McDonald's strengths, weaknesses, and competitive strategies

Marketing Analysis for McDonald's Corporation

History and Scope of Business

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)..

Value Chain

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

Stock Repurchases

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).

Risk Assessment

Market and Credit Risk

The Company borrows on a long-term basis and is exposed to the impact of interest-rate changes and foreign currency fluctuations. This is known as Market risk. In managing the impact of these changes, the Company uses interest-rate exchange agreements and finances in the currencies in which assets are denominated. Derivatives are used to minimize these risks (mcdonalds.com,200)..

The Company uses major capital markets, bank financing and derivatives to meet its financing requirements and reduce interest expense. The Company also manages the level of fixed-rate debt to take advantage of changes in interest rates (mcdonalds.com,200)..

The Company does not have significant exposure to any individual borrower, such as a franchise operation and has master agreements that contain netting arrangements. Some of these agreements require each party to post collateral if credit ratings fall below certain contractual limits. At December 31, 2001, neither the Company nor its counter parties was required to post collateral for any obligation (mcdonalds.com,200). McDonalds has high standards for persons wishing to open a franchise. These standards in combination with the netting and collateral agreements help to limit the credit risk of McDonalds. This risk management strategy has been successful in limiting McDonald's risk in the past and should continue to prove successful in the future.

Foreign Currency Risk and Inflationary Risk

The Company has demonstrated an ability to manage inflationary cost increases effectively. This is because of rapid inventory turnover, the ability to adjust menu prices, cost controls and substantial property holdings, many of which are at fixed costs and partly financed by debt made less expensive by inflation. In hyperinflationary markets, menu board prices typically are adjusted to keep pace with inflation, mitigating the effect on reported results.

Twelve member countries of the European Union have established fixed conversion rates between their existing currencies ("legacy currencies") and one common currency, the Euro (mcdonalds.com,200).

Since January 1, 2002, the new Euro-denominated notes and coins are in circulation, and legacy currencies have been withdrawn from circulation. The Company has restaurants located in all member countries, and the conversion to the Euro has eliminated currency exchange rate risk for transactions among the member countries, which for the Company primarily consists of payments to suppliers. The Company successfully addressed all issues involved with converting to the new currency, and the conversion did not have a significant impact on its financial position, results of operations or cash flows (mcdonalds.com,200).

Credit Rating

Moody's, Standard & Poor's and Fitch currently rate McDonald's debt Aa3, A+ and AA, respectively. A strong rating is important to the Company due to its global development plans. The Company has not experienced, and does not expect to experience, difficulty in obtaining financing or in refinancing existing debt. Certain debt obligations contain cross-default provisions and restrictions on Company and subsidiary mortgages and the long-term debt of certain subsidiaries. There are no provisions in the Company's debt obligations that would accelerate repayment of debt as a result of a change in credit ratings (mcdonalds.com,200).

The Company actively manages its debt portfolio in response to changes in interest rates and foreign currency rates by periodically retiring, redeeming and repurchasing debt, terminating exchange agreements and using derivatives. The Company does not use derivatives with a level of complexity or with a risk higher than the exposures (mcdonalds.com,200). This is conservative strategy, combined with increasing efficiencies in operating and value chain management make McDonald's a formidable competitor in the marketplace.

Contractual Obligations and Commitments

The Company has long-term contractual obligations primarily in the form of lease and debt obligations. In addition, the Company has long-term contractual revenue and cash flow streams that relate to its franchise arrangements. Cash provided by operations (including cash provided by these franchise arrangements) along with our borrowing capacity and other sources of cash will be used to satisfy the obligations (mcdonalds.com,200). In addition to long-term obligations, the Company has other commitments in connection with its share repurchase program. (mcdonalds.com,200).

Assumptions used in Accounting Practices

Accountants make certain assumptions when constructing their financial statements. McDonalds make the following assumptions when analyzing their financial status. Property and equipment are depreciated or amortized over their useful lives based on management's estimates of the period over which the assets will generate revenue. The Company periodically reviews these lives relative to physical factors, economic factors and industry trends (mcdonalds.com,200).

In assessing the recoverability of the Company's fixed assets should an unforeseen event oocur such as a fire or other disaster, goodwill and other non-current assets, the Company considers changes in economic conditions and makes assumptions regarding estimated future cash flows and other factors. If these estimates or their related assumptions change in the future, the Company may be required to record impairment charges (mcdonalds.com,200)..

The Company is subject to proceedings, lawsuits and other claims primarily related to franchisees, suppliers, employees, customers and competitors. The SEC requires that the company assess the likelihood of any adverse judgments or outcomes to these matters as well as potential ranges of probable losses. The Company does not believe that any such matter will have a material adverse effect on its financial condition or results of operations due to its risk management protocol (mcdonalds.com,200)..

History of McDonald's Business Strategy

When the company was first founded in the 1940s, its key business strategy was based on efficiency and quality. This remained its strategy until the 1990s, when its anthem changed to rapid expansion into the global marketplace in an attempt to capture a larger market-share.

According to an article by Millman, 1997, " Michael Quinlan, chief executive of McDonald's Corp., has been sounding the same theme in his annual messages to shareholders for most of the 1990s: The hamburger chain would continue to grow and prosper through a strategy of aggressive expansion and market dominance." (Millman, 1997). This philosophy has not had the effects that were anticipated. The effects of this change in philosophy have had a high price and the company is now considering going back to its old philosophy of efficiency and steady, but slow growth.

In the beginning, McDonald's specialized in hamburgers. An attempt to satisfy the growing number of customers was attracting ultimately led to new items being added to the Classical menu (hamburger, cheeseburger, milkshake and coffee, soft drinks and fries). Now there is a wide range of products that have been introduced throughout the years: Quarter Pounder (1972), Chicken McNuggets (1983), Egg McMuffin (1973), Big Mac (1963), etc.

In order to capture a larger audience and greater market share, new products are always under development. The menu is often enhanced with promotional products to add variety on special menu offerings in some countries outside the U.S. Examples include the popular Teriyaki Burger in Japan and vegetable Nuggets in India. Also in a large Muslim populations, such as Malaysia and many Middle East countries, their menu is Halal, prepared in keeping with Muslim guidelines. Research indicates that customers feel a unique emotional bond with the chain, the idea of a visit to them triggers a feeling of anticipation and excitement unlike in any other restaurant (Love, 1992). The ability to recognize the customer's preferences and adapt to them has allowed them to enjoy a bigger chunk of the market than their competitors. This philosophy has served them well, "over one billion served," to be exact.

Building Brand Equity, a Key Strength

Customers come to McDonald's for signature products they can't find anywhere else. Many families visit the restaurants because of their unique ability to put smiles on their children's faces. Happy meals combine wholesome food whit a toy; Ronald McDonald is a special friend; play places provide safe and fun recreation and the alliance with Walt Disney Company let the children's shout even more (Love, 1992).

McDonald's is recognized as one of the best marketers of the world, investing some hundreds of millions of dollars every year for advertising and promotion of its image. McDonald's has always shown bits of real life in their commercials that seems to have became a standard for them. Their marketing efforts go far beyond advertising, including special food promotions, games, videos, cassettes, tapes, videos, CDs that we couldn't get anywhere else (Love, 1992). This chain is also well-known because of its consistency in delivering a customer experience that has value far beyond good food at a great price.

However, the most attractive side of McDonald's activity is the training that stands as background in every single employee. This training is part of McDonald's brand equity. Training as a part of building an image is a concept unique to McDonalds, but one, which their competitors have tried to copy. McDonald's corporation started his fortune training people on how to be kind, fast, precise and effective: it has been an absolute pioneer in this field.

McDonald's believes that his quick-service format would be lost if service at the order desk was not courteous and efficient, to avoid this problem some detailed video tapes have been created to train every single worker who had to have direct contact with the customers. The tapes cover every aspect of dealing with the customers during his 15 seconds at the counter. Crewmen are instructed to initiate each order with a polite question: 'May I have your order, please?' The success of these service methods cannot be questioned (Love, 1992).

McDonalds operates in a highly competitive marketplace. It has little to differentiate its product from its competitors, all of whom offer really great burgers. The key to McDonalds success is the ability of he marketers to make the Golden Arches an American Icon. People visit McDonald's because of the McDonald's brand, which translates into a two words: convenience and fun. It's such a well-established brand that whenever people get hungry out on the road, they almost instinctively gaze upward, looking for that big yellow "M." McDonald's hamburgers are pre-sold. That's the power of a strong brand (Roberts, 2002).

Globalization vs. Localization

Local people franchise around eighty percent of golden arches, and by doing so, McDonald's are able to overcome cultural barriers that have previously hindered other organizations in an attempt to expand into a global market. Because these local people immediately translate both the product and service, there is little hint of what may be construed as U.S. brand culture. McDonald's is simultaneously global and local (Vignali, 2001).

But can these two approaches really exist side by side? On the face of it they appear so different: Globalization means developing strategies on the premise that the world is a single entity and so can be marketed in the same way. Standardization is king and total commitment to international marketing is essential. Internationalization, on the other hand, involves customizing your strategies depending upon the people you wish to market to. As opposed to standardizing, this approach involves grouping countries according to their culture, economy, politics and so on (Vignali, 2002). It would seem as if McDonalds has been successful at adapting to its marketplace, even in foreign cultures. This is the most difficult task for companies going global. McDonald's has achieved the ability to become a global leader and yet remain in everyone's back yard. Few companies have been successful I their attempts. Usually one is sacrificed for the other.

Failed Marketing Strategies, a Fall from Grace

McDonalds has not been successful in all of its marketing attempts and a recent promotion, just goes to show, that Brand Equity is not everything and that customers still want something other than the "Big M." Under the promotion, known as Campaign 55, diners could buy a featured sandwich, like the Big Mac in April, for 55 cents when purchased with french fries and a drink. But the fast food giant found that customers just weren't biting. They have been criticized for the lack of coherent marketing strategy as of recent.(Commins, 1997)

In order to correct this bingle, McDonald's Corp. will have to go back to its roots, offering good-tasting hamburgers and french fries at a fair price. "They need to focus on improving product quality. That is not something they can do overnight," Natwest Markets analyst Damon Brundage said. One possibility for McDonald's U.S. marketing strategy is to return to price promotions on a few key products, like its signature Big Mac hamburger. (Commins, 1997).

Too Much Too Soon, Overexpansion

To help increase its market share, the company stepped up its global expansion plans. The strategy was to put restaurants in places where people play, shop and work such as theme parks, retail stores like Wal-Mart, Amoco and other gas stations, and in the heart of cities. Confident with their brand equity, McDonald's management believed that people would come just because it was McDonald's. However, management has learned that making sure every American is within a few minutes from a McDonald's doesn't guarantee success. It is a lesson that other retailers, like fast-growing bagel chains and clothing stores, are learning, too (Roberts, 2002).