No one will argue that the golden arches is as much of an American icon as apple pie and baseball. The McDonalds sign is one of the most recognized logos in American and now it is quickly becoming one of the most recognized in the world. McDonald's got its beginning in the late 1940s when Dick and Mac McDonalds were searching for a way to improve their little drive-in restaurant in San Bernardino, California, U.S.A. They invented an entirely new concept based upon speed service, low prices, and big volumes. Its success spread quickly, in 1952 they had more than 300 franchising inquiries a month from all over the country. McDonald's is now the largest and best-known food service retailer and one of the two best-known and powerful brands in the market. It now operates more than 24,500 restaurants in 115 countries (Love, 1992).
The global market potential is still huge: yet on any day, but McDonald's still serves less than one percent of the world's population (Mcdonalds.com). The restaurant chain plans to expand their leadership position through convenience, superior value and excellent operations. There is still a large untapped market and McDonald's plans to capture it.
The Company operates in the food service industry segment and primarily operates quick-service restaurant businesses under the McDonald's brand. Approximately 80% of McDonald's restaurants and more than 80% of the Systemwide sales of McDonald's restaurants are in eight global markets: Australia, Brazil, Canada, France, Germany, Japan, the United Kingdom and the United States (mcdonalds.com, 2002)..
To capture a larger market share, the Company also operates other restaurant concepts under its Partner Brands: Aroma Cafe, Boston Market, Chipotle and Donatos Pizzeria. In addition, the Company has a minority ownership in Pret A Manger (mcdonalds.com, 2002)..
McDonald's Market Segment
The first step in developing a marketing strategy is to understand your customers. The key to success is the ability to react to their changing needs and the changing conditions in the market. This has been a key to McDonald's success. Customer research tells marketers how McDonald's is perceived and about trends that are taking place in the market. Research is conducted in the local area of our restaurants, as well as, into the general market environment, and into specific areas of the business, such as children, seniors and persons on special diets.
Another key to successful marketing is a thorough understanding of major competitors.. The Total Eating Out Market gives the broadest competitive context and includes all restaurants, hotels, pubs, and any other outlet where people eat. The Quick Service Restaurant sector includes all the obvious competition and also fish and chip shops, and sandwich shops, and any other outlet where food is served quickly. The final sector and most closely related sector that we focus on is defined as the Burger House Sector. This looks only at restaurants serving hamburgers including Burger King, Wimpy, Wendy's and all independent burger bars (mcdonalds.com, 2002). This is their most closely related sector and the one most closely watched. McDonald's exists in an market sector within a market sector. It is necessary to keep tabs on the close competition as well as the general market.
Competition and Market Share
McDonald's remains the largest fast-food player with more than 12,000 U.S. restaurants and 21,000 worldwide. McDonald's is still the biggest player in this industry with a 40% market share. By comparison, Burger King, has about a 19% market share and Wendy's International Inc. about 12% (Commins, 1997).
Price promotions have been at the center of the strategy for competitor Burger King, which offers its Whopper hamburgers for 99 cents in some markets. Wendy's has been trying to sell its product on taste, and most recently launched a line of stuffed pita sandwiches. McDonald's tried to improve up its own menu in 1997 with the Arch Deluxe hamburger that was aimed at adult consumers (Commins, 1997)..
Another major competitor is Chick-fil-A. Chick-fil-A's attraction is not price or convenience, but the taste of their chicken sandwiches, billed as a "healthier" alternative to ham- burgers. When com- pared to giants such as McDonald's, Burger King and Wendy's, Chick-fil- A is outnumbered in store count nearly 4 to 1 and outspent in media tenfold (Commins, 1997).
Each of these chains has already carved distinct images in the minds of consumers. The vast majority of fast food outlets sell hamburgers as their primary food product, and usually resort to price promotions and movie tie-ins to attract customers. This competition has had a profound effect on McDonald's business (Commins, 1997)..
The most important factor in McDonald's domination of the fast food segment is its efficient management of it value chain. McDonald's operates in an international arena, and it must meet the challenge of consistency through out its diverse locations. A Big Mac in the UK must taste the same as a Big Mac in New York. McDonald's uses local suppliers a much as possible. This helps to keep their costs down and lessens the likelihood of a breakdown in supply chain, should one of their big distributors suffer a catastrophy. A majority of the supply chain is in the big, distributors, but not all of it.
The Value chain breaks down the firm into its strategically relevant activities, in order to understand the behavior of costs and the existing or potential sources of differentiation. A firm gains competitive advantage by performing these strategically important activities more cheaply or better than its rivals. For a company which feeds some 38 millions clients every day, finding a reliable quality supplies is a major factor for success.
McDonald's distributors are strategically to be accessible to the each restaurant and carry practically everything, from meat and potatoes to Lightbulbs. The following companies are the major suppliers for McDonald's: McKey Food Service (Hamburger patties, bacon and pork products), Golden West Foods Ltd. (Buns, ketchup, Coca-Cola products, milk shake syrups, sundae toppings, multi-temperature distribution), Sun Valley Foods (Chicken products), McCain Foods (GB) Ltd. (French fries and hash browns), Coldwater Seafood Ltd. (Fish products), Unigate Dairies (Milk products), Ashby Dairies (Milk products), Fisher Chilled Foods (Lettuce, onions, tomatoes), Kitchen Range Foods (Fruit pies, donuts, vegetable patties), Coca Cola (Soft drinks), and Dairy Produce Packers (Cheese slices). McDonald's has a supply chain of only a few suppliers. This helps to regulate quality, but does place them at a considerable risk as if one supplier fails or suffers a catastrophy, there is no substitute. Most of these companies are not in the public eye and rely on the success of McDonald's to carry them (Love, 1992).
McDonald's is an example of good value chain management, but it is always looking for ways to improve. McDonald's is increasingly using its leverage to capitalize upon global purchasing practices. New restaurants throughout Europe feature tabletops from Belgium; chairs, floors and tiles from Italy; doors from Austria etc. all using low-cost, quality suppliers (Love, 1992).
The most successful factor of McDonald's value chain is its use of forward integration. Customers can be integrated into the downstream supply chain, as well as the upstream supply chin. PepsiCo did this when it began acquiring local bottlers. McDonald's practices the same with its extensive franchise network. Forward integration ensures a ready and willing outlet for its products (Malberg, 2002).
Forward integration also allows companies to link already existing control over the production process with the way their products are sold. If creating a brand is an important differentiating strategy to the company, then forward integration may assist the process. (Malberg, 2002). Differentiating one company from the competition comes from integrating part of your customers' needs into your operation (industryweek.com, 2002).
Another hallmark of McDonalds is it ability to let individual franchise managers use their business savvy to capture local markets. The manager feels a part of the business and this increases their loyalty and drive. Companies can raise their overall value as they increase the ownership of processes related to their product. Usually this is only considered when critical suppliers are late or raise prices. Vertical integration lessens the risk of cost increases, disruption of critical material supplies, and quality problems. It has to do with the control we exert over successive stages of the entire production process. As risk falls, corporate value increases (Malberg, 2002).
Financial Statement Analysis
The Company uses free cash flow and credit capacity to repurchase shares, as they believe this enhances shareholder value. During 2001, the Company purchased 36.1 million shares for approximately $1.1 billion. Cumulative share purchases over the past five years totaled $6.0 billion or 187.4 million shares. They expect to purchase shares under this program over the next four years, depending on free cash flow.
Given the Company's historically healthy returns on equity and assets, management believes it is wise to reinvest a significant portion of earnings back into the business and use free cash flow for share repurchases. (mcdonalds.com,2002).