Seiichi Steve Fujii

BPS 4305 -5E1

Professor Bochsler

McDonalds Case Analysis Paper

Intro:

Since its inception in the 1940s, McDonalds has grown to be come one of the
best-known brands in the world. It has expanded all over the world reaching 119
countries according to the annual report. In recent years, McDonalds has added
McCafe beverage business to adapt to the new climate that started with Starbucks.
The company is also inventing its breakfast menu to lure more customers in the
morning. The company started with two stores in California own by one family and,
it is one of the well-known American success stories. However, despite all the past
success, the future of McDonalds is unknown. The fast-food industry is evolving
every year with many competitors entering the market. If McDonalds do not take
measure to adapt to the new climate, once a dominant fast food giant could see a
dark future.

What kind of new strategy does McDonalds need to take? When McDonalds
first started out, their fast food model with limited menu and quick service was
revolutionary. McDonalds need to again come up with something groundbreaking
that will give the company competitive edge over its competitors for many decades
to come. Does McDonalds need to change its cost leader strategy to more of a high-
end differentiation strategy? Or does the company need to expand their horizon and
challenge new business sector? Through external, internal and financial analysis,
this paper is going to explore the current situation of McDonalds and possible new
strategies for the future.

External Analysis:

First, a key for McDonalds to stay completive is to analyze the external
environment. Without some knowledge of the current external environment will
inevitably lead to bad decisions.

Fast food industry and all the other restaurant industry are changing every
year. People are more health conscious, and the customers are not just going for
something that tastes good, not caring about the ingredients. As McDonalds already
has an established image of inexpensive but unhealthy food, also known as junk
food, people are going elsewhere to fulfill their appetite. This is a bad trend for
McDonalds. With the established image McDonalds have, some thing drastic need
to happen to compete in this climate.
In addition to the healthy food trend, we cannot also overlook the organic
food trend. As seen by the Stores like Wholefoods and Traders Joes, the extreme
emphasis on organic food is winning the hearts of the modern customers. This is
detrimental to restaurants like McDonalds. Even if McDonalds start trying to add
more healthy food, customers will have hard time associating healthy with
McDonalds. It is basically at the opposite end of spectrum regarding type of food.
Since this trend is not looking to change in the future, McDonalds need to be fully
aware of this and take action.

Using Porters five forces reveals many aspects about the external
environment. This method gives a better understanding of where the company
stands currently.

First, the bargaining power of suppliers effects how McDonalds operate. In
instance, a rise in commodity in the future can affect MacDonalds ability buy
supplies. Rising in meat price will hurt McDonalds the most by increasing expense
for all the stores around the world (5). Supply buyer need to make sure to secure
futures for the important commodity in case of anomalies. Suppliers will have the
power to increase its price if supplies are in high demand and other companies are
willing to paying more.

Second, the bargaining power of the buyers also affects how McDonalds
price its menu. With many competitors in the market, buyers have a lot of power to
lower the price. The customers can easily decide to go to other restaurants with
similar and cheaper food. Additionally, customers have the power to demand better
quality. McDonald need to be careful to not lower its food quality so much cut their
expenses.

Third, McDonalds need to be aware of the new entrants. McDonalds
compete in a industry that has a high threat of new entrants. This is in terms of food
industry as a whole, not just fast food restaurants. Anyone could get into a food
industry with moderate investment. Local family owned restaurant could emerge
any time. Franchising other fast food restaurant, such as Subway, is highly possible
in any market where McDonalds already exists. One aspect McDonalds has an
advantage in this category is it economics of scale. This is mostly true when
competing with family startups. It may be easy for anybody to enter the restaurant
industry but it would be hard to compete in pricing. McDonalds is able to price their
menu aggressively because of its size. Therefore, it is hard for new comers to enter
the fast food market in terms of pricing but not necessary the whole restaurant
industy.

Next, considering the threats of substitutes, there are many that
McDonalds need to be aware. Looking at the potential substitute is beneficial in
making future decisions when the company wants to expand. One substitute for the
customers is grocery stores. Many grocery stores sell frozen foods that are cheap
and taste good as any restaurants. When customers can buy a large quantity of
frozen food at once, it is more convenient to microwave their food rather than going
through the hassle of driving to a fast-food restaurant near-by. Customers also does
not need to think about open hours. In the same way, takeout food such as Chinese
and Thai food, can take always sales from the fast-food industry. Additionally, Gas
stations and convenience stores are a substitute to fast food restaurants too. In
instance of a time crunch, grabbing some food at a convenience store or gas station
is actually faster than getting something at fast food restaurants.

Lastly, competitors are a direct threat to the company. Some of the major
competitors are Yum Brands, Wendys, and Burger King. They all play a big role in
McDonalds performance. McDonalds have to be in a price war with these direct
competitors. McDonalds also need to be always aware of what the competitors are
doing regarding their new products and invest in advertising to attain more
awareness than the competitors.

Another method to analyze the external environment is to look at the general
environment. This is also an important that will help come up with future
strategies.

In terms of demographics, McDonalds do well in places with low-income
families. This aspect was also proved during recession. When great recession hit the
world, majority of the companies in the United States suffered. However,
McDonalds did well. Its sales are still going up as usual. This shows that the external
environment that the company has no control affects the bottom line significantly.
McDonalds need to keep this experience in mind when trying to come up with a
new strategy. Providing inexpensive food in a fast manner is one of the companies
core competencies.

In terms of Socio-cultural aspect, with greater concern for health, McDonalds
is losing its customers. This is one of the greatest issue McDonalds need to resolve.
Even with the introduction of salads, customers perception has not changed much.
McDonalds need to keep investing in this issue (5)

Legal and Political aspects plays a big role in decision-making. New insurance
laws such as Affordable Care Act will affect the cost of human resources. Rising of
minimum wage in certain state is also a big factor. These are not in the companies
control but it is important because it affects the human capital.

In terms of government regulations, the company needs to be aware of the
new tax laws. The company may need to make different plans because of the
differences in the regulation depending on local, state, federal governments. One of
the biggest effects from the government regulation is that McDonalds is required to
post calorie and nutritional information on their menus required by Food & Drug
Administration. This is required for all restaurants with more than 20 location (3).
This is also a sign that McDonalds need to be concerned with health issues because
it is not going away soon.

As McDonalds is a global company, it needs to consider currency exchange
issues. The company needs to be investing in quality financial planner that
specialized in foreign currencies. Cultural, religious issues cannot be over looked
either. Since the company sells its products all over the world, one strategy does not
fit all. Different divisions need to come up with different decisions based on their
country.

Internal Analysis:

In order to come up with a strategy, internal analysis is vital. The value chain
analysis is first used. The value chain will allow us to see the strengths and
weaknesses of the company. It will help us determine the new strategy.

McDonalds primary activity starts with buying ingredients. Since the
company has a wide network around the world and has a negotiation power
because of its size, it has a competitive advantage to the competitors. McDonalds
implements a strategy where it localized the menu. In Middle East, it accommodates
by changing the menu to fit their religious doctrines. In Asia, McDonalds has
hamburgers that use soy souse.

Its operations are efficient since the company is one of the pioneers in the
fast food industry. The company has a system in place for anyone to be able to learn
how to prepare food efficiently and fast.

McDonalds invest heavily in marketing and sales. The company is famous for
the Im living it slogan. The company sponsors many sporting events (4). The
notable sporting events that they invest in are the Olympics and the world cup. The
company is aware that investing in marketing and sales is a vital part of it business.
McDonalds is known for it fast service. With its new strategy in the McCafe, the
company is successfully expanding into more of the middle segment and the caffeine
business like Starbucks.

As a major global company, McDonalds has reliable supporting activities.
The corporate office successfully supports the franchisees. It human resource
management is known for hiring many young people for their first jobs because the
company give the young hires good foundation in the restaurant business.
McDonalds has a good technology support by continuously updating its computer
devices in its stores.

McDonalds competitive advantage comes form its firm Resources. One of the
companys intangible resources is it brand. The brand awareness is one of the best
in the world. This scale of brand awareness cannot be established overnight. Most
everybody has heard of McDonalds and it makes people come into the stores. As the
brand awareness is so high, this aspect is valuable when coming up with a new
strategy.

One of the companys tangible resources is its real estates. McDonalds has
stores all over the world and this is a major asset for the company. McDonald is in
119 countries according to the 2014 annual report.

Competition:

Analyzing the competition is inevitable. The company cannot make decisions
in a vacuum.

The food industry is more fragmented than ever (6). It used to be that people
either chose to go to fast-food hamburger shop restaurant or regular restaurants. In
this case, McDonalds competitors would be such as Wendys and Burger King or
other nicer restaurants, which McDonalds would not be competing. Now, customers
have a choice to go to middle-range restaurants. Some of the examples are burrito
shops like Chipotle and Freebirds. The middle range burger shops such as Five Guys
and Mooyah is popular too. Customers in this middle segment are willing to pay a
little more to have higher quality burgers. There are also many popular sandwich
shops that people choose to go to. Notable sandwich shops are Subway, Potbelly,
Firehouse Subs, and Whichwich.

Another competitor, Jack In The Box owns Qdoba which is a burrito
restaurant with is priced a little higher than it burger restaurants. Jack In The Box is
taking the diversification approach. McDonalds was using the same approach when
it owned Chipotle and Boston Market. However, the strategy was deemed to be
successful and they were divested so that the company can concentrate on its core
competency.

Yum Brands is a direct competitor to McDonalds in terms of the fast food
Industry. Yum brands own Tacobell, KFC, and Pizza hut. They are different from
McDonalds since it takes the diversification strategy. This approach is beneficial in
that when one business sector is not going well the company can still make profit
from the other two business sectors. When McDonalds goes in a period of low sales,
it does not have any other business sectors to fall back on.

Starbucks is another emerging competitor. Starbucks is different in a sense
that they are in beverage business. However, looking at how it is expanding all over
the world like McDonalds, and Starbucks started to serve snacks, McDonalds need
to be aware of this trend. By McDonalds introducing McCafes the two companies
are competing more in the same business model. In terms of the revenue, Starbucks
is the biggest threat to McDonalds. In 2013, Starbucks revenue was 15 billion
where McDonalds was 28 billion. Yum Brands made 13 billion, Burger King 1.15
billion, and Wendys made 2.48 billion.

Subway is another notable competitor. Subway has surpassed McDonalds
with number stores. According to Wall Street Journal, Subway has 33,749
restaurants worldwide and McDonald has 32,737. McDonalds still beats Subway in
terms of revenue. However, because of the trend in healthier food, Subway is ahead
in the health trend. (2)

Growth management:

After using the external and internal analysis, we get a better since of where
McDonalds stand today. The companys growth management is also important
when looking into the future.

When expanding its operations, McDonald can use its industry leading cash
flow. (Annual report p.11). Regardless of whatever strategy the company takes in
the further the cash flow will help the company move more quickly and more
efficiently. This will be one of the competitive advantages since it can move faster
than the competitors.

In order grow, it is essential to come up with new products. McDonalds have
the ability to take more risks than others because McDonalds already has popular
all time favorites that people will still keep buying. Investing in the existing
restaurant is another viable strategy. This has already been implemented and it
needs to continue. Cleanliness will play a major factor is bringing more customers.
Because of their brand and their size, McDonalds will be able to receive a good
credit terms to finance for all the renovations.

In order for McDonalds to grow, the company needs to keep investing into
research and development and marketing. By being cognizant of the future climate
and the choices of new products it can put out, the company will be able to evolve
with the new market climate.

Financial Analysis:

Looking at the Net Income for the last three years, income has stagnated. Net
Income in 2011 was 5.5 billon and net income in the 2013 was 5.6 billon. This is
only a 1.8% increase from three years ago. This proves that the company is not
expanding from the profit side, and it is a concern for the stockholders. Comparing
stock prices within the last three years, it has stayed around $92 (4).

However performing a comparative analysis with the direct competitor Yum
Brands gives us a different perspective. As can be seen from financial table 2, the
current ratio for McDonalds is 1.59, and the Yum Brands has 0.74. Yum Brands have
a ratio below one, which means that their current liabilities is higher than the
current asset. This shows that Yum Brands is more likely to fail paying their current
debt. On the contray, McDonalds has a ratio that is above one. This shows that in
spite of poor growth, McDonalds is stable from the balance sheet perspective. All
the other ratios such as debt-to-equity ratio and debt-to-asset ratio show the similar
result.

Looking at the financials, McDonalds has a good cash flow. In 2013, Cash
totaled $7.1 billion from operations. This exceeded capital expenditures by $4.3
billion. (Annual Report p.19) This number would be well received by short-term
debt holders and suppliers who have receivables from McDonalds. Free cash flow
will allow the company to move more quickly. In addition, when the company
encounters a bad month or quarter, it can sustain the damage.

According to the balance sheet, McDonalds has a total liability of 17 billion in
2013 when adding the current and long-term debt. The debt in 2012 was also 17
billion. Because of the size of the company, McDonalds is able to carry a large
amount of debt. However, this number should be in the attention of the creditors
and stockholders.

Conclusion:

Even though McDonalds profit hasnt gone up for the past few years and the
stock price is not increasing, McDonalds has a good foundation to invest in new
strategy. The company has many usual internal resources, starting with its strong
brand, to take more risks. Like how McDonalds came up with McCafe, McDonald
need something new to attract future customer.

One new option is packaging products that could be sold in grocery stores.
McDonalds already has a brand image. If the company used its brand image and its
enocomic power, it can come up with inexpensive products that would be popular
among all generations. If they focus on frozen foods, the choices are endless. It could
use their popular breakfast menu as frozen foods. Desert category such as ice cream
is also viable.

This strategy will give more exposure to the grocery shoppers and it may
also work as marketing, reminding customers to visit Mcdonalds.
Needless to say, McDonalds is a fast food hamburger company. By reaching
out to packaging products in grocery stores will not hurt the sales in its stores. The
people who currently come to the stores will continue to come. This strategy will
preserves the companys identity and also increase its profits.

Another option is to invest more in the high-end market. The United States
gap between the rich and the poor is widening. Just like McDonald invested and
helped Chipotle to grow to be one of the prominent middle-market chains the
United States, McDonald can invest in to a high-end market. After the high-end
restaurant becomes well known and established, it can cross-market with
McDonalds and increase sales in the both market. This strategy is similar to the
packaging idea, since it will not compete with the existing customers.


Financial Table 1

McDonald's
Current Year
(2013)
Prior Year
(2012)
%
Change
Income Statement

REVENUES

Sales by Company-operated restaurants $18,874 $18,603 1.46%
Revenues from fanchised restaurants $9,232 $8,965 2.98%
Total revenues $28,106 $27,567 1.96%
OPERATING COSTS AND EXPENSES

Company-operated restaurant expenses

Food & paper $6,361 $6,318 0.68%
Payroll & employee benefits
$4,824 $4,710 2.42%
Occupancy & other operating expenses $4,394 $4,195 4.74%
Franchised restaurants-occupancy expenses
$1,624 $1,527 6.35%
Selling, general & administrative expenses
$2,386 $2,455 -2.81%
Other operating (income) expense, net
$(247) $(244) 1.23%
Total operating costs and expenses
$19,341 $18,962 2.00%
Operating income
$8,764 $8,605 1.85%
Interest expense-net of capitalized interest of $15.5, $15.9 and
$14.0 $522 $517 0.97%
Nonoperating (income) expense, net
$38 $9 322.22%
Income before provision for income taxes
$8,205 $8,079 1.56%
Provision for income taxes
$2,619 $2,614 0.19%
Net income
$5,586 $5,465 2.21%


Balance Sheet

ASSETS

Current assets

Cash and equivalents
$2,799 $2,336 19.82%
Accounts and notes receivable
$1,320 $1,375 -4.00%
invenories, at cost, not I excess of market
$124 $122 1.64%
Prepaid expenese and other current assets
$808 $1,089
-
25.80%
Total current assets
$5,050 $4,922 2.60%
Other assets

Investments in and advances to affiliates
$1,209 $1,381
-
12.45%
Goodwill
$2,873 $2,804 2.46%
Miscellaneous
$1,747 $1,603 8.98%
Total other assets
$5,829 $5,787 0.73%
Property and equipment


Property and equipment, at cost
$40,356 $38,491 4.85%
Accumulated depreciationa nd amortization

$(14,608
)

$(13,814
) 5.75%
Net property and equipment
$25,747 $24,677 4.34%
Total assets
$36,626 $35,387 3.50%
LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities

Accounts payable
$1,086 $1,142 -4.90%
Incone taxes
$216 $299
-
27.76%
Other taxes
$383 $371 3.23%
Accrued interest
$222 $217 2.30%
Accrued payroll and other liabilities
$1,264 $1,375 -8.07%
Total current liabilities
$3,170 $3,403 -6.85%
Long-term debt
$14,130 $13,633 3.65%
Other long-term liabilities
$1,669 $1,526 9.37%
Deferred incom taxes
$1,648 $1,531 7.64%
Shareholder's equity

Preferred stock, no par value; authorized 165.0 million shares; issued none
Common stock, $.01 par value; authorized 3.5 billion shares; issued 1,660.6 million
shares $17 $17 0.00%
Additional paid-in capital $5,994 $5,779 3.72%
Retained earnings $41,751 $39,278 6.30%
Accumulated other comprehensive income $428 $796
-
46.23%
Common stock in treasury, at cost; 670.2 and 657.9 million shares

$(32,180
)

$(30,576
) 5.25%
Total shareholders equity $16,010 $15,294 4.68%
Total liabilities and shareholders equity $36,626 $35,387 3.50%

Financial Table 2

(in millions)
Mcdonalds % Yum Brands %
Income Statement
Sales $28,106 100.00% $13,084 100.00%
Operating Income $8,764 31.18% $1,798 13.74%
Net Income $5,586 19.87% $1,091 8.34%




Blance Sheet
Total Assets $36,626 100.00% $8,695 100.00%
Total Debt $14,130 38.58% $6,490 74.64%
Total shareholder's equity $16,010 43.71% $2,166 24.91%


Financial Table 3:
Ratio McDonald's Yum Brands
Current Ratio 1.59 0.74
Quick Ratio 1.3 0.39
Debt-to-equity Ratio 1.29 1.38
Debt-to-total Assets Ratio 0.56 34.38
Inventory Turnover 163.3 35.7
Total Asset Turnover 0.8 1.5
Gross Profit Margin 1.41% -1.34%
Net Profit Margin 19.87% 14.65%
Return on Assets 15.12% 15.11%
Return on Equity 35.73% 47.06%





Reference:

(1) Annual report

(2) -Global Markets Direct SWOT Reports, April 22 2014 (Global data, McDonald's
Corporation - Financial and Strategic Analysis Review, 30-Sep-2013)

(3) "Menus start to count calories." Arkansas Business 11 Mar. 2013: 24. Business
Insights: Essentials. Web. 9 July 2014.

(4) McDonald's Corp - Jul 05, 2014 - S&P Capital IQ STARS Reports 11

(5) Rising Meat Prices Could Hurt McDonald's Margins - Jun 24, 2014 - Trefis 5

(6) Muirhead, Sarah. "McDonald's sets measurable sustainability goals: McDonald's
takes sustainability efforts to next level by setting specific targets in three key
areas." Feedstuffs 2 June 2014: 6. Business Insights: Essentials. Web. 9 July 2014.