Comparison of Financial Statement between McDonalds and Yum Brand - Example

COMPARISON OF FINANCIAL MENT BETWEEN MCDONALD’S AND YUM! BRAND IN 2009 by The of the The of the School (University) The City and State where it is located The Date Table of Contents Introduction………………………………………………………………………………………4 Research Methodology…………………………………………………………………………...5 Food Retailers Industry…………………………………………………………………………..9 Contracting………………………………………………………………………………………11 Liquidity…………………………………………………………………………………………13 Technology………………………………………………………………………………………11 Conclusion……………………………………………………………………………………….16 References……………………………………………………………………………………….18 A. Introduction Food industry is one of the top ranking industries in the world. It occupies around 40% of the GDP in most countries around the globe and increases the employment opportunities as well as eradicating the level of poverty. McDonalds and Yum Brand Ltd are famous fast food industries that boast of the great achievements in the food sector (Spears & Gregoire, 2007). McDonalds was started in 1940 by two brothers Dick and Mac McDonalds as a small restaurant that specialized in producing coffee, milk, potatoes, soft drinks and chips. Later on, it progressively substituted chips with Fried potatoes. After a decade, Mc Donald’s had their first mega sale of share at $ 22.65 per share (Best, 2011, p. 67). The company opened its first international shop in 1968 in Canada and Puerto Rico. In addition, the company was launched in the same year. Improved sales and online advertisement enabled the company to increase its restaurants locally to around 40,000 with more than 1.9 million employees. Currently, Mc Donald’s is ranked top as the best fast product company, competing with relatively strong food industries in the world such as Starbucks Corporation, Yum Brand Ltd, Burger King corporation and Wendy International Ltd. The company is diversified with food such as pizzas, big macs, egg muffins, fried chips, hamburger, and chicken McNuggets (Schlosser, 2012, p. 17). The company has an objective to provide their customers with the quality products and services that meet the world standards at an affordable price. Yum! Brands is a restaurant company that franchises and licenses international restaurant with brands such as Pizza Hut, Best Place Ever, KFC and Taco Bell. The company was founded with an objective of being the leading company in the food industry. As the name suggests, Best Place Ever is known for its expertise in preparing tasty chicken and hamburgers, Pizza Hut produces pizza products, and KFC is famous for the delicious chips and chicken. Taco Bell is a growing international restaurant for its exceptional services. Based on history, both McDonalds and Yum Brand Ltd are very successful companies thus a great choice for this study. They are key competitors in the world market, with smart ideas to outsmart each other, and the rest of the competitors (Galbraith, 1998, p. 78). B. Research Methodology This report will highlight on different outsourcing strategies that help both McDonalds and Yum Brand to remain at peak throughout the year. It will bring comparisons to investigate the best company out of the two. This will be achieved through definition of examples with tables and charts. The research will cover: Franchising strategy Food Retailers Industry Contracting Liquidity 1. Franchising Strategy It involves developing a network of agents to be exclusive sellers of different products. Both McDonald’s and Yum Brands have significant market at international level. In 2007, McDonald’s took a risk of expanding their market by selling 20% of their domestic restaurants in order to expand its market in India and China. This risk has favorable benefits to the company since its market potentials increased to 42% (Gibson, 2009, p. 423). Company 2009 2010 2011 McDonald’s 3.1 5.3 7.44 Yum Brand 3.7 4.9 6.6 The above data indicates that the franchising trend for both industries has been improving since 2010 to 2012. However, the profit accrual from McDonalds is greater than that of Yum Brand Ltd. These results are true since the average percentage income over those 3 years between the two companies is approximately 0.7% (David, 2013, p. 42). McDonalds recorded favorably than Yum Brand Ltd as a result of several franchising measurement that were incorporated in its production system. For instance, “Going Green” strategy targeted energy, social responsibility and management control, improving resting environments, and health packaging. Community clean-up activities achieved 5% of the overall contributions from “Going Green” strategy through improving the image and concern of the company over safe environment and healthy strategies. However, Yum Brand Ltd had the clean-up model of improving their business in to external levels but the outcome was lower to that of McDonalds since there were limited resources deployed to this sector (Munger & Kaufman, 2008, p. 9). This outcome was majored by the economic crisis that hit the industry in 2009. This means that the company was making endeavors for restructuring. Year Wages in billions (McDonald’s ) Wages in billions (Yum Brand) Total 2009 3 2.9 5.9 2010 3.2 3.3 6.5 2011 4.0 3.44 7.44 The above figure illustrates the total wage from both Yum Brand and McDonalds. Both companies collectively earned total wage of $7.44 billion in 2011. This was the highest profit recorded for over 10 years (Paiz et al., 2011, p. 45). McDonalds distributed $60 million to settle debts, including paying its staffs. On the other hand, Yum Brand spent 40% of its profits to buyback more shareholders. However, both means of distributing the finances acquired were helpful in maintaining the performance of these companies at upper par to compete with other companies (Galbraith, 1998, p. 656). A study by Friedman (2007, p. 78) indicated that franchising in small business is unprofitable. This is significantly true based on the performance of Yum Brand after the economic crisis. In the immediate year, the Yum Brand recorded 3.7% but later recorded lower income than McDonalds at an average of 0.6%. From an economist perceptive, it would be an undisputable claim to go for another alternative means of increasing profits in case one business fails (Ferguson, 2008, p. 11). Franchise brands usually apply exorbitant fees to the franchisees for operating their business. Both McDonald’s and Yum Brand can dictate over the daily operation of their franchisees, hence controlling the business. These two companies dictate the wages attained by the franchisee by controlling the supply of their products, quality, and the price of these products. These parameters have a direct influence on the number of employees required, training, technology requirement, and the manpower output (Best, 2011, p. 532). Franchised margin are revenues calculated by subtracting rent and depreciation cost from franchised fees for the restaurant. Considering the time gap 2010-2011, the franchised margin is obtained as two-thirds of the combined margins over this period. The total revenue increased from $205 million in 2010 to $450 million in 2011. The primary force behind this constant increase of the franchised dollar is positive sales for both McDonalds and Yum Brand Ltd. Franchised Margins McDonald (in $ Millions) Yum Brand (in millions) 2011 2010 2009 2011 2010 2009 U.S Europe China India 3,676 2,987 2,878 2,345 3,193 2,547 2,134 1,898 3,098 2,134 2,109 1,457 3,578 2,857 2,133 1,908 3,234 2,787 2,144 1,078 3,121 2,645 2,152 1,908 Other Countries Totals 1,938 13,824 1,112 10,894 989 9,787 1,353 11,829 968 10,211 1,354 11,180 The trend above indicates that McDonald maintained the lead over the entire period though increase in performance is also evidenced with Yum Brands Ltd. McDonalds performance was attributed to opening of 276 restaurants across the targeted countries. However, the revenues from countries indicated are not linear over the years (Noe, 2010, p.135). This is reasonably true due to effects of various business threats that tend to differ from one nation to another. This would compel the companies to close some of their outlets. For example, in 2011 Yum Brand closed its restaurants in Philippines as a result of loss of some of real estate tenures. 2. Food Retailers Industry McDonald’s are specialists in fast food such as pizzas, big macs, egg McMuffins, fried chips, hamburger, and chicken McNuggets. On the other hand, Yum Brand is a specialist in four categories of fast foods: chicken, pizza, seafood and Mexican-type foods. These four brands are proportional to Yum’s retail restaurants: KFC with around 46% of the market share in US promoted by chicken services; Pizza Hut taking 15% infamous in pizza services; Taco Bells leading in US with 58%; and Best Place tops with sea foods at 30% (Vanderhoof, 2005, p. 31). Years 2010 2011 McDonalds 30% 35% Yum Brand 24.6% 25% Wendy 24% 22% Burger 13.1% 12% Colden Arches 8.3% 6% However, majority of the consumers named McDonald’s was named the best fast-food company in 2011 (with 35%). The trend indicated great improvement based on the performance of the previous years. Yum Brand attained 25%, followed by close competitors: Wendy (22%), Burger King (12%) and Colden Arches (6%). McDonald’s improved its dominance in the prominence through introduction of a discounting program that was called “Eating Campaign 40” (Gibson, 2009, p. 9). This campaigned entailed reaching out to as many consumers at a subsidized price, creating a margin of 0.97% across all other competitors. The campaign also had the objective of teaching on healthy eating. It occurred at a wake of “Obesity Free Society Campaign” (Wheelen & Hunger, 2012, p. 78). Similarly, Yum Brand improved their products by adding taste pizza and fried chicken. Along with that, they switched to green salads and low calories sandwich as a measure to promote healthier feeding options. Comparatively, the company gained prominence from 24.6% in 2010 to 25% in 2011. This value is correlated to the profit recorded with that financial year (Toguchi, 2011, p. 443). McDonalds was suffering from stiff competition displayed by other industries particularly those that had already established themselves as healthy food producers. For instance, Subway had already captured around 20% of the consumers in the country and external market at the wake of the opponents to this marketing strategy. This is so since the profit increment by McDonalds would be expected to be more than 5% according to the results above. Luckily, the restaurant responded by aggressive franchise that targeted China and India, which were ready market as speculated (Spears & Gregoire, 2007, p.453). 3. Contracting McDonald’s and Yum Brand participate in contracting their food service with major players being Aramak and Sodexho. Contracting involves providing different food services in public institutions such as universities, health institution, recreational and sport centers, conference facilities and hotels (Ritzer, 2011, p. 213). Food contracting is a growing industry in the world. In 2011, about 2 million people were employed by contractors who linked with Yum Brands Ltd. 56% were estimated as part-timers and the rest as full time workers. Demographically, Yum Brand and its associated contractors employed around 30% African American, 20% Latinos, 40% Whites, 8% Foreign born and the rest to other groups. The labor statistic in U.S indicated that hourly wage in McDonald’s restaurants for food-service employee was $9 per hour. This amount was relatively similar in Yum Brand Ltd. In 2009, outsourcing through contracting accumulated to 4% increment of the revenues compared to 2% increment recorded by McDonalds. This is because, by contracting, Yum Brand improved its warehouses to handle large capacity of goods at various levels of the supply chain. In additional, Yum made 200 contract agreements in Asia and some European countries (Paiz, 2011, p, 266). On the other hand, McDonalds merged with staff contractors in order to afford temporary workers to provide packing, unloading, and selling services across the country. In return, McDonald’s recorded profit increment of 1.8% more than Yum Brands. Wansink (2005, p. 12) indicated that Third-party contracting in any logistic firm creates a bidding war between motor carriers and staffing contractors hence favoring the mother producer through availability of the contracting services at a cheaper cost. As a result, the labor cost goes down, hence shifting the acquired cash to other development matters. However, David (2013, p. 72) noted that aggressive contracting by Yum Brands lead to exploitation of the workers by the low bidding firms since they are remunerated at cheaper costs. The market dominance of Yum Brand rose from 8% to 9.5% in 2012, trampling that of Mc Donald’s at 9.2% in the same years. However, as a result of endangering the workers to cheap labor cost, their image was tarnished hence reducing the net wage by 0.8% in the consecutive year (Friedman, 2007, p. 532). Staff contracting wage in percentage 2009 2010 2011 Yum Brand 7.9% 8% 9.5% McDonalds 8.73% 8.8% 9.2% Contracting with the agricultural industries has been beneficial to both Yum Brand and McDonalds. Some of the agricultural industries are involved in direct production of the food crops and livestock while others are linked with growers to produce such things. However, the degrees of this form of outsourcing highly depend on the wages, benefits, and safety measures given to the employees. Both Yum Brand and McDonalds have long-term obligations with agricultural and staff contractors in supply, lease, or debt obligations. Moreover, both companies have consistent revenue flow that is proportional to the franchise arrangements. The obligation term are satisfied by the cash acquired through borrowing and the franchise operations (Fisher, 1997, p. 322). Contractual Cash flow In billions Operating leases Debt obligations Debt on franchise plans 2010 $ 1.786 1.328 2.364 2011 $ 1.243 1.123 2.173 2012 $1.352 2.164 2.186 Total $4.381 $4.615 $6.723 From the above figures, the maturities on Yum Brand reflect the reclassification of temporary responsibilities to long-standing compulsions of $2.6billion as they are braced by a long-standing line of credit arrangement expiring in 2014. The debt obligations are not included in $58million of the non-cash fair value hedging adjustments or $250 million on the acquired interest. McDonald’s contractual flow deviated from that of Yum Brand with a range of $562 million. 4. Liquidity Investments in the foreign countries are important since they cover-up finances that would have been invested in the growth and development of the project in the mother state. At the beginning of 2008, Yum Brand had more than $790 million in cash and cash equivalent. This amount dropped to $436 by the end of the years. By the end of 2010, the net income was $1.46 billion compared to the previous year where it reached $957 million (Wheelen & Hunger, 2012, p. 198). On the other hand, the Net cash flow for McDonalds was reported to be $1.67 billion 2010 compared to $1.64 billion in 2009. In 2009, $ 65 million was used towards repairs of the infrastructures and the closure expenses. The total cash flow in Yum Brand at the same time after deduction of the impairment expenses was reported to be $1.46 billion. This value was higher than $1.38 billion from McDonald’s after deducting the dividends, money borrowed, and other financing activities. This means that McDonald’s was so successful in creating money from each dollar of sale generated. Return on Equity (ROE) is a parameter applied to calculate return management that a company can earn from the existing capital base. For a food service industry, a percentage greater than 21% is taken as above average. For instance, McDonalds recorded a drop from 18% in 2008 based on returns from past fiscal years. A long-term debt with respect to capitalization percentage shows a significant financial risk. Similarly, the case would have accommodated long before the crisis that occurred to Yum Brand in 2009. In this case, the debt leverage was progressing but it was not accompanied by rise in ROE to curb the threat. Occasionally, a percentage greater than 45% is a warnings. In McDonalds, the L.T debt to capitalization has been lingering around 28% for the past two years, though not on smooth linearity. Company McDonalds Yum Brands Operating margin 0.6 0.53 Market capital 100.78B 65.78B Employees 648,749 536,895 Revenue Growth 0.02 0.01 Gross margin 0.39 0.28 % ROE 67.98 75.38 5. Technology Both Yum Brand and McDonalds keep tab of their consumers and the international consumers through the use of modern technology tools. For instance, Yum introduced automatic ordering system that ensures quick order requests and customer response to increase productivity. Package and delivery are achieved instantly after commitment to pay. Moreover, technology has been essential in locating favorite food restaurants and evaluation of different menus. This is a wonderful arrangement for improving profits (Ferguson, 2008, p. 324). Meanwhile, McDonalds have increasingly improved their production through installation of energy saving equipment, solar panels, internet networks, and green technology in order to cut the energy cost. Moreover, McDonalds have improved their food services by combining broadcasting it in an innovative technology of McTV. This is an in-store TV system that is targeted to consumers and everyone in the locality to come and dine in McDonald’s and also dessert there. This platform will enable consumers to echo their concerns and at the same time give views on ways of improving the quality of the services offered. McTV is projected to remodel most of the restaurants in America by 2015. The remodeled restaurants will possess Wi-Fi services, booth seats, LED lights and modern beaming schemes (David, 2013, p.657). Conclusion From the data presented above, it is clear that outsourcing has significant benefits to a food service company. McDonalds was more actively involved in franchising compared to Yum Brand. There was significant percentage of profit acquired, which could not be realized by relying on the internal production schemes. Moreover, the franchising performance by Yum Brand was encouraging since it indicated gradual improvement from the crisis that had hampered it. Contracting indicated favorable outcomes if applied suitably. From this report, both staff and agricultural contracting strategies are crucial in boosting the income for any company. The exceptional performance by Yum Brand was garnered by contracting cheap bidders. This enabled transfer of the finances saved to other development projects. Liquidity entailed evaluation of the best techniques on meeting all obligations entitled to the company. Both McDonalds and Yum Brands have strategic methodologies to normalize L.T debts to capitalization percentage. Bibliography Best, R. J. (2011). Market-based management. Upper Saddle River, N.J., Prentice Hall. David, F. R. (2013). Strategic management concepts: a competitive advantage approach. Boston, Pearson. Ferguson, N. (2008). The ascent of money: a financial history of the world. New York, Penguin Press. Fisher, P. A. (1997). Common stocks and uncommon profits. New York, Wiley. Friedman, T. L. (2007). 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