McDonald’s Corporation Honors Contract Capstone Final Case Project Zach Bickett, Jerry Bobal, Jack DeLong, Brigid McCuen, Carolyn Smith November 25, 2014 The Biggest Alligator in the Swamp At the McDonald’s annual shareholder meeting in May 2013, CEO Dan Thompson was confronted by a group of activists wanting answers.1 Does McDonald’s target children and African Americans? What is the company doing about its role in the obesity epidemic? How is the company responding to protests about worker pay? Fronting the controversy was Tanya Fields, who portrayed her neighborhood in the Bronx as a food swamp plagued with corner stores and fast food restaurants. Tayna is a mother and executive director of the BLKProjek, whose goal is to, “address food justice.”2 She told the CEO that among the options within walking distance from her house, McDonald’s was “the biggest alligator in that swamp.”3 As the largest QSR (quick-service restaurant) in the world, customers, lawmakers, shareholders, and employees are looking to McDonald’s to set the standard. The company has faced controversy for decades, but has managed to remain on top and work to maintain their public image. However, with the emergence of fast-casual restaurants, are minor adjustments and a strong public relations team enough to deal with the changing industry environment? Started from the Bottom From humble beginnings as a small drive-in barbeque restaurant, McDonald’s has built itself to be the largest fast food service retailer in the world with over 35,000 stores worldwide, serving nearly 70 million people daily.4 In 1940, Dick and Mac McDonald opened McDonald’s Bar-B-Q in San Bernardino, California. By 1948, McDonald’s is founded, with a limited menu, 1 McDonald’s CEO Fields Questions on Nutrition, Wages The BLK Project 3 The 10 Most Absurd Lies Told by McDonald’s CEO 4 Our Story 2 featuring the 15-cent hamburger.5 The brothers began franchising other McDonald’s locations in 1952, starting with Neil Fox, who purchased the first franchise in Phoenix for $1000.6 Enter Ray Kroc Before he pitched his vision for McDonald’s to the McDonald brothers, Ray Kroc worked as Red Cross ambulance driver, piano player, paper cup salesman, and finally, a multimixer salesman. It was his last job as a multi-mixer salesman that led to his involvement with McDonald’s. In 1954, he received a large order from the McDonald’s brothers for 8 multimixers, who used them in making milkshakes. When Kroc went out to California, he was instantly impressed with the brothers’ quality and efficiency.7 He was so impressed that he wanted to become involved in helping the brothers with their franchising goals. By 1955, Kroc had opened his first McDonald’s in Des Plaines, Illinois. Only four years later, the 100th location opened in Fon Du Lac, Wisconsin.5 By 1961, Kroc had bought the exclusive rights to the McDonald’s name, along with Dick and Mac McDonald’s stake in the company for $2.7 million With Kroc at the helm, the company experienced substantial growth. In 1967, McDonald’s opened its first international location in British Columbia, Canada. By 1968, the 1000th McDonald’s restaurant opened up where Kroc had begun: Des Plaines, Illinois. One decade later, the 5000th McDonald’s location opened in Kanagawa, Japan. According to Kroc’s vision, McDonald’s would become famous for its consistency and high quality. He wanted a customer to be able to order a McDonald’s hamburger that tasted the same in Illinois as it did in California. In order to accomplish this, he needed franchisees and 5 McDonald’s History McDonald's first franchise restaurant was built in Phoenix 7 The Ray Kroc Story 6 suppliers to buy into his plan. He promoted his slogan, “In business for yourself, but not by yourself.”7 To succeed in creating a consistent product, McDonald’s former senior chairman, Fred Turner, founded a training program focused on managerial positions and called it Hamburger University. To date, more than 275,000 have graduated the program8, including more than 80,000 restaurant managers, mid-managers, and owner/operators since 1961.9 Currently there are seven Hamburger University campuses around the world.10 The University has 19 full-time professors with restaurant expertise and boasts four curriculums: Crew Development, Restaurant Managers, Mid-Management, and Executive Development.11 Although Kroc was focused on consistency, he also greatly valued innovation. Many famous menu items were created by franchisees instead of upper management. The Filet-O-Fish was invented in 1962 by Lou Groen and was inspired by the needs of the Catholic consumers in Cincinnati. Ray Kroc wagered with Groen that if his fish sandwich outperformed Kroc’s “hula burger”, which was an appetizing creation consisting of a cold bun and a slice of pineapple, then McDonald’s would keep it. Groen claims the Filet-o-Fish’s success saved his franchise.12 The Big Mac, which reached international success, was invented by an early franchisee, Jim Deligatti, in 1967. Delligatti himself claimed in an interview “I always felt it was going to be a huge success, but I only thought in terms of the United States.”13 8 Our Alumni Hamburger University 10 Our Facility 11 Our Curriculum 12 No fish story: Sandwich saved his McDonald's 13 Golden Arch Angel 9 Menu Diversification McDonald’s Breakfast Delligatti continued to make differences in the company when he altered the hours of operation, opening at 7 AM versus the normal 11 AM. He began selling coffee, doughnuts, and other common breakfast items. Five percent of Delligatti’s business was conducted during these morning hours, but other owner/operators could not be on board without double-digit sales gains. The Egg McMuffin was the key to McDonald’s breakfast success. New franchisee, Herb Peterson, was excited to take advantage of this new breakfast market. He invented an egg sandwich complimented by a slice of cheese between a warm English muffin. After Kroc allowed the product to go nationwide, the breakfast business increased in popularity and now represents 15% of McDonald’s sales 14 Decades after breakfast was introduced, McDonald’s announced the arrival of McCafé coffees, including cappuccinos, lattes, and mochas. In addition, McDonalds began offering free Wi-Fi in over 11,000 restaurants in the United States to stage a more coffeehouse-like atmosphere. Kroc desired to take on the competition of chains such as Dunkin Donuts and Starbucks.15 Happy Meals 1979, McDonald’s added the Happy Meal to their menu with the help of Dick Brams, known as the “father of the Happy Meal”. Brams thought of the Happy Meal as a marketing gimmick to drive up sales by targeting kids. Kid-sized portions and a toy made this idea a hit. Though the food remained the same (Chicken McNuggets were added nationwide starting in 14 15 The Birth of the Egg McMuffin Coffee Wars - The Big Three: Starbucks, McDonald’s and Dunkin’ Donuts 1983), the toys changed almost weekly. In 1987, McDonald’s released Disney Happy Meals. This marked the beginning of many different licensed Happy Meals.16 More Additions and The Dollar Menu Among other additions, notable menu items that were added include the Quarter Pounder in 1973, Chicken McNuggets in 1983, and fresh tossed (non-entrée) salads in 1987. Premium salads were added to the menu in 2003. In 2002, McDonald’s further attracted the price-sensitive customer and launched the Dollar Menu. Although it wasn’t the first value menu to be launched in the industry, it was still wildly successful, accounting for almost 15% of sales in 2013.17 The breakfast dollar menu features the sausage McMuffin, a hashbrown, and a McCafé coffee. The dollar menu for the rest of the day includes the McChicken, which is a chicken sandwich with mayonnaise and shredded ice burg lettuce, Chicken McNuggets, several burger options, as well as ice cream and cookies.18 McDonald’s is constantly working to provide new and interesting options to the customers for an affordable price. Ronald McDonald House Much like other large corporations, McDonald’s makes an effort to improve not only their relations with the public but also their social impact. However instead of choosing a charity to donate to, the company created its own. Thus the first Ronald McDonald House opened in Philadelphia in 1973. The Ronald McDonald House Charities, or RMHC, was officially established in 1984 in Memory of Ray Kroc. Although McDonald’s is RMHC’s largest 16 The Happy Meal McDonald's Admits Salads Only Make Up 2 To 3 Percent Of Sales 18 Dollar Menu and More 17 corporate sponsor, it is, in fact, a registered non-profit 501(c) (3). RMHC’s mission is to “create, find and support programs that directly improve the health and wellbeing of children.”19 RMHC has local chapters in more than 62 countries worldwide. Over $200 million has been collected through RMHC Donation Boxes and 78% of the world’s best children’s hospitals have RMHC programs.20 Competition Burger King: Have It Your Way Burger King, publicly traded hamburger fast food restaurant (NYSE: BKW), was founded in 1954 in Miami, FL. The company’s staple product, the Whopper, was introduced in 1957.21 The company then expanded into foreign markets in 1963 with a restaurant opening in Puerto Rico. Pillsbury acquired Burger King in 1967 and at the time had 274 locations and over 8,000 employees. The 1970’s led to many new and innovative programs that Burger King still uses today. Some of these include the “Have it your way” campaign, first restaurant in Europe, and the introduction of the drive-thru service. Burger King allowed customers to customize their items, eventually forcing McDonald’s to follow suit. The company has also developed several successful short-term marketing campaigns but as seen in Exhibit 1, their long term growth still puts them below McDonald’s in terms of market share. Burger King focused more on restaurant growth and menu expansion during the 1980s. Breakfast was introduced in middle of the decade and a chicken nugget meal was introduced shortly after as an alternate to a hamburger meal. 1986 was a huge year for Burger King, with 19 Mission and Vision Our Relationship with McDonald’s 21 Burger King History 20 over 500 new restaurants opening across the world that year (over 4,700 restaurants total in the Burger King system). Burger King was operating in 25 different countries at the end of 1986. In 1988, Grand Metropolitan LLC acquired Pillsbury, including its subsidiary Burger King. Grand Metropolitan had more of an international focus and Burger King further expanded into the Middle East, Eastern Europe, Latin America, etc. In 2002, Burger King was sold to the private equity firms Texas Pacific Group, Bain Capital and Goldman Sachs Capital Partners.19 In 2006, Burger King successfully completed an initial public offering (IPO). In 2010, Burger King went private again, only to go public again in 2012. In August 2014, Burger King announced its intentions to purchase Tim Hortons.22 This will help lower Burger King’s tax burden and help grow the brand’s breakfast offerings. Some speculate the move may also be a response to the rise in “fast-casual” restaurants such as Chipotle. Wendy’s Wendy’s Old-Fashioned Hamburger Restaurant is a publicly traded fast food (NASDAQ: WEN) restaurant that was founded in Columbus, OH in 1969 by Dave Thomas. Wendy’s entered the industry with a focus on providing fresh food at reasonable prices. Wendy’s started out as a hamburger restaurant but quickly expanded into other avenues, including a salad bar in 1979.23 Wendy’s later added chili, chicken, and Frosty dessert products to further add to the product line. Wendy’s does not have a staple sandwich (like McDonalds and the Big Mac and Burger King and the Whopper), but instead is known for having square burger patties. Wendy’s expanded quickly through the United States and the first foreign restaurant was opened in 1975 in Ontario, Canada. Growth began to slow in the 1980s and Wendy’s countered 22 23 Burger King-Tim Hortons Cross-Border Merger Much More Than Tax Inversion Wendy's Timeline this by trying a “Where’s the Beef” commercial campaign. The commercials were successful and eventually Dave Thomas starred in commercials, which helped to grow the Wendy’s brand and put a person behind the company. Over 90% of Americans knew who Dave Thomas was in the 1990s, making him an integral part of their brand. Starting in the mid-1990s, Wendy’s began to expand, starting with the acquisition of Tim Hortons in 1995. Wendy’s later went on to acquire Arby’s, only to sell the roast beef fast food chain three years later. In March 1997, the 5,000th Wendy’s location opened and the company hit 6,000 restaurants a short time after that. Wendy’s continued to expand overseas, later focusing on certain Mexican cities. The company began to revitalize its menu and strategy in the 2000s. The plan included a focus on core business processes, modification and simplification of the value menu, and a plan to attract younger customers that were leaning more towards fast-casual restaurants.24 A few years ago, Wendy’s changed how they made their French fries. Even more recently they have added new menu items, focusing mainly on healthy or premium type of food products. McDonald’s Success: Now We’re Here Arguably the major reason McDonald’s has been so successful is because of their superior brand recognition. It was ranked number nine in Interbrand’s 2014 Best Global Brand rankings with a brand value of over $42 million.25 This high brand recognition allows McDonald’s to engage in profitable strategic partnerships with top brands such as Coca Cola and Heinz as well as sponsorships with Disney and DreamWorks.26 When customers go to 24 Wendy's Is Changing Up Its Strategy To Attract Millennials McDonald’s – Best Global Brands 26 10 Secrets of McDonald’s Success 25 McDonald’s, they know exactly what it is they are going to receive: a fast, cheap, and consistent quality meal, thus fulfilling Kroc’s early visions. McDonald’s distinguishes its products to appeal to different consumers and their changing preferences. This strategy shines through their global expansion and their ability to alter menus to appeal to different cultures. The company offers of shrimp burgers and corn alternatives to French fries in Hong Kong, even offering an item labeled the McSpaghetti in Italy.27 These menu adaptations have been successful in areas that other QSRs lack because McDonald’s has been able to market these differentiated products to specific consumer groups. An increasing trend toward nutrition and fitness, especially among the millennial generation, has led to McDonald’s adoption of healthier alternatives such as fruit and vegetables and implementation of more visible and available nutritional information. In addition, the company developed the dollar menu to appeal to lower income families and introduced new menu items such as coffee and wraps. This allows McDonald’s to expand its market share, avoid stagnation, and obtain a completely different group of customers.28 The Industry Suppliers Most QSRs have a high volume of undifferentiated suppliers that provide the meat products, buns, sauces and syrup, milk products, vegetables and fruits, pastries, coffee, soft drinks, packaging and equipment.29 These products are considered commodities and the suppliers are compelled to price similar to the market. Many industry players have strong brand 27 Why is McDonald’s So Successful? The McDonald’s Success Story 29 SUPPLIERS AND PURCHASING 28 recognition and significant market share; McDonalds is the leader in the fast food industry with over 21% of the market, which can be seen in Exhibit 1. McDonald’s purchases supplies in bulk to save money. Maintaining healthy supplier relationships is important as is in a business relationship. Prices of these commodity supplies have risen in recent years due to rising prices of livestock, corn, wheat, and other products. Due to the highly competitive industry environment, the price increase has shrunk margins. Profit margins in the industry have been less than 10% in recent years.30 In light of this trend, McDonalds tends to source its inventory from suppliers that are located close to the operations. McDonald’s has been able to maintain a very high profit margin compared to the industry at 19.8%, which can be seen in Exhibit 3. Soft-drink suppliers of the industry consist mainly of Coca-Cola and Pepsi, who are powerful brands and dominate market share in the soft drink industry. They provide QSRs with drink dispensers and the necessary syrups. Many QSRs have long-term contracts with these suppliers due to the competitive nature of the soft drink industry. Buyers QSRs sell directly to consumers through chains across the country and internationally. Buyers are extremely price-sensitive, and count on McDonald’s and its competitors to give them the most for their buck. In recent years, the consumer has become increasingly health-conscious. A number of books and documentaries have been released purporting the unhealthiness of the fast food industry, and as a result customers have demanded healthier fast food options. QSRs thus have responded by making healthier options available. 30 Fast Food Industry Report Distribution and Technology McDonald’s has wide distribution channels spanning internationally, and has utilized recent technological innovations, spanning from a mobile application to Point-of-Sales (POS) technology. This POS platform makes kitchens more efficient by communicating with cooks and lessening transaction time, thus increasing productivity and generating more sales. It also collects sales data for use by managers to determine popular menu items and the busiest times of day for each restaurant.31 Fast Casual Industry The up-and-coming “fast-casual” industry poses a real threat to the QSRs. Some successful examples of fast-casual restaurants include Panera Bread, Zaxby’s chicken, and Chipotle. In the first six months of 2014, McDonald’s sales stagnated or stayed the same at over 14,000 of its restaurants. Meanwhile, the number of fast-casual chains has nearly doubled over the past decade, while the number of McDonalds outlets has only grown slightly.32 Furthermore, the changing consumer preference toward quality of food has been trumping price-consciousness in recent years, as customers are willing to pay more for a “better quality” meal. A 2014 Consumer Report survey reported that out of 21 burger joints, McDonald ranked last on the list in terms of Consumer Preference; Burger King and Jack in the Box also ranked very low.33 Meanwhile, fast-casual burger restaurants ranked highest. Competition 31 McDonalds Wants It Their Way McDonalds Real Trouble: Its Losing The Millennials 33 Consumer Reports Slams McDonalds, Taco Bell, KFC 32 There are now over 230,000 fast food companies competing for market share and the same group of consumers.34 Fast food companies have to compete with similar quick service restaurants as well as higher-end, non-traditional fast food franchises such as Starbucks. The market is saturated with numerous competitors that offer comparable products, and thus there are fewer customers per location.35 Quick service restaurants are constantly engaging in price wars with each other, leading to more fickle customers. Morningstar analyst R.J Hottovy argued that rivalry “appears to be on the rise, with chains increasingly competing with one another on the basis of price and product differentiation.”36 Changing consumer preferences towards healthier options and non-traditional fast food have forced companies to be innovative and remain up to date with these changes. QSRs need to respond with “new offerings, pricing and strategies to lure consumers back-in.”35 Rising costs of food, recessions, and the shift towards a more healthfocused society are all relevant in the current industry. McDonald’s Bad Perception Despite its reign as the leading fast food company in the world, McDonald’s has gone through its fair share of legal trouble, which has affected its brand perception, both domestically and internationally. Super Size Me In 2004, a man by the name of Morgan Spurlock starred in a documentary that changed the perception of McDonald’s, and the rest of the fast food industry, forever. Super Size Me unveiled the unhealthy truths of the quality of McDonald’s food, and its harmful effects on 34 Topic: Fast Food Industry Fast Food Industry Analysis – Cost & Trends 36 Fast-Food Outlook: Intense Competition, Margin Pressures 35 Spurlock’s body, as he ate nothing but the restaurant’s food for 30 days. That same year, McDonald's stock price tumbled by 56 percent in 10 months and reported their first quarterly loss. Sales at existing stores were not growing, and in some instances, declining. 37 Interestingly enough, McDonald's turnaround was attributed to the popularity of the Dollar Menu, which originally became a permanent part of the menu in 2002. It increased sales by 33% while increasing share price by 170%.38 McDonald's also opened up fewer stores in succeeding years, while improving the service and the aesthetics of the current ones. Information on sales of premium, healthy options compared to Dollar Menu items can be found in Exhibit 4. The company responded to the allegations in the documentary in a number of ways. First, the day before the movie opened to the public, they introduced a “Go Active” menu. It included a “Happy Meal” for adults, consisting of a salad, water, and a “stepomoter” which could be used to count the number of steps each customer took per day. McDonald’s withdrew the Super Size menu options altogether. They also released an “Eat Smart, Be Active” initiative, and provided fruit, salads, vegetables, and yogurt in stores.38 McDonald’s retooled its PR efforts to emphasize the larger debate on obesity and a healthy diet. They released a series of newspaper ads that drew attention to the expanded salad menu.40 37 38 Salads or No, Cheap Burgers Revive McDonald’s McDonalds Phasing Out Supersize Fries, Drinks The documentary also had an effect on the corporation’s sales internationally. In the UK, pre-tax profits dropped 72%.39 McDonald’s has since made efforts to appeal to a wide variety of customers through menu variety. Exhibit 5 shows the ten most popular menu items at McDonald’s. McDonald’s offers breakfast foods, salads, and café items, all in addition to their traditional menu. Customers have been very loyal to McDonald’s and their classic menu items despite the negative portrayal of the nutrition in the media. The McLibel Case In 1986, a small group of activists, London Greenpeace, released a leaflet called “What’s Wrong with McDonald’s” accusing McDonald’s of corrupt practices. It discussed topics ranging from the corporation’s animal cruelty, to the destruction of rainforests, exploitations of staff, and the sale of unhealthy food. McDonald’s responded by picking five individuals from the group and telling them to apologize, or risk getting sued in court. (They could not sue London Greenpeace as a whole because it was only an association of individuals.) Three of the accused stood down, but two, Helen Steel and Dave Morris, refused to give in to McDonald’s. In 1990, McDonald’s served libel writs to the pair, and the trials began in 1994.40 The individuals were found guilty and were fined, but McDonald’s didn’t force them to pay the fined amount. Regardless, the trial and its worldwide media coverage made McDonald’s a symbol of corrupt practices in the eyes of many. 39 40 The Aftermath: How Super Size Me Effected the Food Industry Famous Cases: McLibel Where’s the Beef? In 1990, McDonald’s announced that it would no longer use beef fat as an ingredient in its French fries, leading many to believe that their fries were now vegetarian. Throughout the subsequent decade, multiple lawsuits were brought against the corporation for the continued use of beef flavoring in the infamous fries.41 The lawsuits ended in 2002 when McDonald’s agreed to pay $100 million to vegetarians and religious groups, in addition to issuing an apology. As a result of the many lawsuits against the company, McDonald’s formed a Dietary Practice/Vegetarian Advisory Panel to advise them on relevant dietary restrictions and guidelines.41 McDonald’s Business Model and Success Story McDonald’s, with its more than 35,000 restaurants worldwide in more than 100 countries serving approximately 70 million people worldwide, earns its revenue through two sources: sales from company operated McDonald’s restaurants and rent and royalty payments from its franchised stores.42 As seen in Exhibit 7, sales by the company owned restaurants for the nine months ended 9/30/14 were $13.873 billion and revenues earned from franchised restaurants were $6.997 billion, which is consistent with the former typically accounting for approximately 67% of revenue and the latter the other third of revenue. 41 42 McDonald’s Settles Beef Over Fries McDonald’s: Not in the Burger Business Sales by the company-owned restaurants are recognized on a cash basis and are presented net of sales and other sales-related taxes. Revenues from the franchised restaurants from rent and royalties are based on a percentage of sales in addition to minimum rent payments and initial fees. Revenues from restaurants licensed to foreign affiliated and developmental licensees also include a royalty as a percentage of sales and any initial fees.43 The rent and royalties are recognized in the period earned whereas the initial fees are recognized when a new restaurant opens or when McDonald’s grants a new franchise term.38 Although sales from company owned restaurants accounts for the most significant proportion of revenue, the franchises are the true source of profit for McDonald’s in terms of operating margin. As seen in Exhibit 8, over 80% of the McDonald’s locations are franchised. The company is able to retain bargaining power with franchisees because they can offer more volume and profit for franchisees than any other global competitors.44 McDonald’s business model of franchising is low cost and a predictable and reliable source of cash flow for the company. McDonald’s owns the land and building that the franchise operates in, but the restaurant is responsible for the costs associated with operations and daily management. This allows McDonald’s to be able to rely on low maintenance and reliable income, usually for a long period of time such as 20-year franchise arrangements.39 Current Environment Fast Casual Restaurants 43 44 McDonald's Corp. (MCD) | Revenues McDonald’s Analysis: I’m Still Lovin’ It Fast-casual restaurants provide an exciting, new middle ground between sit-down dining and quick service restaurants. According to Exhibit 9, there was a larger increase in customer traffic to fast-casual restaurants than there was for QSRs from the years 2009-2013. QSRs like McDonald’s have to decide how to deal with these newcomers in the market. Fast casual restaurants blur the lines between a traditional fast food restaurant (Burger King, McDonalds) and a traditional casual sit-down restaurant (Applebees, Chili’s). Since fast casual is a relatively new way to categorize restaurants, it can be difficult to determine what exactly qualifies a restaurant as “fast casual.” Fast Casual magazine presents four main qualities, service type, food quality, atmosphere and décor, and menu prices; that separate a fast casual restaurant from a traditional fast food or wait-service restaurant.45 A fast casual restaurant often provides limited table service but many utilize pick-up areas. Most establishments will not have a drive-thru option. Although these factors are helpful in determining what qualifies as “fast casual,” one of the more distinguishing factors is the quality of the food, including how it is prepared. Fast casual restaurants typically operate under a “made to order” system and feature fresh food. Many boast organic ingredients or attempt to limit preservatives in their food. Atmosphere characteristic of a fast casual restaurant is relaxed but more up-scale than a fast food restaurant. They often feature paintings or a unique seating area. Prices at fast casual restaurants tend to be higher than their fast food counterparts. This is to reflect the slightly higher service, better ingredients, and perceived healthiness of the food compared to fast food rivals. Fast casual restaurants are six times more likely to have wholegrain or whole-wheat items on their menu than their fast food rivals.46 45 46 Defining Fast Casual Fast Casual Branches Out Current examples of fast casual restaurants include Chipotle, Zaxby’s, Five Guys Burgers and Fries, Panera Bread, among others. Some in the industry say that only a majority of the criteria have to be met for a restaurant to be classified as fast casual. Fast Casual magazine uses Culver’s as an example of a restaurant fitting most of the criteria.45 Culver’s has a drive-thru and seems like a typical fast food at quick glance. But the food is made to order, interior is typically nicer, and it has a slightly higher price point. Fast Casual magazine says that a restaurant that has a value or dollar menu is typically disqualified from being a fast casual restaurant.45 There is a gray area in what is considered a fast casual restaurant and what is not. Subway is an example of a restaurant that fits many characteristics of a fast casual restaurant but is not considered a fast casual restaurant by most people in the industry. Subway features fresh, healthy food, and allows customers to customize their orders. But décor at most Subways is basic, menu items are relatively affordable, and many Subways are located in gas stations or other combined locations. The model that Subway uses to prepare and serve food is identical to many fast casual restaurants. One food critic humorously noted that Subway “was using the assembly line process when Chipotle's Steve Ells was in diapers”.47 Recently the lines between traditional dining, fast casual, and quick service are becoming even more indistinguishable. As mentioned before, Culver’s has a drive-thru and many consider it a fast casual restaurant. Panera Bread is starting to experiment with a drive-thru option at restaurants and the initial stages of the trial have been successful. Panera locations that add a drive-thru option see increases in sales by about 25%. 46 Fast casual restaurants only account for 6% of the current restaurant market share but they are rapidly growing and expanding. It was the only segment of restaurant market that grew 47 The Term “Fast Casual” Has to Go Away in the last five years.48 Fast casual restaurant’s sales grew by 11% and individual restaurants grew by 8% in 201349. Revenue numbers for a restaurant like Chipotle are lower than McDonalds but Chipotle’s revenue growth has been nearly 20% over the past five years. At Chipotle, the average guest count per company store has risen by 5% and 2.3% over the last two years.49 McDonalds, meanwhile, has seen a decrease in average guest count of 1.3% in the past two years. Do they change their base strategy and attempt to offer a comparable experience? How do the companies draw their customers back from the fast-casual diners? Mo’ Money, Mo’ Problems? According to Business Insider, McDonald’s is not only fighting an external battle with fast-casual restaurant but is also facing serious internal problems. At 189.5 seconds from drivethru order to pick-up, McDonald’s service is 9 seconds longer than the industry average.50 A quick service restaurant without quick service leads to increasingly unhappy customers. Why is a company known for it’s speedy service losing in this category? A main component is McDonald’s increasingly complicated menu. The menu has expanded over 70% since 2007.51 A large menu necessitates more knowledgeable employees; meaning increased training costs for the company and further foreseeable complications. In addition to service and competition challenges, customers are changing. Consumers want to know details: what is in their food, how it is made, as well as its effect on their health. This relatively new movement complicates the job of QSRs like McDonald’s. In 2000, Eric 48 Fast Casual Restaurants Gobble up Market Share How the Fast Casual Segment is Gaining Market Share 50 McDonald's Drive-Thrus Are Getting Slower 51 McDonald's CEO Reveals The Brand's 4 Biggest Problems 49 Schlosser wrote the book “Fast Food Nation,” which was later released in documentary form in 2006. Schlosser performed extensive research using himself as a guinea pig. Schlosser commented, “During the two years spent researching this book, I ate an enormous amount of fast food. Most of it tasted pretty good. That is one of the main reasons people buy fast food; it has been carefully designed to taste good. It’s also inexpensive and convenient. But the value meals, two-for-one deals, and free refills of soda give a distorted sense of how much fast food actually costs. The real price never appears on the menu.”52 The law eventually responded to the uproar of the health-conscious. The “Patient Protection and Affordable Care Act” (PPACA) became law in 2012 and required restaurant chains with more than 20 locations to list their nutritional information at the point of purchase.53 The new demands on QSRs to be not only quick and delicious but also healthy mean expensive advertising as well as revised processes, ingredients, and menu choices. McDonald’s problems do not end at changing customer tastes. Consumers are becoming increasingly conscious of ethical standards and sustainability. Accusations of poor ethical standards and adverse economic impact are flying towards McDonalds. People claim that McDonald’s targets children and allows cruelty to the animals, as well as hurts the economies of third world countries. Not all claims can be supported, but the damage to public image is important in the long-term success of the company. Donald Thompson, the current CEO and President of McDonald’s, was raised in the infamous Cabrini-Green Chicago housing project. Thompson overcame the odds and studied engineering at Purdue University before going on to start his career at a defense manufacturer that is now a part of Northrup Grumman. Thompson joined McDonald’s as a robotic engineer in 52 53 Fast Food Nation: The Dark Side of the All-American Meal The Future of Quick-Service Restaurants (QSR) 199054, quickly rising through the ranks to become CEO in July 2012, succeeding Jim Skinner. He is the company’s first African-American CEO55. Thompson eats food from McDonald’s nearly everyday and claims to have lost twenty pounds last year56. Thompson has a tough job ahead of him as he serves as CEO. He needs to create a plan for the company to face the multitude of assertions against both its practices and its product. As the leader in the fast food industry, lawmakers and consumers are looking to McDonald’s to set a better standard. Are the changes McDonald’s are making enough to bring back the health-conscious consumer or is their customer base shrinking in a changing environment? How can the company respond to customers and go beyond legal requirements to prove their nutritional value? McDonald’s has to adapt to the continuously changing market and avoid stagnation. They have been on top for years; the question is, can they stay on top and deal with the challenges presented to them? 54 New McDonald’s CEO Don Thompson’s Path McDonald’s CEO Don Thompson Still Lovin’ It 56 McDonald’s CEO Claims to Have Lost Twenty Pounds 55 Exhibit 1 Top$50$Brands$of$Fast$Food/Casual$Dining$(2014) RANK COMPANY/CHAIN$NAME 1 2 3 4 5 6 7 8 9 10 11 12=(tie) 12=(tie) 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 McDonald's Subway=* Starbucks=* Wendy's=* Burger=King=* Taco=Bell Dunkin'=Donuts Pizza=Hut ChickOfilOA KFC Panera=Bread Sonic=DriveOIn Domino's=Pizza Carl's=Jr./Hardee's Chipotle=Mexican=Grill=* Jack=in=the=Box=1 Arby's Little=Caesars=* Dairy=Queen=* Papa=John's Popeyes=Louisiana=Kitchen Panda=Express Whataburger Jimmy=John's Five=Guys=Burgers=&=Fries=* Zaxby's Bojangles' Culver's Steak='n=Shake Church's=Chicken Papa=Murphy's=* Checkers/Rally's Long=John=Silver's Krispy=Kreme=* Del=Taco White=Castle El=Pollo=Loco=* Quiznos=* Boston=Market Qdoba=Mexican=Grill Tim=Hortons=* Jason's=Deli Einstein=Bros.=Bagels=2 InONOOut=Burger=* Wingstop=* BaskinORobbins=1 Jamba=Juice Moe's=Southwest=Grill Captain=D's=* McAlister's=Deli 2013$U.S.$SYSTEMWIDE$ SALES$(MILLIONS) $35,856.30 $12,735.00 $11,723.00 $8,787.00 $8,502.50 $7,800.00 $6,700.00 $5,700.00 $5,052.60 $4,300.00 $4,284.00 $3,800.00 $3,800.00 $3,400.00 $3,169.00 $3,108.50 $3,032.00 $3,025.00 $2,985.00 $2,494.80 $2,179.70 $1,989.90 $1,588.40 $1,466.70 $1,138.20 $1,073.40 $925.20 $905.60 $895.00 $855.40 $779.70 $723.40 $663.00 $626.00 $622.50 $612.40 $604.00 $601.00 $600.90 $592.60 $589.50 $588.00 $573.00 $558.20 $540.20 $513.00 $500.00 $498.20 $477.50 $459.00 Source: "The QSR 50." Tory. N.p., n.d. Web. 04 Nov. 2014 %$MARKET$SHARE$(among$ top$50$only) 21.73% 7.72% 7.11% 5.33% 5.15% 4.73% 4.06% 3.45% 3.06% 2.61% 2.60% 2.30% 2.30% 2.06% 1.92% 1.88% 1.84% 1.83% 1.81% 1.51% 1.32% 1.21% 0.96% 0.89% 0.69% 0.65% 0.56% 0.55% 0.54% 0.52% 0.47% 0.44% 0.40% 0.38% 0.38% 0.37% 0.37% 0.36% 0.36% 0.36% 0.36% 0.36% 0.35% 0.34% 0.33% 0.31% 0.30% 0.30% 0.29% 0.28% 2013$U.S.$AVERAGE$ NUMBER$OF$ SALES$PER$UNIT$ FRANCHISED$ (THOUSANDS) UNITS$IN$2013 $2,500.00 $490.00 $1,310.00 $1,510.00 $1,200.00 $1,406.00 $872.70 $861.00 $2,846.50 $942.00 $2,465.00 $1,109.00 $762.10 $1,310.00 $2,169.00 $1,380.90 $921.00 $800.00 $659.00 $837.00 $1,298.00 $1,285.00 $2,096.00 $878.80 $1,027.00 $1,845.40 $1,727.80 $1,875.40 $1,750.00 $713.70 $577.00 $930.40 $745.00 $2,565.00 $1,136.30 $1,268.20 $1,500.00 $360.00 $1,298.00 $1,017.00 $1,125.00 $2,399.80 $895.00 $1,955.00 $974.00 $207.90 $737.00 $1,007.00 $920.00 $1,511.40 12,739 26,427 4,408 4,745 7,103 4,878 7,648 7,355 1,713 4,285 910 3,126 4,596 1,964 0 1,786 2,313 3,310 4,527 2,542 2,172 60 125 1,774 805 497 349 487 103 946 1,327 449 890 155 247 0 237 1,400 0 317 857 106 392 0 569 2,460 535 524 243 275 Exhibit 2 Burger Segment of the Fast Food Market 2011 2012 2013—unavailable 2014 Source: "Top 50 Breakdown by Market Segments." Rosie. N.p., n.d. Web. 04 Nov. 2014. Exhibit 3 Source: "Fast-Food Chains Aren't as Rich as Protesters Think." Yahoo Finance. N.p., n.d. Web. 23 Nov. 2014. Exhibit 4 Dollar Menu Sales vs. Premium Option Sales (Daily Average) Menu Item Average Price Average Amount Sold Revenue/day Premium Chicken Sandwich Premium Salad Dollar Double Cheeseburger $4.20 $4.69 $1.00 50 50 400 $210 $235 $400 Source: Warner, Melanie. "Salads or No, Cheap Burgers Revive McDonald's." The New York Times. The New York Times, 18 Apr. 2006. Web. 23 Nov. 2014. Exhibit 5 Source: "10 Most Popular McDonald's Menu Items of All Time - HowStuffWorks." HowStuffWorks. N.p., n.d. Web. 04 Nov. 2014. Exhibit 6 McDonald’s Balance Sheet Source: United States. U.S. Securities and Exchange Commission. EDGAR. McDonald's Corp Form 10K. N.p.: n.p., n.d. Web. 04 Nov. 2014 Exhibit 7 McDonald’s Income Statement Source: United States. U.S. Securities and Exchange Commission. EDGAR. McDonald's Corp Form 10K. N.p.: n.p., n.d. Web. 04 Nov. 2014 Exhibit 8 Franchise Units YEAR COMPANY CANADIAN INTERNATIONAL OWNED U.S. 2014 12,757 1,170 15,067 6,689 2013 12,678 1,114 14,459 6,642 2012 12,605 1,152 14,125 6,598 2011 12,546 1,125 13,407 6,439 2010 12,477 1,097 12,764 6,399 Percentage Franchised versus Percentage Company Owned YEAR U.S. TOTAL CANADIAN INTERNATIONAL FRANCHISED COMPANY OWNED 2014 35.75% 3.28% 42.22% 81.25% 18.75% 2013 36.33% 3.19% 41.44% 80.96% 19.04% 2012 36.56% 3.34% 40.97% 80.86% 19.14% 2011 37.43% 3.36% 40.00% 80.79% 19.21% 2010 38.11% 3.35% 38.99% 80.45% 19.55% Source: "McDonald's Franchise Information." Entrepreneur. N.p., n.d. Web. 19 Nov. 2014. Exhibit 9 %(Change(in(Customer(Traffic Year 2013 2012 2011 2010 2009 Fast(Casual 8% 9% 6% 6% 4% QSR 0% 1% 0% )1% )3% Source: "Key Trends Explaining Our $628 Price Valuation For Chipotle -- Trefis." Trefis. N.p., n.d. Web. 04 Nov. 2014. Exhibit 10 Source: "IndexMundi Blog." IndexMundi Blog. N.p., n.d. 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