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INDUSTRY ANALYSIS

Fast-Food Service Restaurant: McDonald’s

Presented to
R. DiBattista, Ph.D.

In Partial Fulfillment of
The Requirements of MGMT6001
Johnson & Wales University

by
Manatchanok Lertritsirikul (Ann)
Selim Nuhoglu
Sirirat Therawat
October 31, 2006
PART ONE: INTRODUCTION

McDonald’s, the world largest burger chain, had a poor customer service issue in

1994. In 2003, McDonald’s revenue growth declined in the beginning of the year while

the competition had never decreased. McDonald’s error led competitors to entrench

themselves so firmly. Consequently, to re-gain its market share becomes a big challenge

for McDonald’s (Thompson, Strickland & Gamble, 2005).

On competitors’ side, Burger King has to keep in mind maintaining good

relationships with franchisees after having an issue about turning off women and families

in the past year because the company had turned their focus on men customers (Hoover’s,

2006a), Wendy’s has had trouble placing itself in international market (Thompson et al.

2005).

This paper analyzes the Fast-food service restaurants industry, focus on

McDonald’s Corporation as the major company and its top competitors - Burger King

and Wendy’s.

Fast-Food Restaurants Industry

Fast-food and quick service restaurants are companies that own, open, operate or

franchise an eating place which the food is prepared and served quickly in a casual dining

environment to customers who mainly have a compressed time frame. The fast-food is

popular in the US and around the world. In France, the fast-food market had a rapid

growth from 1999 to 2003. The French market was worth $5.09 billion in 2003 (Business

Trend Analysts Inc., 2005).

The health concerns surrounding fast food and the obese problem have had a

major impact to the industry in recent years as well as the increasing of the consumers’
preference on Asian tastes. Many brands altered their menus, adding lean items to capture

the market. This trend will continue probably five years (Datamonitor ComputerWire,

2005). The high gas price in the first half of 2006 caused slow traffic in the restaurant

business, though the fast-food business did not take a big hit, but addressed the value of

each penny consumers could spend (Associated Press, 2006).

McDonald’s History and Background

McDonald’s was found in 1948 in San Bernardino, California. Owners Dick and

Mac McDonald signed a franchise agreement with Ray Kroc who later bought out the

company from Dick and Mac for $2.7 million in 1961.

The company introduced the Golden Arches to the market in 1962, followed by a

debut of Ronald McDonald one year later. In 1965, the company went public and ran its

first TV ads. McDonald’s opened its first store outside the US in Canada two years later.

The drive-through window operated for first time in 1975. The increasing competition in

1980s caused the company’s growth rate down to about five percent per year.

McDonald’s came up with the “value menu”.

McDonald expanded into a fast casual business. It bought a steak in Chipotle

Mexican Grill, head quartered in Denver, in 1998 and spun it off in 2006. Donatos

Pizzeria chain, another brand in the family, was bought in 1999, and sold back to the

owner in 2003. Boston Market was bought in 2000. The company continued to expand to

international markets, buying a 33% stake in the UK’s Pret A Manger, a sandwich chain

market (Hoover’s, 2006d).


The company’s mission is “To leverage the unique talents, strengths and assets

of our diversity in order to be the World's best quick service restaurant experience.” The

company’s vision is

Ensure that our employees, owner operators and suppliers reflect and represent

the diverse populations McDonald's serves around the world. Harness the multi-

faced qualities of our diversity - individual and group differences among our

people - as a combined, complementary force to run great restaurants.

(McDonald’s, 2006d).

Corporate Overview

McDonald’s serves about 50 million people in nearly 110 countries each day. It

operates and franchises McDonald’s restaurants approximately 31,000 units

(McDonald’s, 2006a). The size of organization is larger than the world’s top three

retailers – Wal-Mart, Carrefour, and Royal Ahold – combined (Hoover’s, 2006c).

Thirty percent of its locations are company-owned; the others are run by

franchisees. The company relies on a network of independent suppliers and a huge budget

for advertising to maintain the brand image – about $600 million per year (Hoover’s,

2006c). The increasing of public concern for nutrition made the company’s sales

declined. McDonald’s decided to restructure the US operations in 2001. The business

began to improve in 2003 when McDonald’s introduced some healthier fare to the menu.

In 2005, McDonald’s said it would post the status of its efforts to remove transfats from

its cooking oil (Hoover’s, 2006d).

The global branding campaign “I’m lovin’ it,” which is running now, was

introduced in 2003 and was an attempt to change its brand image to be “Forever Young”
in order to draw young customers. The company had a positive result as the sales

increased steadily through 2003 and early 2004 (Hoover’s, 2006d). Continuing to

improve the company image, and increasing the market share, McDonald’s decided to

renovate its restaurants in a hip style providing a cozy, casual environment (on

franchisee’s budget), and to offer Wi-Fi internet in stores. Currently, about 7,000

restaurants around the world offer Wi-Fi services (McDonald’s, 2006c).

As part of overhauling the brand image and increasing sales in the breakfast

market share, McDonald’s announced a partnership with Green Mountain Coffee

Roasters to sell Fair Trade Certified and organic coffees. In 2006, McDonald’s

introduced a premium coffee as its regular brew (Hoover’s, 2006c).

Competitors

Top competitors of McDonald’s are Burger King and Wendy’s. With more than

11,100 restaurants in the US and about 65 countries, Burger King ranks the word’s

number two hamburger chain behind McDonald’s. To fight competitors, Burger King

added one dollar fare to the menu and focused the company’s marketing efforts on 18 to

34 year olds, called their Superfans, in 2004. It hopes to open about 450 new locations

during 2006-07 with its expansion in overseas markets (Hoover’s, 2006a).

Wendy’s International, Inc., headquarters in Dublin, Ohio, operates and franchises

in fast food business, ranked the world’s number third hamburger chain in terms of

locations – behind McDonald’s and Burger King. The company has more than 6,700

stores in the US and about 20 countries. Besides burgers and fries, Wendy’s offers

alternative fare such as chili, and baked potatoes. Wendy’s also owns the Baja Fresh, a

fast casual Mexican food chain (Hoover’s, 2006e).


PART TWO: EXTERNAL ENVIRONMENT ANALYSIS

General Environment

Demographic Segment

The changes in food consumption are mainly affected by income growth and

demographic factors. However, the share of food in the overall household does not move

parallel with income growth. Hence, the consumers with low income spend a larger share

of their income in food, where wealthier consumers prefer to spend mainly in housing,

services like education and luxury items like recreation.

To explain with a sample, the percentage of the food in the income of an average

American family scaled down from 30 percent to 20 percent between 1960 and 2000

(Schmidt, 2006). Food preferences are more related with the urbanization than economic

growth. Urban areas have larger number of away-from home workforce especially

women in addition to higher income levels. Among developing countries with a large

share of rural population and rapid rates of urbanization, urbanization is expected to

significantly alter consumers' diets with a greater consumption of meats, fruit, vegetables,

and processed food products (USDA, 2005).

The aging of the population is another factor that slows per capita food

consumption down. Young adults ages 20 to 29 years are about 4 times more likely to eat

fast food than adults 55 years of age and older. Also seniors prefer more fresh fruits and

vegetables, less red meat. There is no big gender difference among the adult fast food

consumers (30% males, 23.5% females), but the adults, which are living suburban areas,

are eating more fast food. Also in the U.S. more African Americans (31%) than other

race-ethnic groups reported eating fast food (Bowman & Vinyard, 2004).
Economic Segment

In spite of the increasing concerns over health, obesity and intense competition,

the global fast food market could achieve almost 20 percent growth during 1999-2003.

However, the growth of the fast food industry remained below the growth of the entire

food industry and fast food has been losing market share to so-called fast casual

restaurants, which offer somewhat better and more expensive foods (All Experts, n.d.).

There were 1.9 billion fast food outlets in 2003, with annual sales worth $282

billion and more than 96 billion meals consumed worldwide (Bremner, 2004). The main

share of the sales belongs to the American consumers, who spent $135bn on fast food in

2005 (Euromonitor, 2006). According to Eric Schlosser, author of the 2001 book Fast

Food Nation, one quarter of U.S. adults visit a fast-food restaurant on a typical day (Kam,

2006). The Americans spend more money on fast food than they do on higher education,

personal computers, software or new cars. They spend more on fast food than on movies,

books, magazines, newspapers, videos and recorded music – combined (Schlosser, 1998).

Ninety percent of the money, which Americans spend to eat, goes to processed food. In

the U.S. the burger chains hold the largest share in fast food industry with 54% of the

sales and 76,066 outlets. The industry’ 5 main players, which have 34,7% of the market,

are McDonald’s, Wendy’s, Burger King, Doctor’s Associates and YUM (Euromonitor,

2006).

Political/Legal Segment

The popularity and the success of fast food originates from its convenience but

fast food industry is under fire of consumer, activist and health groups such as PETA,

Center for Science in the Public Interest because of the its unhealthy menu items, which
can lead to obesity with excessive consumption. The uncoverable health issues for

example in the United States the 30 percent of the adults, which means almost 60 million

people, is obese. This number was 30 years ago 15 percent and the trend is similar among

children. The obesity ratio among children have tripled and reached 15 percent in thirty

years (Schmidt, 2006). Besides in the new markets such as Japan the obesity started to

increase with expanding of fast food. Even tough the fast food companies haven’t been

sentenced yet to pay any indemnity to the consumers, the lawsuits about misleading in

the commercial especially directed at children and the contribution of fast food to the

health problems attracted the attention on the companies.

In addition to consumer movements like Slow Food, which aim to protect the

local cuisines and ingredients, the companies begun to put healthier alternatives in their

menu. In response to this, the fast food companies achieved to pass the Cheeseburger

Bill, which actually protects the companies against the lawsuits originated from obesity

claims. However, the industry is still criticized about their advertising, environmental

damages and low-wage policy.

Sociocultural Segment

Fast food industry faces the claims about reducing the diversity of local cuisine

but fast food restaurants present to the customers different products depending to the

region. For example, while in the western culture the burgers are more popular, fast food

means generally in East Asian countries noodle shops and in the Middle East falafel and

shawarma. Also different kinds of food are dominant in Latin America countries and

India. At this point even the global companies think local and consider cultural

differences. In addition to the differences in taste, there are some rules that cannot be
ignored. For example koshur (Israel) and halal (Muslim countries) are strict diet rules,

which explain how the meal should be prepared. In India the beef cannot be used because

Hinduism forbids eating beef.

In spite of all these facts, especially American fast food producers cannot protect

themselves from being seen as the symbol of their origin country’s cultural imperialism

symbol. Therefore the American fast-food franchises compose the main target in anti-

globalization demonstrations (McSpotlight, 2003).

Technological Segment

Although the operations in fast food service look easy, modern commercial fast

food, by contrast, is often based on highly processed industrial fashion with a large scale

of standard ingredients and production methods. The items in the menu are made from

processed ingredients at a central supply facility and then packed to be reheated in the

outlets by using microwave technology to save time. In this period the big companies add

some flavors, which are produced in other companies, to make the customers craved.

To reduce the costs, the cheap genetically modified products are very common in

the industry. Also big companies prefer to use software programs in their inventory,

producing and sales systems, and employee training programs. They are trying to use

and testing some technologies, as McDonald’s HyperActive Bob project, to ease the

confusion in production process. In addition to that the increasing number of internet

user is another opportunity for fast food industry. They can make marketing and services

such as home delivery through the web sites.


Global Segment

The estimates for the future of the global fast food industry are very promising.

For example, according to ERS research, which consider rising incomes and aging

population, the spending of Americans for fast food will rise around 6 percent per person

between 2000 and 2020, while the spending for full time restaurant will increase 18

percent (USDA, 2006). The aggressive moving of the fast food giants into Asian markets

originates from their very positive growth rates, especially in China and India. China’s

fast food industry is growing with 20 percent annual rate and generated already over $24

billions. The country hosts already many global fast food companies such as

McDonald’s, KFC and Pizza Hut (Wu, 2002). The fast food sales in India passed $1

billion recently but the growth rate is over 40 percent although the quarter of the

population remains under-nourished (Halweil, 2006).

Industry Environment

Porter’s Five Forces Analysis

Competitive Force Magnitude of Force Conclusion

Intensity of Rivalry Relatively Strong Reduces profit potential of


the industry
Supplier Power Moderately Weak May increase profit
potential of the industry
Buyer Power Relatively Strong Reduces profit potential of
the industry
Threat of Substitutes Relatively Strong Reduces profit potential of
the industry
Threat of New Entrants Relatively Weak May increase the profit
potential of the industry
Overall Conclusions Most of the forces are relatively strong and should
decrease the profit potential of the industry.
Intensity of Rivalry

The competitors in the market are countless. Although the five big companies’

sales compose over thirty percent of the market, it is not still the majority. Besides, there

is a high price competition among the big players. Most of the rivals present standardized

products and services to the costumers. To meet the high fixed costs the companies

should make big amount of the sales. The leaders of the industry have thousands of

restaurants and operate not in some countries, in contrast to, the competition is global.

According to 10K reports of the companies in 2006, McDonald’s 31,188 outlets in 121

countries, Burger King 11,120 outlets in 61 countries, Wendy’s 6,700 outlets in 22

countries and YUM over 34,000 outlets in more than 100 countries.

Supplier Power

The supplies do not need any special requirement except some health inspections.

Besides, the inputs are very common goods and fast food companies provide them from

various food wholesalers. Especially for the giant food service companies have a great

bargain power against livestock producers and farmers because of their huge amount of

purchases. Another important item for the fast food companies are soda and in soda

market are the companies are dominant Pepsi and Coca-Cola. However, high competition

between these companies reduces their bargain power and makes them dependent to the

fast food industry. For example, Coca-Cola and McDonald’s are allies. The fast food

companies with their huge amount of purchases have a great buyer power against

suppliers and they have extensive relationships with many wholesaler. Also some of the

companies already started to practice vertical integration by developing their own farms.

For example, in Russia McDonald’s produces all of food components by itself.


Buyer Power

In the market, there are plenty of the producers of the same products. Also the

prices and services are similar. Therefore, the customers do not see big difference among

the producer and do not show extra performance to find a specific producer. Besides the

customers can provide the same products from retailers with a cheaper price and make on

their own.

Threat of Substitutes

The researches show that the fast food market is losing its share to full time

restaurants and the aggressively branching grocery stores offer the similar products with a

cheaper price. The concerns about health issues and protecting local cuisines temp the

customers healthier and more varied alternatives. However the wide distribution network,

the speed of the service and fast-paced lifestyle may moderate the threat of substitutes.

Threat of New Entrants

In the market there are high barriers for the new entrants to compete with the big

companies. These big companies are very well known by the customers and they have a

very successful branding policy, which might be a sample even for the firms in other

industries. However, researches indicate that in spite of heavy investment in marketing,

fast food consumers show a very weak commitment to fast food chains (Vargas, 2003).

Therefore the main barriers for the new entrants are capital and economies of scale

advantages of the fast food giants.


Competitor Environment

Future Objective

As this industry grows, the fast food business will still highly compete with each

other in order to attract customers and gain more revenue. The future objective of the fast

food industry is to offer healthy food and premium products in the market since people

are more concerning about their health. People are thinking about what they eat and

looking for way to be physically active. McDonald’s will continue to offer more menu

choices, provide accesses to user-friendly nutrition education and information, support

physical activity and keep the customers trust with responsibility communication and

quality food (McDonald’s Balanced, Active Lifestyles Team, 2005). McDonald’s expect

sales and revenue growth rate of three to five percent and operating income growth of 6

to 7 percent. The company expects to invest 1.8 billion to open about 800 new

McDonald’s restaurants and remodel 2,500 locations worldwide (McDonald’s, 2006n).

Wendy’s future objective is to improve profit restaurant profit margin and reduce

cost over the next three year. It plans to increase sales by reinvigorating core products,

improving marketing, recommitting to service excellence and focusing on leadership

(Oldemark, 2006b). Burger King will focus on opening new restaurants around the world.

It plans to encourage more restaurants to move to competitive operating hours during

fiscal year 2007 and increase the value of band (Forbes, 2006).

In addition, the fast food market is becoming saturated and is beginning to see an

importance of international expansion. They plan to expand their franchises to global

market in order to respond to the increasing demand. They also emphasize on their

brands and building customer loyalty.


Current Strategy

The level of price, nutrition, food quality, store location, and product variety are

the main factors for developing strategies in the fast food industry. McDonalds’s

corporation is committed to support balanced and active lifestyles. McDonald’s believes

that in order to continue long term financial strength and enduring profitable growth, it

has to understand and satisfy the changing needs, wants, and lifestyle of the current and

potential customers. Its objective is to be a leader in supporting the well-being issue that

many customers care about. It offers a diverse range of menu options at the country level

and around the world. It provides programs and examples in order to inspire physical

activities and well-being for families in their everyday life (McDonald, 2006i).

Burger King’s strategy is to individualize each customers order and provide the

fastest service. Burger King gives customers many choices and provides whatever

customers choose. Wendy's differentiate its brand in the quick-service restaurant industry

with innovative products, new product categories, and more compelling advertising. The

Company also plans to test breakfast and introduce it in 2007 and focus on service

excellence, which will improve speed of service, accuracy and courtesy for customers

(Oldemark, 2006b).

Assumption

According to the financial report, McDonald’s has the highest revenue among

Wendy’s and Burger King. In 2006, McDonald’s recorded revenue of $ 21.23 billion

whereas Wendy’s created $ 3.90 billion and Burger King created $ 2.05 billion (Yahoo!

Finance, 2006).
Today, there are many rivals face intense competition in the fast food business.

The market is increasingly competitive, with other fast food business such as fried

chicken and pizza. Thus, many fast food businesses are implementing a low-cost menu to

attract customers. Item on these menus is offered at the lowest possible competitive price,

most commonly around 99 cents. McDonald’s dollar menu features Double

Cheeseburger, McChicken Sandwich, Fries, Soft Drink, Snack Size Fruit 'n Yogurt

Parfait, Hot Fudge Sundae, 2 pies and a Side Salad (McDonald’s, 2006l). Burger King’s

value menu features Whopper JR, Chicken Tenders, soft drink, French fries, onion rings,

Side green salad and apple pie (Burger King Brands, Inc., 2006). Wendy’s super value

menu features crispy chicken sandwich, yogurt, chicken nugget, Jr. bacon cheese burger,

French fries, soft drink, chocolate frosty, and side salad (Oldemark, 2006a).

In addition, Customers are increasingly focusing on quality and nutrition of the

food. Healthy conscious customers are increasing their demands. In response to this

trend, McDonald replaces french fries in happy meal with apple slices. Burger King offer

customers a veggie burger. Wendy’s substitutes milk for soft drink in kid’s meal

(Thompson et al, 2005).

Capabilities

Most fast food businesses compete on food quality, price, quantity service,

cleanliness and accessible location. They focus on serving customers in food court,

business areas, airport areas and community area in both domestic and international.

Many companies are introducing value-priced menu overseas to test customer reactions.

For example, McDonald’s has offered the McChicken Premium, a zesty chicken breast

filet serve on bun, in the United Kingdom, France, Italy, and Belgium. Burger King has
offered Broiled Salmon Fish Sandwich, the breakfast in Mexico. Wendy acquires several

small companies such as Tim Horton’s and Baja Fresh Mexican Grill to expand its

market because it is relatively new (Thompson et all, 2005).

McDonald’s has more than 31,800 restaurants serving burgers and fries in more

than 100 countries (Hoovers, 2006). Burger King Holdings operates the world's number

two hamburger chain with more than 11,100 restaurants in the US and about 65 other

countries (Hoovers 2006). Wendy's International operates within more than 6,700 of its

eponymous burger joints in the US and about 20 other countries (Hoovers, 2006).

Although Burger King has a larger number of locations than Wendy, It creates less

revenue than Wendy. McDonald has the better performance in both revenue and

extensive location.

Dominant Economic Features

Dominant Economic Characteristics

• Market Size and Growth Rate: According to the National Restaurant

Association (NRA) sales in 2005 at quick-service restaurants exceeded

expectations $134.2 billion. The sale at the end of year 2005 was $ 136.5 billion,

increased two percent from the past year. The NRA forecasts the sales will

increase about five percent in 2006, rising to $142.4 billion (Martin, 2006).

• Number of Rivals: Fast-food industry would probably categoried in eight

categories: sandwich, pizza, chicken, family, grill-buffet, dinner house, contract,

hotel (Thompson et al., 2005). Top competitors of the sandwich/hamburger


segment are McDonald’s, Burger King and Wendy’s. These three companies

compete in the multi-national level.

• Distribution: Distribution channel for the fast-food service restaurant has not

changed much from its beginning. The revenue of each company mostly comes

from the most tradition channel, in store sales. Later in 1975, a drive-through

(thru) was introduced by McDonald’s, and has increased sales through the present

day. The percentage of sales through a drive-through is increasing in many parts

of the world, especially in the US. In some part of the world, burger chain stores

offer a delivery service and holding a party at customer’s site.

• Buyer needs and requirements: Burgers, Fries, Soda and treats are basic items

that every brand offer to their customers and these are items that most of

customers crave for when they come to the store. In recent years, the customer’s

favor for healthier food in the fast-food chain store has increased and seems the

trends will stay. Salad and bake items, for example, have been added to the menu

as a result. The rising of gas price raised the value concerned for dollars customer

will spend. Cleanliness of the store and a good service of crew members are

fundamental requirements. A survey by QSR magazine revealed that customer’s

want for a drive-thru service are order accuracy, easy-to-read menu board and

speed of service (Davies, 2006).

• Capital requirements: To enter into the fast-food industry, it does not require

high capital. However, to compete with the major players in the industry, it does.

The major investment in the fast-food industry would be in the marketing and
advertising department. McDonald spends about $600 million dollar each year for

advertising.

Driving Forces

• Television Advertisement: The growth of television usage played important role

in a marketing campaign. Television advertisement is the one of major marketing

tools to promote new products and current promotions. McDonald ran its first

television advertisement in 1965.

• Technological innovation: The drive-through service which allows customers to

order food without leaving their cars has growth sales of the fast-food business in

1980s.

• Changing lifestyle: Consumer’s changing lifestyle to be busier and have so many

things to do in the limited time frame. Fast-food offers quick meal at the value

price. In many countries in Asia, anything related to western country included

fast-food chain restaurant, is considered as a hip and trendy lifestyle, especially

among teenagers which accelerates the growth of fast-food service restaurant

industry.

• Changing social concern: Obese problem raised consumers’ concern for what

people eat. Burgers and fries were blamed as a bad food causing decrease in sales

in the early of 2000s for burger chain stores, mainly in western countries. On the

other side, sandwich chain restaurant like Subway had increased sales because it

was considered as a healthier fast-food than burger and fries.

• Everyday low price strategy: Many fast-food stores offer a value item at the

minimum price everyday, such as hamburger at 99 cents.


Key Success Factors

• Quick and Value meal: Quick service is the major key of success of this

industry. Customers expect to get the food as soon as possible at the minimum

price. The technological advancement helps the fast-food operators to be able to

prepare and serve the meal for grab-and-go.

• Economy of scale: Fast-food operators purchase supplies at a very big quantity

which able them to enjoy the discount rate and able to set the price at the bottom

range.

• Good Marketing: Fast-food chain operators often sponsor national events or

world event such as world cup which allow them to access to n

• Cater to local flavor: Multinational corporations typically modify their menus to

cater to local tastes. Besides, most overseas outlets are owned by native

franchisees which benefit to the brand since the owner understands the market

very well.

PART THREE: INTERNAL ENVIRONMENT ANALYSIS

Resources

Tangible resources

McDonald’s headquarters, located in Oak Brook, Illinois, operates and franchises

about 31,000 restaurants in more than 110 countries. McDonald’s employed nearly

450,000 employees as of 2005, led by current Chief Executive Officer Jim Skinner

(McDoanld’s, 2006a). The Golden Arches logo, Ronald McDonald, “Big Mac” and “I’m

lovin’ it” are trademarks of McDonald’s Corporation and its affiliates (McDonald’s,

2006e).
In the last five years, McDonald’s has had cash provided by operation average

about $3.4 billion per year. As of December 2005, McDonald’s achieved 32 consecutive

months of positive global comparable sales (McDonald’s, 2006i, p. 4). Generally,

McDonald’s borrows on a long-term basis and is exposed to the impact of interest rate

changes and foreign currency fluctuations. At December 31, 2005, debt obligations

totaled $10.1 billion (Security and Exchange Commission, 2005, p. 28).

Service is one of the keys to success in the restaurant business. McDonald’s

provides hands on training and the materials to franchisees. The McDonald’s training

map for operator candidate includes Systems Management, Restaurant Management

program, Business Management program, and Preparing for Ownership. McDonald’s

also has a 2 advanced 5day courses at the Fred L. Turner Training Center at Hamburger

University in Oak Brook, IL – the company’s center of operation training and leadership

development (McDonald’s, 2006q).

Technological requirement in the fast-food industry has not changed much in term

of order taking and cooking process. McDonald’s operates a research and development

facility in the U.S., two facilities in Europe, and will open one facility in Asia soon (SEC,

2005, p. 4).

McDonald’s has tried to add features into its restaurant; McDonald’s installed

automated Redbox DVD rental machines, manufactured by Silicon Valley Company,

inside and outside some of its restaurant (Kiosk Magazine, 2004). McDonald’s USA

partners with American Express to accept ExpressPay at more than 12,000 McDonald’s

restaurant all over the country enhancing fast and convenient services (American Express

Company, 2006).
Intangible Resources

McDonald’s has a strong well-know brand which appeals to all age and customer

segments. McDonald’s had many awards recognition. It was ranked in the top of the Top

100 Global Brands Scoreboard by BusinessWeek magazine for five years since 2001.

McDonald’s was placed the eighth in 2005 according to two criteria; companies had to be

global in nature, 20% of sales or more has to come from outside the home country. Also

the financial data has be publicly to base the valuation. The brand value of McDonald’s

in 2005 increased from last year about four percent to be at $26,014 million (The

McGraw-Hill, 2006).

In term of employers, McDonald’s was named by many magazines as a best

employer to work with. Lists below are some latest interesting recognition it had:

• LATINA Style Magazine 2005 - Top 50 Best Companies for Hispanic Women to

work for in the US

• Essence Magazine, 2005 - 35 Great Place to Work by

• Black Enterprise Magazine 2005 - 30 Best Companies for Diversity by Black

• Nation Urban League (Chere Nabor) 2005 - “Face of Leader”, and much more

(McDonald’s, 2006f).

McDonald's believes skilled employees are a foundation for success anywhere.

Hamburger University, located in Oak Hill, Illinois, is a learning academy the company

established to develop and provide training courses. It has seven campuses around the

world. McDonald’s also have 139 country and regional training centers that provide

training based on the Hamburger University's management curriculum. In 2005,

Hamburger University is the only restaurant organization in the U.S. with


recommendations for college credit from the American Council on Education.

(McDonald's, 2006h)

McDonald's has a good relationship with employees. More than forty percent of

management positions worldwide move up from the system such as Vice Chairman and

CEO Jim Skinner who started his career with McDonald's from a Management trainee,

and Chief Restaurant Office Jeff Stratton who joined the company in 1973 as a

crewmember (McDonald’s, 2006s). They have strong skills and knowledge of the

company and the industry which will enable them to provide high quality service and

reduce the training cost.

The management structure of McDonald’s is by function lines: Operations

(equipment and franchising), Development (property and construction), Finance (supply

chain and new product development), Marketing (sales and marketing), and Human

Resources (customer services, personnel, hygiene and safety) (Biz/ed, n.d.).

McDonald’s has good reputation for quality and consistency in their products.

The company has defined and standardized its key processes rigorously, and transfers

them to entrepreneurs. McDonald’s provides the food distribution infrastructure as well

as the oversight and training to make sure that its standard is upheld (Peter Keen, 2005).

Capabilities

McDonald’s has a strong capability of providing fast food to serve customers all

over the world. It has more than 31,800 restaurants serving burgers and fries in more than

100 countries (Hoover’s, 2006b). The business is effectively managed in many

geographic segments: United States, Europe, Asia/Pacific, Middle East and Africa Latin

America, and Canada (Reuters, 2006). McDonald’s restaurant operations include


company-operated, franchised, and affiliated restaurant outlets in domestic as well as

international market. It offers various food items, and soft drinks and other beverages. It

seeks to serve its customers with the same quality product and experience, which requires

standardized processes and similar quality ingredients for the core menu.

For the global markets, the company is adapted to the customers demand and

local environment. McDonald’s product offerings vary beyond the core menu to meet

local tastes. For example, McDonald’s Taiwan serve a rice burger and McDonald’s in the

Middle Ease serve the McArabia, which features two grill chicken patties, lettuce, fresh

onions, tomatoes and garlic mayonnaise sauces on folded Arabic flatbread (McDonald’s

Blanced, 2005). McDonald’s do this by not only adapting its products but also changed

its promotion strategies.

McDonald’s has positive financial performance, which is achieved through strong

brand and customer loyalty. There are measured from strong sales and marketing

functions. The company achieved revenues of $20,460.2 million during the fiscal year

ended December 2005, an increase of 7.3% over 2004. The operating profit of the

company was $4021.6 million during fiscal year 2005, an increase of 13.6% over 2004.

The net profit was $2602.2 million in fiscal year 2005, an increase of 14.2% over 2004

(Datamonitor ComputerWire, 2006).

McDonald’s has a working capability of more than 1.5 million people worldwide.

They are valued asset helping McDonald’s operate its fast food business successfully. As

a result, every day McDonald's serves more than 47 million customers around the world

(McDonald’s, 2006m). In addition, McDonald’s has Hamburger University, the training

center which emphasized consistent restaurant operations procedures, service, quality and
cleanliness (McDonald’s, 2006h). The university is designed to instruct people employed

by McDonald's in the various aspects of the business.

Speed is related to capability. McDonald’s is a quick service restaurant. It

provides take-away and drive-thru services, which serve customers immediately and

allow them to order and pick up food from their cars. McDonald’s provide convenience

and inexpenxsiveness for the customers who need to eat but have no time to prepare their

food. In addition, McDonald’s invested in IT system such as wireless technology,

computer system and touch-screen, which support the fast service.

Core Competencies

Brand image, it is the most valuable thing McDonald’s has. McDonald’s is the

number nine global brand. This shows that it has strong global performances. According

to the McDonald’s press release, McDonald's Corporation announced that “global

comparable sales rose 5.7% in January, on top of a 5.2% increase achieved for January

2005. This makes the 33rd consecutive month of positive global comparable sales

increases, reflecting the ongoing strength of initiatives designed to enhance the customer

relevance” (McDonald’s, 2006k). The corporation is able to attract customers to the

restaurants around the world with expanded menu choice and variety, quality food,

greater customer conveniences and relevant marketing. In addition, McDonald’s has a

strong financial result which is an important factor to support business expansion.

Since McDonald’s has realized the potential for growth in international markets, it

has planed to benefit from lessons that they learned in the USA. It has applied the lesson

to its rapidly growing international business. McDonald’s can now share ideas, best
practices and human resources across borders, thus further enhancing its competitive

advantage and strengthening its leadership position (Vignali, 2001).

McDonald’s production strategies promote a quality experience by offering new

products to customers in order to address growing changes in demand for healthier foods

and premium products. It provides wide range of low- cost food and fast service to large

groups of customer, including breakfast items, sandwiches, salads, desserts, soft drink,

and value menu. For international market, it successfully adjusts the menu to local taste.

McDonald’s offers vary beyond the core menu to meet local taste. For example,

McDonald’s restaurant in Japan serve pork Teriyaki Burger, McDonald’s Brazil offers

coconut water (McDonald’s Balanced, 2005)

For the international operation, McDonald’s keeps the product, brand or strategy

flexible. Thus, it can be continually adjusted to bridge cultures and meet global trends.

Adaptation is used for many reasons including consumer tastes, preferences, laws and

customs. There are many situations where McDonald’s adapted the product because of

laws and customs in a country. For example, McDonald's began using a trans fat-free

cooking oil in Denmark after that country banned artificial trans fats in processed food

(Cable News Network, 2006)

McDonald’s has a good relationship with its franchisees. McDonald’s provides

training and materials which franchisees need to be a success in their restaurant business.

The training program is designed to enable franchisees to achieve their goal in doing their

business. It creates learning environment, which facilitate the development of skill. It has

over 2400 Operators to grow the business (McDonald’s, 2006g)


McDonald’s takes the attention on support well-being for children and families

wherever it does business. It provides programs to inspire physical activities for family in

their daily lives. The examples are as follow: (McDonald’s Balanced, 2005).

• It partners with the Olympics and FIFA World Cup to identified meaningful way

to make the customers understand how to balance the food they eat with the

activity they do.

• It supports grassroots sports which are also the way McDonald’s give back to

local community through the support of children’s sporting efforts.

• It created www. Goactive.com which is the global website used to inspire

physical activity among consumers. It features a full resource library on fitness

and physical activity and interactive chat room that allow users to talk with fitness

expert.

As McDonald’s has good relationship with its customer, it creates customer

royalty.
Distinctive Competencies

Four Criteria Test

Table no.2

Resource or Valuable Rare Costly Non- Competitive Performance


capability to substitutio consequence implications
Imitate n
able
Distribution Yes No Yes Yes Temporary Avg. to above
Competitive Avg. returns
disadvantage
Brand Image Yes No Yes No Competitive Avg. returns
parity
Production Yes Yes No Yes Temporary Avg. to above
skills/capacity Competitive Avg. returns
disadvantage
Innovation Yes Yes No Yes Temporary Avg. to above
reputation Competitive Avg. returns
advantage
Knowledge Yes Yes Yes Yes Sustainable Avg. to above
competitive Avg. returns
advantage

The success of the distribution in the fast food industry is mainly related with the

number of the outlets. According to the surveys, the convenience of the outlet is ranked

as the number one factor, which affects the preference of the customer, before than the

quality and speed of the service (Kasdan, 1996). The company McDonald’s has a strong

chain with over 30,000 outlets in 121 countries. However, the company is not the leader

in the distribution for example, YUM!, which is the parent of KFC, Pizza Hut and Taco

Bell, has more outlets than McDonald’s as total (around 2000) and expands further than

McDonald’s in the Asian market (The Economist, 2005).

Without a discussion McDonald’s is a model company in branding not only for fast food

industry but also for other industries. The company has been rated always in the first ten
of the top brand lists and none of the other companies in fast food take place even in

hundred. The Golden Arches is one of the most recognizable corporate logos. Also if the

96 percent of the school children in the US can identify Ronald McDonald (the clown

mascot of McDonald’s) and if the only fictional character with a higher degree of

recognition is Santa Claus, it indicates a serious marketing success (Sclosser,1998).

However, the competitors cannot be called unheard of and the main issue is that the

customers show little commitment to the brands.

McDonald’s has a huge production capacity, which serves every day more than

50 million people worldwide but the main factor, which makes company’s production

unique is their adaptation ability to the region. While the burgers remain staple fare on

the menu, local products have also been added. McDonald’s takes the quality control

very seriously and applies very strict specifications for all raw materials they use.

Especially in the foreign markets the fast food producers might face the suppliers, who

are unwilling to meet specifications. In this situation, the cases in UK and Russia shows

that McDonald’s prefers vertical integration instead of compromising in the quality

(Karichalil, 2000). Although the success in localizing needs expensive investment such as

research and management costs, it is not too expensive to imitate for the main

competitors which have strong financial sources too.

McDonald’s has an innovation policy, which promotes the global and regional

initiatives. Besides the different menus for each region, McDonald’s collaborate with

well-known architects to create different designs for new restaurants and extensive

makeovers of existing stores in each country. (For instance, McCafe coffee and dessert

concept in Australia or game stations in Mexico or Gym clubs in France). Also the
company is the creator of the “dollar menu” (special pricing for certain products),

McMenu (different prices on various days of the week in Latin American countries) and

first adaptor of home delivery system in Southeast Asia and some middle east countries

(Nation’s Restaurant News, 2005).

Among the distinctive competencies, the “knowledge” is the most sustainable

advantage of the company. The company could have achieved to keep its market

leadership for decades. It is not so hard even for the small stores to produce a better

tasting burger than McDonald’s but the millions of consumers still pick McDonald’s.

Even though some competitors have more outlets and imitating the majority of the

innovations in the industry requires inexpensive investment, there is a cliff between the

sales of the McDonald’s and its competitors. They have the same product or service but

McDonald’s succeeded differentiation by adding some features and this is mainly

originated from the strategy of management, which determines the changing consumer

habits and trends and being the first in taking action for renovation.

Value Chain

Primary Activities

Supply Chain Management

• Purchasing strategy - McDonald’s strategy is based on long term win-win

partnership, risk sharing and decentralized supplier structure. Suppliers for

multinational were consolidated by zone.

• Logistics – One distribution center of McDonald’s responsible about 200

restaurants by average (about 180 restaurants globally). Supplies are delivered to


stores about three times a week or more frequently in urban areas (Schachner,

2006).

• Supply chain integration - In 2004, McDonald's Europe had implemented its

forecasting and replenishment solutions which enabled the company to be

informed, forecast supplies more accurate and reduce its inventory which

eventually save its cost (SourceWire, 2004). In January 2006, McDonald's

reported in the National Retail Federation 95th Annual Convention & Expo in

New York City, that it could reduce the average inventory level about 30%,

surpassed the target 15% (Schachner, 2006).

• Code of Conduct - The current compliance program of McDonald’s has three

main elements: 1) Signed agreements on a copy of the Code of Conduct for

suppliers, 2) Supplier Training and 3) Onsite Facility assessments which experts

third-party monitors conduct onsite of supplier facilities including inspections of

physical plants and equipment, private interviews with workers and discussions

with facility managers (McDonald’s, 2006p).

• Safety Standard - McDonald’s provides a safety standard that its suppliers have

to follow. It is the company’s intention to maintain the safety quality standard,

and to ensure its suppliers meet or exceed the government requirements. The

International Scientific Advisory Council on bovine spongiform encephalopathy

(BSE) has reviewed the company’s policies concerned use of specific risk

materials (SRM), advanced meat recovery (AMF) and downers. McDonald’s has

never allowed suppliers to use of all of these substances (McDonald’s, 2006o).


• Animal Welfare - The animal welfare program was established and applied in all

the countries which McDoanlad’s does business. It is the company’s commitment

to support a proper animal treatment, quality and safety of the food products.

(McDonald’s, 2006b).

Operations

• Localization – Going to International market as a Global brand but act local.

McDonald’s localizes its products to appeal customers in each country.

McDonald’s has absorbed the culture of countries it operates. Showing respect,

recognition, understanding the culture and blending itself to fit in while still

maintaining the character of the Western culture let McDonald’s gained market

share in many countries.

• Economy of Scale – Serving about 50 million people a day around the world,

McDonald’s needs huge numbers of supplies. From cutlery to ketchup to tissue

paper, McDonald’s has a strong buyer power to negotiate to the cheapest price of

whatever the company buys which enable McDonald’s to sale its products at the

low price.

• Standard – McDonald’s has a surveillance team to check the quality and

maintain its standard. The company operates one research and development lab in

the US, two in Europe and will open one in Asia. McDonald’s strategy focuses on

quality (Cold Chain, HACCP, QIP), product specification and environmental

audits (Schachner, 2006).

• Trans Fats Usage – Following the market trend and health advocate demand,

McDonald’s announced to reduce trans fats using in the cooking process. By


2006, McDonald’s had managed to reduced percentage of trans fat oil in the

kitchen about 15 percent, and still working on a suitable alternative fat that will

not alter the taste (Haynes, 2006).

Distribution

• Number of stores at convenience location – In the US, there are about 550,000

restaurants that serving customers in 2005 (SEC, 2005). McDonald’s considers

the location for its restaurant carefully to ensure its store is located in a convenient

location and able to access conveniently.

• Drive thru – Times is money; every second lost in filling an order is considered

money burned. McDonald’s put POS system to drive –thru units which increases

traffic and accuracy of orders.

• Gas station – McDonald’s signed a deal with the nation’s largest gasoline retailer

in China to open stores at existing and future gas stations. However, Jason Xu, an

analyst at KGI Securities in Shanghai, critics that this strategy may take a long

time to get benefit because typically Chinese does not have a habit of eating when

pumping gas (The Australian, 2006).

• 24 hour service – McDonald’s extend its operating hour till 2 p.m. in many areas.

Some of them are 24 hours restaurants which enable company to generate more

revenue.

Sales and marketing

• Plan to Win – McDonald’s implement the Plan to Win to address the key drivers

of the business – people, products, place, price and promotion. It is a combination


of customer centric initiatives designed to deliver the company’s best operation

and leadership marketing (SEC, 2005).

• Lean fare and Kids meal – McDonald’s expands its menu offering more choices

for kids and adding salad and chicken sandwich to respond to the market trend.

McDonald’s added chocolate milk or apple juice instead of soda (Gray, 2004).

• “I’m lovin’ it” – The global branding campaign which McDonald’s introduced in

2003 at Munich, Germany for the first and roll out to other countries.

• Playplace – McDonald’s is the first who added a child’s play into its restaurant.

One of the primary reasons of this strategy is more than half of the US households

are families with children. Other fast-food chain such as Burger King had

followed this idea. The free play area increases the restaurant sale as children

command seriously where to eat (White, 1998).

• Nutritional Awareness – Further to adding lean fare to the menu, McDonald’s

decided to put its nutrition information on its packing. McDonald’s bases its

nutritional percentages on an average 2,000-calories-per-day diet. The new

packaging was introduced at the Winter Olympics in Turin on February 8, 2006

(Gogoi, 2006).

Service

• MP3 in store – McDonald’s introduced a system which customers can download

MP3 and ring tones, burn CDs, printed digital photos, and surf the Web called

E2Go in Europe and Australia in 2004. It introduced the download kiosk to the

US in May 2005 at its flagship Oak Brook restaurant (Harris, 2006).


• Wi-Fi internet – McDonald’s offers Wi-Fi internet in some stores. Currently

about 7,000 stores in the US equipped Wi-Fi internet for its customers.

• DVD Rental Kiosk – McDonald’s added Redbox DVD rental into the store

aimed to attract new customers and increase the revenue.

• Corporate website – www.mcdoanlds.com is the official company’s website

providing corporate information, press release, information for investors and links

to relevant websites.

Support Activities

Procurement

• Partnership - McDonald’s works with the Center for Environmental Leadership

in Business (CELB) to develop environmentally and socially responsible food

sourcing guideline for agriculture and fish products. This assessment examined

environmental issues which associated with key commodities used within the

McDonald’s supply chain. The pilot program involves five of the biggest items

inside the company: beef, pork, chicken, buns and potatoes (Conservation

International, n.d.).

Technological Development

• Global Point-of-Sale (POS) – McDonald’s partners with Microsoft in December

2005 to help streamline its operations. Window XP Embedded has the ability to

work with a single vendor and make restaurant crew training faster and more cost-

effective, also easily integrating and maintaining devices from multiple POS

hardware providers which eventually, will reduce total cost of operations

(Microsoft Corporation, 2005).


• Packaging – About 83% of the packaging used are for food, beverages, and other

consumer purposes is made of some form of paper or other wood-fiber material.

McDonald’s strategy concerned the packaging is eliminating unnecessary

packaging, reducing the total amount of material used and designing consumer

packaging for its capacity.

• Store Location – Customer now can find where the closet McDonald’s store

from internet is.

Human Resource Management

• Hamburger University – McDonald’s established Hamburger University, a

center human resource management to provide training course and leadership

course.

• Good Reputation – McDonald’s has a good reputation. It received much

recognition from magazine and institution.


McDonald’s Ratio Analysis 2004-2006

Table no.3

Ratios McDonald’s Industry Analysis


(McDonald’s in
2004 2005 2006 2006 and the
Industry)
Profitability
Net Profit Margin 11.95% 12.72% 13.20% 3.5% Very Good
Return on Equity 17.47% 17.73% 18.7% 10.8% Good
Return on Assets 8.54% 9.00% 9.9% 5.4% Good
Gross Profit Margin 31.3% 30.9% 31.20% 21.8% Good
Operating Profit 18.6% 19.7% 19.6% 13.07% Good
Margin

Liquidity
Current Ratio 0.81 1.45 1.35 0.86 Good
Quick Ratio 0.60 1.25 1.3 0.7 Good

Leverage
Debt to Total Asset 0.49 0.50 0.49 0.34 Poor
Debt-to-Equity 0.65 0.67 0.57 0.43 Poor
L/Term Debt to 0.58 0.59 0.53 0.50 Marginal
Equity

Activity
Total Assets 0.7 0.7 0.8 1.5 Poor
Turnover
A/R Turnover 25.8 26.6 26.3 42.7 Poor
Inventory Turnover 94.6 96.0 104.4 54.4 Very Good
DSO 14.2 13.8 14.5 9.84 Poor
Fixed Asset 0.9 1.0 1.1 1.3 Marginal
Turnover

(Edited from Morningstar Homepages, 2006, Reuters Homepages, 2006 and Hoovers
Homepages, 2006)
Profitability Ratio

0 0 .0 0 %
0 0 .0 0 %
0 0 .0 0 %
0 0 .0 0 % 2222
0 0 .0 0 % 0000
0 0 .0 0 % 2222
0 .0 0 % Industry
0 .0 0 %
Net Profit Return on Return on Gross Operating
Margin Equity Asset Profit Profit
Margin Margin

Profitability Ratios of McDonald’s between 2004 and 2006 and the fast food industry

Profitability ratio is the net result of a number of policies and decisions. The ratios

examined thus far provide useful clues as to the effectiveness of firm’s operations.

According to the data, McDonald’s draws a successful in terms of market profits.

The company’s net profit margin increased to 12.72% in 2005 and to 13.20% in

2006. The ratio was 4 times higher than the industry average which indicates that

McDonald’s earned better profit from net profits as a percentage of total sales. The

company had better control over its cost compared to its competitors.

McDonald’s had a better ability to utilize shareholder’s fund. McDonald’s return

on equity increased to 17.73% in 2005 and to 18.7% in 2006, which was higher than the

industry average. It is goods news for the investors where they made $0.19 for every

dollar they invested.


Return on asset was increase to 9% in 2005 and to 9.9% in 2006. The company

was two times higher return on its assets than the industry average. McDonald’s could

use its assets to generate profits from the asset available.

For gross profit margin ratio, McDonald’s was decreased to 30.9% in 2005 and

increased to 31.2% in 2006. This measures the total margin available to cover operating

expenses and yield a profit. This amount can then be used to pay fixed expenses such as

marketing and selling expenses, R&D expenses and administrative expenses. The

company was more successful than the industry which indicates that McDonald’s made

reasonable profit on sales than the industry

During 2004 to 2006, McDonald’s operating profit margin was higher than the

industry. The company had more desirable number than the industry. It was more

effective on operating the costs and increasing its sales. It reached a percentage of 19.6 in

2006 whereas the industry reached a percentage of 13.07.

The Company's strong performance reflects the ongoing benefits of enhancing the

McDonald's experience, introducing innovative products and improving the relevance of

the brand (Morningstar, 2006)

Liquidity Ratio
2 .2
2 .2
2 .2
0 2222
2 .2 2222
2 .2 2222
2 .2 Industry
2 .2
0
Current Asset Quick Ratio

Liquidity Ratios of McDonald’s between 2004 and 2006 and the Fast Food Industry

McDonald’s current ratio was increased to 1.45 in 2005 and lowered to 1.35 in the

following years. However, the ratio was still higher than the industry ratio (0.86) which

indicates that McDonald’s had more ability to meet short-term obligations than the

industry had. It is important to note that in McDonald’s successfully increased its current

assets in order to meet current liability and cover short term debt in 2005 and 2006.

McDonald’s improved its quick ratio between 2004 and 2006. The ratios in year

2005 and 2006 were also higher than the industry ratio which could be the result of

decreased leverage of the company. McDonald’s had a better ability to pay off its debts

with its most liquid assets.

Leverage Ratio
2 .2
2 .2
2 .2
2 .2 2222
2 .2 2222
2 .2 2222
2 .2 Industry
0
Debt to Total Debt to Long Term
Asset Equity Debt to
Equity

Leverage Ratios of McDonald’s between 2004 and 2006 and the Fast Food Industry

McDonald’s did not have much different number of debt to total asset ratio during

2004 and 2006. However the ratio is higher than the industry which indicated that the

company relied on debt to finance assets than the industry did. In 2006, For every dollar

McDonald’s owned its assets, it owed $0.49 to an outside lender while the industry owed

$0.34 to an outside party.

McDonald’s had increased dept-to-equity to 0.67 in 2005 and decreased to 0.57 in

2006, a more desirable number. However, those numbers were higher than the industry

(0.43), which indicates that the company relied more on debt financing than the industry

did.

McDonald’s increased long-term debt to equity to 0.59 in 2005 and decreased to

0.53 in 2006. The number was not much different when compared with the industry

(0.53) in 2006.
It is important to note that both debt-to-equity and long-term debt to equity ratios

of year 2006 were lower than 2005 obviously. This is because McDonald’s repaid a huge

amount of debt in 2006. However, the company should continue to lower these leverage

ratios.
Activity Ratio

222

000

00

00 2222
2222
00
2222
00 Industry
0
Asset A/R Inventory DSO Fixed
Turnover Turnover Turnover Asset
Turnover

Activity Ratios of McDonald’s between 2004 and 2005 and the Fast Food Industry

McDonald’s total asset turnover did not have much different number between

2004 and 2006. The number was 0.7 in 2004, 0.7 in 2005, and 0.8 in 2006 which was

lower than the industry ratio (1.5). This indicated that in 2006 every dollar McDonald’s

invested in total asset, It generated $ 0.8, while those of industry generated $1.5.

McDonald’s increased account receivable turnover to 26.6 in 2005 and decreased

to 26.3 in 2006. This ratio during 2004 and 2006 was lower than the industry. This

suggests that McDonald’s should re-assess its credit policies in order to ensure the timely

collection of imparted credit.

McDonald’s increased inventory turnover to 96 in 2005 and to 104 in 2006. The

ratio was two times higher than the industry in 2006, which indicates that McDonald’s

has strong sales and manages its resources more effectively than the industry
During 2004 and 2006, McDonald’s took more days than the industry to collect

revenue after sales had been made, which shows that McDonald’s had a harder time

collecting the receivable

Fixed asset turnover ratio measures how effectively a firm uses its plant and

equipment. McDonald’s had an improved trend of fixed asset turnover. However, the

number is not as high as the industry. In 2006, for every dollar McDonald’s invested in

fixed assets, the company generated $1.1 in sales while the industry generated $1.3

Overall Summary

McDonald’s profitability and liquidity have been improved respectively. Its

profitability and liquidity ratios were also higher than the industry. For leverage ratios,

McDonald’s had reduced its debts-to-equity and long-term-debt-to-equity in 2006

However, McDonald’s relied more on debts to finance than the industry did.

McDonald’s, then, has to continuously improve its profit. It should cut its operating cost

in order to gain higher profit margin. For activity ratios, McDonald’s has a very high

inventory turnover which shows its efficiency. However, its other ratios in this section

need some improvement. It suggests that McDonald’s should reassess the credit policy

and close the underperforming restaurants


Competitors landscape Analysis

Table no.4

Ratios McDonald’s Burger Wendy’s Industry Analysis


King (The
strongest
Company)
Profitability
Net Profit 13.20% 1.30% 3.20% 3.5% McDonald’s
margin
Return on Equity 18.7% 5.2% 5.6% 10.8% McDonald’s
Return on Assets 9.9% 1.0% 3.3% 5.4% McDonald’s
Gross Profit 31.20% 36.70% 23.70% 24.70% Burger King
Margin McDonald’s
Operating Profit 19.6% 8.3% 5.42% 13.07%
Margin

Liquidity
Current Ratio 1.35 0.92 3.23 0.86 Wendy’s
Quick Ratio 1.3 0.75 3.0 0.7 Wendy’s

Leverage
Debt to Total 0.49 0.78 0.40 0.34 Wendy’s
Assets
Debt-to-Equity 0.57 1.88 0.36 0.43 Wendy’s
L/Term Debt to 0.53 1.87 0.35 0.50 Wendy’s
Equity

Activity
Assets Turnover 0.8 0.8 1.0 1.5 Wendy’s
A/R Turnover 26.3 12.8 18.3 42.7 McDonald’s
Inventory 104 N/A 37.5 54.4 McDonald’s
Turnover
DSO 14.75 27.45 22.92 9.84 McDonald’s
Fixed Asset 1.1 2.3 1.7 1.3 Burger King
Turnover

(Edited from Morningstar Homepages, 2006, Reuters Homepages, 2006 and Hoovers
Homepages, 2006)
Profitability Ratios

0 0 .0 0 %
22 .22 %
0 0 .0 0 %
0 0 .0 0 %
0 0 .0 0 % McDonald's
22 .22 % Burger King
0 0 .0 0 % Wendy's
Industry
0 .0 0 %
0 .0 0 %
Net Profit Return on Return on Gross Operating
Margin Equity Assets Profit Profit
Margin Margin

Profitability Ratios of McDonald’s, Burger King, Wendy’s and the Fast Food Industry

Among the tree companies, McDonald’s had the highest figure on net profit

margin (13.20%), return on equity (18.7%), return on asset (9.9%) and operating profit

margin (19.6%)

Better net profit margin indicates that McDonald’s earned better profit from net

profits as a percentage of total sales than Burger King and Wendy. The company earned

more profit per dollar of sales.

McDonald’s had a better ability to utilize shareholders’ funds than Burger King

and Wendy. For every dollar the shareholders of McDonald’s invested they earned $0.19

of net income whereas the shareholders of Burger King and Wendy’s earned only $0.05

of net income

McDonald’s could generate its profits from asset better than those two companies

and industry. This places McDonald’s as an efficiently managed company. The company
was able to use its assets to its fullest potential, which highlights McDonald’s ability to

generate profit from the available assets

In addition, McDonald’s operated the costs and increased its sales more effective

than Burger King and Wendy’s. However, Burger King had the highest gross profit

margin (36.70%) which indicates that Burger King made more reasonable profit on sales

compared to McDonald’s (31.20%) and Wendy’s (23.70%)

McDonald’s strong financial performance reflects diligent execution of

fundamental business drivers. The results confirm that the strategy of growing by

improving the existing restaurants and focusing on the right strategy for McDonald’s.

(McDonald’s 2006 Press release)

Liquidity Ratios

2 .2
0
2 .2
McDonald's
0
Burger King
2 .2 Wendy's
0 Industry

2 .2
0
Current Ratio Quick Ratio

Liquidity Ratio of McDonald’s, Burger King, Wendy’s and the Fast Food Industry

Wendy’s had the highest figure of current ratio (3.23) and quick ratio (3.0). This

shows that Wendy’s had the ability to pay short-term obligations and depts. better than

McDonald’s and Burger King. However, all of three companies had higher current ratio

and quick ratio than the industry.


Leverage Ratios

2 .2
McDonald's
0
Burger King
2 .2 Wendy's
Industry
0
Debt to Total Debt to Equity Long Term
Asset Debt to Equity

Leverage Ratios of McDonald’s, Burger King, Wendy’s and the Fast Food Industry

Wendy’s had less debt to total asset, debt to equity and long-term debt to equity

than McDonald’s and Burger King. It represents that McDonald’s and Burger King relied

more on debts to finance than Wendy did in 2006.

Activity Ratio

222

000

00
McDonald's
00
Burger King
Wendy's
00
Industry

00

0
Asset A/R Inventory DSO Fixed Asste
Turnover Turnover Turnover Turnover
Activity Ratios of McDonald’s, Burger King, Wendy’s and the Fast Food Industry

The total asset turnover of three companies was not much different. However,

Wendy’s had the highest figure to total asset turnover ratio. It represents that for every

dollar Wendy’s invested in total asset, it could generated more about of dollar than

McDonald’s and Burger King.

McDonald’s had the highest account receivable turnover compared to Burger

King and Wendy’s which indicates that McDonald’s extension of credit and collection of

accounts receivable was more efficient than Burger King and Wendy’s. However the

ratios of three companies were lower than the industry. This suggests that McDonald’s,

Burger King and, Wendy should re-assess its credit policies in order to ensure the timely

collection of imparted credit.

McDonald’s had higher inventory turnover than Wendy’s (37.5) and industry.

(Burger King’s inventory turnover ratio is not available) which indicates that

McDonald’s managed its resources more effectively than its competitors.

McDonald’s took 15 days after to collect revenue after sales have been made. It

performed better than Burger King and Wendy’s, which took 27 days and 23 days

accordingly. However, the ratios of three companies were above the 10-day average

industry which shows that they had a harder time collecting the receivable.

Burger King had the highest figure of fixed asset turnover ratio. It represents that

for every dollar invested in fixed assets, Burger King was able to generate more sales

than McDonald’s and Wendy’s


Overall Summary

Each company had dominant financial in different ratios. For profitability ratios,

McDonald’ was the strongest in the area of net profit margin, return on equity, return on

asset and operating profit margin. The ratios were higher than the competitors and

industry. However, Burger King had the strongest gross profit margin. McDonald’s

liquidity ratios were lower than Wendy’s but higher than the industry. Thus, they are

acceptable. Wendy’s had a more desirable number of leverage ratios than McDonald’s

and Burger King. McDonald’s, and Burger King needs to improve the leverage ratios

because they had less ability to pay off their liability than the industry did. For the

activity ratios, Wendy’s performed well in the area of asset turnover. Burger King

performed well in the area of fixed asset turnover. McDonald’s performed well in the

area of day sales outstanding, account receivable turnover and inventory turnover.

Nevertheless, McDonald’s needs some improvement in this section because some ratios

were not as good as the industry’s ratios


Consumer Commitment
Strategic Group Map

High

WEN
Low

BK

MCD
Few locations Many locations

Number of restaurant

Among competitors in the fast-food chain industry, McDonald’s has number of

restaurants more than its competitors. However, it does not have a high commitment from

customers. In contrast of the number of location, McDonald’s has the lowest score of

consumer commitment. Increasing number of restaurants is usually the fundamental goal

of any companies in order to cover as many geographic areas as possible. This should be

a near term strategy to increase the market share. For the long term strategy, McDonald’s

should increase the customer loyalty to maintain its leading position in the market.

Weighted Competitive Strength Assessments


Key Success Factor/ Important McDonald’s Burger King Wendy’s
Strength Measure Weight Rating/Score Rating/Score Rating/Score
Product quality 0.05 7 0.35 5 0.25 6 0.30
Brand-name 0.10 10 1.00 7 0.70 6 0.60
recognition
Service performance 0.05 8 0.40 7 0.35 10 0.50
Outlet/distribution 0.25 10 2.50 7 1.75 4 1.00
Diversity of products 0.20 9 1.80 7 1.40 8 1.60
Financial Resources 0.15 9 1.35 6 0.90 7 1.05
Price 0.10 8 0.80 8 0.80 8 0.80
Customer loyalty 0.10 5 0.50 6 0.60 7 0.70
Sum of important 1.00
weight
Weighted overall 8.70 6.75 6.55
strength rating

From the customers’ perception there is no big difference between the product quality of

McDonald’s and its competitors’ but accepting the nutrition and fat value of the foods as

a main factor, McDonald’s present more healthier foods than the competitors do

(Nutrition information, n.d.).

Besides being the most recognizable brand in fast food industry, McDonald’s has been in

the first ten of top brands list of the world for decades. More important than that, among

the burger based producer, the number of the world wide outlets of the company is more

than double to Burger King, which is the second in the list. The importance of this fact

originates from that the customers care the convenience of the restaurant more than its

brand. Also, the company is the last in the list of customer loyalty. The customer

satisfaction is low among the McDonald’s customer and Wendy’s has a faster and more

professional service than McDonald’s.


Because of the high price competition, there is no high price superiority among

competitors. Even if there is little differences, special pricing promotions like coupons,

balance this difference. Especially in Europe and US, the price of the products is cheap

and ignorable comparing with the income of customers.

Although Wendy’s offers more sandwich and salad menu than its competitors,

McDonald’s differentiation strategy is not limited only with products and it has a variety

of local food, services and design of the outlets especially in foreign countries.

Comparing the debt to equity and gross profit margin, McDonald’s is behind its

competitors but the revenues and operating margins show that the company operates

more widely and efficiently.

This assessment showed us a very special characteristic of burger based fast food

industry different. The quality of products and services are the some but McDonald’s are

much further than its competitors. The main factors, which make McDonald’s stronger,

are the number of its restaurants and the diversity of products.

SWOT

Table no.6

Strength Weakness
• Brand Name • Service Quality
• Finance • Low Customer Loyalty
• Number of restaurant • Low Customer Satisfaction
• Standardization • Unsuccessful Promotion Strategy
• Diversified geographic
• First Move

Opportunity Threats

• Growth in China and India • Growing Heath Consciousness


• New Products • Bird Flu, Mad Cow
• POS – Cost saving • Intense Competition
• Full-service Restaurant
• Frozen Food

KEY RESULT AREAS

1. Public Perception

The company’s image is affected badly by health, low wages and marketing

issues. Especially the nutrition of the ingredients is the one of the most controversial

subjects in the media. The customers are directed to look for healthy food options. Even

though comparing with the competitors in the fast food industry, McDonald’s offers a

wider variety of nutritious items, as a parent company they draw the majority of the

unwanted attention. Also the company has to take in consideration the environmental

concerns of the customers. Some environmental initiatives might pay themselves off by

reducing other kinds of costs.

McDonald’s is one the most recognized brands in the world. Although the US

customers show little commitment to the fast food brands, this reputation will be useful
especially in foreign markets. Abroad, the lines in front of the first established outlets of

McDonald’s are not originated from the fast service or high quality products of the

company. The company is the symbol of fast food culture and has different types of

customer than US. Therefore, McDonald’s suffers from the backlashes of this reputation

especially in the demonstrations.

2. The cost of differentiation

Growing customer wants and needs along with increased competition has forced

the company to alter and improve their menu to better fit the environment. Therefore the

products, services and even the design of the outlets are different in each region but the

creation and implementation of the new products cost millions of dollars. Also some of

the new products such as Arch Deluxe and McPizza, which do not exist anymore,

couldn’t provide the desired success and the projects like “Made for You” created a

contradiction with the standardized process of a fast food company. For example,

McDonald’s invested around 400 million dollars to redesign of the production in the

outlets to let the customers choose the ingredients of the food but the problem was the

customers complained about longer waits in line. Finally with the exception of some

countries, the company removed “Made for You”. The company has a similar problem in

its new “Plan to Win” strategy. Even though as total sales, the strategy has been

successful since it was announced in 2003, some franchisees complain about the rising

costs.

3. Customer service
The quality management perception of the company includes the total customer

satisfaction and minimizing the time for processes, which are based on efficient

operations. The company invests in improving the processes and training the employees.

However, the company ranked the last among the fast food chains in the customer

satisfaction. The company cannot meet the customer expectations in the quality and the

speed of the service. The customers complain mostly about slow service and

unprofessional employees.

4. Expansion

The convenience of the restaurants plays the major role in the preferences of the

customers and McDonald’s, which has over 32,000 existing outlets and opened averagely

700 outlets per year since 2000, is the leader in the burger based fast food companies.

However, more than half of these outlets are in US or European market and these markets

are saturated. Therefore the companies are directed to new markets such as Asia and

expanding very aggressively, for instance 100 of the 700 new outlets are opened in

China. By expanding quickly into international markets, the target is arriving before

competition and securing a plan for future growth opportunities. Also being first in the

international markets makes the company first in the minds of international consumers

but expanding aggressively especially in international markets might be not successful as

projected. In addition to low demand, some countries require a whole infrastructure

instead of a simple supply chain and weaker foreign currency might impact international

divisions’ profitability. For example in 2002 the company closed its 175 outlets in 10

countries due to poor profitability. Besides, the expanding in saturated markets brought
up some other problems. McDonald’s tried to expand into airports, malls and hospitals

and this effort became another failure sample.

5. Acquisitions

The full service restaurant market has a bigger growth ratio than fast food

industry. Therefore, McDonald’s moved into other brands of food and restaurants. They

acquired Boston Market and Pret A Manger. These acquisitions will allow McDonald’s

to move into growing non-hamburger markets while increasing product selection and

have the ability to be expanded internationally depending on their success in the existing

markets.

6. Franchisees

Over 70 percent of the outlets are franchised and the average demand for an outlet

is 10. Hence, the franchisees are another important customer group. On the other hand,

the company implements performance measures, including a restaurant review and

measurement process, to enable and motivate franchisees and restaurant employees to

serve customers better. The company has also increased its staff of consultants who

inspect restaurants and work with franchisees to improve their operations but the plan

comes at a difficult time for many of McDonald's smaller operators, who are being

squeezed by flat sales and rising costs. The franchisees claim that this strategy forces

weaker franchisees out and gives more restaurants to larger operators with more financial

resources. Also, the franchisees complain about the cannibalism of close outlets.

OBJECTIVES
• Better the company’s image in the eyes of the customers by cooperating with well

known organizations especially in the environmental and health issues

• Increase the variety of healthier and local products

• Develop the relationship with the franchisees

• Expand in the promising markets such as Asia and increase the profitability in the

existing markets

• Increase the revenues in existing restaurants of mature markets instead of

launching new outlets

• Improve the customer service by sustaining employee training and human

resources

• Increase the customers’ satisfaction by using effective methods

• Increase the revenues by entering in other food industries under new brands

STRATEGIES

1. Localizing

The company knows the maintaining the industry leadership without considering

consumer trends, is impossible. Therefore the company start to apply a “Plan to Win”

program, which focuses on 5 P’s “people, product, place, price, promotion” (Hume, n.d).

They intend to reduce the company’s ownership percentage in outlets, although the 85

percentage of US outlets and 70 percent of the worldwide outlets are controlled by

independent operators. The purpose is cooperating with local entrepreneurs who know

the local culture, business and legal environment (Brandon, 2006).


2. Differentiation

In addition to burgers, the menus of McDonald’s offer several types of food such as

salads, fruits and local product options. Also they practice the differentiation in services

too. For example in some areas they have different pricing, home delivery and diner

services. A new strategy for mature market is developing new brands in other food

segments.

3. Growing

McDonald’s growth strategy is based on three elements; increasing the number of

outlets, maximizing sales and profits at existing outlets and improving international

profitability (McSpotlight, n.d.). .While the company seizing the new markets in

Southeast Asia, they focus in the mature markets like Europe and US to add customers to

existing stores. Also maximizing sales and profits at existing stores will be achieved

through better operations, product development, effective marketing and lower costs.

International profitability will be realized as economies of scale are achieved in

individual markets and through the benefits from global infrastructure.

4. Public Relation

The company realized the increasing health trend and focused extraordinary

efforts to add nutritious products in their menu. Also McDonald’s provides information

to the customers about the quality of its food. They developed nutrition and education

programs for the customers and motivates them to make food and fitness choices that are

right for them. Besides, McDonald’s collaborates with sport and health organizations

such as IOC and Better Health Foundation. For example, McDonald’s was the sponsor of

the 2006 Winter Olympics and the McDonald’s global web site “Go Active” was created
with the support of IOC. As part of its waste reduction action plan, McDonald’s has

committed to reviewing annually all food service products and packaging items to

identify opportunities for source reduction. McDonald’s environmental effort was

honored by the U.S. Environmental Protection Agency for its conservation and recycling

efforts. The firm collaborates with its suppliers, train them about environmental issues

and take their evaluations.(McDonald’s n.d.).

5. Improve the customer service

To improve the organization, McDonald’s collects information from its customers

about its performance and deficiencies. In addition to two main surveys on larger scale,

the managers are supposed to talk at least one customer during each travel path which

means every thirty minutes of his shift. To ensure that all employees properly perform

their assigned duties, McDonald’s invests greatly in their training program. Beside the

basic FAF (Fast, Accurate and Friendly) training program, the company has 10

international training centers and every year around 5,000 people attend to Hamburger

University, which is owned by McDonald’s. The company continues to receive

prestigious awards for their leading-edge training, including the “Employer of Choice

Award” from the Restaurant Business Magazine (McDonald’s, n.d.).

DECISION CRITERIA
McDonald’s increases the diversity of its products not only by imitating some

local products but also building their own food studios. The last sample is that the

company built in 2006 a new multimillion dollar food studio in Hong Kong for Asian

market. With these cooking laborites which employ the executive chef, nutritionist and

quality experts, the company created the greatest cookbook in the world ( Bremner,

2006).

To better the public image McDonald’s has assembled their Global Advisory

Council on Balanced Lifestyles. This council is formed of exercise and obesity

specialists, environmentalists, and other professionals to ensure that McDonald’s takes

appropriate steps in helping its customers achieve optimal health. Because of the

continual review and evaluation of packaging materials, the company was announced by

US Environmental Protection Agency as an industry leader. Also the company plans to

implement the new packaging in more than 20,000 restaurants by the end of 2006 (Yahoo

Finance, 2006).

To improve the customer satisfaction McDonald’s uses some specific

measurement such as Fast Track 2+2 Timing Systems which calculate the total time that

the customers spend in the line since the beginning of order until getting their food

(Phase research, n.d.).

As a part localizing strategy, the company identified around 20 markets, in which

they intend to convert their existing ownership to franchising agreement. Under this

program the company will hand over the control of approximately 800 restaurants in 32

countries outside the U.S. to the local operators (Yahoo finance, 2006).
Besides to empower the efficiency of its supply chain McDonald’s has cooperated

with an electronic Foodservice Network, where a company can operate in an independent

business to business marketplace, to ease the sales and purchases in the food industry

(Bertognoli, n.d.).
Balanced Scorecard

Objectives Measures Initiatives

Financial: 1.1) Compare the revenues 1.1) Increase sales by


1) Increase the revenues with historical data expanding in the new
markets and industries
2) Decrease the costs 1.2) Compare the costs and 1.2) Benefit from economies
profitability ratios of scale and technology

Customer Service: 1.1) Evaluate customer 1.1) Develop the employees


1) Improve the customer surveys and feedback training and the relationship
satisfaction 1.2) Research the operation with the franchisees
processes and waiting 1.2) Providing variety of
periods of the customers in products
2) Better the image of the the outlets. 2.1) Cooperate with the
company 2) Inspect the pro and con government and social
articles in the media organizations

Internal Processes: 1) Focus on the supply chain


1) Grow especially in not 1) Evaluate the growth of and distribution channels
saturated markets sales in the new markets 2.1) Increase the number of
2) Improve the availability 2) Compare the number of outlets
of the outlets the outlets with historical 2.2) Home delivery service
3) Continue the variety of data 3) Consider the customer
the products 3) Compare the number of trends
4) Expand in other food products 4) Investment in new brands
industries by improving 4) Evaluate the market 5.1) Practice think global act
subsidiaries performance share local strategy
5) Creating better tactics to 5) Compare the operational 5.2) Using the local
adapt the regions’ costs operators and suppliers in
conditions maximum level

Growth and Learning:


1) Improve the training of 1) Evaluate the work flow 1) Training program (FAF)
the employees period 1.2) International training
centers
2) Effective human resource 2) Compare the absenteeism 2) Cooperation with the
management and turnover Career websites Investment
in new brands

Conclusions
The National Restaurant Association forecasts the sales of fast-food business will

increase about five percent in 2006, rising to $142.4 billion. McDonald’s which ranks the

number one in the hamburger chain business has a good resources and ability to serve

millions customers in varied geographic areas. However, the research shows that among

its direct competitors McDonald’s has the lowest score of consumer commitment.

The growing health concern has affected the industry for couple years.

McDonald’s is doing very well in term of responding to the market trend. The company

future objective is to offer variety choice on the menu, promote nutrition information and

support physical activities. The competition in the fast-food restaurant is very intense.

McDonald’s use a marketing strategy of “Think Global, Act Local.” It promotes the

global campaign “I’m lovin’ it.” In the same time, to capture different markets in each

region, McDonald’s caters its menus to fit to local test.

Knowledge is the most distinctive competencies McDonald’s has; the brand

image is the most valuable thing it has, and helps the company being sustain in the

market. The financial health of McDonald’s is strong though leverage ratios of the

company are higher than industry ratios.

Recommendations

The current company’s marketing strategy which focuses on customers, called

“Plan to Win”, should be addressed and come up with a strategy to improve the customer

satisfaction. The training program should emphasize the important to customer

relationship and what front line employees should do (smiling, courtesy greeting, etc.) to

increase the customer satisfaction.


Full service restaurants also provide a drive-through lane which is a threat to the

fast-food business. McDonald’s should pay close attention to the service provided for a

drive-through window. Friendly, accuracy of order taking and speed of service should be

improved. The company’s mistake on some of it’s strategies such as “made for you”

which made the operation system slower indicates that McDonald’s should do research

about consumer’s need more carefully.

For long term strategy, McDonald’s should expand to other areas of food

business.

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