- COMPANY FRANCHISING RELATIONSHIPS
- THREE FRANCHISING MODELS
- RISKS IN THE FRANCHISING MODEL
- SUPPLY CHAIN MANAGEMENT AT MCDONALD’S
- GLOBAL RESTAURANT CHAIN
An Analysis of McDonald’s Business Model
McDonald’s is the second largest fast food brand of the world based upon number of stores operational worldwide. Run mainly by its franchisees, it has seen a lot of success worldwide. Apart from strong brand equity, it has an impressive presence globally. McDonald’s is expanding and adding new markets as well as new stores every year. It is known for its great quality food, taste and customer service. However, at the core of its successful business is a strong business model which is enjoying continuously faster growth. Last year, it re-franchised several of the company owned restaurants. In the longer term, it aims to manage more than 95% of its restaurants through franchisees. McDonald’s global chain of restaurants has grown to more than 36,000 restaurants and recently it opened one in Kazakhstan. To remain its customers’ favourite, McDonald’s has kept experimenting and innovating.
While a system nearly fully operated by franchisees can run quickly into operational issues, the case of McDonald’s is different. It has managed a largely uniform system and its success with managing its franchisee system shows high level of synchronisation. The core focus of the system is still customers’ preferences and their convenience. McDonald’s has also continued to play with the menu and improve it to suit changing preferences of the customers. The company has come a long way since the McDonald’s system, Inc purchased the rights from the McDonald brothers for $2.7 million in 1961. The business is enjoying immense popularity worldwide and plans to achieve faster growth. Its business model and business strategy are distinct and very different from the rivals like Burger King. Despite being a large chain of 36,000 Quick service restaurants run mainly by franchisees, McDonald’s is bound by a common thread. Apart from seeing high level of financial and operational success, the QSR brand is working to drive meaningful progress through collaboration between systemwide partners.
Company Franchisee Relationship :
The company operates and franchises restaurants that serve fast food and beverages across more than 100 countries at several price points. McDonald’s system is made up of both company operated and franchised restaurants. There are three kinds of structures under which it operates its franchised restaurant. These three structures are conventional franchise, developmental license and affiliate. There are several factors that affect optimal ownership structure for a restaurant, trading area or a country. They include entrepreneurial experience of individuals, financial resources as well as the legal and regulatory environment locally in several areas including property ownership and franchising. McDonald’s long term goal is to run 95% of its system through franchisees (McDonald’s Annual Report, 2017). For this purpose and for continuous optimization, it regularly reviews its mix of company owned and franchised restaurants. The relationship between the McDonald’s brand and its franchisees is of utmost importance to the company. The franchisees are bound by agreement which requires them to adhere to certain essential standards and policies.
McDonald’s can be seen as mainly a franchisor because independent franchisees run more than 90% of its restaurants. These independent franchisees own and operate the McDonald’s restaurants. These are some major advantages of being a McDonald’s franchisee. The company and the brand act as a core support while the independent franchisees can be their own employers and exercise major control over employment, marketing and pricing related matters. McDonald’s is a renowned brand and its global fame is highly beneficial for the franchisees. The company utilises the expertise it has gained by operating company owned restaurants to support and improve franchisee operations and help them be successful. Moreover, it can test the innovations made by franchisees and if possible implement them across relevant restaurants. The biggest advantage for a franchisee is that he enjoys all the necessary freedom to successfully operate his business. At the same time, he has all the support he needs to be successful in terms of marketing, branding and operational know-how. However, McDonald’s own operations are also of special significance since they help it be a credible franchiser. The company personnel can gain training experience for restaurant operations at the company operated restaurants. These restaurants also act as platforms for innovation where the company tests new operation standards as well as innovative ideas as well as marketing concepts. These things benefit the franchisees down the line.
Three Franchising models:
As already discussed, the company uses three types of franchising models for its restaurants.
1. Conventional franchising:
The first type is the conventional franchising model. Generally in this kind of agreement, the company either owns the land and the building or obtains a long term lease for the restaurant location. The franchisee has to pay for equipment, signs, seating and decor. This type of arrangement where the company holds the ownership of the real estate and where the franchisee and the franchisor invest together, helps ensure the highest standards of operational performance in the entire QSR industry. The franchisees should also reinvest capital into their business over time. However, the company also cooperates with them at times in order to help them improve their restaurant and operations as well as for implementation of special initiatives. In this way, the company is able to increase its own brand value by developing more attractive and modern restaurants that generate higher revenue. Typically, the term of a franchise remains 20 years. Franchisees should meet the rigorous standards developed by the company. McDonald’s has designed the business relationship between the brand and the franchisees in a manner as to ensure high quality and consistency across all restaurants. The conventional franchisees pay rents and royalties to the company. The company has specified minimum rent payments and the royalties are a percentage of sales. Apart from that, there are also some initial fees that are to be paid at the time of the opening of a new restaurant or when a new franchise is granted. This is a profitable structure allowing the company to generate significant levels of cash flow (McDonald’s Annual Report, 2017).
2. Developmental license:
This is the second type of franchisee agreement which is referred to as a developmental license arrangement. The company does not make any investment in this type of arrangement. Instead, the entire capital is invested by the licensee himself. Apart from the costs of operations, the charges of real estate are also paid by the licensee. However, McDonald’s does receive a royalty which is a percentage of the sales. It also receives initial fees when a new restaurant is opened or when a new license is granted. The developmental license franchise structure is used by McDonald’s in more than 80 countries. There are around 6,900 restaurants that operate under this structure. The largest of such developmental licensees operates around 2,200 restaurants in 19 countries of Latin America and the Caribbean (McDonald’s Annual Report, 2017).
McDonald’s has an equity investment in a limited number of affiliated markets which are referred to as affiliates. In these markets too, the company receives a net percentage of the sales as royalty. McDonald’s completed the sales of its Hong Kong and China based businesses in 2017. However, it retained a 20% ownership in the entity that now holds the ownership of those businesses. Japan and China are the largest affiliated markets of McDonald’s with around 2,900 and 2,600 restaurants respectively. In total, there are around 5,800 McDonald’s restaurants in the foreign affiliated markets (McDonald’s Annual Report, 2017).
Risks in the Franchisee Model:
These were the three models that McDonald’s has used to run its system operations around the world. While it has brought the brand immense success, this business model is not without risks. McDonald’s system has more than 90% of its operations being carried out with the help of franchisees. This leaves the company heavily dependent on the franchisees. Moreover, the level of control and participation that the franchisees enjoy is very high. This leaves the company with limited control and influence over franchisee operations. Giving the franchisees enough scope to run their own operations and make their own decisions is a good practice with its own benefits but since the company’s influence gets limited, it also presents certain kind of risks. Now, the company’s success depends heavily on cooperation of the franchisees including the conventional franchisees, development licensees and the affiliates. Their financial success is also important for the success of the company (McDonald’s Annual Report, 2017).
The two main sources of income for McDonald’s are income from the franchisees and its own restaurants. Franchisee fees include the rents as well as the royalties which are a percentage of total sales and sales from its own restaurants. Sales from the company operated restaurants generate less revenue than the company receives in the form of fees from its franchised restaurants. The franchisees manage their business independently and the day to day operations of their restaurants are the responsibility of the company. So, the revenue that the company collects from the franchised restaurants depend on the ability of the franchises to grow their sales. Otherwise, if the franchises are not able to generate significant revenue then it would affect the company’s revenue as well. Moreover, if the sales trends for the franchisees grow worse then it could lead to restaurant closures as well as financial loss in the form of lower revenue. As McDonald’s continues to refranchise its restaurants, its dependence on franchisees and the potential effect of these factors which can affect revenue. Gaining the cooperation of franchisees is also very crucial to the success of the system. The system depends on the franchisees for several major things like implementation of key initiatives several of which may require financial investment. It requires the franchisees to remain closely aligned with the brand for the successful implementation of such initiatives. There are several critical decisions related to effective selection of franchisees, licensees and affiliates which affect the success of the system. Selecting the right franchisees helps at achieving the financial and other objectives of the brand.
Supply Chain Management at McDonald’s:
A large and global chain cannot be operated just through franchisees. You also need to have a strong network of suppliers to ensure the availability of quality raw materials. Apart from that while supply chain management is a source of competitive advantage, it is also a very challenging area. QSR industry is facing new challenges in terms of SCM including a need for higher transparency as well as consistent global standards. These challenges are not as easy to accomplish as they may look. You have to innovate continuously to find the right balance. Moreover, short term solutions do not always produce the right results. Consumer trends have changed fast in the 21st century. McDonald’s has also faced its fair share of challenges related to transparency and food quality and safety practices. Even if your supply chain is not your customers’ priority, how you are managing it is an important concern. There are challenges related to reputation that can emerge from not managing a healthy supply chain. The QSR industry has grown highly competitive. Increased competition demands that you do not just adopt best supply chain management practices but continuously revisit them and your standards to make improvements. Sustainability is also an important concern affecting both suppliers and companies. How you source your food and how you keep it till it is consumed, all these questions have become an important priority for QSR brands. Growing need for supply chain transparency and a generation of health conscious foodies, require your QSR brand to follow the best practices in terms of sourcing and storage.
McDonald’s has maintained a strong and global supply chain to source good quality food and other raw materials from. Neither the company, its franchisees, subsidiaries and nor the affiliates provide the food, paper, equipment or packaging. The entire supply chain is outsourced. There are several independent suppliers from whom the company and its franchisees food, packaging, equipment and other goods. However, having outsourced the supply chain the company enjoys greater flexibility which allows it to focus on operations management and innovation. The company does not own or operate warehouses or distribution centres either. Instead there are company approved and independently owned and operated distribution centres. These centres distribute food and supplies to the restaurants. To manage the storage and handling part, the company has trained its personnel properly. McDonald’s has managed long term relationships with its suppliers and distribution partners. Martin Brower is an important logistics partner for McDonald’s. The partnership started long back when Ray Kroc had founded his first restaurant. Stock inventory control at McDonald’s is a collaborative process between the company and Martin Brower. It takes place once at the end of the business day on a daily, weekly or monthly basis. The central ordering team forecasts future demand on the basis of stock levels. It generates orders to ensure every restaurant has the correct stock levels.
The company also ensures that its quality standards are consistently met. It has established quality centres all around the globe for the purpose of quality review. As a part of its supply chain management, McDonald’s conducts ongoing product reviews as well as on site supplier visits. Apart from that, there is a Food Safety Advisory council to manage the food safety aspect of McDonald’s supply chain. This council is made of technical and safety experts as well as supply chain specialists. Suppliers and outside academia are also a part of this council who advise on food safety practices. This helps the company manage all the aspects of food safety. Another area where the company has partnered with its suppliers is innovation. It works in tandem with its suppliers to encourage innovation and to ensure that the correct standards are closely followed. It also helps assure that the best practices are being followed and the system continuously improves on them. The goal of McDonald’s is to achieve a competitive and strong supply chain which helps it manage costs more efficiently. In this regard the company collaborates with suppliers and leverages its scale, infrastructure and risk management strategies to derive the best results. Over the longer term, this will help the management keep the costs of raw material, paper and equipment under control.
Global Restaurant Chain:
McDonald’s is a global chain of restaurants. By the end of 2017, the number of company operated restaurants was 3,133 whereas that of the franchised restaurants was 34,108. Total number of restaurants in the McDonald’s system at year end 2017 was 37,241 in 120 countries. U.S. is the leading market for McDonald’s which accounted for around 35% of the company’s revenue in 2017. The number of restaurants in U.S. by the end of 2017 was 14,036 (McDonald’s Annual Report, 2017). McDonald’s has divided its market into four types of markets. Apart from U.S., there are International lead markets, high growth markets as well as foundational markets. UK and Canada are the international lead markets whereas China and HongKong are high growth markets. A large global network of restaurants serves millions of customers every month. McDonald’s extensive global presence is also an important pillar of its business model. The number of total restaurants grew by around 340 in 2017 compared to 2016. Apart from re-franchising company owned restaurants, McDonald’s is also opening new restaurants to grow its presence and revenue.
Analysis of McDonald’s Operations Based on the 4Vs Model
Operations and operational processes are like the fundamental building blocks of organizations that decide the productivity of the organization and the quality of their output as well. Focusing on operational efficiency helps businesses find faster growth both domestically and internationally as well as maximize output. Many times, if the efficiency of processes is low then it is mainly because the company has adopted a poor operational design. Processes across business organizations and industries can differ significantly and that is why all processes need to be managed differently.
Some of the leading differences between various processes are due to the types of technologies and know-how involved. Different processes require different production equipment as well as different skills and know-how. However, apart from these things, the difference also lies in the nature of the demand for the products and services these processes produce. There are four particular characteristics of demand that have a significant impact on process management and which are as follows:
- The volume of the products and services produced
- Variety of products and services produced
- Variation in the demand for products and services.
- Degree of visibility that customers have of the production of products and services.
Volume of products and services:
Does the business being discussed produce a large amount of the same products and services or many items in small volumes? If the volume of output is high, it indicates repeatability or high-level familiarity of the process. Many times since a large business produces more and more of the same thing, it helps the business gain significant expertise in a particular area. The company may also acquire a significant competitive advantage compared to the smaller ones.
McDonald’s is among the largest fast-food brands in the world. The company has maintained a strong global presence through a large number of company-operated and franchised restaurants. The company is headquartered in Chicago, Illinois, United States. McDonald’s offers its customers a largely uniform menu globally apart from a few small regional variations. Over time, the company has also innovated its menu greatly. The operation processes of McDonald’s are generally low complexity processes. It is because the company is mainly involved in the production of food products including hamburgers and cheeseburgers, Big Mac, Quarter Pounder with Cheese, Filet-O-Fish, several chicken sandwiches, Chicken McNuggets, wraps, McDonald’s Fries, salads, oatmeal, shakes, McFlurry desserts, sundaes, soft serve cones, pies, soft drinks, coffee, McCafé beverages, and other beverages. However, apart from these food products, McDonald’s restaurants also serve some other products during limited-time promotions. In the case of the franchise-operated restaurant stores also, the company provides the required knowhow and training to run the stores and produce the menu items. Over time, the company has also gained significant expertise and efficiency in this area which has become a source of competitive advantage for it. The company has leveraged its competitive advantage to maintain its leading market position. The processes at McDonald’s are generally repetitive and the employees make and serve items from the menu on offer daily. There are no major changes in processes that can happen overnight.
Variety of Processes as well as products and services produced:
Variety denotes the various types of operational activities being performed by a company. The level of operational complexity can be higher in the case of the mixed model manufacturers that have to continuously switch between various processes. In that case, apart from a large range of inputs required for producing the output, the company would have to deal with the additional complexity of matching customer requirements to the products or services. The high variety processes are generally more costly as compared to the low variety processes. However, several businesses employ both high and low variety processes.
McDonald’s as a fast-food brand is mainly involved in low variety processes. The company sources its raw material from the local suppliers in various geographical markets. Apart from that, the company produces and serves food products locally inside the restaurants. There is no major switching between various processes and that allows the company to handle a large volume of orders without difficulty. As in the case of the restaurant industry, businesses are mostly engaged in low variety processes. These processes are also not very costly and the raw material can also be found easily in the local markets. McDonald’s employs a large number of talented employees to handle the low variety tasks.
Variation in demand of products and services:
In fact, this is one of the most challenging aspects of business operations. It is easier for businesses to manage the processes when the level of demand is predictably constant. However, when demand can fluctuate significantly then managing processes becomes a lot more complex. If demand is predictably constant, it is easier to gear resources to efficiently cater to the existing demand, Moreover, businesses can plan operational activities including marketing and sales or after-sales services in advance.
On the other hand, if the level of demand varies significantly or can be highly variable or even unpredictable, then resources will need to be adjusted over time. What is even worse is that if demand can soar unpredictably, extra resources need to be devoted to the process such that it provides a capacity cushion that can easily absorb the unexpected demand. Let’s take a simple example of seasonal variations in e-commerce. Demand for a large range of products surges suddenly during the festive season including gifts, electronics, home decor products as well as fashion products. Businesses like Amazon need to remain ready to cater to the fast surge in demand that happens during the festive season.
However, compared to the technology or retail businesses, the level of uncertainty or fluctuation in demand is generally much lower in the case of a fast-food brand. It is because the demand for fast food remains predictably constant during most seasons. Moreover, the demand for fast food does not significantly increase or decrease during the holiday season. However, since a large number of people are at their homes during their holidays, they would like to visit restaurants and that can lead to a small surge in demand during the holiday period. Apart from that the demand mostly remains predictably constant and companies do not have to face significant surges. There are certain factors that may cause a decline in demand for fast food as happened due to the spread of Coronavirus. Due to the spread of Coronavirus, a large number of restaurants had to be shut down and companies like McDonald’s were operating their businesses mainly to cater to the orders placed online or switched to drive-thru models. So, there are rare cases where demand can significantly rise or fall for a fast-food brand.
Visibility of processes:
This is also a rather complex aspect of business operations to grasp. It denotes that aspect of business operations that is easily visible to the customers. The businesses that work with consumers directly may have more visible processes. For example, the healthcare and retail industry have more visible processes. However, the same is not true about an automobile business. Customers generally do not have a very clear view of the production and distribution processes of automobile brands. They cannot peep into everything that goes on before the finalized cars reach the showrooms. This is the only aspect of automobile operations that they are generally familiar with. It is also true about businesses like Apple inc. However, when it comes to businesses like Amazon or even Facebook, these are highly customer-facing businesses or customers have very high visibility into their operations. These are also some businesses for which transparency and accountability matters a lot. Customer trust and business accountability have continued to gain significance in the modern era.
It is also applicable in the case of a fast-food brand like McDonald’s whose most visible aspect of business operations is its restaurant store operations. The company carries out its sales as well as marketing from its stores. Since store operations are the most visible aspect of its business, they also have the most significant influence on demand apart from product quality. It is why McDonald’s places a significant focus on customer experience and trains its employees to provide great customer service. Apart from that the company also strives to provide its customers with an in-store dining environment that helps them relax and enjoy their food.
Five Operational Performance Objectives
To run an organization, a well-defined set of operations performance objectives is essential. There are five basic performance objectives applicable to all types of business operations. These five basic operations objectives include cost, dependability, flexibility, quality, and speed. There are both internal and external implications of these five performance objectives. Moreover, the internal effects of these performance objectives have a definite impact on cost.
This is the first leading operational performance objective. Your customer’s expectations are the best measure of your quality and quality denotes performing according to your customers’ expectations. Quality also has a direct and significant effect on customer satisfaction. However, what quality implies for business varies on the basis of the industry it operates in. For example, quality acquires a different meaning for an automobile business and for a technology business. The same quality standards will not apply to the two businesses. Quality can acquire different meanings in different settings or industry environments. While in some industries, staff friendliness and customer service are the main measures of quality, product quality, and performance might be the main indicator of quality for another. However, no matter whatever industry a business belongs to, customers appreciate quality is a fact. Quality bears a direct and major influence on not just customer satisfaction but also on organizational performance. Nevertheless, quality is also related to a company’s image and apart from making certain things easier for the business like customer acquisition, it can also increase an organization’s profitability. Moreover, given the level of competition in today’s industry environment, quality has become all the more important for businesses. Growth for any business is not possible without quality and compromising quality in most cases leads to loss of customers and financial performance. This is just as true about the fast-food industry as any other industry. Consumers have become highly health-conscious and if fast food brands do not focus on the quality of food they serve, they will lose both their customers and reputation.
McDonald’s is a leading fast-food brand and it has acquired a strong brand image through its consistent focus on product quality as well as customer service. It has acquired a very large customer base by expanding its presence internationally and throughout the globe, it operates its business through the help of company-operated and franchised stores. However, quality is one of the most important concerns for McDonald’s since it directly affects the company’s reputation globally. It is why the company focuses on maintaining consistent quality standards throughout the system. Apart from food quality, the company also focuses on maintaining the highest quality standards in the other aspects of its business operations including supply chain management. The company sources only from reliable suppliers and the ones that offer the highest quality raw material whether they are supplying vegetarian products or non-vegetarian products. This has helped the company manage a strong reputation in the market and stay ahead of the rival fast-food brands. Quality for fast food brand like McDonald’s also means several more things like store environment, hygienic operations as well as customer service. The level of customer service that the company offers in its restaurants is also an important determinant of overall quality and affects the company’s image among its customers as well as the level of customer engagement. Overall, when it comes to quality, McDonald’s excels in nearly every area, and for quicker growth as well as market expansion, the company will need to sustain its focus on product quality.
Speed has also become an important factor affecting organizational performance. The growth of digital technology has led to a higher focus on both speed and efficiency. The speed at which products and services are delivered has become an important factor that affects customers’ perception of a brand. Speed has become a central concern like product quality, prices, and operational efficiency for nearly every industry. A large range of services is being bought and consumed online. People order products including food products online and some companies like Domino’s have also used speed as a pillar of their marketing strategy. Not just in manufacturing or services industries but in the other industries too speed matters more than ever. It is because companies need to deliver their products or services to the consumers in a timely manner.
For companies like McDonald’s too that serve their customers in their restaurants as well as take orders online, speed is an important concern. They have to serve fresh food to their customers whether customers dine in the restaurants or order their food from their homes. Due to the spread of Coronavirus, a large number of restaurants have opted for online delivery or drive through models. McDonald’s as well as several more restaurants switched to a drive-through model including Starbucks to cater to their customers’ needs during the pandemic. So, fast food brands have changed their operating models in order to suit the need of the time. However, speed is also an important concern in the supply chain operations of McDonald’s. The company has to source fresh raw materials and serve fresh items before their customers. It is why in areas like inventory management and restaurant operations as well as speed is very important for companies like McDonald’s.
Dependability also implies reliability or trust that customers place in a business. Brand equity is a leading strength for any business and companies take it more seriously than anything else in order to find market growth. How dependable your business is or how much your customers trust your business decides your overall influence in the industry as well as the markets where your business operates. There are a large number of factors that affect reliability or dependability in each industry. For example, it is the quality of the product and its efficiency that matters in one industry, in the other it is the product design apart from product quality as well as how well a company markets itself that affect dependability. Brands must only make promises that they can keep since if your product or services fall below their expectations, it will hurt your brand image and reduce your dependability. The kind of customer experience that you offer to your customers also affects your customer experience. especially, when a large number of products and services are being sold online and the level of human interaction between customers and sellers has reduced, customer experience has a significant and direct impact on the dependability of businesses. Moreover, the focus on dependability must also remain due to the fact that the level of competition in most industries is very high.
McDonald’s has focused on building a strong global brand with a strong image. The company has been highly successful at growing its influence in the fast food industry through its focus on product quality and marketing. Its growth is a direct result of a consistent focus on product quality, customer service, and marketing. Apart from product quality, other aspects of quality that matter in the case of McDonald’s include customer service in-store environment as well as quality marketing. Building a dependable brand requires focus upon all these aspects of business operations and consistent efforts to build trustful relationships with customers. In the era of digital marketing and digital shopping, companies have to focus more than ever on customer relationships to remain a dependable brand in the eyes of the customers. The reason that McDonald’s has a large customer base is that the company is trusted by millions throughout the world.
Flexibility means the ability to change what, how, and when operations do. There are four types of flexibility in general that are applicable to business operations. They include product/service flexibility, mix flexibility, volume flexibility, and delivery flexibility. Product/ service flexibility means the ability to introduce new or customized products or services. Mix flexibility means the ability to widen the product/services mix to cater to the customer needs better. Volume flexibility denotes the ability to change the output level to produce different quantities of products/services over time. Delivery flexibility on the other hand means the ability to change the timing of delivery. Overall, flexibility is an important aspect of operational performance and superior flexibility also denotes superior performance. Flexibility can also acquire different meanings in different industrial environments. For example, in a healthcare environment, the ability to introduce new types of treatment and to widen the range of available treatments or the ability to adjust more patients and reschedule appointments can all be a sign of flexibility. However, in the case of the automobile or retail industry, flexibility can mean different things.
In the case of the fast-food industry, flexibility is important since trends change faster and brands have to cater to changing market trends and customer demand. McDonald’s is also highly flexible in most aspects of the business. The company has established a global business empire that includes both company-operated and franchised stores. This helps the company operate on a global scale with a very high level of flexibility. In other aspects of business operations also the company is highly flexible including store operations as well as supply chain and delivery services. Sourcing at the local level allows the company to serve fresh food and continue its store operations flexibly. Moreover, the resilience of their business models was tested during the pandemic due to which a large number of fast-food brands including McDonald’s adopted drive-thru models.
Cost in terms of operations performance mainly means the operating expenses incurred by businesses. However, the proportion of various operating costs can vary from industry to industry. For example, staffing costs may represent the largest costs for a transportation company but the costs of raw material may be the largest group of operating costs for an automobile brand. In the case of most companies, if their operating expenses are low, they can also keep the prices low for their customers. Not all companies compete in the market on the basis of price. Some companies compete on product quality, other companies compete on the basis of customer service and others on the basis of marketing or all of these factors. However, even the companies that do not compete on the basis of prices, they too are interested in keeping their operational costs low. If a company reduces its operating expenses that will help it increase its profits because a penny saved equals a penny gained. The way in which operations need to be managed in order to keep operating expenses low requires focusing on areas where the company incurs the highest operating expenses.
The largest category of expenses for McDonald’s is the expenses it incurs in running company-operated stores. Other leading operating expenses of the company include occupancy expenses related to the franchised restaurants. The company has been able to reduce its operating expenses over the years through a focus on growing the efficiency of its operating model and by reducing necessary expenses. In 2019, the operating expenses of the company equaled $12 billion.
McDonald’s has kept growing popular over years. However, McDonald’s is facing a large number of challenges concerning food quality, transparency and management of its franchise system. Apart from the high level competition in the QSR industry, the demand for transparency has also grown higher. McDonald’s is working to tackle these challenges as well. It publishes information related to its sourcing practices and suppliers on its website. Its franchisees enjoy a lot of freedom in terms of decision making and control over the operations of their restaurants. They also receive a lot of support from the brand. However, the success of the company also depends on the level of cooperation from the franchisees and their reinvestment in their businesses. There are several inherent risks in a franchisee based business model. Apart from higher dependence on the franchisees for revenue, there is also the risk of failure of initiatives. As McDonald’s continues to re-franchise its restaurants, the company’s dependence on the franchisees will grow higher. However, despite these risks McDonald’s has remained popular. Despite being full of risks, its business model has worked and is generating an impressive revenue each year. For last some years, as the company has continued re-franchising its owned restaurants, its revenue has declined. However, the share of licensed restaurants in the net revenue is also growing bigger with time.
- MCDONALD’S ANNUAL REPORT 2017.