Mcdonalds vs Burger King - Research Paper Example

? The fast food industry is one of largest industries in the United s. There are over 160,000 fast food establishments in America (Numberof, ). The industry generates millions of jobs in the United States and abroad. Some of the American franchises have made it big internationally including the industry leader McDonald’s. McDonald’s participates in the burger segment of the industry. The biggest players in that segment are McDonald’s and Burger King. These two companies have had intense competition over the years and their marketing efforts target each other on many occasions. Over the years the two companies have had advertising wars over product superiority such as the French fries wars. The purpose of this paper is to compare and contrast the business models, advertising strategies, and financials of McDonald’s and Burger King. McDonald’s Company Profile McDonald’s was founded in 1955 by Ray Kroc. The hamburger chain restaurant has brought innovation into the industry since its inception. In 1975 they became the first company to ever offer a drive-thru window. Today the firm enjoys market leadership in the industry. The company achieved global sales in 2010 of $24,075 billion. The firm is a public company whose common stocks are traded in the NYSE under the symbol MCD. The company has over 32,737 restaurants across 118 countries worldwide serving nearly 64 million customers each day (Aboutmcdonalds, 2011). About 80% of the firm’s restaurants are independently owned franchises. The chief executive officer of the company is Jim Skinner. The organization has 1.7 million employees worldwide. Burger King Company Profile Burger King was founded in 1954 by James McLamore and David Edgerton. The company first TV advertisement aired in 1958 and by 1961 the firm began selling franchises. Burger King has 12,078 franchises worldwide. The firm has established operations in 73 countries. In 2010 Burger King achieved total revenues of $1,839 million. The firm is traded in the NYSE under the symbol BKC. The firm franchises nearly 90% of its stores. Burger King is the second largest fast food company in the world serving over 11 million customers worldwide (Bk, 2011). Business Model Comparison Burger King and McDonald’s both have similar business models. They are both burger chain franchises that have domestic and international operations. McDonalds has a larger operation than Burger King with over 20,000 more stores. McDonalds is a bigger international player with 17,276 foreign stores located across 118 countries (Worldfranchising, 2011). McDonalds has a better brand value than Burger King. The firm has capitalized on that brand value by charging a 12% royalty fee which is 8% higher than the 4% royalty Burger King charges to its franchises. Both companies sell products of equal nutritional content. Burger offers in its combo better value due the fact that their hamburgers are bigger and of better quality meat. US customers prefer McDonald’s French fries over Burger King French fries. McDonald’s has a better $1 menu than Burger King. The organic growth model used by McDonald’s has been more effective at achieving a higher market share than Burger King’s growth strategy. Both companies were founded at around the same timeline. A difference between the franchises in terms of store capacity is that Burger King requires a building of a minimum size of 3,600 square feet, while McDonald’s stores can be located in buildings as small as 2,000 square feet. Marketing Comparison McDonald’s and Burger King both spend millions of dollars each year in marketing budget. A great portion of the marketing budget of these companies is financed by a special advertising fee the company charges to its franchises. Burger King and McDonald’s both charge their franchisees an advertising fee of 4% of the store’s revenue (Worldfranchising, 2011). McDonald’s has been more effective over the years at targeting children in comparison with Burger King. “McDonald's single biggest accomplishment is their ability to market to children” (Buscemi, 2007). Burger King has preferred not to compete for a market share of the kids market, instead the company has focuses its efforts on the adult population. Burger King has a better customer rewards program in comparison with McDonald’s. The firm’s new BK rewards offer its customers a 5% credit on every purchase. This reward program has the potential to increase the firm’s overall customer retention rate. Both firms utilize characters as their company symbol. The main character in McDonald’s is Ronald McDonald and in Burger King is “The King” The King often appears in BK commercials. He is a funny character that always seems to be getting into trouble. In a recent commercial he went on a mission impossible to steal a secret formula from McDonald’s headquarters. A picture of each character is illustrated in Appendix A. McDonald’s has been able to capitalize better in advertising its mascot especially among children. Financial Analysis Comparison The current market price of the Burger King common stocks is $23.99 per stock (Advfn, 2011). In 2010 Burger King generated $1,839 million. The revenues of the company were 2.23% lower than the previous year. Between fiscal years 2006 and 2010 the revenues of Burger King have gone down by 2.03% annually. The net income of Burger King in 2010 was $186.8 million. The net margin of the company in 2010 was 10.16%. The balance sheet of the company in 2010 reflected total assets of $5,559 million. The firm back in fiscal year 2006 had total assets of $2,552 million. The annual growth in the total assets account of the company during the past five years has been 23.56%. The total liabilities of the company were $4,104 million. The total equity reflected in the balance sheet as of December 31, 2010 was $1,455 million (Annual Report: Burger King, 2010). McDonald’s common stocks are currently trading at $82.11 and its total market capitalization is $82.6 billion (Yahoo, 2011). The last dividend paid by the company was of $2.44 with dividend yield of 2.90%. McDonald’s had global sales in 2010 of $24,075 million (Annual Report: McDonald’s, 2010). In comparison with the previous year the revenues of the firm were 5.52% higher. During the last five years the revenues of the company have gone from $20,895 million to the current $24,075 million level. McDonald’s has achieved annual sales growth of 3.04%. The net income of the company in 2010 was $4,946 million. The net margin of McDonald’s in 2010 was 20.54%. The total assets of the enterprise in 2010 were $31,975 million. In fiscal year 2006 the total assets of the firm were $28,974 million. During the last five years McDonald’s has achieved a growth of 2.07% in total assets. The total liabilities of the firm in 2010 were $11,505 million. The total equity of the company in 2010 was $14,634 million. The table below illustrates a ratio analysis comparison of McDonald’s and Burger King in 2010. McDonald’s Burger King Net ratio 20.54% 10.16% Return on Equity 33.80% 12.85% Return on Assets 15.47% 3.36% Current Ratio 1.49 1.18 Debt Ratio 2.78 1.35 Working Capital $1,444 mm $82 mm McDonald’s has a net ratio of 20.54%. The net ratio is an absolute measure of the profitability of the company. The net ratio of McDonald’s was 2.02 times higher than Burger King. Both companies enjoy health profitability levels. The return on equity of Burger King was 12.85%. Return on equity measures how well the financial leverage of the company is working towards the success of a firm. Higher return on equity results is preferable. McDonald’s had a return on equity in 2010 of 33.80%, The return on equity of the company is 20.95% higher than Burger King. The return on assets metric measures the efficiency of management at employing its assets to generate profits. The return on assets of Burger King in 2010 was 3.36%. The return on assets of McDonald’s was higher than Burger King by 12.11%. The current ratio of Burger King in 2010 was 1.18. The current ratio measure a company’s ability to pay off its short term debt. A rule followed by accountants to evaluate current ratio results is that the metrics should be above 1.0. Since Burger King’s current ratio exceeded 1.0 it is fair to say that the company is not having liquidity problems. The current ratio of McDonald’s was also very good at 1.49. The debt ratio measures a company’s ability to pay off its long term debt. The debt ratio of Burger King is 1.35, while McDonald’s has a debt ratio of 2.78. Both companies are in a good position to pay off its long term debt. The high debt ratio of McDonald’s is an indicator that the company could absorb the usage of more debt to achieve further growth. Conclusion McDonald’s and Burger King are the two largest fast food restaurants in the world. They are both hamburger franchises that were founded in the mid 1950s. Over the years McDonald’s has used a more effective growth strategy. Today McDonald’s has more than twice as many stores as Burger King. The competition among these two companies in the domestic market is fierce. Marketing has been a critical success factor for both these companies. Due to criticism from the general public that the food sold by these two firms was too unhealthy both firms have focus on expanding their menus to include a higher variety of healthy food products. Burger King currently is using a very aggressive customer retention strategy though its BK rewards program by offering a 5% gift, but McDonald’s has used a better long term customer retention strategy by targeting children in their advertising campaigns. By getting children to become loyal customers of the firm the company is ensuring that these kids once they grow up continue to be clients of the company. Ever since the global recession of 2008 McDonald’s has been better able to offset the bad economic effects and continue to achieve growth. One of the potential reasons McDonald’s performed better than Burger King during the recession was that McDonald’s has diversified its overall market risk better due to its greater expansion into international markets. The ratio analysis performed on both companies in 2010 showed that McDonald’s performed better financially. McDonald’s had better sales, profitability, and better capacity to pay off its short and long term debt. Being the market leader in this industry is a great competitive advantage since the industry generates over $65 billion in sales in the United States. McDonald’s has showed a better ability to penetrate foreign markets which has helped the firm achieve incredible levels of growth. The success future success of both these firms depends on the companies abilities to adapt to market changes. \ References Aboutmcdonalds.com (2011). Our Company. Retrieved August 8, 2011 from http://www.aboutmcdonalds.com/mcd/our_company.html Annual Report: Burger King (2010). Retrieved August 8, 2011 from http://www.bk.com Annual Report: McDonalds (2010). Retrieved August 8, 2011 from http://www.aboutmcdonalds.com/etc/medialib/aboutMcDonalds/investor_relations3.Par.56096.File.dat/2010%20Annual%20Report%20(print).pdf Advfn.com (2011). Burger King Stock Price BKN. Retrieved August 8, 2011 from http://www.advfn.com/quote_Burger-King-Hol_NYSE_BKC.html Bk.com (2011). Company INFO. Retrieved August 8, 2011 from http://www.bk.com/en/us/company-info/index.html Buscemi, E. (2007). McDonalds vs. Burger King: Battle of Brands. Retrieved August 8, 2011 from http://www.bloggingstocks.com/2007/04/09/mcdonalds-vs-burger-king-battle-of-the-brands/ Google.com (2011). Ronald McDonald. Retrieved August 8, 2011 from http://www.google.com.pr/imgres?q=Ronald+Mcdonald&hl=es&biw=1366&bih=481&gbv=2&tbm=isch&tbnid=3spbwcBiZn8iFM:&imgrefurl=http://mashpedia.es/Ronald_McDonald&docid=3dWjs-AVyzBUQM&w=342&h=500&ei=lKNATvqPDef40gGcudTDCQ&zoom=1&iact=rc&dur=118&page=3&tbnh=152&tbnw=113&start=27&ndsp=14&ved=1t:429,r:0,s:27&tx=68&ty=58 Google.com (2011). Burger King mascot. Retrieved August 8, 2011 from http://www.google.com.br/imgres?q=Burger+King+mascot&hl=pt-BR&biw=1366&bih=442&gbv=2&tbm=isch&tbnid=D_2GtvRrLtJS8M:&imgrefurl=http://1019litefm.radio.com/2011/06/13/did-you-thing-the-burger-king-king-was-creepy/&docid=-C-U4TZOrvT1dM&w=183&h=266&ei=vqRAToL-GvS80AGGopjuCQ&zoom=1&iact=rc&page=6&tbnh=128&tbnw=88&start=72&ndsp=14&ved=1t:429,r:5,s:72&tx=39&ty=80 Numberof.net (2011). Number of Fast Food Restaurants. Retrieved August 8, 2011 from http://www.numberof.net/number-of-fast-food-restaurants-in-america/ Worldfranchising.com (2011). Burger King. Retrieved August 8, 2011 from http://worldfranchising.com/franchises/Burger-King-Corporation.html Worldfranchising.com (2011). Mcdonald’s. Retrieved August 8, 2011 from http://www.worldfranchising.com/franchises/mcdonalds.html Yahoo.com (2011). McDonalds Corporation (MCD). Retrieved August 8, 2011 from http://finance.yahoo.com/q?s=MCd&ql=1 Appendix A: Ronald McDonald and The King (Google, 2011) (Google, 2011). Read More