Economics for Business: McDonalds - Case Study Example

Academia-Research Topic: economics for business McDonald's is the most favourite place I often visit in London I live. I love to eat hamburger and drink delicious coffee at the shop that attracts me to be there and enjoy. McDonald's, there's one on Oxford Street. They are literally at most places around. They're normally like 2-4 for a grub. Any other place Caf's and smaller eating diners around the City can be quite cheap too! Pub meals can also be quite cheap varying in price from 4-12 per meal), but McDonald's is superb for its taste and grandeur. McDonald's sells hamburgers, various types of chicken sandwiches and, french fries, soft drinks, breakfast items, and desserts. McDonald's offers salads and vegetarian items. There are local deviations from the standard menu in places characterised with regional food taboos, religious taboos and food habits. Beefs are not allowed in India for the Hindus. Indonesian prefer to eat more rice and rice based foods. America is the heartland for McDonald's with 50% of global sales. Europe has one third of global sale and is catching up fast, with 39% of global earnings. McDonald's has a presence in 40 European countries though 65% of European earnings come from the Big Three France, Germany and Britain. France is first by profits, with Germany second and Britain third. Russia is the market with the strongest growth with only about 200 McDonald's outlets. It is the group's most profitable market worldwide in operating income per restaurant. Global consumption for burgers and fries made sales at McDonald's soar high in 2007. The company had 2007 sales up 9% year-on-year to $22.8bn($20.5 billion in 2005). Revenue in 2005, $5bn and net profit$2.26bn in 2005. Operating income fell 12% to $3.9b.Europe in 2007 over 2006 result, with sales up 7.5% year-on-year, contributed operating income of $2.13bn. There was disappointment over the fall of sale and operating income of the company resulting in drop in share price of McDonald's. www.caterersearch.com McDonald has three major problems in Europe from where it gets its one third of its revenue. The beef crisis, which was supposed to create brain damage and foot and mouth disease, haunted the company's food business badly. This caused the reduction in consumption of McDonald's food by 60% in Germany and also in other European countries. This problem is now subsiding. This is a big problem because it concerns with health of human being, which is very sensitive matter. Weakening euro that hampered the sale of US products in terms of dollar causes the second problem. Weak euro reduced the dollar value of company sale in Europe. This is an economic problem a multinational company with thousands of outlets abroad will often face this problem because cross currency fluctuations. Third important problem mentioned later in this paper also is about the unhealth food by fast centres in general and by McDonald's in particular. The oily and fatty food damaged health but youths run after it. There is campaign all over the world against fast foods to distract students from them. Even Pricne Charls had riaed voice against it.The solution is recommende later in this paper. Supply strategy The company adopted the common strategy of opening more and more outlets in a country or in a city to increase its turnover. This made the supply side stronger to meet the growing demand of McDonald's food. The company also allowed the local outlet to change in the ingredients in the product to suit the local taste and menus. The company did not prefer the strategy to squeeze more out of the existing outlets but recently it has given green signal to bring changes to suit the local tastes. This strategy will increase the sales per restaurants and make the outlet organically stronger. Certain strategic changes in some restaurants with new interiors and new welcome logos of McDonald were made to attract new customers who look for changes. New McCafes' coffee shop chain has been started for serving the coffee lovers with special attention and thereby to increase revenue. In England this strategy is not very successful because of the existing crowds of coffee shops there in every street but in Germany with 400 outlets yielded good response. The coffee thrust in every outlet, new chain of coffee shops plus the changes in the existing outsets together brought about good yield with sales growth increasing up to 12% in many markets globally. The share price of McDonald has gone up to $ 50 and market capitalization up to about $60 billions. McDonald followed the old strategy of increasing profitability by increasing the top line and not improving internally. That made the company to open as many outlets world wide as possible. There are about 30,000 outlets in 119 countries as per the known records serving about 50 million customers worldwide and 2.5 million in UK alone everyday. There are 1250 restaurants in UK alone with 9 McCafes. They are going to ad another 800 outlets in 2008 worldwide. Besides the new addition about 2500 restaurants are on the anvil for renovation and re-imaging. Website: http://www.mcdonalds.co.uk Demand side McDonald's is one of the most darling food centres all over the world. Youths throng round it and they enjoy because the company has avoided focusing on high- income pockets. Young people of all classes enjoy food here. The demand of the McDonald's food is high that they have to open outlets in every important corners of the city. Children also like to enjoy with their parents in McDonald's. There is a dictum that children may not recall the Christ's cross but do recall the McDonald's arch of M. McDonald faced some setback in 2007 market caused by the competing smaller nimbler in the market. Moreover, nutritionists, animal welfare institutions, anti-globalists and unions have attacked the business of McDonald's. Diversification has been reined down, many unprofitable stores closed, new opening stalled, non-core brands offloaded, moving out of pizza market in Germany were some of unwanted actions taken recently by the company. The UK market, which is third best in the world, has under performed in recent years with lower turnover of 1b mainly because the brand could not satisfy the UK customers. The demand for more health food was not met. Prince Charles of England had gone against the quality of food served. More salt and fats did not make meals healthy. The company is launching fruit bags, a new salad range and healthier breakfast options in its biggest menu-shake-up for 30 years. They are eyeing on the coffee and sandwich market of London now. Out of the earned revenue of individual outlets, which as big as 900,000 will be, used to create new wealth and jobs in the local area and outlet only. Prices of foods in London market The prices charged in McDonald Restaurant and the adjoining ones are follows: Coca Cola $0.50 Hamburger $1.88 Medium coke $0.88 Medium Big Meal $.3.29 Corona Bear $2.00 (Outside) $3.80 for two (supermarket) Keeping in the cost of living in England these prices are very attractive. McDonald is basically not focused on up market segments but on medium segments that can enjoy good food at reasonable prices. According to a customer who often travel to various destinations comments that McDonald in Paris appeared costly at first instance but when he converted his sterling into euros at a rate of 1.34721 which fetched Euro 4.43 he had to conclude that the parish food was cheaper than the food in London in the same chain. Strategy McDonald's will sell premium coffee drinks made by Baristas at most of their 14,000 stores and will compete with Starbucks, which is also a big food chain. How should Starbucks react to the McDonald's threatThey should simply watch because the market segments of both are different. Starbucks focus on youth of creamy layer more and also on morning customers. McDonald is focused on lower-income group in London and less educated people than they originally served. These are people comfortable at McDonald's. The real threat to McDonald is from the smaller shops spread around in London who has been serving low income groups fro long. McDonald's should cut down its prices to compete the local outlets and even the customers of big brother Starbucks to attract them in the breakfast time when there is enough space in their outlets but Starbucks is overcrowded. This strategy will be very effective to draw price conscious consumers and would benefit McDonald in utilizing the thin hours in the outlets. McDonald should follow segmentation principle for differentiating its product for the busy time slot and charge higher prices for the food to impress upon the premium clients and earn better revenue. The strategy is wonderful for big food chain like McDonald'ds which hardly use this differentiation methods. McDonald has many outlets spread throughout the city, which can be utilized for a coffee corner. This will save resources of the company and make the outlets more profitable instantaneously. At the time when in Europe the revenue is falling this would be a wise strategy to cut the cost by adding to new service in the existing premises rather than buying new ones. This is a long-term solution provided it does not damage the image of the outlets. www.businomics. typepad.com The market is very elastic with food products and McDonald's can manipulate it by changing its strategies continuously. The old attitude of serving the standard type of food that is designed in USA would not be sufficient. A lost of elasticity to conform to changes in the lifestyle and attitude of today's youths will be required. References: >www.caterersearch.com< visited on 30th April 08 >www.businomics. typepad.com< >http://www.mcdonalds.co.uk< Business Week 26th April 2008 www.london-budget.com/londoneating/ Business Report, www.busrep.co.za/index Read More