Investment Strategies Employed by McDonald's - Essay Example

Investment Strategies Employed by McDonald's Any organized human activity, which is done in-group, will be most times constituted into an organization. So, Organization is a structure with a ‘collage’ of humans doing their allocated work under the supervision of a leader, for the benefit of the organization as well as them. These workers will normally be apportioned into different departments for better arrangement or streamlining of work. Among the many departments, which constitute an organization, the finance department’s role is omnipresent and crucial. It can only, boost an organization by adopting various strategies. With every organization expanding their horizons and making an imprint in various markets, the finance department had to put in an extra effort to formulate strategies to reach company’s financial target. So, this paper will focus on the American food major, McDonald’s and will discuss the major successful strategies adopted by it to deal with international finance and investment issues, then evaluate its performance overall in relation to those financial issues and finally will pick up the potential challenges it could face in the 21st century in the financial segment of its functioning. Major successful strategies McDonald’s, the world’s largest chain of fast-food restaurants, went through ups and downs in its 60 years of functioning, in every aspect of the organization including the financial aspects. Financial aspects, which are the lifeline of any organization, needed to be handled or solved first for the organization to succeed or even survive. In the case of McDonald’s, financial issues have not given any major troubles before 2000. After early 2000 only, McDonald’s faced financial problems and that only led to the implementation of various strategies, which turned out be successful. One of the successful strategies adopted by McDonald’s to deal with its international finance and investment issues, is its “Plan to Win” strategy. Using this strategy, McDonald’s brought wholesome changes, particularly changing the financial issues to the positive side. That is, it introduced new health friendly dishes, refurbished the store’s environment and also signed new celebrities to promote the product and store. “Plan to Win, a combination of customer-centric initiatives designed to deliver operational excellence and leadership marketing leveraged around five drivers of exceptional customer experiences - people, products, place, price and promotion” (biz.yahoo.com). Even though, these steps did not directly relate to the financial issues, these steps only caused a major financial turnaround for McDonald’s, as it was able to increase the revenues and the share prices. As accepted by Skinner, McDonald’s share price has increased three-fold since its strategy; Plan to Win was implemented, with its strategic imperative to be “better, not just bigger”. The other strategy which succeeded for McDonald’s and helped it to handle finance and investment issues is the disposal of its investment in Chipotie, a Mexican fast food chain. That is, after increasing its stake to more than 50 percent in Chipotie in 2000, McDonald disposed its entire investment via public stock offerings and tax free exchange for McDonald’s common stock. With this strategy, McDonald was able to garner cash proceeds of about $329 million. Using the cash, it was able to acquire about 18.6 million shares of McDonald’s stock via the exchange. It also went for an aggressive financial strategy which provided good benefits. “Moody's said Wednesday that McDonald's revitalization plan is likely to improve its operating performance and cash flow” (aol.com). So, after the lull in its performance in the early 2000, McDonald’s was able to set its ‘cash registers ringing’ by adopting successful strategies. Evaluate the McDonald's financial performance Recently, McDonalds went through a slump in profits and market value pushing the organization to introduce new strategies to make a turnaround. That is, 2003 turned to be one of the worst years in McDonald’s history as many negative events happened in that year. “McDonald's share price was as low as it had been for almost a decade. In the same year the company posted its first quarterly loss and - to add salt to the wound - the health lobby was determined to push home its message that McDonald's food was bad for consumers... driving away more customers” (Choueka). But, McDonald by implementing the above discussed strategies was able to correct this situation and put McDonald’s on the path of success, in the aspect of International finance and investment issues. That is, by executing the “Plan to Win” strategy, McDonald’s was able to exercise greater financial discipline, and thereby achieved various financial targets. That is, its coffers rose to optimum levels and that enabled McDonald’s to take many initiatives, benefiting the customer as well as the organization. That is, during the four year, period ending in December 2006, McDonald’s reported 44 consecutive months of positive global comparable sales, delivered double digit increases in annual earning per share, returned more than $9 billion to shareholder through dividends and share repurchases, added six million more customers per day, and increased average annual restaurant sales about 20 percent. That is, after showing negative returns for few months, McDonald’s was able to translate it into positive returns, maintaining it for 44 continuous months. Even the cash flow to shareholders through dividends and share repurchases also bordered on the higher side with the successful implementation of the strategies. From 2007 through 2009, the company plans to return $15 billion to $17 billion in cash to shareholders (McDonald.com). In U.K., McDonald’s strategy to reduce the percentage of company-operated restaurants also yielded good results. That is, it reduction from 63% at the end of 2005 to 54% at the end of 2006, generated good inflows and elevated the overall performance of the European segment of its operations. “We are encouraged by our momentum in Europe and confident that our combined initiatives designed to enhance the customers’ experience will continue to drive growth over the long term” (biz.yahoo.com). Even in the anti-American areas of Middle East, McDonalds’ has been able to maintain its presences and show a good growth. “Anti-Americanism over the Iraq war hasn't eaten into global sales, either, despite the golden arches' close association with Uncle Sam abroad. The increase was 12.4 percent in its Asia/Pacific, Middle East and Africa restaurants” (Carpenter). With a good growth rate, which is expected to grow further, McDonald’s is able of show its strength in stock market trading as well. That is, with the McDonald’s showing a growth rate of 7.6% and expected to grow its earnings at just an 8.9% rate per annum for the next five years; it trades at roughly 19-times the current year's consensus estimate of $2.74 per share. This scenario could continue because they had garnered large number of markets and are dominating it, which can aid them in maintaining their market share. So, finally when we look at their global performance and their future reinvestments, it gives a ‘rosy picture’. That is, in 2006, its strong global performance generated $4.3 billion of cash provided by operations. And as a beneficial investment about $1.7 billion of this cash was reinvested in their business, primarily to remodel existing restaurants and build new ones. The annual dividend was also increased nearly 50% to $1 per share. Importantly, McDonald’s also removed a part of an impediment, which can prevent it from growing. That is, it paid down $2.3 billion of debt in 2006 reducing the 2005 increase related to the Homeland Investment Act. So, when the McDonald’s performance in relation to the International finance and investment issues are evaluated, it gives a positive outlook. Potential challenges McDonald's will face in the 21st century As McDonald’s continuous to grow after recovering well from a slump, there will be some challenges, which can impede its path of success. That is, every organization will have expected as well as unexpected future challenges which will need their fullest attention. Another important aspect is that, these future challenges would arise from different quarters in the organization. Likewise, McDonald’s could also face challenges in their different departments, including its financial department. The financial and investment issue which could challenge McDonald’s, is its negative margin pressure, which could affect the company’s credit. That is, McDonald’s could face negative margin pressure in relation to commodities, energy and labor. This fact is accepted and confirmed by the world’s leading financial research and analysis firm, Moody’s. “Moody's said other challenges to the company's credit include intense industry competition and negative margin pressure related to commodities, energy, and labor” (money.aol.com). The other important challenge which could prevent its fullest growth is the existing debt, which amounts to around $8.2 billion. “The bond-rating firm Fitch affirmed McDonald's $8.2 billion of debt”. That is, it has to allocate a proportion of its revenues to clear debts. Also the presence of debts could downgrade McDonald’s ratings by important financial firms. Apart from this challenge, McDonald could face problems due to anti-globalization issues. That is, globalization with liberalization making presence in many countries, many Multinational companies are leading the charge. This initiative of the Multinational corporations will not receive favorable response from all the countries and its people. The native people and the national government will view the entry of these MNC as a threat to their own economy and will try to block and restrict it. Likewise, McDonald’s also faced these problems because of economic reasons. That is, even if the national government allows entry of foreign MNC’s including McDonald, due to compulsion or some other agreements; they will try to restrict its functioning, by first imposing high and tight taxes. These taxes will form a large chunk of the revenue for McDonald’s affecting its financial revenues. The other challenge which could affect it financially is the legal suits. That is, McDonald’s could expect as well as file many legal suits because of issues ranging from high calorie, obesity causing food to protection of its trademark. That is, McDonald is continuously facing many legal suits because of its high calorie menu and also wants to file cases against firms which is infringing on its brand name. So, McDonald’s like many companies also went through a bad phase, but recovered well to travel in the path of success. But, one can be sure that McDonald’s will face many challenges in the future as well, but can overcome those challenges by following good strategies. 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McDonald's legal cases, viewed on 28 October 2007. http://en.wikipedia.org/wiki/McDonald's_legal_cases Read More