The History of Success at McDonalds - Essay Example

McDonald's Company Background McDonald's Corp, established in 1955 as McDonald's System Inc, is the largest fast food operator in the world, with over 30,000 restaurants in 120 countries. The company offered shares to the public in 1965. Of the company's over 30,000 outlets worldwide, approximately 45% are located in the US. The company's signature product, the Big Mac, was launched in 1968, and began the strategic move towards menu standardization that has marked the history of success at McDonald's. Although the company began as strictly a hamburger chain, McDonald's took its first step towards menu diversification with the 1964 launch of the Filet-o-Fish sandwich, and added Chicken McNuggets in 1983. Subsequent initiatives included a breakfast menu available nationwide, with the introduction of the Egg McMuffin in 1973. Ronald McDonald was first seen in a television appearance in 1963, and has since become the ubiquitous company representative and also ambassador of charity involvement in the form of Ronald McDonald House, which was established in 1974 as a key element of the company's philanthropic community involvement. The Happy Meal was introduced in 1979, which pioneered the promotional concept of marketing to children by giving away toys and games with meal purchases. This concept has since been adopted by all major burger chains, and has evolved into a significant promotional and tie-in tool for partnerships with major entertainment companies and events. Having created the promotional toy tool with the introduction of Happy Meals in 1976, McDonald's is the leader in toy-based promotions in both foodservice and across all industries. (www.datamonitor.com) McDonald's suffered from a series of strategic blunders and a deteriorating public image in the mid-1990s. These slips included the launch of the low-fat McLean Deluxe sandwich, which was very poorly received, and the launch of the adult-targeted Arch Deluxe sandwich, which did not win consumer acceptance, whilst operating margins were negatively impacted by heavy couponing; The Campaign 55 promotion, a US$0.55 sandwich offer subject to a variety of confusing conditions, proved too difficult and was pulled. In an attempt to find growth opportunities outside of the saturated burgers segment, McDonald's took a step towards diversification in 1998, when it purchased Latin American fast food chain Chipotle, and then in 1999 with the acquisition of Ohio-based pizza chain Donato's Pizza. In the same year, the company announced its intention to purchase the bankrupt Boston Market chain of restaurants that specialized in meal replacement and limited FSR. The sale was approved in 2000, and constituted McDonald's first major acquisition outside of its QSR stronghold. In response to continuing criticism regarding its foods' nutritional content and to broaden its appeal to health conscious consumers, McDonald's has added a variety of healthier meal options, including premium salads and fresh fruit. The company discontinued its "supersize" menu items in 2004, and in 2006, McDonald's was the first fast food restaurant to post nutritional information on the packaging of each of its food items. The new packaging will use bar charts and icons to detail five basic nutritional elements - calories, protein, fat, carbohydrates and sodium. Competitive Positioning McDonald's is by far the leading fast food burger chain in the US, with nearly a 45% market share in foodservice. The company does, however, face strong competition, like other foodservice operators, but its ever growing market penetration, new product innovation and strong advertising backing helped the company see a consecutive value share increase between 2000 and 2005. The reach of the McDonald's brand has posed growth challenges in recent years, as saturation presents limits to opportunities for unit growth in the US, the company's main market. The company initially turned to a strategy of diversification, evident in its acquisitions of Chipotle and Boston Market, and, most recently, McDonald's has focused on boosting unit same store sales through new product innovation and its value menu. Recent product additions include a line of premium chicken breast sandwiches and premium salads, as well as its 2006 addition of the Chicken Snack Wrap, which includes a piece of crispy chicken, cheddar jack cheese with ranch dressing wrapped in a soft tortilla. McDonald's Chipotle brand is considered a leader in fast casual Latin American fast food. While Taco Bell dominates the Latin American fast food category, Chipotle is the largest fast casual Latin American restaurant, in large part due to McDonald's funding. McDonald's plans to completely divest Chipotle by the end of 2006, in order to focus on its fast food hamburger chain and allow the company to buy back McDonald's shares using highly appreciated Chipotle stock with no tax on the appreciation. (www.datamonitor.com) Fast food chicken chain Boston Market, originally purchased by McDonald's for its real estate, has since become a valuable brand for the company as it has diversified its business. Since McDonald's acquisition of the brand in 2000, the company has seen sales increases. Boston Market does not compete directly with other fast food chicken chains, like KFC, which offer mainly fried chicken items, as it focuses on providing high quality home meal replacements like rotisserie chicken. With growing consumer demand for convenient meal options, especially healthy and high quality food, the Boston Market concept is expected to do well. Strategic Direction McDonald's provides a core menu of traditional burgers, premium products and everyday value items in an attempt to appeal to the widest possible customer base. The company strives for continued unit expansion as well as same-store value sales growth. McDonald's strategy is to focus on its customers and maximize system profitability by capturing opportunities within five fundamental drivers - people, products, place, price and promotion. Each fundamental is intended to maximize customer relevance and system profitability. Long-term, McDonald's looks to create a variety of customer experiences that build brand loyalty and drive profitability. As the largest restaurant chain in the world, McDonald's is challenged by continual scrutiny, amplified further by the media, regarding the food it serves. Consequently, the company has committed itself to promoting balanced, active lifestyles and adding healthy menu options. In 2006, McDonald's was the first fast food restaurant to print the foods nutrition information on the package. McDonald's also focused its appeal on winning back mothers with new premium salads, chicken sandwiches and apple slices. The company has also used athletic role models, such as tennis stars Venus and Serena Williams, in a global campaign tied in with the Olympics to talk about exercise and nutrition. Despite these efforts, the company continues to face negative publicity and is likely to continue to do so as the obesity epidemic in the US continues to escalate. www.mcdonald's.com While McDonald's faces several challenges, the company is expected to maintain its strong market presence and continue to see value growth and outlet expansion globally as a result of its strong brand recognition, rapid outlet penetration, continual menu innovation and low price offerings, all backed by its considerable annual marketing and advertising investment. SWOT analysis Strengths McDonald's has an almost unassailable position in consumer foodservice, with sales nearly twice those of its nearest competitor. McDonald's currently has a rejuvenated corporate identity, having implemented its new slogan "I'm lovin' it" at every level. McDonald's benefits from a wider geographical spread than other competitors and is thus less reliant on mature and competitive US fast food. Following its sale or closure of a number of non-core interests, the company now has a considerably more streamlined portfolio. Due to its size, McDonald's benefits from economies of scale and is able to draw on impressive financial strength. Weaknesses While McDonald's achieved an excellent performance in profits in 2006, there is still much progress to be made before it recovers ground lost during the middle of the review period. The company currently owns Boston Market and Chipotle, two non-core brands with an undecided future. McDonald's initial results to menu and marketing changes were excellent in 2006. However, the brand is planning more innovation in 2006 and it will require considerable skill to shift the emphasis of the brand whilst retaining consumers and brand identity. Opportunities McDonald's revitalization strategy and new global marketing campaign appear to be resulting in strong growth, which seems set to continue in the near future. The introduction of a new salad range and a healthier menu focus in Europe is likely to result in good growth for year end 2007 and could influence menu innovation globally. McDonald's holds a leading position in many of the world's major long-term growth markets, including Russia, India, Brazil and China. McDonald's McKids licensing range should provide excellent growth in 2007, if it is successfully positioned to appeal to both children and adults. Threats As the leading brand in consumer foodservice and a leading US brand, McDonald's remains under attack from many sources and must continue to face challenges including boycotts, media attacks and even physical attacks on outlets. Consumer concerns regarding weight and nutrition are high and rising, which could prove challenging for McDonald's core burger offering and may result in damaging legislation being introduced in key countries. Although McDonald's does not currently face any competitor of its size, it could experience long-term erosion by smaller or innovative players with perceived healthier products. Positioning vis--vis competitors McDonald's is the leading global player in terms of consumer foodservice system-wide sales and far exceeds its nearest competitor Yum! Brands. Yum! Brands lead in terms of unit volume, although this is unlikely to worry the company in the near future, with its current emphasis on growing same-store sales rather than unit volume. Within burger fast food, McDonald's dwarfs its competitors, with system-wide sales more than three times the size of its nearest competitor Burger King. However, while McDonald's continues to outrun the competition, it remains mindful of competition from other global brands such as Burger King and Wendy's. McDonald's also faces a major threat from local chains, such as the Quick burger chain in France and Belgium. In the US, it faces competition from players Berkshire Hathaway and CKE, along with a host of smaller chains and independents and the emerging fast casual chains. Burger fast food is an increasingly crowded and mature area, particularly in key countries such as the US. (www.datamonitor.com) McDonald's closest competitors in burger fast food is Wendy's and Burger King, with the latter being the only brand with a strong international focus. Burger King and McDonald's have a strong and historic rivalry and their price wars continue in the US. 2006 saw Burger King innovate ahead of McDonald's by introducing a low-carbohydrate burger, and McDonald's introduced the option of burgers without buns, in response to heightened concerns about high levels of carbohydrates in foods. KFC acts as a strong rival to McDonald's in Asia-Pacific, with its sales far exceeding McDonald's in China in 2006. While KFC is positioned in chicken, its increasing emphasis on chicken burgers places it in competition with McDonald's, particularly in regions with a cultural or religious aversion to beef. McDonald's expansion into more diverse brands brought it into competition with a wider range of competitors. Chipotle faces competition from Mexican fast food leader Taco Bell in the US, although it is positioned more in competition with "fresh-Mex" fast casual restaurants, such as Wendy's Baja Fresh. Boston Market is a chicken fast food brand but competes with traditional full-service restaurants such as Applebee's. www.mcdonald's.com Recommendations and Conclusion McDonald's entered a new phase in 2006, with a streamlined single-brand focus and rejuvenation under one global marketing strategy. The company is currently in the middle of implementing major structural and conceptual changes, which makes estimates of its future performance difficult. However, McDonald's appears to be well placed for an excellent short-term performance. Its close single-brand focus led to excellent growth in 2006 for both sales and profits, and the removal of non-performing or non-core elements should result in a solid foundation for future growth. Its "I'm lovin' it" campaign appears to be successfully broadening its appeal to young adults and offering it a more contemporary image. McDonald's own growth targets for 2006 and beyond are to increase annual system-wide sales and revenue by 3-5% in constant value terms, with sharper growth in operating profit of 6-7%. The company has ambitious and promising plans for 2007, including the launch of its multi-level licensing range McKids and an overhaul of its menus with an emphasis on health, quality and value. The company also plans to introduce new global packaging to reinforce its marketing campaign and new corporate identity. However, McDonald's will continue to face a number of challenges. Its leading position in consumer foodservice unfortunately results in the brand bearing the brunt of anti-globalization and anti-US campaigns. Additionally, there is currently strong media and governmental concerns regarding levels of obesity in many countries. A number of governments, including the UK, are currently considering a tax on high-fat food, which would present a major problem to McDonald's. The company will also continue to face competition from major rival Burger King and the combined force of a myriad of smaller players. Burger fast food is becoming increasingly competitive and mature and all players are focusing on innovation in order to stay ahead. Works Cited McDonald's Retrieved from www.datamonitor.com on March 28, 2007 Retrieved from www.mcdonald's.com on March 28, 2007 Retrieved from http://finance.yahoo.com/qs=MCD on March 28, 2007 Appendix Income Statement PERIOD ENDING 31-Dec-06 31-Dec-05 31-Dec-04 Total Revenue 21,586,400 20,460,200 19,064,700 Cost of Revenue 14,602,100 14,136,000 8,579,000 Gross Profit 6,984,300 6,324,200 10,485,700 Operating Expenses Research Development - - - Selling General and Administrative 2,405,000 2,331,000 6,759,800 Non Recurring 134,200 (28,400) 185,400 Others - - - Total Operating Expenses - - - Operating Income or Loss 4,445,100 4,021,600 3,540,500 Income from Continuing Operations Total Other Income/Expenses Net 123,300 36,100 20,300 Earnings Before Interest And Taxes 4,568,400 4,057,700 3,560,800 Interest Expense 402,000 356,100 358,400 Income Before Tax 4,166,400 3,701,600 3,202,400 Income Tax Expense 1,293,400 1,099,400 923,900 Minority Interest - - - Net Income From Continuing Ops 2,873,000 2,602,200 2,278,500 Non-recurring Events Discontinued Operations 671,200 - - Extraordinary Items - - - Effect Of Accounting Changes - - - Other Items - - - Net Income 3,544,200 2,602,200 2,278,500 Preferred Stock And Other Adjustments - - - Net Income Applicable To Common Shares $3,544,200 $2,602,200 $2,278,500 Source: Yahoo Finance Balance sheet View: Annual Data | All numbers in thousands PERIOD ENDING 31-Dec-06 31-Dec-05 31-Dec-04 Assets Current Assets Cash And Cash Equivalents 2,136,400 4,260,400 1,379,800 Short Term Investments - - - Net Receivables 904,200 795,900 745,500 Inventory 149,000 147,000 147,500 Other Current Assets 435,700 646,400 585,000 Total Current Assets 3,625,300 5,849,700 2,857,800 Long Term Investments 1,036,200 1,035,400 1,109,900 Property Plant and Equipment 20,845,700 19,908,000 20,703,100 Goodwill 2,209,200 1,950,700 1,828,300 Intangible Assets - - - Accumulated Amortization - - - Other Assets 1,307,400 1,245,000 1,338,400 Deferred Long Term Asset Charges - - - Total Assets 29,023,800 29,988,800 27,837,500 Liabilities Current Liabilities Accounts Payable 2,739,000 3,377,600 2,658,300 Short/Current Long Term Debt 17,700 658,700 862,200 Other Current Liabilities 251,400 - - Total Current Liabilities 3,008,100 4,036,300 3,520,500 Long Term Debt 8,416,500 8,937,400 8,357,300 Other Liabilities 1,074,900 892,300 976,700 Deferred Long Term Liability Charges 1,066,000 976,700 781,500 Minority Interest - - - Negative Goodwill - - - Total Liabilities 13,565,500 14,842,700 13,636,000 Stockholders' Equity Misc Stocks Options Warrants - - - Redeemable Preferred Stock - - - Preferred Stock - - - Common Stock 16,600 16,600 16,600 Retained Earnings 25,845,600 23,516,000 21,755,800 Treasury Stock (13,552,200) (10,373,600) (9,578,100) Capital Surplus 3,445,000 2,797,600 2,186,000 Other Stockholder Equity (296,700) (810,500) (178,800) Total Stockholder Equity 15,458,300 15,146,100 14,201,500 Net Tangible Assets $13,249,100 $13,195,400 $12,373,200 Source: Yahoo Finance Cash Flow PERIOD ENDING 31-Dec-06 31-Dec-05 31-Dec-04 Net Income 3,544,200 2,602,200 2,278,500 Operating Activities, Cash Flows Provided By or Used In Depreciation 1,249,900 1,249,500 1,201,000 Adjustments To Net Income (289,400) 72,800 (171,900) Changes In Accounts Receivables (90,800) (56,500) (35,900) Changes In Liabilities (70,800) 498,200 241,100 Changes In Inventories (1,600) (29,400) (14,900) Changes In Other Operating Activities - - 405,700 Total Cash Flow From Operating Activities 4,341,500 4,336,800 3,903,600 Investing Activities, Cash Flows Provided By or Used In Capital Expenditures (1,741,900) (1,606,800) (1,419,300) Investments - - - Other Cashflows from Investing Activities 468,500 (211,000) 36,200 Total Cash Flows From Investing Activities (1,273,400) (1,817,800) (1,383,100) Financing Activities, Cash Flows Provided By or Used In Dividends Paid (1,216,500) (842,000) (695,000) Sale Purchase of Stock (1,983,700) (363,800) (40,500) Net Borrowings (2,264,700) 1,612,300 (815,500) Other Cash Flows from Financing Activities 272,600 (44,900) (82,500) Total Cash Flows From Financing Activities (5,192,300) 361,600 (1,633,500) Effect Of Exchange Rate Changes - - - Change In Cash and Cash Equivalents ($2,124,200) $2,880,600 $887,000 Source: Yahoo Finance Read More