McDonald's Industry Life Cycle and Financial Analysis

Introduction to the Industry Life Cycle

The industry life cycle is a framework that describes how an industry grows and theoretically where it ultimately ends up (Inc., 2015). The beginning of the life cycle for the franchised fast food model essentially started with McDonald's in the early 1960s, and the industry quickly entered a rapid growth phase. McDonald's followed this phase of the life cycle around the world, over a period of decades, to become the most dominant player in the fast food business — not just domestically, but globally as well. In general, McDonald's was a pioneer of the industry in many foreign markets.

As an industry exits the growth stage and enters into the maturity stage, its growth rate flattens (Inc., 2015). This is something that can be seen in McDonald's revenue figures from recent years (MSN Moneycentral, 2015). There is no real growth in the industry for McDonald's because it has saturated its existing markets and there are few new market growth opportunities remaining.

The Maturity and Decline Stages in Fast Food

The maturity stage of the industry life cycle is characterized by fewer, larger firms. These firms tend to be cash cows, earning substantial profits during this stage despite little or no growth (NetMBA, 2015). This stage can last for years. There will still be new entrants at this stage, but they will typically only be able to win a small amount of market share from established players. In fast food, the share held by McDonald's has generally been difficult to win away, owing to the company's considerable competitive advantages.

The final stage of the industry life cycle is the decline stage, which is characterized by declining sales and profits and the exit of several firms from the industry. This occurs when an industry is no longer sufficiently relevant to consumers. Decline can result from technological innovation, but also from shifts in consumer tastes. There is a growing belief that changing consumer preferences are responsible for the current maturation of the fast food industry, and may ultimately lead to its decline. People now have much greater exposure to high-quality food than ever before, and this is reducing market interest in traditional fast food.

Financial Performance and Revenue Trends

As noted, McDonald's revenues have flattened over the past four years. The company turned $4.7 billion in profit in 2014, which was the lowest level over that four-year period. McDonald's has historically been able to earn healthy margins on its food, but those margins have begun to be squeezed as several competitors have emerged to skim market share. Nevertheless, McDonald's is still roughly four times the size of the next-largest burger chain, and brings in double the industry average in revenue per store (QSR, 2015). Per-store sales of $2.5 million rank third in the industry and first among burger chains. The only burger chain close to that figure is Whataburger, which is substantially smaller. In terms of operating metrics, McDonald's remains one of the industry's top performers.

The flat revenue and slight dip in profits, however, remain a concern for the company. While this is a classic "cash cow" situation typical of competing in a mature industry, it also signals that revenues are stagnant and profits are declining. As a result, earnings per share is also declining. The company pays out a significant portion of its EPS in dividends, so it is important that McDonald's maintain a healthy EPS — otherwise it may be forced to cut its dividend in the future.