The Global Economy: McDonalds - Case Study Example

Executive Summary

The Global Economy: McDonald’s

A brief history of the organization

McDonald’s started as a hot dog stand in California in 1937 and built its first built its facility in 1940. The founders, McDonald brothers, realized the lucrative profits they generated from hamburgers; hence, they decided to focus on a limited menu. However, McDonald’s was officially incorporated in 1955 after the brothers, Mac and Dick decided to focus on hamburgers, cheeseburgers, French fries, shakes, apple pie, and soft drinks. They initiated the self-serve operation, and their major target customers were families, rather than the teenagers. The business became quite impressive since all of McDonald’s employees performed their tasks efficiently, and the founders took care of the kitchen setup. The operations at the facility were speedy since every worker’s chores were well keenly choreographed to ensure maximum efficiency that anyone can expect in an assembly line. Since the 1950s, McDonald’s has been growing, and it has gone global and become a large corporation in the food industry (McDonald’s, 2019). The company owns most of its restaurant branches worldwide through franchises. The company opened its first franchise restaurant in Illinois, Chicago, under the leadership of Ray Kroc (Gross, et al., 2012). McDonald’s is currently a large successful multinational corporation.

Its domestic and international operations

McDonald’s has since its founding grown and expanded into the international markets, including Canada and Puerto Rico. McDonald’s had a strategy for going global and ensured that its Drive-Thru in Sierra Vista, Arizona served happy meals in its menu. Its strategy was to introduce a completely active lifestyle that was unique to the world and provided a balanced public awareness. Notably, the company utilized an intense, rapid expansion into international borders based on three primary methods, including franchising, company-owned restaurants, and joint ventures. However, many of the restaurants operating outside the United States originated from franchising deals. Therefore, the franchising agreements were a strategy to facilitate acceptance into unfamiliar markets with completely unique eating styles. McDonald’s prefers franchising due to the limited risks and maximum gains associated with the agreements; hence, contributing to the company’s international success. McDonald’s has a centralized international structure, which helps it maintain its stable operations, cost, and topnotch quality in the competitive food industry. In 1971, McDonald’s expanded into Asia, and Europe, particularly in countries such as Japan, Netherlands, and Munich, Germany. In the same year, the company applied its “expand at all cost” motto and opened its franchise branches in Tokyo, Japan, Amsterdam, Netherlands, and Sydney, Australia. In 1979, McDonald’s opened another franchise in Rio de Janeiro in Brazil. Later in 1990, the company expanded into Moscow, Russia, and China (McDonald’s, 2019).

The organization’s current position

It currently has over 210, 000 employees in over 36,000 restaurants in more than 119 countries worldwide. Therefore, McDonald's is one of the most recognized brands that compete with other renowned brands, such as Burger King and Wendy's. McDonald’s 2019 financial report confirmed that the company is currently well-established. The corporation has made significant milestones and recorded systemwide sales of more than $100 billion. In the final quarter and year ended 2019, McDonald recorded realized a global comparable sales increase of 5.9%, which was the highest in over a decade while its consolidated revenues reached $21.1 billion (McDonald's Corporation, 2020). This implies that the corporation attained the highest global comparable sales increase, possibly due to the flexibility and efficiency with which employees served clients the meals they crave. In the fourth quarter, McDonald’s recorded a comparable sales growth of 5.9% while its consolidated revenues increased by 4%. However, the systemwide sales increased by 6%, which meant a 7% increment in constant currencies while the consolidated operating income increased 15% further, which translates to $140 million.

McDonald’s annual worldwide comparable sales increased by 5.9%, which was an increment based on the figure from its international operating segment that stood at 6.1%. However, in the United States, the comparable sales was 5% (McDonald's Corporation, 2020). The consolidated revenues slightly increased by 3%, which was only $21.1 billion. McDonald’s systemwide sales in 2019 increased by 4%, which made it realize $100.2 billion with 7% in constant currencies. In 2019, the company recorded an increase of 5% in its diluted earnings per share from its initial $7.88 with 7% in constant currencies. The company’s operators delivered cash worth $8.1 billion, and the 2019 free cash flow was $5.7 billion (McDonald's Corporation, 2020). This figure meant a 36% increase compared to the previous year. Additionally, McDonald’s returned $2.3 billion to shareholders, as evident in its share repurchases and dividends made in the final quarter of 2019. McDonald’s repurchased shares worth $8.6 billion the whole year (McDonald's Corporation, 2020). Note that the company successfully attained its targeted return of $25 billion, which it forecasted since 2017. Therefore, the figures indicate that McDonald had a strong operating performance owing to the significant increment in the sales-driven franchised margin dollars.

After the COVID-19 pandemic hit the world, McDonald’s started experiencing reduced performance despite its exceptional global momentum realized in January and February 2020. At the beginning of the year, the company’s sales reflected a strong performance trend, but the pandemic disrupted all its operations since March. Currently, MacDonald’s is operating in a challenging and unpredictable arena, although the management is devising strategies to help the organization escape the crisis and attain a position of competitive strength. Despite the pandemic, the company is still determined to offer their clients affordable and convenient food. Nevertheless, the organization is obliged to continue maintaining the safety of all employees and customers who still support the local markets. Generally, the coronavirus disease outbreak adversely affected the operations of the organization due to several factors. For example, the pandemic led to restaurant closures, limited operations to observe curfew hours, and significant shifts in consumer behavior (McDonald’s, 2020). Such factors contributed to the dramatic decline in the company’s sales and the ultimate reduction in revenues in the first quarter. In the first quarter, McDonald recorded a reduction of 3.4% in its global comparable sales and another decline of 6% in its consolidated revenues. The company also realized a decline of 4% in its systemwide sales, while the diluted earnings per share reduced by 15% (McDonald’s, 2020). With such undesirable economic outcomes in the first quarter alone, McDonald’s strives to adopt strategies that can help it maintain its financial flexibility.

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Effects of labor and wages on the organization’s international and domestic operations

The rapid spread of the novel coronavirus disease has raised mounting pressures and concerns among McDonald’s food service workers and its financial position. Many of the employees have requested for paid sick leave. The situation has compelled the company to consider the implementation of sick leave policies and strengthen some similar directives that had been implemented earlier on. Generally, COVID-19 has adversely affected McDonald’s labor force, and most employees have been forced to provide doctor’s notes, even those without insurance coverage. After the World Health Organization declared the novel coronavirus a pandemic, McDonald’s employees called for paid sick leave and other social and economic protections. The company’s employees in Tampa, Orlando, and Florida organized demonstrations, demanding an increase in the minimum wage by at least $15.

Additionally, they demanded paid time off for all employees who have felt the direct impacts of the pandemic, including those whose relatives are ill. Further, they demanded that all workers on quarantine receive pay, including additional cleaning supplies and personal protective equipment (PPEs) in all franchise stores worldwide. With reduced revenues, the company still pledged to provide its employees paid time off, especially for workers operating in corporate-owned restaurants that are on quarantine for a fortnight. All employees who tested positive for coronavirus qualified to receive the payment. Many of the employees, particularly in Missouri, lack health insurance, and other frontline workers in many of its branches across the world still receive low wages.

Despite the reduced revenues, the company still has to hand out bonuses to employees at any company-owned stores. McDonald’s is striving to thank its employees for their commitment to working even during the global COVID-19 pandemic. McDonald’s revenues may further reduce if the economic stimulus package does not support the company’s operations. The amount of bonus is equivalent to 10% of the employees' pay that they earned in May. Although the restaurants remain open and continue to serve customers in various communities, the rate of stock turnover and revenues, in general, has gone down. The company is spending a lot of money to support franchisees that offer compensation benefits to employees during the coronavirus pandemic. For example, McDonald has allocated colossal amounts of money to provide employees with appreciation pay, bonuses, gift cards, and even salary raises.

The World Health Organization (WHO), in collaboration with various government agencies, issued directives to curb the further spread of COVID-19, particularly in the workplace. One of them is the stay-at-home directive, which reduced working days. As many employees continued to stay at home, productivity reduced, and ultimately comparable sales of the company’s domestic and international operations (World Health Organization, 2020). In the United States and international operated markets, the comparable sales after January 2020 revealed an unbalanced growth when considering the company’s approximate check and guest counts. The reduction in the labor force with a simultaneous increase in the company’s expenses crippled international operations in China, as evident in the 25% closure of restaurants in February 2020. The situation made McDonald’s branches in China vulnerable. In contrast, the US franchise branches only operated take-away, delivery, and drive-thru with very tight measures to curb the spread of the virus. Such local strict restrictions made the business less profitable, particularly due to limited menu offers and reduced operating hours. Internationally operated markets, including Germany, Canada, Russia, and Australia, became limited because the number of drive-thru, delivery, and take-aways reduced drastically. Other restaurants in the aforesaid markets even closed down their facilities while some just operated for a limited number of hours in a day because menus were restricted in capacity. McDonald’s capital expenditures have gone down significantly by approximately $1 billion. The company’s reduction in capital expenditures is a result of the limited number of domestic projects, particularly in the United States.

Additionally, there is a reduction in the number of franchise restaurants that open in most markets globally. The overall situation has compelled McDonald’s to suspend its share repurchase programs since March 2020. The executive management arrived at the decision to help the company preserve its financial flexibility.

Effects of currency fluctuations on the organization’s international operations

The floating foreign exchange system that defines the current global economy has direct impacts on currency fluctuations. The foreign exchange markets usually determine the floating exchange rate system to influence the supply and demand for commodities and services worldwide. McDonald’s is one of the companies that is adversely affected by the existing foreign exchange risks. Precisely, currency risk compels McDonald’s to pay more for supplies when they intend to continue serving their menus at relatively lower prices. This implies that when their prices remain constant amid the increasing currency risk, they can realize reduced profits. The currency risk can also reduce the supply and demand of the company’s products globally, especially when different countries experience fluctuating currency risks. The number of customers in the international franchise branches may reduce due to the fluctuating supply and demand brought about by the risk. Notably, many customers can resort to cheaper menus offered by other competitors in the international market; hence, McDonald’s can make less profits, and equity prices can increase dramatically (CBC News, 2012). The currency risks during the COVID-19 pandemic has adversely eroded McDonald’s returns, especially in overseas markets. Generally, a strong US dollar has negatively affected McDonald’s. In the financial year ended 2015, the company recorded a reduction in its revenues and net income, mainly due to the fluctuating foreign currency exchange rates (Light & Kiddon, n.d). To put the concept into context, McDonald’s can serve its hamburger in Japan and receive Japanese yen currency for its products. The organization will be obliged to exchange the yen for US dollars, especially when it is ripe to take the proceeds back in its home country. The exchange can take a hit on the final revenue that it received for selling the hamburger, especially when the dollar gains in value. The increase in the dollar value leads to the depreciation of the yen since the United States will take more Japanese yen than one dollar (Martin, 2015). Therefore, the policies regulating the foreign currency exchange are vital growth determinants for the organization since it expects growth to take place from business expansion overseas. It cannot expand just within the United States. The fluctuating foreign exchange rates squeeze McDonald’s profits since the increasing costs of ingredients, such as hard-hit fast food companies in the US.

Effects of domestic, monetary, and fiscal policy on the organization

In the recent past, political factors have adversely affected the operations of McDonald’s operations. Domestic government policies related to trade and public health usually limit the organization's operations due to increased costs of its products and activities. Even in the international markets, McDonald’s faces issues related to the trade agreements in place, which can operate in certain areas. This usually happens when domestic policies limit the organization's operations due to differences in food standards available in various markets where the organization operates. For instance, Europe can implement domestic policies that limit McDonald’s operations because it does not offer the same quality of meals it serves in the United States. Other domestic policies regarding health issues, such as obesity also increase the costs of operation; hence, making their menus more expensive. Additionally, the expansionary fiscal policies that increase government spending and reduce taxes favor the organization's operations. Even if the interest rates increase, the government will spend more to help such corporations meet their aggregate demand.

Consequently, customers will increase their demand for hamburgers. The organization will experience an increased capital inflow despite the increasing foreign exchange rates; hence, McDonald’s usually strive to take advantage of higher returns as they purchase more of the domestic stock and assets. Monetary policies also increase capital inflows since the increase in money supply results in the depreciation in the domestic market. Typically, the pound's value can depreciate in the UK market, making the domestic assets less expensive compared to the US assets; hence, increasing net exports in such markets. Therefore, the increase in net exports usually leads to an increase in aggregate demand.

Effects of worldwide economic integration on international business operations

Global economic integration has several positive impacts on corporations due to the increasing opportunities for survival and the elimination of pressure to preserve and strengthen the positions of such multinational companies in the market. Generally, international economic integration helps corporations attain a competitive advantage and expand their operations rather than confining them to the domestic market. The integration promotes political changes that unify and socialize the global community due to the implemented preferential trade agreements. For instance, NAFTA and the European Union have enabled large companies to take advantage of market opportunities (Katerina & Aneta, 2014). Notably, global economic integration ensures the progressive elimination of trade barriers and diversifies foreign investment among government agencies. The ultimate result is the opening up of new markets and mergers and collaboration among international companies.

Additionally, integration promotes the development of technology, such as computing and communication technologies. Advanced technologies improve communication and the spread of ideas and information across international borders; hence, the fast supply of goods and services to consumers globally (Katerina & Aneta, 2014). Further, economic integration creates a favorable international business climate, thanks to the improvements in communication and information technologies. Integration leads to the development of newly emerging markets due to the constant technological advancements that open up growth opportunities and bring about economic benefits. The worldwide economic integration has led to the development of markets, facilitating the fast and efficient supply of McDonald’s menus. Many customers have access to information and communication technologies, which promote a more rapid pace of global tourism, increasing cultural exchange, and improving living standards (Katerina & Aneta, 2014). Precisely, the integration results in an increased liberalization and the opening up of many distribution channels that diversify opportunities for McDonald’s and other corporations that offer their products in the international marketplace. Specifically, McDonald’s has gained a competitive advantage due to the increasing integration of global markets; hence, they can easily escape competition in the domestic markets.

Open economies and growth impact on business operations

An open economy is where domestic actors and international entities from overseas markets take part in the trade of goods and services. The export and import of products take place with limited restrictions in an open economy. Open economies promote faster growth of businesses due to improved innovation, increased productivity, and the diversification of opportunities that increase incomes. Business operations become more efficient because of the affordability of goods and services in open economies. This implies that improved trading activities can help different countries and companies sustain livelihoods and reduce both local and global poverty. Importantly, open economies facilitate the growth of businesses by increasing productivity and innovation (Atwater & Gill-Morlis, 2012). Even smaller firms operating in such economies gain access to more significant markets that diversify their opportunities to attain economies of scale while ensuring a healthy competition in the market. The opportunities encourage smaller firms to export their products and further increase their productivity in the long run. New technologies can move more freely around the globe only through open economies rather than the closed ones. Generally, business operations can increase through technological spillover and improved managerial know-how that expand opportunities, which ultimately enhance productivity. The spread of ideas becomes faster, and workers resort to using advanced technologies to increase productivity and get better wages.

Furthermore, open economies support the growth and expansion of business operations by improving efficiency and ensuring adequate transportation systems, logistics, and customs. The diversification of trade improves connectivity in telecommunications and expands the financial markets by allowing small businesses to adopt new technologies that can sustain positive growth (OECD, n.d). Also, open economies eliminate complicated regulatory environments and encourage new investments to ensure that the overall market is regulated based on competitive behaviors and policies. Such legislation can lessen the actions of major cartels that might stifle innovation, productivity, and overall market growth.

An evaluation of current trade policies that affect the organization

Three major policies currently affect McDonald’s organization. The policies form the primary external factors affecting the organization. They include the increased international trade agreements, government provisions regarding diet and health of foodservice organizations, and the rising public health concerns. To some extent, expanding global business policies offer ample opportunities for the expansion of the multinational corporation due to the continued enhancement of global supply chains. However, the increasing concerns about diet and the health of organizations have been the major threats to the organization. The policies usually criticize the organization's activities and products, citing the adverse impacts of such products on the health of the global population (Greenspan, 2018). Importantly, the diet and health concerns can also be advantageous to the organization because the policies regarding the same sometimes improve McDonald’s products. The company can add more ingredients to their menus to enhance the dietary content and ensure that it increases its sales despite the existing political external factors that regulate unhealthy competition in the market.

Additionally, the trade war between the United States and China hurts McDonald’s operations due to the retaliatory tariffs that target the foodservice industry. For instance, in 2018, the US imposed 25% of Chinese products worth over $50 billion of all goods from China, including industrial technologies (Supply Chain Scene, 2019). In response to the same, China imposed tariffs worth $34 billion on 545 American goods entering their territories. The tariffs result in a significant imbalance and hurt the operations of food industries, specifically their production outside the United States. For example, the tariffs hard-hit the American manufacturing sector, including the foodservice industry that has been targeted through the milking machines, and an assortment of crop harvesting devices.

In conclusion, despite the economic downturn and legal, political policies, McDonald's strives to attain success by leveraging its discounting menu. Generally, McDonald’s position in the market has not been affected by the economic slowdown, particularly the one experienced due to the outbreak of the coronavirus pandemic. The organization adopted its growth strategy, which involves discounting $1 on its menu to maximize its profits and overcome the prevailing market conditions. Even with unfavorable tariffs and economic policies globally, McDonald’s has managed to make huge profits using its low prices strategies. The discounting of $1 on fries, burgers, and drinks has helped the global corporation maintain its market position even amid the global COVID-19 pandemic.