netrashetty
Netra Shetty
McDonald's Corporation (NYSE: MCD) is the world's largest chain of hamburger fast food restaurants, serving more than 58 million customers daily.[4] In addition to its signature restaurant chain, McDonald’s Corporation held a minority interest in Pret A Manger until 2008, was a major investor in the Chipotle Mexican Grill until 2006,[5] and owned the restaurant chain Boston Market until 2007.[6]
A McDonald's restaurant is operated by either a franchisee, an affiliate, or the corporation itself. The corporation's revenues come from the rent, royalties and fees paid by the franchisees, as well as sales in company-operated restaurants. McDonald's revenues grew 27% over the three years ending in 2007 to $22.8 billion, and 9% growth in operating income to $3.9 billion.[7]
McDonald's primarily sells hamburgers, cheeseburgers, chicken products, french fries, breakfast items, soft drinks, shakes, and desserts. In response to obesity trends in Western nations and in the face of criticism over the healthiness of its products, the company has modified its menu to include alternatives considered healthier such as salads, wraps and fruit
McDonald’s (NYSE: MCD) is the world's largest fast food restaurant chain, with over 32,000 locations in over 110 countries. McDonald's operates its own restaurants and franchises its brand to local businesspeople (about 70% of the world's McDonald's restaurants are franchised).[1] The company experienced a dramatic turnaround in 2003, driven by a two-pronged strategy. In the U.S., McDonald's focused on increasing sales at existing locations by renovating stores, expanding menu options and extending store hours. Internationally, McDonald's expanded aggressively, opting to franchise rather than operate its new locations, providing new income with little overhead.
Both strategies have paid dividends - despite its size, sales have grown by a third since 2003[2]. Domestically, McDonald's continues to perform well despite a pullback in consumer spending and is even benefiting as consumers trade down from more expensive eating options. At the same time, international operations are driving profit growth. A growing global middle class, particularly in emerging markets like China, India, and Latin America, represents a massive opportunity for McDonald's.
Business Overview
McDonald's makes money by operating its own restaurants and franchising to third parties. As of late 2009, 25,975 (80%) of its 32,278 restaurants around the world were franchises while only 6,303 (20%) were company-operated.[3] Franchises provide the initial capital required to build the restaurant and maintain it through reinvestment, whereas direct restaurant operation is more capital-intensive relative to franchising and results in lower restaurant margins as a percent of revenues. Over time, McDonald’s has been shifting its restaurant portfolio toward franchises.
Contents
1 Business Overview
1.1 Business & Financial Metrics
1.2 Q1 FY2010 Earnings Summary
1.3 Q2 FY2010 Earnings Summary
1.4 Q3 FY2010 Earnings Summary
1.5 Q4 FY2010 Earnings Summary
1.6 Business Segments
2 Key Trends and Forces
2.1 Strong International Growth is Driving MCD's Sales
2.2 MCD Entered a Lucrative Coffee Market but Faces an Ongoing Bidding War Against Competitors
2.3 MCD's Menu Must Adapt to Constant Changes in Consumer Preferences to Insure Profitability
2.4 Healthcare Reform will Create Looming Employment Costs for MCD
3 References
McDonald’s generates revenue from sales by its company-operated restaurants as well as fees from its franchise restaurants. Revenues from conventional franchised restaurants include rent and royalties based on a percent of sales along with minimum rent payments, and initial fees. Revenues from restaurants licensed to affiliates and developmental licensees include royalties based on a percent of sales, and generally include initial fees.
McDonald’s primarily sees its company-owned restaurants as a testing ground for new marketing, product, and pricing strategies that can be scaled to its entire system as well as a training ground for corporate personnel and an important element in maintaining its status as a credible franchiser.
McDonald’s has pursued two strategies since 2003. To keep up with rapidly changing consumer preferences, demographics, and spending patterns, McDonald's has introduced new items (Premium Chicken sandwiches and the Angus Beef Burger) and campaigns to create more healthy foods (Premium Salads). The strategy reflects the philosophy that novelty, as opposed to loyalty to traditional products, is the key determinant of sales in the fast food industry.
McDonald’s has also focused on increasing sales at existing restaurants instead of opening new ones[4]. To do so, McDonald's has remodeled many restaurants, kept stores open longer, and increased menu options. Nevertheless, new McDonald’s restaurants are still opening around the world at a rapid rate.
McDonald’s Franchises versus Company-Owned Restaurants
Metric 2004 2005 2006 2007 2008 2009
Total Restaurants 30,496 30,766 31,046 31,377 31,967 32,478
Franchised Restaurants 22,317 22,593 22,880 24,471 25,465 26,216
Company-Owned Stores 8,179 8,173 8,166 6,906 6,502 6,262
% Company-Owned Stores 26.8% 26.6% 26.3% 22.0% 20.3% 19.3%
Business & Financial Metrics
In 2009, McDonalds had revenues of $22.7 billion and operating profits of $6.8 billion. Sales across all of its company-owned and franchised restaurants totaled $56.9 billion. Revenues were down 3.3% over 2008, but profits were up 6.2%. Over 5 years, McDonalds has seen company revenues increase at an annual rate of 4.9%, while profits increased by 10.0% and storewide sales grew by 9.0%. [5] McDonald's revenues for the first three quarters of 2009 (ending September 30, 2009), were $11.4 billion, down 10.1% from the first nine months of 2008. At the same time, operating income increased 1.5% over the same period last year, reaching $5.0 billion. The declines in revenue were offset by larger declines in operating cost.
Q1 FY2010 Earnings Summary
MCD posted earnings of $1.09 billion, or $1 per share, during the first quarter of FY2010, up from $979.5 million, or $0.96 per share, of earnings in Q1 FY2009.[6] These earnings results were impacted by a $0.03 charge relating to closings of some locations in Japan. Revenues for MCD rose to $5.61 billion, an increase of 10% from Q1 FY2009, and also ahead of analyst expectations of $5.53 billion. Same-store-sales also went up 4.2%, with US same-store-sales up 1.5%, 5.2% in Europe and 5.7% in Asia, Pacific Islands, Middle East, and Africa.[7]
MCD attributes its changes in menu to value based products for its strong quarterly performance. For example, MCD saw success in its McCafe product line, as well as a new value breakfast menu which all provided cheaper alternatives for consumers.[8]
Q2 FY2010 Earnings Summary
MCD posted revenues of $5.945 billion USD for the second reporting quarter of FY2010, a 5% increase compared to $5.647 billion USD in Q2 FY2009.[9] Further, net income came to $1.225 billion USD, a 12% increase compared to $1.093 billion USD in Q2 FY2009. MCD attributes these increased results to higher comparable sales, traffic and profits.[10]
For example, global comparable sales increased 4.8%, with Europe leading at 5.2%, followed by Asia/Pacific, Middle East and Africa up 4.6%, and finally U.S. up 3.7%. Further, diluted earnings per share were $1.13, up 15% with foreign currency translation having no impact.[11] These were attributed to a daypart expansion and core menu extensions which gave greater choices for consumers to choose MCD. Given positive results, MCD returned $1.6 billion to shareholders through share repurchases and dividends.
Q3 FY2010 Earnings Summary
MCD posted earnings of $1.39 billion ($1.29 EPS) for the third quarter of FY2010, a 10% increase compared to same quarter FY2009, while sales also rose 4.3% to $6.3 billion.[12] MCD's success comes while other competitors such as Burger King reported continously falling year-over-year sales. Specifically, MCD attributes increased performance to sales from new products such as frappes and fruit smoothies, as MCD begins to diversify itself from its traditional menu. As a result, MCD has been able to increase market share gain as it begins to steal market share from rival substitute markets such as fruit smoothie or coffee.
MCD's chain sales at stores open more than 13 months increased 6% globally. Highest growth came from Asia, Middle East and Africa where growth was 8.1% compared to the U.S. which rose by 5.3% and Europe which increased by 4.1%. McDonald's plans to raise menu prices to blunt higher costs which is projected to rise between 2% to 3% in FY2011.[13] The company also planned to cut the number of remodels stores from 400 - 500 stores to 225; the company plans to remodel 600 next fiscal year.[14]
Q4 FY2010 Earnings Summary
MCD reported earnings of $1.24 billion, or $1.16 EPS, for the fourth reporting quarter of FY2010, a 1.6% increase compared to $1.22 billion same quarter last year. Revenues rose to $6.21 billion from $5.97 billion, a 4.0% increase.[15] This met against analyst consensus estimates of $1.15 EPS and revenue estimates of $6.2 billion.[16]
MCD attributes profitable market-share growth and global same-store sales of 5% increase to be the attributing factors of positive performance. For example, same-store sales rose 4.4% in the US, 3.4% increase in Europe, and 5.5% across Asia Pacific, Middle East and Africa.[17] As global economic slowdown continues, consumers continue to trade down from more expensive restaurants to food venues like McDonald's. However, going forward, MCD plans to raise prices this year to offset a total of ten commodities that account for 75% of MCD's food preparation costs.[18] These ten commodities include beef, chicken, pork, bread and milk products, paper, cola, ketchup and other sauces, and fruits and vegetables.[19] With food prices rising across the world, MCD expects its costs to rise 2% to 2.5% in the US and 3.5% to 4.5% in Europe.
Business Segments
McDonald's breaks down its revenue by geographical segments. McDonald's generates most of its revenue in Europe. Part of the McDonald's growth strategy is global expansion.[20]
Key Trends and Forces
Strong International Growth is Driving MCD's Sales
McDonald's has a sizable international presence; the majority of sales occur outside of the United States. In addition to developed markets like the U.K., Canada, South Korea and Australia, McDonald's operates in fast growing emerging markets like China, India, Russia and Eastern Europe. By tapping into a growing global middle class, the company's international operations have consistently posted strong same-store sales growth. China is a particularly promising opportunity. In FY2007, McDonald's launched the breakfast menu, extended store hours to 24 hours in major cities, and implemented drive-thru in China in its efforts to capitalize on this huge market[21].
As a result, MCD's June 2010 sales have shown a continuous uptrend in international markets at 7%.[22] Specifically APMEA (Asia/Pacific, Middle East & Africa) was the major contributor to MCD's success, along which Japan, Australia, and China showed most promise. These results have emphasized the importance in MCD's core value menu offerings and variety in its breakfast menus. Specifically, MCD's move to expand to international markets means that it can tap into a less health-conscious market segment that will allow MCD to utilize a menu that relies less on costly constant product changes.[23]
MCD Entered a Lucrative Coffee Market but Faces an Ongoing Bidding War Against Competitors
Starbucks road to fame was marked by a move into a small coffee drinker market over one decade ago, but as Starbucks starts to hit market saturation, large and small enterprises alike are starting to enter to steal market share. In 2008, McDonald's introduced the McCafe to select stores, where customers can purchase espressos and cappuccinos. These drinks, which are priced in the $2-4 range, represent McDonald's foray into the high-margin caffeinated beverages market, currently dominated by Starbucks.[24]
Though MCD has been able to profit greatly from its McCafe move, the resulting "coffee war" amongst the food giants began a costly ad campaign in which MCD tried to orient customers away from Starbucks and to cheaper alternatives. This bidding war allowed small-time coffee chains such as Green Mountain Coffee Roasters (GMCR) and Caribou Coffee Company (CBOU) to steal market share as unique quality coffees, the very type of business model that Starbucks attempted to implement in the early days.[25] However, as commodity prices for coffee continue to rise, it is uncertain whether these small chains will be able to survive against large food giants which have the capacity and experience to hedge effectively. The coffee market for MCD therefore continues to become a profitable but now more uncertain market.
MCD's Menu Must Adapt to Constant Changes in Consumer Preferences to Insure Profitability
Consumer preferences that gravitate towards more nutritional food (see Natural & Organic Foods Consumption and Health & Wellness) decrease the appeal of eating at McDonald’s. As these consumer trends continue to shift towards the mainstream, public perception of McDonald's becomes increasingly negative. These changes may climax in lawsuits or media publications like Super Size Me, which criticizes McDonald’s products for causing obesity, and Fast Food Nation, which decries McDonald's business practices. Since McDonald's is the most recognized brand name in the fast food industry, these negative publicity events have widespread impact on its brand equity. Furthermore, because there are many alternatives to fast food (such as cheap dine-in restaurants, street vendors and convenience stores), the corporation's sales depend on its ability to maintain its brand name and attract new customers.
The introduction of salads and public nutrition campaigns are examples of McDonald's efforts to adapt its business model to changing trends in the market. In recent years, McDonald's has turned away from a stable unchanging menu to one which is innovative and trendy. Following product launches such as the "McGriddle," "Snack Wrap" and premium coffee (set to take market share from Starbucks), MCD's latest product is the smoothie.[26] The new products, strawberry-banana and "wild berry" smoothie flavors aim to take market share from the fruity beverage sector after successfully doing the same to the coffee market.
The new venture into drinks may provide a new turning point for MCD by turning to compete against smaller competitors (Jamba Juice, Tropical Smoothie and Planet Smoothie) rather than major fast food players such as Burger King Holdings (BKC) or Yum! Brands (YUM). The smoothie category currently is small, with a yearly consumption of about 422 million servings in America compared to 2.57 billion servings of specialty coffee from April 2009 to March 2010.[27] MCD therefore hopes to transform a niche market into a mass market as Starbucks did to specialty coffee in the early 2000's.
Healthcare Reform will Create Looming Employment Costs for MCD
MCD currently provides 29,500 hourly restaurant workers "mini-med" plans, but the new regulations for healthcare reform may force MCD to drop these plans because the requirement concerns the percentage of premiums that must be spent on benefits.[28] Some hourly restaurant workers choose "mini-med" plans rather than full coverage because they are insured by some other source; this is particularly true for hourly-workers that have spouses covering their medical insurance or individuals that are dependent on their parents.[29] However, as these individuals are considered employees, they are under the guidelines of the new reform. Currently, a single worker can receive approximately $10,000 of coverage per year for roughly $32 a week.[30]
Competition Although McDonald's is the clear leader of the fast food industry in terms of revenues generated and restaurants established, it faces competition from other fast food chains, which are introducing new products themselves. ues Major direct competitors in the (hamburger-based) fast food industry include:
Burger King Holdings is the second largest hamburger fast food chain. Although more of Burger King’s restaurants are franchised than McDonald’s restaurants, Burger King franchise revenues trail behind that of its competitor, mainly due to the McDonald’s size advantage.
Wendy's is the third largest hamburger fast food chain. It has a lower operating margin that McDonald’s, so it is likely to be more negatively impacted during a recession.
Yum! Brands runs Kentucky Fried Chicken, Taco Bell, Pizza Hut, Long John Silver’s, and A&W All-American Food Restaurants. Currently, Yum! brands are dominating the China market, posing a challenge to McDonald's attempts to enter the market. While McDonald’s Corporation focuses on its flagship brand, Yum! splits its resources among a wide variety of restaurants.
In addition to the above competitors, McDonald’s also competes with non-hamburger-based fast food restaurants (such as Panera Bread Company (PNRA), Panda Express and Qdoba), local and national dine-in restaurants (such as Red Robin’s and Shari’s), pizza parlors, coffee shops (Starbucks), street vendors, convenience stores and supermarkets. McDonald's main competitors and its respective financials are shown below: Company Revenues (M) Net Income (M) Net Margin Restaurants Franchised % McDonald's (MCD) $22,745 $4,551 20.0% 32,478 81% Yum! Brands (YUM) $10,836 $1,083 10.0% 37,000 Starbuck’s (SBUX) $9,775 $391 4.0% 16,635 47% Darden Restaurants (DRI) $7,218 $372 5.2% 1,773 0% Brinker International (EAT) $3,621 $79 2.2% 1,689 40% Wendy's International (WEN) $3,581 $4 0.1% 6,451 80% Burger King Holdings (BKC) $2,537 $200 7.9% 11,925 88% Jack in the Box (JACK) $2,471 $131 5.3% 2,212 46% CKE Restaurants (CKR) $1,419 $48 3.4% 3,141 71% Domino's Pizza (DPZ) $1,404 $80 5.7% 9,339 91% Panera Bread Company (PNRA) $1,353 $87 6.4% 1,380 58% Data from company FY 2009 annual reports (CKE data from FY annual, ended January 31, 2010).
A McDonald's restaurant is operated by either a franchisee, an affiliate, or the corporation itself. The corporation's revenues come from the rent, royalties and fees paid by the franchisees, as well as sales in company-operated restaurants. McDonald's revenues grew 27% over the three years ending in 2007 to $22.8 billion, and 9% growth in operating income to $3.9 billion.[7]
McDonald's primarily sells hamburgers, cheeseburgers, chicken products, french fries, breakfast items, soft drinks, shakes, and desserts. In response to obesity trends in Western nations and in the face of criticism over the healthiness of its products, the company has modified its menu to include alternatives considered healthier such as salads, wraps and fruit
McDonald’s (NYSE: MCD) is the world's largest fast food restaurant chain, with over 32,000 locations in over 110 countries. McDonald's operates its own restaurants and franchises its brand to local businesspeople (about 70% of the world's McDonald's restaurants are franchised).[1] The company experienced a dramatic turnaround in 2003, driven by a two-pronged strategy. In the U.S., McDonald's focused on increasing sales at existing locations by renovating stores, expanding menu options and extending store hours. Internationally, McDonald's expanded aggressively, opting to franchise rather than operate its new locations, providing new income with little overhead.
Both strategies have paid dividends - despite its size, sales have grown by a third since 2003[2]. Domestically, McDonald's continues to perform well despite a pullback in consumer spending and is even benefiting as consumers trade down from more expensive eating options. At the same time, international operations are driving profit growth. A growing global middle class, particularly in emerging markets like China, India, and Latin America, represents a massive opportunity for McDonald's.
Business Overview
McDonald's makes money by operating its own restaurants and franchising to third parties. As of late 2009, 25,975 (80%) of its 32,278 restaurants around the world were franchises while only 6,303 (20%) were company-operated.[3] Franchises provide the initial capital required to build the restaurant and maintain it through reinvestment, whereas direct restaurant operation is more capital-intensive relative to franchising and results in lower restaurant margins as a percent of revenues. Over time, McDonald’s has been shifting its restaurant portfolio toward franchises.
Contents
1 Business Overview
1.1 Business & Financial Metrics
1.2 Q1 FY2010 Earnings Summary
1.3 Q2 FY2010 Earnings Summary
1.4 Q3 FY2010 Earnings Summary
1.5 Q4 FY2010 Earnings Summary
1.6 Business Segments
2 Key Trends and Forces
2.1 Strong International Growth is Driving MCD's Sales
2.2 MCD Entered a Lucrative Coffee Market but Faces an Ongoing Bidding War Against Competitors
2.3 MCD's Menu Must Adapt to Constant Changes in Consumer Preferences to Insure Profitability
2.4 Healthcare Reform will Create Looming Employment Costs for MCD
3 References
McDonald’s generates revenue from sales by its company-operated restaurants as well as fees from its franchise restaurants. Revenues from conventional franchised restaurants include rent and royalties based on a percent of sales along with minimum rent payments, and initial fees. Revenues from restaurants licensed to affiliates and developmental licensees include royalties based on a percent of sales, and generally include initial fees.
McDonald’s primarily sees its company-owned restaurants as a testing ground for new marketing, product, and pricing strategies that can be scaled to its entire system as well as a training ground for corporate personnel and an important element in maintaining its status as a credible franchiser.
McDonald’s has pursued two strategies since 2003. To keep up with rapidly changing consumer preferences, demographics, and spending patterns, McDonald's has introduced new items (Premium Chicken sandwiches and the Angus Beef Burger) and campaigns to create more healthy foods (Premium Salads). The strategy reflects the philosophy that novelty, as opposed to loyalty to traditional products, is the key determinant of sales in the fast food industry.
McDonald’s has also focused on increasing sales at existing restaurants instead of opening new ones[4]. To do so, McDonald's has remodeled many restaurants, kept stores open longer, and increased menu options. Nevertheless, new McDonald’s restaurants are still opening around the world at a rapid rate.
McDonald’s Franchises versus Company-Owned Restaurants
Metric 2004 2005 2006 2007 2008 2009
Total Restaurants 30,496 30,766 31,046 31,377 31,967 32,478
Franchised Restaurants 22,317 22,593 22,880 24,471 25,465 26,216
Company-Owned Stores 8,179 8,173 8,166 6,906 6,502 6,262
% Company-Owned Stores 26.8% 26.6% 26.3% 22.0% 20.3% 19.3%
Business & Financial Metrics
In 2009, McDonalds had revenues of $22.7 billion and operating profits of $6.8 billion. Sales across all of its company-owned and franchised restaurants totaled $56.9 billion. Revenues were down 3.3% over 2008, but profits were up 6.2%. Over 5 years, McDonalds has seen company revenues increase at an annual rate of 4.9%, while profits increased by 10.0% and storewide sales grew by 9.0%. [5] McDonald's revenues for the first three quarters of 2009 (ending September 30, 2009), were $11.4 billion, down 10.1% from the first nine months of 2008. At the same time, operating income increased 1.5% over the same period last year, reaching $5.0 billion. The declines in revenue were offset by larger declines in operating cost.
Q1 FY2010 Earnings Summary
MCD posted earnings of $1.09 billion, or $1 per share, during the first quarter of FY2010, up from $979.5 million, or $0.96 per share, of earnings in Q1 FY2009.[6] These earnings results were impacted by a $0.03 charge relating to closings of some locations in Japan. Revenues for MCD rose to $5.61 billion, an increase of 10% from Q1 FY2009, and also ahead of analyst expectations of $5.53 billion. Same-store-sales also went up 4.2%, with US same-store-sales up 1.5%, 5.2% in Europe and 5.7% in Asia, Pacific Islands, Middle East, and Africa.[7]
MCD attributes its changes in menu to value based products for its strong quarterly performance. For example, MCD saw success in its McCafe product line, as well as a new value breakfast menu which all provided cheaper alternatives for consumers.[8]
Q2 FY2010 Earnings Summary
MCD posted revenues of $5.945 billion USD for the second reporting quarter of FY2010, a 5% increase compared to $5.647 billion USD in Q2 FY2009.[9] Further, net income came to $1.225 billion USD, a 12% increase compared to $1.093 billion USD in Q2 FY2009. MCD attributes these increased results to higher comparable sales, traffic and profits.[10]
For example, global comparable sales increased 4.8%, with Europe leading at 5.2%, followed by Asia/Pacific, Middle East and Africa up 4.6%, and finally U.S. up 3.7%. Further, diluted earnings per share were $1.13, up 15% with foreign currency translation having no impact.[11] These were attributed to a daypart expansion and core menu extensions which gave greater choices for consumers to choose MCD. Given positive results, MCD returned $1.6 billion to shareholders through share repurchases and dividends.
Q3 FY2010 Earnings Summary
MCD posted earnings of $1.39 billion ($1.29 EPS) for the third quarter of FY2010, a 10% increase compared to same quarter FY2009, while sales also rose 4.3% to $6.3 billion.[12] MCD's success comes while other competitors such as Burger King reported continously falling year-over-year sales. Specifically, MCD attributes increased performance to sales from new products such as frappes and fruit smoothies, as MCD begins to diversify itself from its traditional menu. As a result, MCD has been able to increase market share gain as it begins to steal market share from rival substitute markets such as fruit smoothie or coffee.
MCD's chain sales at stores open more than 13 months increased 6% globally. Highest growth came from Asia, Middle East and Africa where growth was 8.1% compared to the U.S. which rose by 5.3% and Europe which increased by 4.1%. McDonald's plans to raise menu prices to blunt higher costs which is projected to rise between 2% to 3% in FY2011.[13] The company also planned to cut the number of remodels stores from 400 - 500 stores to 225; the company plans to remodel 600 next fiscal year.[14]
Q4 FY2010 Earnings Summary
MCD reported earnings of $1.24 billion, or $1.16 EPS, for the fourth reporting quarter of FY2010, a 1.6% increase compared to $1.22 billion same quarter last year. Revenues rose to $6.21 billion from $5.97 billion, a 4.0% increase.[15] This met against analyst consensus estimates of $1.15 EPS and revenue estimates of $6.2 billion.[16]
MCD attributes profitable market-share growth and global same-store sales of 5% increase to be the attributing factors of positive performance. For example, same-store sales rose 4.4% in the US, 3.4% increase in Europe, and 5.5% across Asia Pacific, Middle East and Africa.[17] As global economic slowdown continues, consumers continue to trade down from more expensive restaurants to food venues like McDonald's. However, going forward, MCD plans to raise prices this year to offset a total of ten commodities that account for 75% of MCD's food preparation costs.[18] These ten commodities include beef, chicken, pork, bread and milk products, paper, cola, ketchup and other sauces, and fruits and vegetables.[19] With food prices rising across the world, MCD expects its costs to rise 2% to 2.5% in the US and 3.5% to 4.5% in Europe.
Business Segments
McDonald's breaks down its revenue by geographical segments. McDonald's generates most of its revenue in Europe. Part of the McDonald's growth strategy is global expansion.[20]
Key Trends and Forces
Strong International Growth is Driving MCD's Sales
McDonald's has a sizable international presence; the majority of sales occur outside of the United States. In addition to developed markets like the U.K., Canada, South Korea and Australia, McDonald's operates in fast growing emerging markets like China, India, Russia and Eastern Europe. By tapping into a growing global middle class, the company's international operations have consistently posted strong same-store sales growth. China is a particularly promising opportunity. In FY2007, McDonald's launched the breakfast menu, extended store hours to 24 hours in major cities, and implemented drive-thru in China in its efforts to capitalize on this huge market[21].
As a result, MCD's June 2010 sales have shown a continuous uptrend in international markets at 7%.[22] Specifically APMEA (Asia/Pacific, Middle East & Africa) was the major contributor to MCD's success, along which Japan, Australia, and China showed most promise. These results have emphasized the importance in MCD's core value menu offerings and variety in its breakfast menus. Specifically, MCD's move to expand to international markets means that it can tap into a less health-conscious market segment that will allow MCD to utilize a menu that relies less on costly constant product changes.[23]
MCD Entered a Lucrative Coffee Market but Faces an Ongoing Bidding War Against Competitors
Starbucks road to fame was marked by a move into a small coffee drinker market over one decade ago, but as Starbucks starts to hit market saturation, large and small enterprises alike are starting to enter to steal market share. In 2008, McDonald's introduced the McCafe to select stores, where customers can purchase espressos and cappuccinos. These drinks, which are priced in the $2-4 range, represent McDonald's foray into the high-margin caffeinated beverages market, currently dominated by Starbucks.[24]
Though MCD has been able to profit greatly from its McCafe move, the resulting "coffee war" amongst the food giants began a costly ad campaign in which MCD tried to orient customers away from Starbucks and to cheaper alternatives. This bidding war allowed small-time coffee chains such as Green Mountain Coffee Roasters (GMCR) and Caribou Coffee Company (CBOU) to steal market share as unique quality coffees, the very type of business model that Starbucks attempted to implement in the early days.[25] However, as commodity prices for coffee continue to rise, it is uncertain whether these small chains will be able to survive against large food giants which have the capacity and experience to hedge effectively. The coffee market for MCD therefore continues to become a profitable but now more uncertain market.
MCD's Menu Must Adapt to Constant Changes in Consumer Preferences to Insure Profitability
Consumer preferences that gravitate towards more nutritional food (see Natural & Organic Foods Consumption and Health & Wellness) decrease the appeal of eating at McDonald’s. As these consumer trends continue to shift towards the mainstream, public perception of McDonald's becomes increasingly negative. These changes may climax in lawsuits or media publications like Super Size Me, which criticizes McDonald’s products for causing obesity, and Fast Food Nation, which decries McDonald's business practices. Since McDonald's is the most recognized brand name in the fast food industry, these negative publicity events have widespread impact on its brand equity. Furthermore, because there are many alternatives to fast food (such as cheap dine-in restaurants, street vendors and convenience stores), the corporation's sales depend on its ability to maintain its brand name and attract new customers.
The introduction of salads and public nutrition campaigns are examples of McDonald's efforts to adapt its business model to changing trends in the market. In recent years, McDonald's has turned away from a stable unchanging menu to one which is innovative and trendy. Following product launches such as the "McGriddle," "Snack Wrap" and premium coffee (set to take market share from Starbucks), MCD's latest product is the smoothie.[26] The new products, strawberry-banana and "wild berry" smoothie flavors aim to take market share from the fruity beverage sector after successfully doing the same to the coffee market.
The new venture into drinks may provide a new turning point for MCD by turning to compete against smaller competitors (Jamba Juice, Tropical Smoothie and Planet Smoothie) rather than major fast food players such as Burger King Holdings (BKC) or Yum! Brands (YUM). The smoothie category currently is small, with a yearly consumption of about 422 million servings in America compared to 2.57 billion servings of specialty coffee from April 2009 to March 2010.[27] MCD therefore hopes to transform a niche market into a mass market as Starbucks did to specialty coffee in the early 2000's.
Healthcare Reform will Create Looming Employment Costs for MCD
MCD currently provides 29,500 hourly restaurant workers "mini-med" plans, but the new regulations for healthcare reform may force MCD to drop these plans because the requirement concerns the percentage of premiums that must be spent on benefits.[28] Some hourly restaurant workers choose "mini-med" plans rather than full coverage because they are insured by some other source; this is particularly true for hourly-workers that have spouses covering their medical insurance or individuals that are dependent on their parents.[29] However, as these individuals are considered employees, they are under the guidelines of the new reform. Currently, a single worker can receive approximately $10,000 of coverage per year for roughly $32 a week.[30]
Competition Although McDonald's is the clear leader of the fast food industry in terms of revenues generated and restaurants established, it faces competition from other fast food chains, which are introducing new products themselves. ues Major direct competitors in the (hamburger-based) fast food industry include:
Burger King Holdings is the second largest hamburger fast food chain. Although more of Burger King’s restaurants are franchised than McDonald’s restaurants, Burger King franchise revenues trail behind that of its competitor, mainly due to the McDonald’s size advantage.
Wendy's is the third largest hamburger fast food chain. It has a lower operating margin that McDonald’s, so it is likely to be more negatively impacted during a recession.
Yum! Brands runs Kentucky Fried Chicken, Taco Bell, Pizza Hut, Long John Silver’s, and A&W All-American Food Restaurants. Currently, Yum! brands are dominating the China market, posing a challenge to McDonald's attempts to enter the market. While McDonald’s Corporation focuses on its flagship brand, Yum! splits its resources among a wide variety of restaurants.
In addition to the above competitors, McDonald’s also competes with non-hamburger-based fast food restaurants (such as Panera Bread Company (PNRA), Panda Express and Qdoba), local and national dine-in restaurants (such as Red Robin’s and Shari’s), pizza parlors, coffee shops (Starbucks), street vendors, convenience stores and supermarkets. McDonald's main competitors and its respective financials are shown below: Company Revenues (M) Net Income (M) Net Margin Restaurants Franchised % McDonald's (MCD) $22,745 $4,551 20.0% 32,478 81% Yum! Brands (YUM) $10,836 $1,083 10.0% 37,000 Starbuck’s (SBUX) $9,775 $391 4.0% 16,635 47% Darden Restaurants (DRI) $7,218 $372 5.2% 1,773 0% Brinker International (EAT) $3,621 $79 2.2% 1,689 40% Wendy's International (WEN) $3,581 $4 0.1% 6,451 80% Burger King Holdings (BKC) $2,537 $200 7.9% 11,925 88% Jack in the Box (JACK) $2,471 $131 5.3% 2,212 46% CKE Restaurants (CKR) $1,419 $48 3.4% 3,141 71% Domino's Pizza (DPZ) $1,404 $80 5.7% 9,339 91% Panera Bread Company (PNRA) $1,353 $87 6.4% 1,380 58% Data from company FY 2009 annual reports (CKE data from FY annual, ended January 31, 2010).