abstract

The case focuses on the strategies adopted by the world's leading fast
food restaurant chain McDonald's Corporation in the, McDonald's had
been expanding steadily over the world ,by providing quality, service, and
value to its customers. The case details the definition of growth and pestl
analysis , SWOT and strategies adopted by McDonald's in the UK
including its operational, localization, promotional, In 2003, McDonald's
adopted the 'Plan to Win' strategy market in order to increase sales. As
part of the 'Plan to Win' strategy, McDonald's offered variety and value,
tastier food, and improved service to customers. McDonald's introduced
healthier options such as salads and provided nutritional information
about its products on food packages. It regularly altered its menu to
include new items. In order to attract customers, McDonald's tried to
localize some of the items on the menu. It offered a few versions of local
food on its menus. For the health conscious customers, items such as the
Vegetable Deluxe burger were offered. In the desserts category,
McDonald's offered as many as three kinds of donuts as these were
popular with customers.

The case concludes by identifying the challenges faced by McDonald's in.

McDonald's faced several challenges. One of the major problems was
consumers' perceptions about McDonald's as a promoter of obesity. The
chain drew criticism from consumers as its products were considered to
be high in fat content and hence detrimental to health. Critics alleged that
McDonald's promoted unhealthy food. The company also faced intense
competition from other fast food outlets in which offered healthy food
along with a trendy atmosphere and many issues related to economies
changes and environmental issues and rules.

Introduction

With over 35000 locations over 100 countries, McDonalds (NYSE:

MCD) is the world's largest fast food restaurant chain. McDonald's
operates its own restaurants and franchises its brand to local
businesspeople (about 70% of the world's McDonald's 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 which provide 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 strongly 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, is a
massive opportunity for McDonald's. McDonald's aggressive
efforts to expand its global presence- most notably in 2008 Beijing
Summer Olympics- have produced strong comparable sales and
profit growth.

] Business Overview
Business Model

McDonald's makes money by operating its own restaurants and

franchising to third parties. Of the 31377 McDonald’s restaurants
around the world, 20505 (65%) are operated by franchisees, 3966
(13%) are operated by affiliates, and 6906 (22%) are company-
operated. In the last few years, McDonald’s has sought to
enfranchise more and more restaurants. For example, in 2007, it
sold its businesses in Brazil, Argentina, Mexico, Puerto Rico,
Venezuela and 13 other Latin American/Caribbean countries to
one franchisee[3]. Steering in this direction has resulted in greater
cash flow (which increased by 12% in 2007)[4], reduced spending
on operations, and less corporate exposure to rising commodities
prices.
Strengths

• McDonalds has built up huge brand equity. It is the No. 1 fast-food

company by sales, with more than 31,000 restaurants serving
burgers and fries in almost 120 countries. Sales, 2007 (11,4009
million), 5.6% sales growth[1].
• Good innovation and product development. It continually
innovates to retain customers in the business.
• The McDonalds brand offers consumers choice, reasonable value
and great service
• Large amounts of investment have gone into supporting its
franchise network, 75% of stores are franchises[2].
• Loyal staff and strong management team.

Weaknesses

• Core product line out of line with the trend towards healthier
lifestyles for adults and children. Product line heavily focused
towards hot food and burgers[3].
• Seasonal
• Quality issues across the franchise network.

Opportunities

• Joint ventures with retailers (e.g. supermarkets).

• Consolidation of retailers likely, so better locations for franchisees.
• Respond to social changes - by innovation within healthier lifestyle
foods. Its move into hot baguettes and healthier snacks (fruit) has
supported its new positioning.
• Use of CRM, database marketing to more accurately market to its
consumer target groups. It could identify likely customers (based
on modelling and profiles of shoppers) and prevent brand
switching[4].
• Strengthen its value proposition and offering, to encourage
customers who visit coffee shops into McDonalds.
• The new “formats”, McCafe, having Wifi internet links should help
in attracting segments. Also installing children’s play-parks and its
focus on educating consumers about health, fitness.
• Continued focus on corporate social responsibility, reducing the
impact on the environment and community linkages.
• International expansion into emerging markets of China and India.
Threats

• Social changes - Government, consumer groups encouraging

balanced meals, 5 a day fruit and vegetables.
• Focus by consumers on nutrition and healthier lifestyles.
• Competitive pressures on the high street as new entrants offering
value and greater product ranges and healthier lifestyles products.
E.g. subway, supermarkets, M&S.
• Recession or down turn in economy may affect the retailer sales, as
household budgets tighten reducing spend and number of visitors.
• Pressure groups - environmental.

PESTLE Analysis
POLITICAL
The operations of McDonalds are affected by the government
policies on the regulations of fast food operation. Currently
government are controlling the marketing of fast food restaurant
because of health concern such as cardiovascular and cholesterol
issue and obesity among the young and children in the country.
Governments also control the license given for open the fast food
restaurant and other business regulation need to follow such as for
a franchise business. Good relationship with government in giving
mutual benefits such as employment and tax is a must for the
company to succeed in any foreign market. McDonalds should
also protect its workers by ensuring all the hiring, compensation,
training or repatriation is according to Malaysian Labor Law as
stipulated.

ECONOMICS
As a business entity, McDonalds need to face a lot of economic
variables outside its company or its macro environment. Dealing
with international sourcing for its material McDonalds should be
aware on the global supply and currencies exchange. Remember,
McDonalds import most of its raw material such as beef and
potatoes due to local market cannot supply in abundant to meet
the demand of its product. Any upside of currencies especially
dollar will be impacting its cost of purchase.

Working on the local country, McDonalds must face government

regulations on tax of profit where it gains from the operation and
other tax such as entertainment and restaurant service tax. Each
country may have different scale or types of tax available and
McDonalds should follow the regulation if it wants to continue the
operation. As a franchise, McDonalds should also pay certain
percentage of the revenue to the parent company in United States.
The economic condition and growth of the country also is an
important indicator to the demand of products that McDonalds
offered. As the food priced slightly above normal foods, not many
people will have the income range to consume the products.
Moreover if the economy is bad and income percapita is affected,
the demand of McDonalds product will certainly going down. On
the other hand the good economy also means disposable income
is more and people can spend more on more expensive food at
fast food restaurant.

SOCIAL / CULTURAL
The changing lifestyles of Malaysia due to development of
Malaysian economy should be also taking into consideration.
While more people are able financially to eat at more expensive
outlet such as fast food restaurant, they have higher expectation.
They want to have quality in services and more conveniences that
can differentiate one restaurant from another. Young urban
consumers want technology in their life and facilities such as credit
card payment, wireless internet, cozy and relaxing ambient place,
and other attraction for their hangout and eating. All these needs
should also be taken into consideration. There is not much
difference between cultural and the purchase of products in a
single country but for different countries cultural sensitivity should
be upheld. For example in India people (Hindu) do not take beef,
Muslim countries do not take pork, German like beers, Finnish like
fish type of food menu, Chinese like to associate food with
something good (for example prosperity), Asian like rice and
Americans eat in big-sized menu. So far McDonalds has shown
good efforts in localization of its menu to suit local taste but it
should constantly survey and learn about local culture to better
understand and design the best product for them.

TECHNOLOGY
For a fast food restaurant, technology does not give a very high
impact on the company and it is not a significant macro
environment variables. However McDonalds should be looking to
competitors innovation and improve itself in term of integrating
technology in managing its operation. For example in inventory
system, supply chain management system to manage its supply,
easy payment and ordering systems for its customers and wireless
internet technology. Implementation of technology can make the
management more effective and cost saving in the long term. This
will also make customer happy if cost savings results in price
reduction or promotional campaign discount which will benefits
them from time to time.
LEGAL
As a certified fast food operator, there are many regulations and
procedures that McDonalds should follow. For example is the Halal
certification that becomes a concern to Muslim consumers.
McDonalds should protect its integrity and consumer confidence
by ensuring all materials and process are as claimed or must
followed.
Other legal requirement that the business owner should follow as
stipulated in laws are such as operating hours, business
registration, tax requirement, labor and employment laws and
quality & environment certification (such as ISO) in which the outlet
has been certified. The legal requirement is important because the
offenders will be fined or have their business prohibited from
operating which can be disastrous.

ENVIRONMENT
As one of world largest consumer of beef, potatoes and chicken,
McDonalds always had been critics for world environmentalist.
This is because high consumption of beef causing the green house
effect by methane gasses coming from the cow’s ranch. Large
scale plantation has effect the environment and lost of green forest
opening for plantation activities. Vegetarian environmentalist
criticizes the fast-food giant for cruelty to animals and slaughtering.
In Japan, once McDonalds want to introduce whale burger causing
uproar because whales are endangered species. Before using
paper packaging, once McDonalds also had been criticized for
being insensitive to pollution because using polystyrene based
packaging for its foods. Imagine millions of people purchase from
fast food operator and how is the impact to world environment by
throwing away those hard to recycle packaging. Our world is
getting concern on environment issue and business operating here
should not just care for profit, but careful usage of world resources
for sustainable development and care for environment safety and
health for our future generation. Critics and concern from all public
or activist should be review and support if necessary to ensure we
play our social responsibility better.

Business Strategies
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[5]. 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 - the
company plans to open about 1,000 units in 2008, and continues
to grow its new restaurants at a 1%-2% rate each year.[6]

] Size Matters
McDonald's size has three key advantages:

Uniform menu offerings can be mass produced, lowering

production costs.

Bargaining power with suppliers lowers input costs and boosts

margins.

Large advertising budget means lots of domestic and international

exposure.

] International Expansion
McDonald’s is well-established in Europe, Asia/Pacific Islands, the
Middle East, and Africa. Its growth in Europe is mainly driven by
France, Germany and the United Kingdom. In Asia, the general
management has indicated that there is significant potential in the
China market. The corporation has adapted its menu items to local
cultures, such as the Teriyaki Mac in Japan, variants of Filet-O-
Fish In neighboring China, in China, and using lamb instead of
beef in India

McDonald’s has been selected as the Official Restaurant of the

Beijing 2008 Olympic Games - an honor that will further bolster its
global reputation.

McDonald's International Revenues

Geographic Region Percent of Total Revenues
US 35%[7]
France, Germany, UK 21%[8]
Rest of Europe 14%[9]
Australia, China, Japan 8%[10]
Rest of Asia, the Middle East, Africa 8%[11]

Current Financials
McDonald's revenue decreased by 7% to $5.65 billion in Q2 09
(ending March 31st, 2009), a decrease from $6.08 billion the
previous year. However, operating income increased 2% over the
previous year, from $1.65 billion to $1.68 billion. Much of the
decline in revenue can be attributed to company-operated
restaurants, whose revenue numbers decreased by 10% from $4.3
billion in the previous year to $3.8 billion. Revenue from franchised
restaurants, on the other hand, actually increased 1% from $1.78
to $1.80 billion.[12] Since the margins on franchised restaurants are
higher than those of company-operated restaurants, the higher
contribution from franchised restaurants in the revenue mix
positively impacted McDonald's operating margins (from 27.2% to
29.8%).
McDonald's also noted that McCafe, which they labeled as a "long-
term home run", had met sales expectations and has benefited
from the high level of advertising that McDonald's has committed
to it. Coffee sales now make up 5% of McDonald's total sales.[13]
McDonald's reported a July sales gain of 4.3%, in part due to large
growth in European orders of 7.2% on the month. McCafe sales
continued to increase and now make up 5% of McDonald's total
revenues.[14]

In August 2009, McDonald's reported sales growth of 2.2% for

existing restaurants, including 1.7% growth in the United States
and 3.5% growth in Europe. The U.S. numbers missed analyst
projections of 2.8-3%, causing McDonald's shares to fall 1.6%.
During this recession, McDonald's has benefited as an increasing
amount of diners choose the lower-priced meals meals that
McDonald's offers. However, McDonald's has seen less sales in its
"non-essential" beverages and breakfasts segments.[15]

[edit] Key Trends and Forces

[edit] McDonald's looks to compete in the high-margin
beverages market with "McCafe"
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. McDonald's expects to
eventually add $1 billion to annual sales through McCafe-related
beverages[16]

Analysts have taken notice of this threat and expect McCafe to

have a negative impact on Starbucks' same-store sales.[17] While
the results of this "Coffee War" are not yet set in stone, some
analysts believe that the two competitors will eventually settle into
separate niches, with McDonald's being the better value
proposition and Starbucks offering more of a quality experience.[18]

[edit] Strong International Growth is Driving Sales

McDonald's has a sizable international presence; 60% 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 FY 2007, 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[19].

[edit] Changes in consumer preferences could decrease sales

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.

[edit] Commodity Costs can Impact Margins

McDonald's earnings are sensitive to prices of commodities such
as beef, corn, cheese and poultry. Since 2005, food prices have
increased substantially, but competition has prevented McDonald's
from passing costs along to customers. Thus, increasing input
prices have come at the expense of margins.

[edit] Sensitive to the Dollar

McDonald's is also sensitive to the relative strength of the dollar.
Although the company is based in the US, McDonald's does 60%
of its business overseas. As foreign currencies strengthen relative
to the dollar, goods sold in foreign markets are suddenly worth
more dollars back in the US, boosting earnings. On the other hand
a strengthening dollar reduces the value of sales from abroad.

[edit] 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.

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.
 [edit] Market Share
The major players in the fast-food market, which generates around
$120B[20] in annual revenues, are: Domino's, Inc.[21], Burger King
Corporation[22], Wendy's International, Inc.[23], Jack in the Box,
Inc.[24], Yum! Brands, Inc.[25], Doctor's Associates, Inc.[26], and
McDonald's Corporation[27]. As can be seen, the fast food industry
is somewhat fragmented. The seven major competitors only
account for 45% of total revenues.
The Fast Food Hamburger Restaurant industry, on the other hand,
is dominated by McDonald's, who possesses approximately 90%
of the market share for this component. The FFHR is a $67 billion
segment. Burger King is second behind McDonalds with a 4%
share of the segment. The QSR segment and FFHR category are
extremely competitive because each FFHR restaurant offers
similar menus and prices.

McDonald's is first in the Fast Food Hamburger Restaurant

category for revenue followed by Burger King and then Wendy's.[28]