A Pestel analysis of McDonald’s

 

McDonald’s: An Introduction

McDonald’s is among the world’s largest fast-food chains with operations spanning 119 countries across the globe.

At the end of 2020, the company was operating 39,198 restaurant stores across the globe of which around 93% were run by franchisees.

McDonald’s is mainly a franchisor and the number of franchised McDonald’s restaurants at the end of 2020 was 36,521.

The company itself operates only a limited number of restaurants.

However, despite its largely franchised business model and the challenges that are a fundamental part of international operations, the company has experienced solid growth and success.

It enjoys very strong popularity worldwide driven by a diverse menu and a strong focus on customer service.

The company has adopted several innovative practices in terms of food quality, supply chain, store operations and marketing to maintain its competitive advantage in the fast-food sector.

This sector is currently experiencing a high degree of competition and there are several QSR brands that compete with McDonald’s for market share and sales worldwide.

Every international business including those operating in the QSR sector faces a unique set of challenges.

In this pestel analysis, we will analyze the macroenvironmental factors that affect McDonald’s international operations and profitability and highlight how the company manages their impact.

Pestel analysis of McDonald’s:

 

Political:

Political factors now play a crucial role in various markets in terms of overall industry environment and profitable operations of small and large businesses.

No industry is untouched by the impact of political factors like government policies, legal framework, accounting policies, tax regimes and other similar factors.

Political changes sometimes bring critical changes to the market environment that can have a solid impact on sales and profitability.

Apart from it, how open a market is in terms of foreign direct investment, also affects how well international brands will perform in that market.

Companies across all industry sectors therefore need to focus on the political environment of the markets in which they operate and accordingly form strategies to be successful.

McDonald’s is a US based international fast-food brand.

While the market environment in the United States is more suitable for business there are several types of hurdles for these businesses operating in the Asian and Middle eastern markets.

The market environment in China has become complex because of the trade wars and their complex political and legal framework.

In the Indian market too, operations can be less profitable compared to the US because of the complex tax structure and unique labor laws and other factors.

It is why the company forms strategies to adapt to the local political environment and laws.

Economic:

Economic factors are among the most critical external factors that have a strong influence on the operations of international businesses.

They include various factors like the economic environment of the various markets, employment, consumer spending, competition and other factors.

All these factors affect the level of sales and profitability and international business can achieve in any market.

Fluctuations in the global economy also cause sales to rise or fall for businesses in the QSR sector.

Let’s take the recent situation caused by the pandemic for example.

The pandemic induced recession caused consumer spending to fall in several areas as people stopped spending on no essential items during the pandemic.

A large number of people globally lost their employment and overall employment level fell i8n the US and several more countries globally.

The fast food brands that quickly altered their operating models and switched to a largely digital operating model were able to maintain impressive sales.

However, several fast food brands also experienced a decline in sales and income during the pandemic.

McDonald’s also experienced a decline of 10% in its net revenues for 2020 compared to 2019 caused mainly by the pandemic.

In this way, economic factors can have a severe impact on international businesses and their profitability.

Managing economic factors is generally outside the control of businesses, but they can manage their impact to a certain extent through the use of technology and other alternative methods apart from managing prices to maintain consumer loyalty.

Sociocultural factors:

Social factors have kept growing in importance in the context of international business as the public scrutiny of businesses has grown aided by the proliferation of technological tools and channels.

Businesses have to remain more conscious of their social image to maintain their market position and popularity,

Their social image has a direct impact on popularity as well as sales and revenues in various markets.

It is also why even the large fast-food businesses like McDonald’s are focusing heavily on social responsibility and sustainability.

Store operations and supply chain operations as well as marketing also impact the social image of companies around the globe.

McDonald’s also maintains a strong focus on all these areas to maintain a strong social image.

Demographic changes around the globe have also affected how businesses operate.

For example, the main target market of the fast-food brands like McDonald’s are the millennials and Gen Z.

These demographic changes have also forced the businesses like McDonald’s to change their menu and marketing strategy to suit the preferences of the new generation.

Apart from business operations social factors also affect how businesses market themselves.

It is why considering the social factors and their importance in terms of business operations and strategy has become essential for fast food brands like McDonald’s.

Technological:

Technology is a key driver of competitive advantage across all the industries.

Businesses that want to gain market share faster and improve their competitive edge against their rivals invest in technology and innovation.

Even in the fast-food industry, digital technology is playing a central role in terms of profitable business operations, supply chain management, marketing, sales and other areas including driving a superior customer experience.

Technology has become the key to growth in all areas including sales and marketing.

McDonald’s was able to retain its sales level during the pandemic despite reduced demand in various markets and lower consumer spending.

The credit mainly goes to the significant investments the company has made in improving its digital sales and delivery capabilities in the recent years.

Across its top six markets, digital sales remained around 20% of its total sales in 2020.

In the same year, the company invested around $1 billion in technology and digital initiatives.

During the third and fourth quarters of 2020, the company specifically focused on driving higher digital engagement of customers worldwide that drove significant sales during both the quarters.

Overall, technology has proved to be a gamechanger for McDonald’s and other fast-food brands during the pandemic.

Even after the pandemic, digital technology will continue to remain a key driver of growth for fast food businesses.

 

Environmental:

Environmental factors and sustainability have also become key considerations for businesses in the QSR sector.

In the QSR sector, apart from sustainable business operations, companies are also increasingly focusing on sustainable sourcing and reducing their environmental impact.

It is because apart from benefitting their business operations, it also benefits their social image.

McDonald’s has also set several environmental goals and continues to measure progress across various areas to improve its long-term sustainability and resiliency.

It monitors environment related government initiatives and consumer preferences and responds to them in a timely and appropriate manner.

It has developed environment goals and performance indicators that are updated periodically.

These goals and KPIs are informed by relevant frameworks including the Sustainability Accounting Standards Board.

Some of the key areas where the company has achieved significant progress include greenhouse gas emissions, elimination of deforestation from global supply chain, responsible sourcing of ingredients and packaging, and increased availability of recycling in restaurants to reduce waste materials.

Overall, the company plans to achieve significant progress in terms of environmental impact over the coming five years.

While sustainability offers important benefits in terms of business operations, it also offers a solid advantage in terms of social image and reputation.

Legal:

Legal compliance and ethical business practices are just as important for fast food brands as the businesses operating in other industry sectors.

Non compliance often results in heavy operations and sometimes shutting of operations for a business.

There are several laws and regulations including those related to food quality and labor that apply in the fast-food industry and are important for McDonald’s and other QSR brands.

Another important factor to note in this regard is that the legal and regulatory framework differs from market to market.

McDonald’s needs to monitor its business operations across all markets to ensure that its franchisees comply with all the necessary local laws and regulations.

McDonald’s has established a separate function to deal with compliance organization wide.

Its Global Compliance Office monitors and enforces the company’s policies prohibiting money laundering, bribery and doing business with terrorist groups, as directed by the US Patriot Act, the FCPA and Executive Order 13224.

The company has also established a code of business conduct that the employees need to abide in order to do business ethically.