McDonald’s Strategic Analysis

Strategic Analysis of McDonald’s Corporation

#INTRODUCTION:

McDonald's

McDonald’s is a leading name in the world of fast food. It is a global brand operating across more than 100 countries. McDonald’s is primarily a franchisor with franchisees owning and operating more than 90% of its restaurants. Its goal is to become 95% franchised over the longer term. Operating across more than 100 countries, the brand serves locally relevant quality food and beverages at various price points. The QSR industry has grown highly competitive in the recent years. However, McDonalds remains the most popular brand due to its quality and variety of food and extensive presence globally. Although its menu differs across geographies based on local taste and preferences, the brand still serves a substantially uniform menu. Changes are made to the menu to suit the local taste. Apart from that it tests new products regularly to make its menu exciting. The number of QSR brands in the global fast food industry has grown high and McDonald’s has continued to compete on the basis of price, quality customer convenience and flavour.

According to  research by Euromonitor International, the IEO (Informal Eating out Segment) which constitutes the primary competition of McDonald’s and includes quick-service eating establishments, casual dining full-service restaurants, street stalls or kiosks, cafés,100% home delivery/takeaway providers, specialist coffee shops, self-service cafeterias and juice/smoothie bars was composed of 9 million outlets in 2016 and generated 1.2 trillion in sales. McDonald’s systemwide sales accounted for 7% of the entire sales generated by the IEO segment while its eating out establishments only constituted 0.4% of the entire 9 million outlets.  Research and data collected by Euro Monitor International for 2016 also showed that the entire restaurant industry was composed of 19 million outlets and generated 2.4 trillion dollars in sales.

McDonald’s systemwide sales accounted for 3.5% of the entire restaurant industry sales while its outlets were only 0.2% of the total outlets. As of year end 2017, McDonald’s employed 235,000 employees. However, the competition from other small and big brands in the restaurant industry has kept growing intense and continued success of McDonald’s depends upon how well it is able to innovate its menu, prices and style of customer service.

Of the 37,241 McDonald’s restaurants that the brand operated in 2017, in 120 countries, 34,108 were franchised and 3,133 were operated by the company. While the brand’s systemwide sales increased 7%, consolidated revenues decreased 7%. Global comparable sales of McDonald’s increased by 5.3% and guest count increased by 1.9%.  Moreover the company returned 7.7 Billion dollars to the shareholders through share repurchases and dividends for the year.

– McDonalds 2017 Stats – 
Revenue 22820 Mn $
Operating Income9553 Mn $
Net Income5192 Mn $
Advertising costs Mn $532.9 Mn $
Number of employees235000
Number of restaurants37241

External Analysis of the restaurant industry:

As per the Euro Monitor International report for 2016, the entire restaurant industry had 19 million outlets. The total amount that it generated in sales equalled 2.4 trillion dollars.  The IEO (Informal Eating Out) segment on the other hand had 9 million outlets and generated 1.2 trillion dollars in sales. Another report by Nation restaurant Association showed that the US restaurant industry had sales worth 799 Billion dollars in 2016. This was around 33 billion dollars higher than the previous year. The shape and condition of the US restaurant industry has continued to improve over the years and even during the recession, its performance was fine. It was because the industry was quick to adjust its menu and prices. The number of restaurant locations in US is now higher than 1 million. It is also a large employer and employs more than 14.7 Million people alone. It is expected that  by the year 2027, it would have created 1.6 million more jobs in USA. The restaurant workforce of USA constitutes 10% of its entire workforce.

Moreover,

9 out of the ten restaurant managers currently had started at the entry level. 

8 out of 10 restaurant owners had started their careers as entry level employees.

9 out of every ten restaurants in US have less than 50 employees.

7 out of ten restaurants in US are single unit operations.

In this way, there performance the US restaurant industry is expected to keep improving over the coming years.

#SWOT Analysis of McDonald’s:

  • Strengths:

Brand image and equity:

The most important strength of a global brand is its brand image and brand equity. McDonald’s is very popular in the global market and in various corners of the world. It is because the brand has been able to build very high level of trust among its customers.  It is a well known name in most corners of the world and brand image is helpful in terms of marketing as well as sales both. The stronger the brand image of a brand, the higher are its sales and profits. In case of McDonald’s it is well known as the leading fast food brand of the world.

Global presence:

Another important strength of McDonald’s is its global presence. The brand sells across more than 100 countries through its franchised and company owned restaurants.   The number of total systemwide restaurants of Mcdonalds operational across 120 countries reached 37,241 in 2017. Of these 34,108 were franchised and 3133 were operated by the company.

Innovative menu:

Another important strength of the brand is its innovative menu. The brand serves a diverse menu that includes hamburgers and cheeseburgers, Big Mac, Quarter Pounder with Cheese, Filet-O-Fish, several chicken sandwiches, Chicken McNuggets, wraps, french fries, salads, oatmeal, shakes, McFlurry desserts, sundaes, soft serve cones, pies, soft drinks, coffee, McCafé beverages and other beverages. In addition, the restaurants sell a variety of other products during limited-time promotions. (Annual report, 2017)

Customer service:

McDonald’s places heavy focus on customer service. It helps at attracting new as well as retaining old customers. Apart from courteous staff, the brand also uses a variety of technologies to serve and engage its customers.

Investment in digital technology:

the brand is investing heavily in new technologies to improve its level of customer service as well as to engage its customers. It uses a variety of digital solutions to serve its customers including point of sale, and other in-store systems or platforms.

Excellent supply chain management:

Another important strength of McDonald’s is its supply chain management.  McDonald’s sources its raw material from suppliers around the world. However, it does work to manage its quality standards and enforces them with the help of quality teams. It has quality centres around the world that help ensure good quality raw materials being sourced from its supply chain.

  • Weaknesses:

Franchisee issues: The McDonald’s system is 90% franchisee based which is bound to give rise to franchisee related issues. Due to such a large system being heavily dependent on franchisees quality control sometimes become difficult. A large number of McDonald’s restaurants had to be closed in India only because the brand could not manage its franchisees there well.

Food Quality related issues:

Food quality related issues also erupt from time to time across the McDonald’s system. In 2017, a large number of McDonald’s restaurants in New Delhi India were found to be serving low quality food and had to be shut down.

  • Opportunties:

Product innovation:

The demographics of the global population have changed and this offers opportunities for menu innovation. McDonald’s must design its menu as per the taste of the millennial regeneration and serve healthier products. the millennial generation is highly health conscious and wants healthier products. Another key factor is affordability. Including more low cost items on the menu can also prove profitable for the brand and attract higher sales.

Market expansion in Asian markets:

The Asian markets are among the fastest growing in the world and offer some major opportunities of growing sales and profits. Both India and China are major markets which can be penetrated deeper. however, the brand will have to focus on managing its quality there and better management of franchisees in these regions.

Customer engagement opportunities:

The millennial generation should be engaged using modern technologies and other various methods for higher retention level. Millennials are a highly etch save generation  who want affordable products and  good customer service. However, several brands are also including modern technologies like AI and other marketing methods to reach out to the millennials and engage them. Apart form social media, there are other tools and methods also to bring the millennial consumers closer.

  • Threats:

Legal compliance:

Compliance issues have grown bigger in the 21st century which is because of the higher level of legal and political  regulation of international businesses. Non compliance results in heft fines an can cause large financial losses. Moreover, there are so many laws related to food safety, health, quality and labor that brands have to manage local compliance teams for each region they are operating in. This also leads to higher costs and issues.

Heavy competition:

Competition in the QSR industry has kept rising and it has led to higher marketing and customer service costs for brands.  the fast food industry is populated with several global and local brands. each brand is quite aggressive about competition and uses so many strategies like seasonal discounts and offers to lure customers away from the rival brands. This has led to higher marketing and promotion costs as well as research and development costs for international brands like McDonalds.

Management structure:

Managing a large and international business like McDonalds is not an easy task. It is especially so when the brand is heavily franchisee based. McDonalds’ 90% restaurants are operated by franchisees. the brand plans to turn it into 95% operated by franchisees.  This has been leading to management and control related issues for McDonalds.

Rising health  consciousness and health related criticism:

Globally, health consciousness is rising and people want  healthier food. the Millennial generation especially is highly health conscious and wants only affordable and good food. MCdoandls is known for its calorie heavy menu and has also received criticism in the past for its unhealthy food. Rising health consciousness and food quality related criticism can hurt the sales of fast food brands and it is why they need to focus on food quality and a healthier menu.

#PESTEL Analysis of McDonald’s 

Political :

Political factors have kept growing in importance in the 21st century. Around the world the government oversight and regulation of businesses has grown. Particularly, it is the international brands that are being most affected by the increased control. McDonalds is also subject to severe regulations, control and oversight by the government authorities. the political factors are also exalted to economic factors and an unstable political environment can cause business and supply chain disruption.  In the way, political factors can affect business profitability.

Economic:

Economic factors have a direct effect on the sales and profitability of businesses. the world has been through  recession some years ago and during such times of low economic activity, employment level falls. This in turn leads to lower consumer spending because of lower disposable income. Such situations can affect restaurant businesses and bring their sales and profitability low. the US restaurant industry has seen every fast growth once the recession passed. As the US economy retrained in track , it eld to higher employment and higher spending by the consumers. This has proved good for all the big and small restaurant brands operational in the US market including Mcdonalds.

Social:

The social factors have also kept growing in relevance in the 21st century. It is because social factors now play an increasingly important role in deciding the fate of the businesses. Competition in every industry has increased and only the brands that  keep their customers’ taste and preferences in mind are being successful. Society is at the centre of the entire picture and brands have to keep in mind the changing social trends. the demographic composition of the world population has changed a lot in the recent years. It is the millennial generation that  constitutes the largest section of the global population.  Brands have to design their food menu with their preferences as priority. Sociocultural factors have an increasingly important role in the context of marketing and business strategy both.

Technological:

Technology is heavily important for businesses to survive in the 21st century. The brands that have invested more in technology are ahead of the others in market. McDonalds is also making heavy investment in technology for successful marketing and growth of its brand.  McDonalds is increasingly relying on technologies for service and food delivery. Technological systems like point of sale, and other in store systems or platforms and technologies that support McDonald’s digital and delivery solutions. There are other technologies also that McDonalds uses to collaborate internally out externally with its partners. The role of IT and digital technologies has kept growing in the McDonalds system. This shows the growing role of technology in the success of the fast food industry.

Environmental:

Environmental factors have become very important in the business industry given that  societies and governments are increasingly conscious of the environmental impact of businesses.  Increased focus government authorities on the environmental matters can affect McDonalds both directly and indirectly. It is why McDonalds is focusing on sustainability and trying to achieve higher sustainability in the long term. 

Legal:

Legal factors are also just as important for successfully doing business in the 21st century. Legal compliance is now heavily important to find success in 21st century. Non-compliance in any industry results in hefty fines and losses. Even in the fast food industry the role of law is important. there are so many laws from health quality related laws that can affect fast food businesses. McDonalds operates in more than 100 countries and has to remain cautious about compliance so as to not become a target of law.

#VRIO Analysis of McDonalds

Resources and capabilities of McDonalds:

Brand image and equity: One major resource of McDonalds that is above is its brand image and brand equity. Brand image and equity help with marketing of the brand and help to derive better results from its marketing efforts. trust is important in this era and McDonalds has got a strong brand image which shows trust among its customers.

Global Presence: McDonalds is present in around 120 countries. 90% of its restaurants are operated by franchisees. Global presence is an important capability which means a large customer base and higher sales and profits. 

HR & Culture: The HR management and culture of an organization are important resources and every organization including McDonalds has its own culture. As of 2017, McDonalds employed around 235000 employees.

Supply chain and technology: McDonalds has a well managed supply chain which is among one of its major strengths. Apart from that the brand has invested in technology down its supply chain as well as in other processes including internal and external communication as well as customer service.

Innovative menu:

McDonalds has got an innovative menu which is largely uniform with small variations over the globe from market to market and region to region. these small variations are made in order to suit the taste of the local customers.

Customer loyalty:

McDonalds has a large customer base and enjoys very high level of customer loyalty.  Having a large and loyal customer base is an important strength that can result in higher sales and profits. Customer loyalty can also be  major advantage in times of economic uncertainty.

Resource/capability

Valuable

Rare

Inimitable

Exploited

Implication

Brand image

Yes

Yes

Yes

Yes

Competitive Advantage

Global presence

Yes

No

No

Yes

Temporary advantage

HR&Culture

Yes

Yes

No

Yes

Temporary advantage

Supply chain

Yes

Yes

Yes

Yes

Competitive advantage

Customer loyalty

Yes

No

Yes

Yes

temporary advantage

#Five Forces Analysis of McDonalds:

Bargaining power of suppliers:

The bargaining power of most of McDonalds suppliers is low which is because of their small size and being scattered globally. McDonalds sources its raw material from all around the world.  However, for most of its raw material it has several options or several suppliers to source from.  There are very few suppliers that cannot be replaced or can be replaced with difficulty which gives them some bargaining power. In case of most their small size and isolated position does not give them much bargaining power.

Bargaining power of customers:

The bargaining power of customers in the 21st century  has grown very high. There are several reasons behind it apart from the increased competition. the 21st century customer is equipped with information as well as technology and is also highly health conscious. Not just this there are so many brands in the industry competing for market share. Each brand is trying to snatch market share away from its rivals. Fast food brand are investing a lot in marketing as well as customer service. Since each customer is valuable and none of the brands want to lose even a single one the focus has shifted towards customer and brands are trying to be more and more customer oriented. While this has intensified the race on the one hand, on the other it has given customers higher bargaining power.

Threat of substitute products:

the threat of substitute products for McDonalds is moderate. There are several brands that are offering similar products or have similar menu items. The threat is not just from the international brands but also from the local and smaller brands. However, the threat gets to be moderated by the brand image as well as  large market share of the McDonalds. the overall threat from substitute products and brands remains moderate.

Threat of new entrants:

The threat from new entrants for McDonalds is also moderate. while there are no significant barriers to entry, still to grow into  major brand is not easy because there is still a large investment in marketing as well as having skilled human resources as well s having the other infrastructure required for growing into a large and global brand. McDonalds is a large and global brands with a string brand image. It also holds the largest market share n the fast food industry. These factors moderate the threat from any new brand.

Competitive rivalry among the existing brands:

The level of competitive rivalry among the existing brands in the fast food industry is very high. the number of international brands in the fast food industry has kept growing. This has kept adding to the intensity of rivalry in the fast food industry. Moreover, from Dominos to Burger King there are several large and influential brands that are aggressively competing for market share in the fast food industry. There are other factors too leading to higher competition among the rival brands. Overall the level of rivalry among the existing brands is very high.

#Core Competencies of McDonalds:

Some of the main core competencies of McDonalds include :

brand image

– food variety and quality

– global presence

– customer service

– Economies of scale

McDonalds’ brand image is one major competence that gives the brand extra leverage in terms of marketing as well as sales. It has a strong brand image in the market that  it has built over the years and continues to strengthen through new campaigns and a smart strategy. It is one of the fast food brands that serves the largest variety. However, still it serves a rather uniform menu globally with minor local variations to suit the local taste.  Moreover, the brand is present in around 120 countries which also allows the brand access to a very large customer base. Its global parsec is major competence that  has led to growth in sales and profits. McDonalds is already known for customer service. However, to make such large scale operations possible as profitably one must have economies of  scale as in the case of McDonalds. McD has some important competencies including a well managed supply chain and a pool of talented employees. All these competencies have enabled it to grow its market share and customer base.

#McDonalds Value Chain Analysis

The value chain includes all the activities from product conception to marketing and after sales service. Managing the value chain well allows to eradicate performance bottlenecks as well as add extra value to the product and production process. Mcdonalds has managed its value chain skilfully. Here is how:

Primary activities: This is a description of the primary activities in the value chain of McDonalds.

Inbound logistics: McDonalds has managed a large supply chain from which it sources raw materials. Materials sourced from these suppliers are bright to the McDonalds distribution centres worldwide.

Operations: McDonalds is operational in around 120 countries. However, a  very large part of the McDonalds system around 90% is run by franchisees.

Outbound logistics: McDonalds has approved a large number of distributors which are independently owned and operated. these distribution centres distribute products and supplies to Mcdonalds restaurants globally.

Marketing & Sales:

“McDonald’s global brand is well known. Marketing, promotional and public relations activities are designed to promote McDonald’s brand and differentiate the Company from competitors. Marketing and promotional efforts focus on value, quality, food taste, menu choice, nutrition, convenience and the customer experience”. (McDonalds Annual report 2017)

Support activities: This is a description of the support activities in McDonalds’ value chain.

Technology: A smart value chain is not possible in the 21st century without investing in technology.

HRM: In the 21st century, financial growth is not possible without investing in human resources. By the year end 2017, the company had 2,35000 employees in total which included the employees working in its offices as well as in the company operated restaurants.

Procurement:

The company procures raw material from suppliers around the world through its procurement teams.

Firm Infrastructure: McDonalds has maintained a very large firm infrastructure that includes its offices as well as other important properties. It both owns and leases properties primarily related to the company owed and operated restaurants.

#Financial Analysis:

McDonalds six years financial summary
Source: McDonalds Annual Report 2017

The total revenue of McDonalds has continued to fall from 2013 onwards. In 2016, the total revenue of the brand was 24,622 million dollars which fell to 22,820 million dollars. However, both operating income and net income of the brand have kept rising during the last three years. The operating income rose from 7,745 million dollars in 2016 to 9,553 million dollars in 2017. The net income of McDonalds rose from 4687 million dollars to 5,192 million dollars. Total assets of McDonalds rose from 31,024 million dollars to 33,804 million dollars. Total debt also rose during this period from 25,956 to 29,536 million dollars.

 

Suggestions:

– The focus of McDonalds must remain on both reputation management and menu innovation. While on the one hand any negative news has the potential to hurt sales and reputation a healthy and innovative menu has become essential to retain the millennial customers.

– In the recent years McDonalds has reduced the expenditure on marketing and promotion. While most brands are focusing more on marketing and promotions, reducing its efforts in this area can have a negative effect on sales. McDonalds must again focus on its marketing campaigns to increase its sales.

– McDonalds needs to focus on managing its franchisees strategically. The number of franchisees in McDonalds system has continued to increase. However, McDonalds needs to rethink its management structure for better management of its franchisees.

– It must focus on employee development and management.

Sources:

https://economictimes.indiatimes.com/industry/cons-products/food/why-mcdonalds-had-to-shutter-outlets-in-delhi/articleshow/59402309.cms

https://www.restaurant.org/News-Research/Research/Facts-at-a-Glance

https://corporate.mcdonalds.com/content/dam/gwscorp/investor-relations-content/annual-reports/McDonald%27s%202017%20Annual%20Report.pdf

Abhijeet Pratap

I am Abhijeet Pratap, editor of notesmatic. I am an MBA with marketing (major). Apart from writing on various topics in business management, marketing and English literature, I like to read and write about technology.