Fast Food Market: A Comparison of Burger King and McDonald's - Case Study Example

Burger King and McDonalds are apparently two most well known brands in the industry of the fast food. Both these companies provide almost identical menus and services to their customers. No wonder that they compete fiercely in the niche of the market they operate in. Burger King and McDonalds have many common features. Officially McDonalds was established in 1937 by two brothers, however they started mass expansion and franchising of their restaurant only at the beginning of the 50s. In 1954, first Burger Kings' restaurant was opened1. By 1967 Burger King had already acquired more than 220 outlets around the country and had achieved huge success in the fast food industry, this result prompted Pillsbury Co to purchase Burger King Corporation.2 By June 22, the acquisition had been completed and Pillsbury Co had acquired Burger King in exchange for 350000 shares of Pillsbury common and 60000 shares of convertible preferred3. At the same time McDonald brothers sold their business to Kroc for the sum of 2.7 million, however they did not retain the right to keep McDonald's franchise. By the mid seventies both these companies faced similar problems: high costs of raw materials, rising labor costs as well as fierce competition in the market; however energy crisis was one of the biggest threats that the companies faced. In view of many experts at that time the industry could be adversely affected by high energy and fuel costs that might have restricted the mobility of potential customers4. However as both of these companies provided their customers with "take -away" service the crisis did not have profound effect on their businesses, even though high prices on gas hampered expansion policies of fast food restaurants, which was an important element in the business development of the companies. (In 1972, for instance, more than 80 % of the revenues of McDonalds came from the sales of the outlets owned by the corporation yet, 62% of profit was derived from rental incomes as well as franchising fees. The same hold true for burger King). In spite of the rising costs of energy and fuel, McDonalds and Burger King managed to adjust to energy crisis and by the middle of the seventies they had started implementing new marketing strategy-wide expansion in the regional market. One of the reasons for massive expansion of fast food restaurants in the regional area was the absence of competition in rural areas. Both McDonalds and Burger King implemented almost identical marketing strategy-they reduced the sizes of their restaurants. For instance McDonalds Corporation introduced so called "Mini- Mac" (new types of the restaurants destined for rural areas) which were much smaller than their traditional types of the outlets in large cities; whereas Burger King established several restaurants in rural areas which could host 40 or 50 clients, instead of 100 customers 5 Right from the start, McDonalds and Burger King relied heavily in their business on franchising operations. In 1975, Carrols Development Corporation signed the agreement to convert two thirds of its facilities into Burger King's restaurants (in mid seventies Carrols corporation already had restaurants in Northern States, Canada and some Scandinavian countries) 6 Increased competition in the market led to the possibility of price war between two companies in 1979. That year McDonalds decided to reduce the price on its hamburger an cheeseburger by 10%. Representatives of the company justified this step by claiming that the reduction in the costs (especially the price on beef) allowed them to reduce the price on some of its products. 7Nevertheless many specialists hold the belief that it was just another step to win competition and increase consumers' traffic to the company. Yet, many of the fast food chains decided not to cut the prices on their products and representatives of Burger King claimed that their had much better products (with more quantity of meat) and thus they would abstain from retaliatory measures. 8 Both of these companies implemented similar marketing strategies in an attempt to attract customers to their facilities. For instance, in 1979, Burger King decided to introduce new type of the sandwiches destined for dinner-hour customers, one year later McDonalds decided to follow the suit. In 1980, Mc Donald's hired new person -Mr. Quinlan to manage the company. Mr. Quinlan was resolved to keep the company abreast of the marketing strategy of its main competitor- Burger King.9 Despite the fact that currently children menu is associated with McDonalds' brand, the company introduced new marketing strategy aimed at the children as the response to similar marketing strategy initiated by Burger King and aimed to attract more children to their restaurants. In his interview to Wall Street Journal Mr. Quinlan said the company would introduce more play grounds around its restaurants as well as more birthday party rooms at its premises. He also wanted to implement more aggressive marketing strategy aimed at adult by blending the internal as well as external design with the area. Apart from that the company attempted to lure additional number of consumers by changing the types of products available for customers during the day. For instance, the company tried to sell new products only after 4 P.M, so the customer would be able to face different menus in the same day. In spite of some innovative steps implemented by Quinlan, he was quite cautions on new products as in his opinion they were too dependent on the sales hit. However, both of these companies competed not only for their customers but for their employers as well. In 1977, senior executive and vice president of McDonalds-Donald Smith left the company to manage Burger King. He was a professional manager who introduced new so called "grand slam "strategy in order to improve the operations and marketing strategy of the corporation, as well as several effective measures to diversify menu of the company.(The fact that he was hired by PepsiCo in 1980, was certainly a vindication of his professionalism)10. By the year 1980, both McDonalds and Burger King had concentrated more on effective marketing steps that could attract customers to their existing restaurants rather than on expansionist measures in new regions. 1979, was one of the worst years in the history of fast food chains of the USA (and undeniably worst in the decade, with the growth of 1% compared with the average growth of 7% in the seventies)11. Both McDonalds and Burger King attempted to diversify their menus by introducing new products and services. For instance, Burger King introduced new menus for the breakfast (the move that had been taken by McDonalds in 1976), it competed with McDonalds by launching more aggressive advertising campaign to lure children (mainly by advertising popular heroes of Star War movies-McDonalds also advertised the heroes of this movie), as well as trying to implement new slogan campaign, which had already been successfully implemented by McDonalds.12 Coupon promotions and two for one deal were extensively used by both of these companies in an attempt to lure potential customers. McDonalds decided to provide its customers with free Mc Chicken if they purchased a big sandwich; likewise new giveaway games were introduced in order to attract children. In the summer of 1980, Pillsbury Company (which was the owner of Burger King) hired Loius P Neeb as new chairman and executive officer of the company. Most of the analysts applauded the decision taken by Pillsbury (though some of them claimed that it would be very difficult for him to adjust to new environment, as he had been working in restaurant, not in the fast food chain). Loius Nibb was widely regarded as one of the most capable professionals who had already managed to increase the revenues of another company- Steef and Ale (Nibb devised new ways of increasing profit of the company by cutting labor costs)13. In 1981, as new decade had begun, Burger King tried to shift to new advertisement technique. Whereas, previously the company had relied on merchandises in its advertisement campaign it decided to concentrate on the mood of the customers (New TV advertisement run by the company asked the customers whether they were hungry for Burger King). Actually, this advertisement apparently reflected more active mood of the customers of the 80s14. Apart from more aggressive advertisement aimed to lure potential customers, Burger King also decided to compare its products with the products of its major rival-McDonalds. In the TV advertisement Burger King attempted to portray McDonald' hamburger as fried whereas Burger King were claimed to be broiled; the advertisement also implied that consumers are more inclined to consume broiled food than fried one15 However, as McDonalds brought litigation against Burger King, the latter decided to withdraw some controversial parts of the advertisement. 16 In spite of more aggressive advertisement conducted by the companies of fast-food industry there was an urgent need to diversify the menus of their restaurants. Many analysts hold the opinion that the USA had been bored of the hamburger and cheeseburger. It was partly due to the fact that more and more people were working and there was a necessity to diversify the products base that these outlets offered17. Yet, Burger King was still resolved to continue its aggressive advertising campaign, rather than concentrate on the diversification of its menu (some of managers even maintained that new type of advertisement was the only possible solution to win the competition against McDonalds). Burger King still maintained in its advertisement that its whopper is much better in taste than Big Mac. In October 1982, Burger King even started to provide its customers with free whopper if they ordered products at the restaurants with the phrase "Whopper beat Big Mac". According to the information of Wall Street Journal, this advertisement campaign was relatively successful as the sales of the company rose by more than 75% in the USA alone (they rose by 109% in Minneapolis, the town where headquarters of Pillsbury were located)18. Other measures implemented by Burger King were much less effective. Advertisement aimed at the children did not bring expected results, neither the steps aimed to boost the sales by diversifying the menu of the company (it had to abandon its idea of dinner basket.) Yet, the company still expected that the average sale of the restaurant would exceed 798000 USD per restaurant in 1983. It also intended to expand the chain of the restaurants (according to the management of the company it considered to purchase several unconfident sites such as military bases and several truck stops) and emphasize quality of its products and services in its advertisement campaign. It looked like the management of the company did not hold the belief that the market was saturated (views expressed by many analysts at that time). On the contrary, the plan of the company was based on the assumption that the growth in the industry would reach 45% and the demand on the fast food would rise as the result of some demographic and social changes. In spite of its aggressive advertisement campaign, Burger King lagged behind its major competitor -McDonalds in capital spending, average sales per restaurants as well as outlays on advertisement. McDonald's was also more diversified company (it had 7063 restaurants, with more 1283 of them overseas), whereas Burger King had twice as less restaurants and 1283 of them were located in foreign countries. In October, 1982 McDonald's shares were traded on the NEW Stock Exchange for 59 USD per share, whereas Pillsbury shares were traded at 48 USD per share. Despite the fact that two decades have passed since 1982, yet McDonalds is still wining competition and widely regarded as the leader in the fast food industry. Burger King attempted to implement new marketing strategies in order to win the competition. Yet according to the article of Wall Street journal, by the year 2002, the value of Burger King had decreased by 22.8 % ( to 2.16 billion from 2.80- billion in 1999), and the brand value of its major competitor- McDonlads has increased by 1% to 27 billion in 2002. McDonalds was the eights most valuable brand in the world, whereas Burger King was only 90th. Neither several marketing strategies helped to resolve the problems of sluggish growth of levels of sales of Burger King. 19 McDonalds has managed to maintain its leadership position in the market during the following four years. It is still widely regarded as the leader in the market of the fast food. The quality of the services at McDonalds restaurant had also improved; in 2001 The Wall Street Journal hired one independent company- mystery shopping company Dallas feedback Plus Inc. 20The company mentioned visited all restaurants in several major American cities. According to the information of the company the score reached by McDonald's was 81.19, which was a comparatively high results( restaurant industry, had been able to gain 80%) In orde to acess the quality of the services of McDonalds with its main rivals in the market, its main competitors were also accessed and evaluated. In order to understand the importance of this result one should recall that the restaurant had been managed for four years by Jack Greenbdrg , who had already introduced some innovative cooking system and made some reorganization of the management. Yet despite of these innovations growth rates were still sluggish and the sales declined; thus another strategy was implemented by Greenberg- he hired the company to access the quality of the services that the chain provided. According to the representative of Feedback Plus Company, if the company raised its scores on several additional points the level of the sales would increase. Nevertheless, many observers were not so sure, they pointed out to the fact that another franchise company in Texas had already been able to gain the score of 92%, yet the sales had not been increased correspondingly. In spite of the above mentioned discussion, it was clear that the report of the Feedback company was useful in accessing the overall performance of the company. For instance, the company claimed that McDonalds had comparatively poor counter service where it gained only 72.4% scores and only 64% greeted the customers with smiles, despite the fact that it was one of the principles of the company; just 36% of the employees provided the customers with foods promotion and juts 52% of the employees were able to describe the order accurately. Neither vaunted drive through service of the company had been able to gain high scores (only in 70% of the cases the employees provided clients with such utensils as napkins), and thanked customers only in 50% of the time; in most of the cases employees did not mentioned food promotions which was vital for the marketing strategy of the company and consequently for the boosting of the sales. However one of the greatest strengths of the company was the fact that it managed to serve the customer within 3 minutes, though it was far enough from the goal of McDonalds to serve one customer within 90 minutes. In order to reach the above mentioned goal, the company introduced new innovative service- purchasing the products by credit card. According to many specialists the queues at the company would get shorter as the customers would spend much less time at the counter. In 2002, the Wall Street Journal predicted that the company would be able to approve the customers of the chain within 5 seconds 21(whereas the same operations with cash might take up to 10 seconds). As one can see, with new service the company would be able to serve more customers within definite period of time, which was a crucial factor for the leading fast food chain of the country. Many observers hold the belief that long waits might discourage customers to purchase at the restaurants. Many other fast food services and main competitors of McDonalds, Burger King included tried to implement the same services at their restaurants. Apart from the competition for its customers, both chains also compete for the locations where new restaurants should be established. By the year 2003, the market of the industry had been oversaturated, so the companies were forced to hire some scouts in order to evaluate various geographical markets at the area; more detailed examination and the evaluations of various elements such as demographic trends, location and overall well being of the districts were required. 22 Apart from saturation another trend was evident- fast food chains attempted to provide more healthy food to its customers, as the customers of the fast food chains become more health conscious. For instance Burger King was the first fats food chain that provided its customers with so called vegetarian burger- BK Veggie. Other restaurants tried to include more diet food and salads to their menus. In order to compete in the market of healthy food, McDonalds started to provide its customers with sandwiches as well as more diet food. Many observers greet current trend in the market of the fast food, and perceive such actions as effective marketing strategy. When the fast food chains like McDonalds and Burger King provide the customers wit more healthy offers. The customers who are lured by the offers mentioned might reassess the whole menus of the chains. 23 In the February 2006, one notable event occurred- Burger King announced that it intended to raise 400 million dollars in initial public offering (according to some analysts it could be the fourth largest public offerings in this year. 24 It was the first time the company had offered to sell its shares to the public (first time in 52 years). This is certainly an attempt by Burger King to compete successfully with McDonalds that has been trading its shares for decades now. 25 Burger King has been managed by Greg Brenneman since 2004; according to the information provided by the company the profits have been growing steadfastly and menu of the chain has been diversified, new more ingenious advertising techniques have been implemented and many financial problems of the company have been resolved; however many specialists are not convinced that the company will be able to attract the attention of invertors by selling its shares to the public.26 So far Burger King Holdings Inc has been unable to reach the profits margins of two major rival companies- Wendy's and McDonalds. Despite the fact that the company has offered to sell shares to the public, its representatives have been short on the specifics and details of the offer. Many investors doubt that it is worth their while to invest in the shares of Burger King, as they fear that the shares of the company may not pay dividends, neither it was possible to predict whether the dividends on shares would ever reach the dividends on McDonalds' shares. One should compare financial results of Burger King and McDonalds to understand the pessimism of investors. Whereas net income of 51 million dollars on revenues of 1.99 billion was reported by Burger King in 2005, McDonalds could boast about net income of 2.6 billion on the revenues of 20 billions. Profits margins were also higher for McDonalds with 12.7 for McDonalds against 2.6 for Burger King. Neither the fact that Burger King has large amount of debt encourages investors (this debt has been accumulated as the payment of dividend and fees to various owners of the company), however the company still posses suffice financial resources to pay off its debt and invest in the development of the company. One must remember many franchises were unable to sustain fierce price competition from McDonalds and were forced to close their businesses in 2004. Despite the fact that financial restructuring program was created, some of the franchises are still considering whether it worth their while to stay in the market, so the number of the restaurants had reduced from 2540 in 2003, to 150 restaurants by the end of 2005. Despite this fact royalties and fees increased and currently they are at 100 percent (according to the information provided by the company 4-5 percent of the sales of the franchise is usually paid to the company for marketing in addition to 3 or 4 percent that franchise must pay for the sales). Many low-profit restaurants were closed which led to the growth of 11 percent in restaurant sales. More aggressive campaign of Burger King with new logo (smiling King) as well as increased satisfaction of the customers with products and services that the company provides, more diversified menu that company has started providing recently( in an attempt to compete with McDonalds that has recently took identical step) led to the overall improvement in the business of the chain. Apart from this the level of sales in the stores has also been increased and same-store sale are continuing to rise from 6 percent drop in 2003, to 1 percent growth in 2004 and almost 6 percent growth in 2005. Moreover, Brenneman is a highly-skilled, experienced professional who knows how to rescue companies from difficult financial situations and many investors have confidence in his abilities to restore the financial stability of company. Similar problems were faced by McDonalds as well, as it was forced to close several British outlets and low performing restaurants as it was competing with other companies in the market in European market. 27In spite of the fact that the company faces some problems in various niches of the market it still has achieved substantial growth in 2005, as its sales increased up to 20 billion dollars in the year of 2005 28(record level in the whole history of the company). Moreover the company is planning to expand aggressively in the new markets by opening 800 new restaurants. Apart from this it is resolved to continue its program to diversify its menu. As one can see both of these companies have used similar methods in their marketing campaigns, nevertheless there are some notable differences between them. First of all, McDonalds is a publicly traded company, whose shares have been traded on New York Stock Exchange for decades now; whereas the shares of various owners of Burger King, rather than shares of the company itself, have been traded on the stock exchange. Second, McDonalds is more internationalized, it has many more restaurants in overseas nations than Burger King has; moreover it is widely regarded as the most well-known world brand in the fast food industry. The company also has so called Hamburger University where many feature employees study to become the members of McDonald's team, so far no corresponding facility of Burger King has been created. This allows to state that despite price wars, aggressive advertisement, various marketing campaign of Burger King, McDonalds will maintain its leadership position in this industry for many decades to come. In my opinion Burger King will not be able to achieve the same success unless the company implements some innovative original marketing strategy or takes some steps in the diversification of its menu that might attract new customers to their outlets. Works cited. 1) Burger King, from http://en.wikipedia.org/wiki/Burger_King 2) Pillsbury Co. Says it agreed "in principle" to buy Burger King Wall Street Journal 1967, p.12. 3) Pillsbury completes acquisition Wall Street Journal, Jun 22, 1967, p24 4). Economy-restaurant and take-out chains worry about effects of energy shortage, Wall Street Journal, Nov 21, 1973, p.38. 5) Fast Food Chains deserve a break today, so they are moving into smaller towns, The Wall Street Journal, Apr.12, 1976, p.42 6) Carrols to convert 140 units to Pillsburry's Burger King outlets, Wall Street Journal, November 5, 1975, p.8 7) You deserve the cut in prices, say 10% McDonald's decides, Wall Street Journal, Aug 20, 1979, p.19 8) Mc Donald's competitors aren't lowering prices, Wall Street Journal, August 1979, p.4. 9) McDonald's fast track drops Quinlan into the hot seat as the competition sizzles, Wall Street Journal, Feb21, 1980, p.30. 10) PepsiCo hires away Burger King Chief to spice up pizza hut chains' business, Wall Street Journal, May 13, 1980, p.8. 11) After their slow year, Fast food chains food use ploys to speed up sales, Apr.4, 1980, Wall Street Journal, p.1. 12) Sizzling McDonalds sues to block Burger King's a, Wall Street Journal, September 24, 1982, p.22. 13) Burger Battle sputters as three giants signed accord, Wall Street Journal , Nov 1, 1982, p. 17. 14) Pillsbury names Neeb chairman, Top Officer of Burger King Unit, Wall street journal, Jul 23, 1980, p.29. 15) Burger King to shift from lifestyle ads to hard hungry sell, Wall street journal, Nov 25, 1981, p.40. 16) Restaurants Chains show good prospects, but analysts are being increasingly selective, Wall Street Journal, Apr 13, 1982, p. 55. 17) Pillsbury's burger King Brass is certain recipe for the growth is spelled : aggressive, Wall Street Journal, Oct 29, 1982, p.14 19) New Burger King shop hits the grill-With change of ownership, franchisees' expectations will put heat on deutsch, Wall Street Journal, Aug, 15, 2002, p.2 20) Burger King plans $400M IPO Fast-food chain offering could be fourth largest of 2006 < http://www.marketwatch.com/News/Story/Story.aspxguid={A795F4AD-C760-4FFA-8358-D59BB981AE1C}&siteId=google> 21) Burger King seeks to raise US$400 million in IPO, < http://www.canada.com/nationalpost/news/story.htmlid=403d2f57-5fe7-4977-99f9-0c0fa9c9ef1d&k=87585> 22) John Pain, Burger King's fortunes brighter, but will investors buy in 23) McDonald's to close 25 UK outlets, 24) McDonald's global sales top $20bn, http://news.bbc.co.uk/2/hi/business/4644772.stm 25) McDonald's Asks Mystery Shoppers What Ails Sales --- Undercover Customers to Rate Service and Food Quality Our Own Give It a 81.9% Wall Street Journal. (Eastern edition). New York N.Y.: Dec 17 2001. pg. B.1 26) Shirley Leung and Ron Lieber, The New Menu Option At McDonald's: Plastic --- Fast-Food Giant Will Allow Customers to Use Credit Cards; Earning Miles With Your Fries Wall Street Journal. (Eastern edition). New York, N.Y.: Nov 26, 2002. pg. D.1 27) ELIZABETH LEE, BUILDING A BETTER BURGER: Where's the beef BK Veggie part of fast- food evolution, The Atlanta Journal - Constitution. Atlanta, Ga.: Mar 18, 2002. pg. C.1 28) Shirley Leung, Where's the Beef A Glutted Market Leaves Food Chains Hungry for Sites, Finding Spots for New Outlets Takes Heaps of Research And an Eye for Details, Hint: Move Next to Wal-Mart, Wall Street Journal. (Eastern edition). New York, N.Y.: Oct 1, 2003. pg. A.1. Read More