Mcdonalds Works Within the Quick Service Industry,

McDonalds works within the quick service industry, where they have a differentiated position (Mantkelow, 2014). Although low price is a starting point for firms in the industry, McDonald's is not the lowest-price competitor in the business. They try to use branding as a means of creating differentiation for their products, many of which have trademarks for their own (i.e. Big Mac, Quarter Pounder, McCafe). The company's strategy therefore relies heavily on a two-pronged approach: Spend heavily on marketing and invest in cost-saving measures on the operations and supply chain side.

With a unified product/service operation worldwide, McDonalds operates with a geographic organizational structure -- USA, Europe, APMEA, Canada/Latin America, overlaid by Corporate, which has divisions for HR, Finance, Global Marketing, Legal, Operations and "Chief Restaurant Officer." This allows the company to focus on adapting the product/service offering to the individual local contexts while maintaining a high level of brand consistency around the world. That combination of consistency and local adaptability is essential to maintaining the strength of the McDonalds brand. A recent shift in branding strategy began to allow for adaptations only in products, with the brand receiving more universal treatment, the result being universal slogans to create a high level of brand consistency based on simple consumer responses to the brand (Interbrand, 2014).

Slide Three: In 2009, McDonalds remains a leader in the QSR industry. The company is experiencing growth during recessionary times, possibly as a result of consumers trading down. This highlights the power of McDonalds' brand position, but reflects poorly on its ability to trade up in good economic times. The company's financials remain strong -- it had poor translation effects on its income statement, but most of those operating profits were reinvested in local markets, so this was not a transaction-level forex exposure. This view is bolstered by steady revenue and profit growth recorded over the past few years, noting that only translation effects hurt this growth on the statements. The company's strong market cap indicates its size over its competitors.

Slide Four: While McDonalds is dominant in lunch and dinner, Starbucks is a threat to its breakfast business in particular. Starbucks trades in a highly popular drug (caffeine), and uses this to get customers in the door in the mornings. That in turn allows them to sell breakfast items, rendering Starbucks a significant competitive threat to all other quick service chains. QSRs value breakfast as a means of generating sales at hours when they would otherwise be closed but incurring fixed costs. McDonalds has long been the leader in breakfast with the Egg McMuffin (Cardenal, 2014), but consumers are starting to view coffee quality as a key determinant in their breakfast purchase decisions -- important since many consumers only want coffee in the morning. Food is secondary, so being the best in food isn't as valuable as being best in coffee.

Slide Five: One of the unusual strengths of McDonalds is its exceptional pricing power. For a company that does business in a low cost industry, it is able to price in a way that makes it somewhat more expensive than many competitors, giving it a 20% net margin. If you look at low cost players in other businesses -- say Costco or Wal-Mart -- they cannot come anywhere near this. McDonalds has cultivated tremendous pricing power for itself through its brand, in order to deliver a 20% net margin consistently. Indeed, the brand has an estimated value of $33 billion, one of the top ten most valuable brands in the world and the most valuable brand in its industry. The most powerful brand in the business helps McDonalds when opening new markets, and it helps with that pricing power. Another strength for McDonalds is that it is in sound financial condition. While the health of its competitors has fluctuated over the years, McDonalds almost always has sound financial condition, right now with a current ratio of 1.14.

The be fair, a company as successful as McDonalds does not have many weaknesses for competitors to exploit. The brand growth has been sluggish, ranking 51st overall among major global brands. While this might just reflect the strength of its brand (growth is easier when you are smaller), it also means competitors are closing the gap. The company also suffered from significant translation losses of $642 million in Q1 FY09. It is easy to overstate the importance of translation losses, however, because shareholders notice them, but the reality is that McDonalds plows back foreign earnings to grow those markets, and did not take transaction losses on very much of that money. Where there is real operating weakness, however, is in the Canada/Latin America region. In FY08, this region lost $43.6 million, which was a relatively low loss. While Canada is a mature market, McDonalds should be expanding rapidly in Latin American and enjoying tremendous success, but it is not. This has to be a concern.

Slide Six: There are many opportunities for McDonalds, even as successful as it is. APMEA growth was at 17.5% in FY08, a very high level. This hints at the tremendous potential of the region. Asia Pacific is an excellent opportunity, and while the Middle East and Africa are smaller markets, there are good opportunities there as well, at least in the major cities. That said China has actually been a source of struggle. Doubtlessly heralded as a great opportunity for the company, China has proven a challenge. McDonalds was forced to cut prices by 40% recently in order to spur demand there, eating into profits substantially (given a 20% net margin, the company is probably taking a loss to remain in that market). Another opportunity exists to improve internal efficiency. This is sort of a perpetual opportunity for firms competing on low cost platforms, and requires staying on top of recent technological innovations. McDonalds can increase its profits by driving down its costs, and should continue to focus on that.

In addition to the aforementioned China issue, there are other threats as well. The industry is intensely competitive, but a new competitor (Starbucks) has a unique dynamic that makes it a major threat in the breakfast business. Starbucks is doing $10 billion/year in revenue, some of which has surely been poached from McDonalds on the breakfast side. Lastly, there has been bad publicity that has threatened to harm the brand. This wasn't quantified (that would be almost impossible) but it was discussed at length in the case. Between activists and movies like Super Size Me, McDonalds is the figurehead of a fast food industry that has come under intense scrutiny from the public and regulators alike.