McDonald's Corporation organizational structure and operations

McDonald's Corporation

This is an attempt to study the history and development of one of the great institutions of United States and a part of the images of the country that has spread in the whole world. As is well-known, the dominance of the world by United States came after the Second World War when the traditional leaders of United Kingdom and Germany lost their predominant positions due to the destructions of the war, and the impact of change in economic order due to the freedom of many countries. This was the freedom of the colonies and United States had been one of the first colonies to be free, and the former colony became the leader, along with Russia which was the pathfinder of the failed social and economic structure of communism. It was a contest between the two to prove the relative superiority of the two systems, and the old structure of Russia has passed into history. At that time it was important to spread the message of the free world and her economic methods into the rest of the world who were waiting on the sidelines and deciding on which of the leaders they should follow.

McDonald's was one of the institutions that came out then and later spread throughout the world. It is a system where the concept of food was made simple and easy to serve. The system was to give people a bundle of taste, energy, nutrition and health in a form that the person could easily take up. He could even carry it with him to eat at some other place and it freed him from the drudgery of cooking his own meals. This led to its immediate acceptance among a group of people who came out to face the brave new world and make their own fortunes in it, and that helped them in their search. It was comparatively much cheaper as it did not have certain built in costs of restaurants like the rental for space, the cost of tables and chairs where the people would eat and wait, the cost of the large team of servers and cleaners who would maintain the restaurant, etc. this made the food cheap and easily affordable. This increased the popularity of the system.

Within a short period it spread to a great part of the world, and with the food went the message of a free country. It is still traveling in different parts of the world, as those parts still contain a large number of people who are the hardy pioneers trying to build up their own countries into leaders of the world from being back of beyond. It is a process that will continue as man feels that all are the same and entitled to become a leader if they work hard enough for it, and that was the reason for the success of United States. In the rest of the world, McDonald's is still popular and spreading, but in the home country, it has probably reached a plateau. The reason for this is probably more psychological than anything else, and the reason is that people feel that they are now entitled to more comforts, as they can afford to pay for the comforts. This is also bound to happen, as in the process of development, it is a cycle and the society will slowly change.

The generation which took McDonald's to the top in USA is now becoming older and their thoughts are changing as will happen to any individual with age and economic prosperity. They are slowly loosing interest and the new generation has different dreams and that is not all McDonald's. It is like the change of tastes in music, in movie stars, in dress and many other forms of entertainment. Ultimately when one looks at it, humans have been eating from the days they started life on this planet thousands of years ago. The nature of the food that they took first changed when they went from hunting to farming, the discovery of fire, and so on. The advent of McDonald's and its progress through the hands of man is also one such chapter. As an organization one has to think of the concept of an organization as a living being which is born, then grows, reaches maturity and finally declines. All organizations will also die, but their life can be extended if the form is changed bringing different interests to the organization. The present management is trying that.

I. Introduction

Why I chose this topic?

The image of McDonald's is not like the image of the United States in certain countries and the same time, it represents a great American brand name. The largest market for McDonald out side the United States is Japan and there the brand name is "Makadonaldo" in Japanese and the first restaurant was opened in 1971 on the world famous Ginza. It was situated inside a store called the Mitsukoshi Department Store and was then the smallest McDonald's restaurant in the world with an area of only 500 sq. ft. Of course that was only the beginning and the store has been expanded since and taken in another location. There are also another 2,000 McDonald restaurants that have joined the sale of McDonald products. (Fascinating Mcfacts about McDonald's International)

This is in spite of the fact that the Japanese are basically against foreigners and they do not like outsiders. Probably this feeling comes from the country being just a small island and they do not like even the neighbors like Korea and China. There is dislike of Americans because of the Second World War. At the same time, there is no dislike of this brand, and this was cultivated very carefully. The advertising in that country are all emotional advertisements just as it is in the United States, and the only difference is in the fact that all the families are Japanese and that extends even to their dress. (In Japan, McDonalds means great marketing)

Importance of this research

Every research has an objective, and one of the prime objectives in marketing and advertising is to study the question of branding. There is an importance of branding that is more than the importance of the product itself, and essentially, the basic product sold by McDonald's are simple hamburgers. The brand name is also not very old. The first restaurant was opened less than 50 years ago in Des Plaines, Illinois, USA. It was then expanded only in the country till 1967 when the first restaurant was opened outside United States in Canada and then in Puerto Rico. Today there are McDonald's in over 10 countries of the world and there are more than 20,000 restaurants. (Fascinating Mcfacts about McDonald's International) This is the greatest achievement of McDonald's in that it has succeeded in spreading a brand name all over the world for a basically simple product. It is a success story in marketing and advertising, and that is the importance of this research.

Goals

The objective of this research is to go through the history of the company in the last few years, and it is quite clear that the company is facing a certain amount of trouble. In the history of marketing of any product, the life of the product is like a human being - birth, development and growth and then decline. This is the fate of all brands in all areas, and part of this is because of the development of human beings and their changes in taste, likes and dislikes, development of new products which make some other products redundant, changes in lifestyles and associated choice of products, availability of new products, etc. It is important to study old brands so that we can find out why the products are gradually loosing out on their popularity. That is the objective of this research. "Their most serious problem is the belief they can grow the business forever," says Atlanta marketing strategist Al Ries. (Slumping McDonald's shrinks its super-size expansion strategy) "No brand lasts forever. McDonald's is a brand built on hamburgers, and 282 million people can only eat so many hamburgers." (Slumping McDonald's shrinks its super-size expansion strategy)

Company overview

History

The company was formed by the founder Ray Kroc who had taken over the Speedee Service system that had been developed by two brothers named Richard and Maurice McDonald. This gradually became an empire of burgers and fries, with the basic assumption that there could never be too many McDonald's. The same thought keeps going on today, and only the limit has changed from the United States to cover the entire world. The situation has developed to the extent that there are now more than 30,000 restaurants in 121 countries, and has increased in size by three times since the death of Kroc in 1984.

The difficulties had started appearing outside United States for quite some time, but are now being seen in the States also. (Slumping McDonald's shrinks its super-size expansion strategy) In the meantime it has spread all over the world and has branches in Oylu in Finland, which is the northernmost branch and in Invercargill in New Zealand which is the southernmost branch. In the east, it starts with Gisborne in New Zealand and covers the world to reach Western Samoa. These two countries are the closest neighbors on either side of the International Date Line. (Fascinating Mcfacts about McDonald's International) Thus, it is clear that the objective of the founder in terms of spreading the enterprise across the world has been fulfilled. The products have however remained mostly fast foods.

Business Description a Major products

The greatest achievement of the founder of the company was to make one complete unit from his suppliers, employees, and franchisees into one complete system that could be used for feeding people. This was finally calculated down into a science and the cooking in a McDonald kitchen is not left to chance. The original manual for cooking the hamburger had been drafted by Fred L. turner in 1958 and has grown over the years. Today, the size of the manual is 732 pages and the weight is 9 pounds. This determines that every hamburger has to come out in the exact size, down to measurements in thousandths of inches from a stamping machine. The weight of the hamburger has to be exactly 1.6 ounces.

The process of cooking them is also specified in the manual and the worker has to toss the frozen patties that he receives onto to a grill. The grill has a top plate of steel that comes down to the exact height of the burger that has to be cooked. The top plate has got a lot of automatic devices and gets lifted when the internal temperature that is reached is 155 degrees and this takes 38 seconds. Bigger pieces take longer to cook and the pieces that are a quarter pound in weight take 104 seconds. Then is the spraying of exactly a third of an ounce of ketchup and a teaspoon of mustard onto the bun. This is done by pulling the trigger on a plastic funnel. The next job in the stores is with an Arch machine which has the task of putting the correct amount of spuds into the frying basket.

The oil for frying is maintained at exactly 335 degrees, and men have to pull out the frying basket for shaking the basket after getting a warning from a beep when 30 seconds have been completed. It is then to be put back in the basket for another two and a half minutes till there is a longer beep to warn him that he has to finally pull it out. But these are the old products which are slowly loosing out on popularity. The company has decided to let people have their own meals under their "Made-for you" system. The reason for this was that the menu of McDonalds was felt to be stale. The last successful product introduced by the company was Chicken McNuggets which were introduced in 1983. After that also there were introductions called McDLT, the McLean, the Arch Deluxe and the McPizza, but none of those products were successful. The tradition then was to run products nationally or not introduce them at all.

Today there are many regional products like the McBrat launched with sauerkraut and onions and the product has been a big hit in Wisconsin and Minnesota. This product would have never been a success on the coast, as the constituents would not have been accepted in those markets. There are also other items like a McLobster Roll in New England, and Hot-mustard filled Homestyle Burger in Texas and there are also varieties with three burger patties called the Brutus Buckeye Burger in Ohio. The Ohio variety has three patties, three slices of cheddar, lettuce, tomato and onions, and can easily fill up people. (Beyond Burgers) for the other types, there have been the launch of new varieties like the Arch Deluxe which is supposed to be a sophisticated adult burger, and things like Crispy Chicken Deluxe, Grilled Chicken Deluxe and Fish Fillet Deluxe. (Wall St. loses taste for McDonald's)

The main business of McDonald's has always been of hamburgers and it has sold well over 100 billion hamburgers in its restaurants throughout the world. There is also a high demand for French fries and the group prepares more than 6.8 million pounds of them every day. Throughout the world, the main diet offered by McDonald's is hamburgers, chicken and fish sandwiches and the world renowned French fries. In some markets there are offerings suited to local tastes as they appeal more to local tastes and provide variety. There is an item called 'McHuevo' that is sold in Uruguay and that is just a hamburger with a poached egg on top. In Norway there is 'McLaks' and that is a grilled salmon sandwich with dill sauce. McDonald's sell beer in Germany and they sell the 'Samurai Pork Burger' in Thailand, which is a sausage patty in teriyaki sauce. (Fascinating Mcfacts about McDonald's International) b. Services

This seems to have become the weak point in the entire operations of McDonald's and this seems to be more so outside the United States where a complete study has been done on the subject. An individual has done a study for six years on the subject and he has even published a book. According to his study, the company not only has a standardized menu, but also standardized service practices, and these practices do not even change from country to country irrespective of the local laws in the country. In general, the company likes to use franchisees for the operations of its different outlets, especially in the economies where the company is doing well, yet there is very tight control that is exercised by the head office in United States of all recruitment, training, and meeting between the employees. It is but natural that the management in McDonald's disputes this picture of its operations.

As the study has been done in Europe, the person doing the research has given his opinion regarding Europe, where he feels that the employment practices of McDonald's are the same throughout Europe, independent of the country of operation. It is well-known that the employment market in UK is quite flexible and the market in Germany is full of a number of social legislation, yet the employment strategy of the company is the same in both the countries. The strategy that is followed has certain similarities and the main part of it is that the employees are generally not in a position to oppose strict control by the management. The company achieves this by selecting its employees from the weakest section of the society, and people who would find it difficult to get a job which would be suitable to them.

One part of this is to employ very young staff, and this is said to be due to the fact that the consumers of the products sold are very young. This reflects in the UK by having two-thirds of the employees as being below the age of 21 years. At the same time, in certain countries like Germany and Austria, they cannot recruit any individual below the age of 18 due to the laws in those countries, and the enforcement is quite strict. The company gets around this difficulty by employing a lot of staff from other countries in those countries, and these are mainly migrants who have come to those countries from Eastern Europe, and the basic reason for shifting was economic. These employees are not in a social situation to be able to enforce their rights as they do not know what will be their future.

The net result of having workers of this type is that the workers in McDonald's do not know much about the work, as they have no previous experience, and thus they do not have confidence in their own capacity regarding the work. On the other side, the work in the company is also an attractive option for some workers who need part-time jobs, or for short-term employment. This type of workers is the students and married women who need to have flexible hours so that they are able to pursue their other interests. Again, the employment of such staff leads to high turnover when seen on annual basis. This situation does not take place in Germany, Austria, Finland, and southern Italy where the employees are not able to find other types of jobs.

Yet, according to the author, the organization is still trying to impose a system which was designed in America on all the countries where it is operating. The only changes that it makes are to adjust with the local laws. This leads to a lot of long running battles with unions regarding the negotiations and rules of employment practices. The problem was seen acutely in France where there was an agreement between the unions and McDonald's only after 15 years, and yet this agreement was not valid for 90% of the restaurants. The reason for this was that the restaurants were being operated as franchisees and joint ventures. In the country of Spain the unions are not able to get any form of recognition. (Inside Track: Company before nation: McDonald's Operations)

The poor quality of service has also been experienced by the company management and they have written in internal memos that the company 800 number has confirmed the existence of rude service, slow service, unprofessional employees and inaccurate service. This is the major cause for complaints made by the customers against McDonald's. The worst part noted by them is that the number of complaints has also been rising steadily for the last five years. The aim of the company is now to create a culture of service within the company. This was felt to be essential to deliver the quality that the company wants to deliver within United States. This is also required for the company to achieve the superiority that it seeks to achieve over the competitors. (Fast Food, Slow Service: The McDonald's Memo)

The same feeling exists within the experience of the new president of the company, Mike Roberts. He is an expert and the authority in the matter as he has been directly chosen by the Chief Executive, Green berg to get the company over the present troubles. He feels that the investors also want to see results from the company, and are not interested in talks from the president. This requires improvement of service, refreshing of the appearance and the changing of the old outlets. They also link this to the old message that is being constantly repeated by the company. These are of course intangible, but the delivery of quick and efficient by the company employees is keeping the President awake at nights as he is not being able to find a solution. One of the main reasons for the delay that is being faced is the changes in the food production system. This is a relatively new change and implemented only four years ago. (Service woes exacting heavy toll on McDonald's)

Even the customers are getting a similar experience and some of them know that the operations in McDonald's are full of chaos, and the main reason is attributed to the fact that they do not have good enough people. On a recent visit to the restaurant, he saw a fight that was occurring in front of him between a customer in a queue and the employees as his lunch was getting very late. The employees were not able to understand his own order, and he did not get the Diet Coke that he had ordered, but got only plain water. Yet another person also waiting for a meal felt that this individual had got his meal too fast.

The situation was bad, and the customer felt that the expansion of McDonald's was only get better returns on the investment and thus make the investors happy, but not to make the customers happy. The customer felt that the company had run out of the supply of competent managers, franchisees and workers. The customers are also realizing that this is beginning to hurt the company. According to them, the company has to cut back on its operations and not expand only because of this reason. The company has already spoken about the plans it has developed for the cutback, but it is felt that the company is not going far enough. This sort of small cuts is not going to help the service that is available in the company. The attitude of the company is also that it is still a growth company. (No smiles for McDonald's Customers)

SWOT analysis

A.

Strengths a. Massive global presence

The size of McDonald's has been impressive for a long time and the company has been insisting on its great size from the 1990s. The feeling within the company has always been that it will continue to grow and prosper through all time because of the size. The company has been growing and prospering of dominating and aggressively expanding throughout the world. It has become one of the largest food retailers in the world with more than 20,000 restaurants spread through the world, and yet the company regrets that any given day, the company still is not able to have a sizeable proportion of the people of the world in its restaurants and the company has less than 1% of the people of the world. The company definitely wants more people to eat at the restaurants.

There have been plans continuously for the expansion of the numbers of restaurants and the main aim has been to put up new restaurants in areas where people come for a variety of reasons like playing games, I shopping complexes and even for working. This has got McDonald's in theme parks, in large retail stores like Wal-Mart, in the centers of large gas stations like Amoco and others, and even as independent entities in the heart of cities. The concept of expansion was a corporate philosophy in itself, much like saying that if you build a restaurant, the people will come. The problem of McDonald's is not of size, and they are a very strong restaurant in terms of the number of restaurants that they have spread all over the world. (Retail Over saturation, McDonald's and others find, has)

The company has grown continuously for 44 years as one of the fastest growing American companies and this is probably now leading to a saturation of the markets for their type of restaurants within the United States. The strength of the company in the United States is thus being lost out because there is not much demand any more, not because of the inherent ability of the company, but because of the market situation. This is leading down to the slowing down of the growth of the company to only 150 new restaurants in the current years from more than 1,000 restaurants that they were adding in earlier years. The number of restaurants that they will be adding is less than what some of the competitors like Wendy's are adding - it is less than half their number.

The reason for adding fewer restaurants is not their weakness, but it is because of the lack of market demand, and even four years ago they had added more than 1,100 restaurants. The large numbers of restaurants that were opened in the 1990s has begun to hurt there existing franchisees and they have seen that 2,800 of those restaurants suffer due to other restaurants eating into their sales, and this has led to large declines of more than 20% in their sales. In a way, their strength has become a problem, and this problem has been recognized by some of their investors, and from 1998 also there was the famous Warren Buffet reducing his investment in the company by as many as 4.8 million shares. This process has been going on for quite some time and his shares have come down to only 1.8 million shares with a value of $76 millions. This is a sharp decline from Buffet had over 60.3 million shares.

Now the restaurant has branches in 117 countries and has a world-wide share of 63% for fast food. The number of customers they serve is also increasing very sharply and they are serving some 40 million customers world-wide. The number has grown up from 30 million that existed only about 5 years ago. The number of restaurants is still going up sharply outside United States and is expected to cross the number within United States in the current year to more than 12,000 in number. It may be estimated that the total number outside United States may even reach as high as 25,000 before one can really say that the company reaches total global saturation. (Beyond Burgers)

In itself the company has been performing well and has been earning high profits and many restaurants has been the recipients of very high profits and a large number of them, 2000 to be more specific, have earned more than a 69% on invested capital. This is according to reports from Credit Suisse First Boston. The problem is that it has many units now, and the number of units in the country is over 10,000. Of these, the company itself owns 1,902 are owned by the company and the rest are franchised.

Throughout the world, the company has now felt that it has very little room to grow, and this is clearly seen in the fact that it is now slowing down the growth in the United States and is instead concentrating on the improvement of the facilities in the existing restaurants. The sales are not growing much in the existing units, and the average annual rise has been only around 1%, and there have been steady declines in cash flows in these restaurants which have been to the extent of $2.75 billion in 1999. The company realizes now it can grow only abroad, but the operations abroad are not giving the company enough returns as per their norms. During the entire period of 1996 to 2000, the returns from their foreign operations were less than 1%. (McMissteps) b. Strong real estate portfolio

Another area of strength for McDonald's is the huge area of real estate that it has under its own control. The development of this real estate has been fine tuned by the company to almost a science and this is not the industry practice. The company has under its ownership, or under long lease the large portion of land that houses the large group of stores is situated on. The value of the land on the balance sheet of the company amounts to a figure of $3.8 billion. This is a large part of the investment assets of the company. Most parts of this land was purchased, or negotiated quite some time ago, and the average period can be estimated to be around 20 years.

This has led to the growth of the price of the land in terms of the present value of the land, and the present value can be safely estimated to be over $12 billion. This is certainly a hedge against inflation that the company has provided and also a safety valve for the value for the shares of the company. The ownership of the land also gives the company better control over the maintenance of the restaurants and costs of maintaining the restaurant in that location as it does not have to pay higher rents. The first step in the process of the purchase of land is a fine-tuned method. Once the land has been looked over and selected, then the company enters the information about the property into the database about its properties.

The point of interests here are the demographics of the area and the flow of traffic in that area. In the database are stored the details of the land that the company owns in other places, and once the details of the land are entered, the system gives the company details about ten other locations. Then the company calls up the owners of the ten matching restaurants and finds out the specifications of those sites in terms of drive-through windows, the existence and locations of play-places, the number of staff those restaurants employ and other details about the operations there. This gives the company a very clear idea of the costs that will be involved to run those restaurants.

Then comes the question of training up the necessary managers for the new outfits, and for this the designated managers will still have to go for training to the designated school which is now called the Hamburger University in Oak Brook in the United States or the other four locations in the foreign countries. This training at the University will be for a period of around two years, before the trainee can hope to get a store for himself. These Universities teach the students not only the methods of making the products of the company, but also how to run a restaurant through building up of good relations with the customers, managing the workers in the restaurant through discussions and influences over them, and finally the methods of teaching workers how to work in a McDonald's. (Beyond Burgers) c. Brand recognition

One of the major advertising images of McDonald's has been the image of the character called Ronald McDonald in the United States and many other countries, and he has been the character on the television from 1966. The occasion was Macy's Thanksgiving Day parade. Ten the character was developed to become the official spokesperson to children for the company. His fame and use spread very fast and he is the main vehicle for advertising of McDonalds in all markets of the world. This has made him a language specialist with a capability to speak in over 25 languages and the list is quite long. It includes languages like Cantonese, Portuguese, Russian, Tagalog, Papiamento and Hindi. During his worldwide appearances, even his name gets changed sometimes. In Japan, his name has become Donald McDonald, and in Singapore he has become Uncle McDonald.

To spread the awareness of the brand, the name has been used in many places and the nature of the food is best suited to food during travel. This has helped them to become the choice food for a child on the flights that were being operated by United Airlines flights within United States. There was a choice of the food abroad the Crossair Airline in Switzerland. The food was also served in the restaurant dining cars on the Swiss national railways. Even while traveling on the ferries between Helsinki in Finland and Oslo in Norway; it could be obtained as a choice food. The food was also made available in the restaurants that existed in hospitals, toll-ways, zoos, college campuses, airports and military bases. (Fascinating MCfacts about McDonalds International)

This has made the brand very popular and well-known. The strength of the brand name is a lot dependent on the awareness that it has, and the methods have been used to promote the brand name has made it very well-known. The knowledge is not restricted to only United States, but the awareness exists in all countries where the brand exists. The name is the leader among all the names of the quick service restaurants, and this is also promoted by the large number of restaurants that it has in the United States - over 12,000 of the restaurants. Of course many of the outlets are franchised outlets and run by outsiders on a commission sharing basis, but the customer does not know this, and he still gets exposed to the brand name. The typical McDonald's is also a large operation with an annual sale of over 41.6 million per outlet. This is much larger than some of the competitors like 'Wendy's which has a sale of $1.2 million per outlet and $1 million at Carl Jr. It is clear that the brand dominates the market for breakfast. (McDonald's Looking for a Break)

In terms of the growth connected with the brand name, the name of McDonald's has been more effective outside United States than within the country in the recent period. These consist of many markets like Japan, Germany and Britain, but even in these markets, the position of McDonald's is approaching product maturity and is not really growing very fast. The growth of any product to maturity is inevitable as it is a part of the product life cycle. In other words, it may be said that Ronald McDonald is approaching middle age. It may also be viewed as a period where the growth of the company and its products will not be as dynamic as it was a few years back.

The company seems to be passing through a rough and rocky patch, but this is not the first time that the company is in this situation. During the period of growth, the brand name and the company has passed through such phases before also. The main solution of the company had then been to reduce prices and thus increase sales, but with the changes in the market situation that does not seem a likely solution right now, and that concept is further reinforced by the fact that the company has recently launched a number of deluxe products. Yet there is a decline in the profitability of the product and that is reducing the interests of the investor in the company. (Wall St. loses taste for McDonald's)

The image of McDonald's as a symbol of American consumer industry and the concerned capitalistic inroads that it permits in other countries has been there for a long time. This conveys both good and bad images, but the image exists. Many people eat at the restaurant with a view that it is the best possible meal that is possible at that price, but the rapid development of the organization has also a lot of opposition and led many to believe that it is being used by the American government to dominate the culture of other countries. (INSIDE TRACK: Company before nation: McDonald's Operations)

Yet this strong brand name is under siege and the main reason is that there are not enough sales for the organization to sustain itself, and this is leading to try for sales at discount prices. The attempt is now to introduce a set of products which will give the customers value for money and the name has been fixed as 'dollar value menu'. This menu consists of Big 'N' Tasty burger, the McChicken sandwich and different sizes of fries, soda, salad and desserts. This of course is not a new attempt by McDonald's, as this is a strategy that has been followed by the company many times in the past also, but this will be different in the sense that there will be a consistent message that will come from the top of the company. The aim this time is to create a menu with products at two different levels, and this will help in maintaining certain products like Big Mac at the top. This is quite similar to the strategy that has been followed by Wendy's in the past to get a number of customers oriented towards saving pennies into their restaurant. (Can McDonald's Shape Up?)

Thus it is clear that the image of McDonald's no longer has the strength in itself to draw customers at a high price level into the restaurant. At the same time, it is a well-known brand name that will cause a certain amount of interest in the consumers to visit the restaurant for a trial with sufficient publicity. This is of course true for many old brands, and the brand image tends to get stale with age. The world is a place full of continuous change, and this can be easily seen in the area of communications, games, travel, job responsibilities, etc. The thought that is difficult for many to accept that it happens in the area of food habits also. In that case, let us remember that America used to eat a long time before McDonald's came up also, and there were also different types of meals then. It is possible that the problem is not with the brand name in itself, but with the type of food they are serving.

B.

Weaknesses

Market saturation

When the founder Kroc took over the brand from the McDonald's brothers, he had an original assumption that there could be never too many of the restaurant. While it was certainly true in his time, as there was only one McDonald's at that time, that cannot be a permanent truism. There has to be a limit to the number of restaurants they can have in an area, and this has been discussed earlier where we have talked about there being 20 McDonald's within a distance of 2 miles. Certainly we should understand that this is a restaurant, and an individual who wants its products will come to the restaurant.

The size of the restaurant will determine how many it can seat and serve, and the size may be expanded when needed, but if there are too many restaurants, under the same brand name serving the same basic foods, then the large number of restaurants end up in only splitting the crowd. The situation in terms of travel has changed since the days of the founder, and travel is not so much of a problem any longer, and if people want the burgers that the chain serves, they will certainly make their best efforts to reach the restaurant. The final statement on this can also be taken as the stand that the 282 million people in America can only eat a certain number of hamburgers, and when more than that are being produced, the sales will not go beyond that point. (Slumping McDonald's shrinks its super-size expansion strategy)

The clear picture has to be understood and that is there are now to many McDonald's and coupled with that they have too much on their menu. This is the major difference that has been made since the time of Kroc. When the chain was established, the aim was to sell hamburgers of a special type, and somewhere along the way, they seem to have lost that objective and made themselves a multi-food chain. The increase in the number of items on the menu has led to loss of perfection in their cooking. It is clear that they do not have 9-pound manuals on all the 40-odd items they sell, as otherwise the cooks would never have learnt enough about cooking in McDonald's.

Let us look at a much smaller competitor in-N-Out, and they are older than McDonald's having been in the market for 54 years. They just serve hamburgers, fries, sodas and shakes and the chain has just 170 restaurants in the chain as compared to 12,000 odd of McDonald's. Yet, in that restaurant the cooking is perfect and the quality of the burger that is served looks exactly like the photograph they have placed on the place mat. Of course, part of the reason is the smaller number of restaurants and it is much easier to control a smaller number of people, yet, the quality achievement is to be praised. The result is that it has too much of a crowd in all the restaurants. The number of branches may probably be increased, but then the liking for the brand may go down. Distance makes the heart grow fonder. (The Arches Are Sagging. What Would the Doctors Do?)

Increasing price competition

The main product sold by McDonald's is hamburgers, and the philosophy of the company is clear in saying that there will never be a day when they will not be able to sell enough hamburgers due to a lack of demand. It has also been mentioned earlier that they are succeeding in selling the product in millions. There is clearly not much effect of competition in terms of price, yet the company keeps reducing prices in different situations when the market changes as this enables them to sell more of the products. This has been done continuously by them the last time when there were continuous problems due to the Mad Cow disease and then the events of 9/11. This happens in a company which has existed for a long time, as the company has a lot of suppliers on contract for long periods and their goods have to be lifted. This of course has to be sold, and the workers have to be paid, the other people working with the company also have to be paid. This requires the company to give away goods cheap sometimes.

Rising food and labor costs

Most of the material is purchased by suppliers and this is purchased by them on long-term contracts and that gives them rates which are quite different from the other purchasers like individuals who buy small quantities. This permits them to have the best quality of material and that is not available to even most individuals. There was the case with the promotions firm which was accused by McDonald's of cheating them on certain material, and there was a case. (McDonald's Ends Talks Aimed at Out-of-Court Settlement with Promotions Firm)

One of the directors in that firm was a supplier to the company of a lot of raw materials for the production of its foodstuff. Another in that firm was a supplier of soft toys to the company which were used as gifts for children. Thus there is certainly an overall effect of rising food and labor costs on the company, but it is not out of line with other companies. Instead, the company has a high impact of certain management costs. The cost of the material is borne by the franchisees in 80% of the stores and does not affect the company directly.

The model of operation of the company was originally fixed by the executive from Tastee Freeze who joined McDonald's, Harry Sonneborn. He was the financial officer under the founder Ray Kroc and according to his plans; the profit of McDonald's was to come from its real estate and not the products. The franchisee had to first give a deposit towards the cost of the land to the company which owned the land. The rest of the cost was then borrowed by the franchisee to start the restaurant after building it. So far as the company was concerned, it was just collecting the rents and the checks for royalty. Even today, the payment of the franchisees are quite high and they end up paying 12% of the unit's sales as rent and the sales on an average are 12% of the turnover.

The company collects in addition another 4% in royalties, and it can be said that as much as 20% of the sales of a restaurant ends up with the company. The problem with the company is in its high overheads and this runs at a 91% higher level than Tricon Global Restaurants which owns 30,000 restaurants of Taco Bell, Pizza Hut and KFC. The expenditure of McDonald's is around $45,400 on an average for each domestic restaurant and around $63,300 for each overseas unit. There are other inefficiencies in the headquarters and this has been recognized by the present boss, Greenberg who went on a "home office productivity initiative" in 1998, and this resulted in a $160 million special charge. In October 2001, the company took another special charge of $175 million or so as it dropped between 500 and 700 employees. (McMissteps)

The problems of the company is more with the made to order cooking system that it made its restaurants in U.S. buy a couple of years ago so that the burgers of the company would taste better and thus help the company in its dealing with competition. The problems of taste still remain, and the only result of the new equipment was to irritate the franchisees. The costs of installing the equipment and related up gradation of the restaurant was said to be costing around $25,000 per restaurant, but in the end the costs came to $50,000 to $60,000 per restaurant according to a study that was made by Dick Adams who is a consultant for many franchisees. He is also a former owner of a McDonald's and he had done the survey among several hundred restaurants. The company still claimed that the cost was only about 10% in excess, and the company helped the franchisees by providing fifty percent of the $25,000 it had said the equipment will cost. Many of the franchisees were affected and annoyed. (Fallen Arches)

Yet the franchisees continue with the company as they have one of the best deals in franchising that exist in the burger business. The competition, Burger King nets for its franchisees only about $125,000 a year on an average. In the case of McDonald's, the very good restaurant can net the franchisee even a figure as high as $500,000 and thus the franchisee can get back his entire investment in one year. The average is of course much lower and is around $180,000 for the franchisee. He of course has to pay his depreciation and debt costs from this figure. The problem is that this figure has come down by about $30,000 from the figure that existed about two years ago.

According to an expert in the business, Paul L. Westra, who is an analyst at Salomon Brothers "Franchisees have taken a pay cut, but it's still a damn good deal." (McDonald's aggressive growth strategy isn't going down well with rebel franchisees) This sort of an ambivalent attitude is also being noted among the franchisees in the surveys, and there was a survey conducted by Business week and that shows a certain amount of discontent. There was coverage of 120 respondents in that survey and quite a high part of them, roughly 71% said that they were happy to be associated with McDonald. Yet these same respondents felt that the cash flows and equity values of the company would continue to decline. There were also feelings of a majority of the franchisees that the company had gone off the correct path, and two-thirds of the respondents that the company was not compensating them for their losses due to cannibalization by other nearby restaurants.(McDonald's aggressive growth strategy isn't going down well with rebel franchisees)

C.

Opportunities

Revitalization plan

There is a drastic change that is going on in the company and that may be viewed as an attempt to change the present situation. The first step was taken in a Chicago suburb which is a few miles away from the corporate headquarters of the company. It started with a big band and throwing of balloons on the way before a Caterpillar backhoe broke down one of the walls of the company's old restaurants. The location is called Hinsdale and was 24 years old. It was certainly looking a bit old and tired like a lot of McDonald's. This has been replaced by a much more modern looking New England restaurant with facilities for bed and breakfast, and not like a typical hamburger place. (Can McDonald's Shape Up?)

This process is continuing and is expected to continue for a couple of more years, and during this period, it is expected that around a 1,000 of the old restaurants will be rebuilt. At the same time, another 6,000 of the other franchisees from a total of 13,099 as is the figure being given now, will be improved in terms of appearance. This is however not the rebuilding of the business of burgers in the country, and this country still accounts for more than half of the total business of more than $40 billion. This is because the problem is that the business f the company has started shrinking and had shrunk by some 2.7% during the months of July and august when compared to the figures of the previous year. This is certainly a sharp drop for one year. (Can McDonald's Shape Up?)

There are also high costs that are associated with this entire exercise of rebuilding, and the company is right now in the process of rebuilding only 50% of its existing properties in the country, and even this exercise is expected to cost the company a figure in the region of $800 million. This has to be spent in two years as per the plan decided on by the top management. Let us hope that this will get Ronald McDonald back into shape from his present bloated position. In addition to this there are other plans like providing a new impetus for fast and friendly service, rolling out a national menu which provides better value for money and even an advertising campaign at a cost of $20 million. The other attempt is to try out new more attractive formats for the restaurants that are being controlled by the company. The formats may be of many varieties like being a sit down dining facility with menu like meat loaf or chicken fried steak. The other alternative is to convert all the outlets into a three in one type of outlets with serving of burgers and fries, Boston Market chicken and Donatos.

The other two are brands owned by the company and that should not pose a problem, but the question is that of the retention of the McDonald's image. Another alternative is to convert the restaurants into small snack bars with very limited menus, and these could be provided within other outlets which get a lot of crowd, like Home Depot or Wal-Mart. This again is going to cause a lot of difficulties to the image of the company. There are even proposals to utilize the vast real estate that the company has already collected over the years and use it for totally different purposes like selling totally different goods from toys to videos. Again, this is expected to give image problems for the company.

Better franchise relations

As has been discussed earlier, the franchisees are not totally happy with the present arrangement, and the main reason is their feeling that they are not earning enough money. This will remain in such a relationship where the basis of the relationship is the sharing of profits, and to give the franchisees better returns, it is essential for the company to make more money from the assets that it has. The principal asset is of course the land on which the restaurants have been built and most of that has been purchased by the company. The change in business at the site will have to be done to get better returns from the sites, and once it is decided to change, then the change should be done along with the franchisees as they are at least known devils. Once that is done, then the earnings of the franchisees will improve and this will also improve the relationship between them and the company.

Changing trends

The world changes all the time and that leads to continuous changes in all our lives. The type of people who liked the McDonald's type of hamburgers has now become old and this has led to changes in their food habits, and that is causing the drop in sales to the company. This was the group that had led to the growth of the company during the 1970s and the 1980s. Most of them were from the suburbs and concentrating on the quarter pound hamburgers that are still an important fare in the restaurant. They have grown up into middle aged successful executives and they have stopped eating the meals because of the new concepts about food. They would not even like their children to have this meal. At the same time, the competitors were busy launching a range of products that were more successful due to their up market orientation. This is proving to be more successful with both the parents and the children. (Wall St. loses taste for McDonald's)