may not be reflective of what is available in
McDonalds Menu.
Average Price = (3.74 + 3.95 + 4.24 + 3.78) / 4 = $3.93
e. The average gross margin (price minus food & paper cost)
for an Extra Value meal is 80 percent.
Not reasonable as the average gross margin of 80% is calculated
based on the four popular value meals (Table D) and thus may not
be reflective. Furthermore, the food & paper cost is a variable cost.
Average Gross Margin = (81 + 81 + 75 + 82) / 4 = 79.75%
4. What is the total gross margin, measured in dollars, currently
earned by the average McDonalds store? What is the average
gross margin percentage for the a la carte items?
Total Gross Margin (in $) earned by the ave. McDonalds store = 66% X
$400,000 = $264,000
Average Gross Margin (in %) for the a la carte item = [0.66 (0.5 X 0.8)] /
0.5 = 52%