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Analysis of McDonald’s
Shelby McCoy
BPS 4305.007
April 15, 2014
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INTRODUCTION
With over 32,000 outlets all across the globe, McDonald’s is one of the largest
foodservice retailing chains in the world. Operating primarily in the Americas, Europe,
and Asia, the company serves an average of 64 million customers per day (Schlosser,
2012). McDonald’s is known as America’s favorite choice for fast food with popular
menu items such as the Big Mac and Chicken McNuggets.
Though McDonald’s has been incredibly successful since its debut, there are
many challenges the company will take on in the upcoming years. One of the biggest
dilemmas facing McDonald’s is the health trend growing across the nation. Many are
seeking healthier and more nutritious options, and McDonald’s has not been able to
cater to that market very successfully. In addition, the fast food industry is becoming
much more competitive, and McDonald’s will need to find new ways to compete with its
competitors. Another challenge McDonald’s is facing is poor management of growth.
Excellent customer service and quality has been sacrificed with the growth of
McDonald’s, and management will need to handle this problem.
This case analysis will fully examine McDonald’s as a company. An internal,
external, and competitive analysis will be done to further assess the central issues
surrounding McDonald’s.
EXTERNAL ANALYSIS
The general environment is composed of many factors that can have a large
impact on a company. The external environment is continuously changing, and thus the
strategy of a firm must consistently change to match these conditions in order to
compete. The three factors that are affecting McDonald’s the most are the sociocultural,
global, and economic segments.
SOCIOCULTURE SEGMENT
Sociocultural forces influence the values and lifestyles of a society. One of the
most highly influential forces today is the trend in healthy living. In a study done to fully
understand what Americans think upon hearing the word “healthy living”, the words
fresh, natural, balanced diet, and organic were words that came to most minds
(Marsden, 2002). The greater concern for physical fitness and healthy diets has led to a
boom in health products and nutritional food.
However, this trend has also led to more people becoming wary of fast food in
general. When people think of McDonald’s, they do not associate the chain with words
such as “fresh” or “natural”. The shift in customer preferences towards healthy foods
such as sandwiches and salads will require all fast food chains to seriously reconsider
their menus. New customer health expectations must be meet without compromising
the classic menu items.
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GLOBAL SEGMENT
The global segment involves influences from foreign countries, including foreign
market opportunities, foreign-based competition, and expanded capital markets (Dess,
G., Eisner, A., Lumpkin, G.T., McNamara, G., 2012). The past couple of decades have
seen in increase in businesses expanding internationally, as well as businesses
reaching the United States from overseas. This has been highly beneficial for
McDonald’s, since they have expanded into over 100 countries overseas (McDonald's
Corporation Case Study, 2012). However, this global trend has also increased
competition for McDonald’s. As more foreign businesses have become introduced in the
United States, consumers have developed exotic tastes. This external factor may
become a serious threat to the fast food industry in the United States in the upcoming
years.
ECONOMIC SEGMENT
The economy is a significant external factor for all industries. The economic
segment of the general environment includes national income and monetary conditions,
and can greatly influence the spending habits of consumers. The recession that recently
hit the United States greatly impacted businesses everywhere, including McDonalds.
People were more conscious with their money, and businesses were hurt. However,
many people flocked to McDonald’s during this time because of their dollar value menu.
Other fast food chains can rarely beat the cheap prices McDonald’s has been able to
consistently offer. As we have come out of the recession in recent years, however,
people have been willing to spend a little bit more money. This may become an issue
for McDonald’s, since people are not as reluctant to spend their cash on places with
higher prices.
INTERNAL ANALYSIS
Using the resource-based view, the internal environment of McDonald’s can be
effectively studied. The resource-based view is a perspective that a firms competitive
advantages are due to their strategic resources that are valuable, rare, difficult to
imitate, and costly to substitute. These resources can be tangible, such as financial and
technological, or they can be intangible, such as reputation and human capital.
INTANGIBLE RESOURCES
Reputation:
The reputation and brand name of McDonald’s is a strong point for the company.
It is known as one of the most successful fast food chains across the world, and it would
be difficult to find someone who has never heard of McDonald’s. When people think of
McDonald’s, they typically think of lower prices and their main menu items such as the
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Big Mac. The marketing efforts of McDonald’s have been extremely successful for many
decades.
However, McDonald’s has been given a bad reputation ever since the healthy
living trend boomed. This could clearly be seen with the documentary “Super Size Me”,
which followed a man who ate only McDonald’s food for thirty days straight (Gumbel,
2004). His health drastically deteriorated by the end of his McDonald binge. The film
gained wide public attention and led to an outcry against McDonald’s. Following the film,
McDonald’s removed its “super size” option and added some healthier items to its
menus to combat negative public reception from the film. Despite these changes, many
people now have a negative connation associated with McDonald’s, which will be a
tough barrier to overcome.
Innovation:
Another intangible resource that McDonald’s has is innovation. McDonald’s has
been able to successful create products that the public knows and loves. These
products include the Chicken McNuggets, the Big Mac, and the McGriddle breakfast
sandwiches. Despite their classic products that the public continuously craves,
McDonald’s has recently had trouble with new product innovations. For example, the
low-fat McLean Deluxe and the Arch Deluxe burgers were not a big hit among their
target adult audience. Another drawback for McDonald’s continuously innovating is that
their competitors tend to copy their successful moves, yet learn from McDonald’s
mistakes.
Human:
Human capital is one resource that McDonald’s falls behind on. They have
intelligent and innovative management, but one of the biggest drawbacks that
McDonald’s has seen is that their customer service at stores is severely lacking. The
service and quality of the chain has fallen far behind competitors. McDonald’s has
consistently ranked as the lowest customer service ranking among the fast food
industry, where one in five customer complaints are related to friendliness issues
(Verrill, 2014).
When the headquarters stopped grading franchises for cleanliness, speed, and
service, McDonald’s ran into multiple problems at its stores. It wasn’t until someone new
stepped up and revamped the standards for customer service at McDonald’s did the
service improve. Turnover is still quite high at McDonald’s as well, which is a key reason
for the poor customer service. Making employees happy is the key to producing
excellent customer service.
TANGIBLE
Physical:
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Physically, the franchise has recently undergone a remodeling of its stores.
McDonald’s has been working hard to refurbish the stores to look appealing and
contemporary from the interior to the exterior. McDonald’s went for a “Starbucks effect”,
where many of the stores have leather chairs, black granite-like tiles on the walls, tall
tables with bar stools, and wireless Internet (Arellano, 2006). McDonald’s has been
working hard to get their stores to look like a destination spot to lounge at for hours,
rather than the spur-of-the-moment snack stop.
Financial:
Financially, the company is still going strong. It has the largest amount of sales in
the fast food industry, and its revenue continually increases each year. When looking at
the financial statements for the previous three years, profits and sales continue to
increase at a healthy rate. Most of the accounts on the income statement are growing at
a gradual 2% each year (McDonald’s Corporation, 2013). McDonald’s assets, liabilities,
and stockholder’s equity continue to increase at a healthy rate as well.
Income Statement-McDonald’s
Total Revenues
Operating Costs/Expenses
Operating Income
Interest Expense
Nonoperating Income Expense
Income before Tax
Income Taxes
Net Income
EPS-Diluted
(In millions)
2013
28,106
(19,342)
8,764
(522)
(38)
8,204
(2,618)
5,586
5.55
2012
27,567
(18,962)
8,605
(517)
(9)
8,079
(2,614)
5,465
5.36
Percentage Change
1.9%
2.0%
1.85%
.98%
422%
1.55%
.15%
2.2%
3.5%
Balance Sheet-McDonald’s
(In millions)
2013
ASSETS
Current Assets
Other Assets (Intangibles)
PPE
Total Assets
LIABILITIES AND EQUITY
Current Liabilities
Long Term Debt
Other Liabilities
Deferred Income Taxes
Shareholder’s Equity
Total Liabilities and
Shareholder’s Equity
2012
Percentage Change
5,051.1
5,828.9
25,747.30
36,626.3
4,922.1
5,787.2
24,677.2
35,386.5
2.6%
.72%
4.34%
3.5%
3,170
14,129.8
1,669.1
1,647.1
16,009.7
36,626.30
3,403.1
13,632.5
1,526.2
1,531.1
15,293.6
35,386.5
(7.4%)
3.65%
9.4%
7.58%
4.7%
3.5%
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Financial Ratios (McDonalds vs. Burger King)
Current Ratio
Quick Ratio
Debt-to-Equity Ratio
Debt-to-Assets
Inventory Turnover
Total Asset Turnover
Gross Profit Margin
Return on Assets
Return on Equity
McDonalds
1.6
1.3
.88
.56
140.2
.8
38.79%
14.78%
35.69%
Burger King
3.1
2.9
2
.74
88
.2
69.67%
6.39%
17.37%
Common Size Statements-McDonalds vs. Burger King
INCOME STATEMENT
Revenue
Gross Profit
Net Income
BALANCE SHEET
Totals Assets
Current Assets
Other Assets
Total Liabilities
Total Stockholder’s Equity
(In millions)
McDonalds
%
Burger King
%
28,106
22,520
5,586
100%
80.1%
19.9%
1,146.3
912.6
233.7
100%
79.6%
20.4%
36,626.3
5051.1
31,575.2
20,616.6
16,009.7
100%
13.8%
86.2%
56.3%
43.7%
5,828.5
1074.4
4,754.1
4,312.3
1,516.20
100%
18.4%
81.6%
74%
26%
When observing the balance sheet, it is evident that McDonald’s has a good
balance between long-term debt and stockholder’s equity. They do not concentrate too
heavily on one or the other, and they have an excellent debt-to-equity ratio of .88. In
addition, the current debt ratio is at 1.6. This is good, because it shows that current
assets are higher than current liabilities. If the company were to ever run into financial
trouble, McDonald’s would be able to cover all of its immediate debts and loans.
Another very impressive number that McDonald’s has is their inventory turnover
ratio. A company’s inventory turnover ratio refers to how quickly goods enter and leave
storage at the business (Kennon, Joshua, 2001). With a turnover rate of about 140, it is
obvious that McDonald’s clears its inventory incredibly fast. This means less money is
wasted on inventory and more money can be spent in other places in the business.
When compared to one of its burger-chain competitors, Burger King, it is clear
that McDonald’s is a strong company financially. McDonald’s has almost 25 times the
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revenue as Burger King. Though Burger King is a very popular burger fast food chain in
the Americas and some areas overseas, McDonald’s is the clear dominating force
globally. One of the other major differences between the two companies when
observing their statements is that Burger King has much more debt than equity. Burger
King has a debt-to-equity ratio of 2, which is generally not a good sign to investors.
Burger King also has a low Return on Assets ratio of 6.39%. Investors use this ratio to
determine if a company is earning enough money from capital investments. McDonald’s
has a Return on Assets ratio of almost 15%, which is almost twice as high as Burger
King. In this case, McDonald’s is doing extremely well compared to one of their biggest
competitors in the burger fast food industry.
The one disrupting financial pattern that has been observed recently at
McDonald’s is the decrease in same store sales. In 2012, McDonald’s reported the first
monthly same-store sales decline in nine years (Dess, G., Eisner, A., Lumpkin, G.T.,
McNamara, G., 2012). Management has suspected that this is due to external
conditions, including the economy and the healthy living trend discussed in the previous
section. McDonald’s needs to be able to find a way to cope with the external
environment conditions in order to continue to increase their same-store sales.
COMPETITION
Although McDonald’s is currently one of the most dominate fast food chains
globally, it still has plenty of competition. The food industry is a highly competitive
market, and this is one of the major issues for McDonald’s. The company has to
compete not only in the United States, but also around the world. By using Porter’s Five
Forces Model, we will distinguish what is truly a threat to McDonald’s.
THREAT OF NEW ENTRANTS
The threat of new entrants is the possibility of profits eroding due to new
competitors. This aspect is entirely dependent on the entry barriers to enter the industry.
For the fast food industry, the threat of new entrants is high. There is easy market
access and a low start up cost to enter the fast food industry. There are also no legal
barriers that would keep someone from entering the industry.
However, if these new entrants wish to actually compete with McDonald’s, they
must spend a large amount of money on advertising and marketing to not get run out of
business by McDonald’s. Since McDonald’s has such strong brand name and offers the
lowest prices, it would be difficult for a new entrant to enjoy a long life in the fast food
industry.
THREAT OF SUBSTITUTES
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Substitutes for the fast food industry can include any restaurant or food
establishment. This can include sandwich shops, restaurants, cafes, pizza delivery
services, or even grocery stores. The competition is very high and intense between
firms selling substitute products.
One major threat in this aspect to McDonald’s is the healthy living trend. People
who are serious about eating healthy will completely abstain from McDonald’s and
chose a healthier substitute. The rise is sandwich shops are directly related to this
health conscious trend (Osswald, 2013). However, McDonald’s has the low price, quick
service advantage to other substitutes.
BUYER BARGAINING POWER
The fast food industry is flooded with many different types of choices for
consumers. If a fast food business does not match the demands of the buyer, the buyer
has plenty of choices to choose from. When the documentary “Super Size Me” was
released, many consumers demanded for McDonald’s to add healthier options and to
get rid of the “Super Size” option. In response to negative publicity, McDonald’s listened
to the buyers and released healthier menu items.
McDonald’s is willing to listen to its customers when the public outcry is large.
Due to the high amount of substitutes in the industry, as well as the large amount of fast
food chains, it is vital for McDonald’s to listen to feedback from the customers. However,
a single buyer does not have much of a bargaining power with the company.
McDonald’s is such a huge corporation that it would take something big like “Super Size
Me” to make changes to it’s policy.
SUPPLIER BARGAINING POWER
The relationship with suppliers is a vital part of a business. Maintaining a good
relationship with suppliers is important to getting good quality materials at fair prices.
However, the supplier’s bargaining power is relatively low with McDonald’s. Suppliers
are typically content when supplying to a large corporation such as McDonald’s, and
there are plenty of substitute suppliers that can replace current ones.
INTENSITY OF RIVALRY
The intensity of rivalry among competitors in the fast food industry is extremely
high. This is one of the most important aspects of competition pertaining to McDonald’s.
Fast food restaurants compete on price, quick service, and number of physical stores,
and the industry is continuously growing. Burger King, Wendy’s, and Jack in the Box are
some of the other established leaders in the burger fast-food industry, but there are
plenty more big-name chains that directly compete with McDonald’s that don’t even
focus on burgers, such as Subway, Taco Bell, and KFC.
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McDonald’s has done many things already to combat the intensity of rivalry in the
industry. Instead of just offering burgers, McDonald’s has brought in a variety of menu
items that can cater to many people. Offering chicken, fish, breakfast items, and salads
helps to bring in more customers who might not just want a burger. In addition,
McDonald’s has now begun to compete with the higher-end Starbucks by introducing
their new McCafe’s. Customers can now order cappuccinos, lattes, and other coffee
items. This has brought in a whole new market to McDonald’s that may have just gone
to Starbucks otherwise.
GROWTH MANAGEMENT
It is no doubt that McDonald’s has grown into one of the largest corporations
globally. With over 32,000 stores in more than 100 countries, McDonald’s has grown
into a fast food powerhouse. However, when a company typically experiences a large
amount of growth, other problems arise as well. McDonald’s realized it comprised the
quality and service with each new outlet that was being opened. The early years of the
2000’s witnessed this problem, and Cantalupo was brought on board in 2003 to handle
this dilemma.
Cantalupo cut back on the opening of new outlets, and focused instead on
generating more sales from its existing outlets (Dess, G., Eisner, A., Lumpkin, G.T.,
McNamara, G., 2012). The company now focused on increasing their revenue growth
from existing stores instead of opening up new ones. The customer service aspect of
the company was also revamped to compensate for the new business model. The
quality and service of McDonald’s had been severely lacking, and McDonald’s realized
that the foundation needed to be right if McDonald’s wanted to keep growing.
Even ten years later, this idea for growth management is an effective one.
McDonald’s is such a large company, and it is vital for the business to keep focusing on
generating more sales from its existing stores. McDonald’s has continued to expand
globally, and it is important for the company to keep its service and quality at top notch
at stores across the world.
In addition, expanding on the menu will help the company increase sales without
adding more stores. Discovering alternatives to the traditional McDonald’s lineup that
customers will love is a very tricky. However, by utilizing test markets and observing
trends in the industry will help McDonald’s to discover new ideas that will help bring in
customers.
CONCLUSION
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The long-term success of McDonald’s will depend upon the company’s ability to
compete with its rivals in the fast food industry. The industry is highly competitive, and
McDonald’s must be able to continuously compete to survive. As mentioned earlier, one
area that McDonald’s is lacking behind other fast food chains is customer service. As
more stores get built, McDonald’s cannot compromise service with growth. Offering
slightly higher wages and treating employees better could be a solution. Management at
these stores also needs to be top notch, and they need to continuously emphasize the
importance of the customer experience to their employees.
One of the other major setbacks for McDonald’s is the healthy living trend. More
and more people are changing their lifestyles and paying attention to their health.
McDonald’s needs to revamp their menu to include more choices for those who are
health-conscious. The only healthy meal options McDonald’s currently offers are salads.
One idea is to possibly add a sandwich lineup, and then heavily market the new
concept. Just like McDonald’s has begun to directly compete with Starbucks by adding
the McCafe’s, McDonald’s could add a sandwich line in order to compete with Subway
and other sandwich places. Sandwiches would be a healthier alternative to burgers, and
it could drive in more customers who would normally eat at Subway but prefer the lower
prices at McDonald’s. In addition, McDonald’s can heavily emphasize certain words
while marketing new healthy menu items, such as “organic” or “fresh”. These key words
can help McDonald’s become more associated as a fast food chain that cares about
servicing those living a healthy lifestyle. This would also improve the reputation of
McDonald’s, which has been hurt by negative comments about their unhealthy menu.
McDonald’s is one of the most successful corporations worldwide. The majority
of the public loves the staple McDonald’s menu items that have been around for
decades. In an intense competitive industry, McDonald’s has been able to differentiate
itself as a company that can provide low prices, offer a wide selection of menu items,
and have convenient locations. Recent innovations that McDonald’s has successfully
incorporated into its stores are the McCafe’s, revamped exteriors, and sleek new lounge
areas. As long as the company keeps finding new ways to compete with its competitors,
McDonald’s will continue to be a strong company.
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