IILM Institute for Higher Education Project Report on Global Business Environment Of Mc Donald and Its FDI Initiative

in India

Submitted to:

Submitted by Tarun Jhalani Reg No. Pg20082550

Meeta Das Gupta Maam

INTRODUCTION Origins History of Mc Donalds A Unique Philosophy Rewarding Innovation The Beginning McDonalds-Global Fast Food powerhouse McDonalds Values Company Profile Strategic Direction Reporting Segments Restaurant Ownership Foreign direct investment Types Methods FDI in India Global Initiatives by Mc Donalds McDonald's India - A Profile Challenges Faced by Mc Donald in entry in Indian market Indian Market Social Diversity Infrastructure Political Economic Pressure Groups Cost faced by McDonalds 2

1991- MNC Invasion Targeting Markets India-Entry Strategy Product Adaptation-The Indian Challenge Menu Development International Standards Family Restaurant Value Pricing Competitive Pricing Widening the Customer Base Marketing Strategy Promo Spends Target Markets Supply Chain Cold Chain Geographically diverse sourcing Benefits of its fdi Ratio Analysis and Forecasting RecommendationUndervalued Security: McDonalds is Well Positioned: Margin Expansion: Healthy Financials: Valuation: Looking Good on other Criteria: Risks: Business Overview Industry Overview Five Forces Model Rivalry Among Firms: Threat of New Entrants: Threat of Substitute Products: Key Success Factors Bargaining Power of Suppliers

Bibliography

1. INTRODUCTION History of Mc Donalds Origins In 1917, 15-year-old Ray Kroc lied about his age to join the Red Cross as an ambulance driver, but the war ended before his training finished. He then worked as a piano player, a paper cup salesman and a multi-mixer salesman.

In 1954 he was surprised by a huge order for 8 multi-mixers from a restaurant in San Bernardino, California. There he found a small but successful restaurant run by brothers Dick and Mac McDonald, and was stunned by the effectiveness of their operation. They produced a limited menu, concentrating on just a few itemsburgers, fries and beverageswhich allowed them to focus on quality at every step. Kroc pitched his vision of creating McDonalds restaurants all over the U.S. to the brothers. In 1955 he founded the McDonalds Corporation, and 5 years later bought the exclusive rights to the McDonalds name. By 1958, McDonalds had sold its 100 millionth hamburger. A Unique Philosophy Ray Kroc wanted to build a restaurant system that would be famous for food of consistently high quality and uniform methods of preparation. He wanted to serve burgers, buns, fries and beverages that tasted just the same in Alaska as they did in Alabama.

To achieve this, he chose a unique path: persuading both franchisees and suppliers to buy into his vision, working not for McDonalds, but for them, together with McDonalds. He promoted the slogan, In business for you, but not by you. His philosophy was based on the simple principle of a 3-legged stool: one leg was McDonalds, the second, the franchisees, and the third, McDonalds suppliers. The stool was only as strong as the 3 legs. Rewarding Innovation Ray Kroc believed in the entrepreneurial spirit, and rewarded his franchisees for individual creativity. Many of McDonalds most famous menu itemslike the Big Mac, Filet-O-Fish and the Egg McDuffie were created by franchisees. At the same time, the McDonalds operating system insisted franchisees follow the core McDonalds principles of quality, service, cleanliness and value.

The Roots of Quality McDonalds passion for quality meant that every single ingredient was tested, tasted and perfected to fit the operating system. As restaurants boomed, the massive volume of orders caught the attention of suppliers, who began taking McDonalds standards as seriously as McDonalds did. As other quick service restaurants began to follow, McDonalds high standards rippled through the meat, produce and dairy industries. Again, Ray Kroc was looking for a partnership this time with McDonalds suppliersand he managed to create the most integrated, efficient and innovative supply system in the food service industry. These supplier relationships have flourished over the decades: in fact, many McDonalds suppliers operating today first started business with a handshake from Ray Kroc. Hamburger University In 1961, Ray launched a training program, later called Hamburger University, at a new restaurant in Elk Grove Village, Illinois. There, franchisees and operators were trained in the scientific methods of running a successful McDonalds. Hamburger U also had a research and development laboratory to develop new cooking, freezing, storing and serving methods. Today, more than 80,000 people have graduated from the program. The End of a Legend Right up until he died on January 14, 1984, Ray Kroc never stopped working for McDonald's. Even when he was confined to a wheelchair, he still went to work in the office in San Diego nearly every day. He would keep a hawk's eye over the McDonald's restaurant near his office, phoning the manager to remind him to pick up the trash, clean his lot, and turn on the lights at night. From his passion for innovation and efficiency, to his relentless pursuit of quality, and his many charitable contributions, Ray Krocs legacy continues to be an inspirational, integral part of McDonalds today. The Beginning 1954, Ray Kroc, 52, a distributor of milk shake maker- Multitier, heads West on hearing about the McDonald Bros hamburger stand inCaliforniaSeizing the opportunity, he pitched the idea of opening up several restaurants to the McDonald brothers, to sell 8 of his Multimixers to each and every one.

"Who could we get to open them for us?" they asked "Well," Kroc answered, "what about me? McDonalds-Global Fast Food powerhouse 2004- Worlds biggest marketer of fast food31000 restaurants120 countries47 million customers per day Ronald McDonald, introduced 1963, second only to Santa Claus in terms of recognition

McDonald's complete commitment to Quality, Service, Cleanliness and Value (QSC&V). "

We take the burger business more seriously than anyone else "Ray Kroc"If you've got time to lean, you've got time to clean"Ray Krocon & Values McDonald's brand mission is to be our customers' favorite place and way to eat. Our worldwide operations are aligned around a global strategy called the Plan to Win, which center on an exceptional customer experience People, Products, Place, Price and Promotion. We are committed to continuously improving our operations and enhancing our customers' experience. McDonalds Values We place the customer experience at the core of all we do. Our customers are the reason for our existence. We demonstrate our appreciation by providing them with high quality food and superior service in a clean, welcoming environment, at a great value. Our goal is quality, service, cleanliness and value (QSC&V) for each and every customer, each and every time. We are committed to our people. We provide opportunity, nurture talent, develop leaders and reward achievement. We believe that a team of well-trained individuals with diverse backgrounds and experiences, working together in an environment that fosters respect and drives high levels of engagement, is essential to our continued success. We believe in the McDonalds System. McDonalds business model, depicted by our threelegged stool of owner/operators, suppliers, and company employees, is our foundation, and balancing the interests of all three groups is key. We operate our business ethically. Sound ethics is good business. At McDonalds, we hold ourselves and conduct our business to high standards of fairness, honesty, and integrity. We are individually accountable and collectively responsible. We give back to our communities. We take seriously the responsibilities that come with being a leader. We help our customers build better communities, support Ronald McDonald House Charities, and leverage our size, scope and resources to help make the world a better place. We grow our business profitably. McDonalds is a publicly traded company. As such, we work to provide sustained profitable growth for our shareholders. This requires a continuous focus on our customers and the health of our system. We strive continually to improve. We are a learning organization that aims to anticipate and respond to changing customer, employee and system needs through constant evolution and innovation

Company Profile McDonalds is Global and in Your Hometown McDonalds is the leading global foodservice retailer with more than 33,000 local restaurants serving nearly 68 million people in 119 countries each day. More than eighty percent of McDonalds restaurants worldwide are independently owned and operated by local men and women. Our goal is becoming customers favorite way and place to eat and drink by serving core favorites such as the world famous French Fries, Big Mac, Quarter Pounder and Chicken McNuggets. Our Strategic Direction The strength of the alignment among the Company, its franchisees and suppliers (collectively referred to as the System) has been key to McDonalds success. This business model enables McDonalds to deliver consistent, locally-relevant restaurant experiences to customers and be an integral part of the communities we serve. In addition, it facilitates our ability to identify, implement and scale innovative ideas that meet customers changing needs and preferences. McDonalds customer-focused Plan to Win provides a common framework for our global business yet allows for local adaptation. Through the execution of initiatives surrounding the five elements of our Plan to Win People, Products, Place, Price and Promotion we have enhanced the restaurant experience for customers worldwide and grown comparable sales and customer visits in each of the last eight years. This Plan, combined with financial discipline, has delivered strong results for our shareholders. Reporting Segments The business is managed as distinct geographic segments that include: US Europe Asia/Pacific, Middle East and Africa (APMEA) Other Countries & Corporate(OCC) including Canada, Latin America and Corporate Restaurant Ownership We view ourselves primarily as a franchisor and believe franchising is important to delivering great customer experiences and driving profitability. At year end 2010, 80% of McDonalds restaurants were franchised. Of the total McDonalds restaurants worldwide:

Nearly 59% are conventional franchisees

21% are licensed to foreign affiliates or developmental licensees Nearly 20% are Company-operated

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Foreign direct investment (FDI) is direct investment by a company in production located in another country either by buying a company in the country or by expanding operations of an existing business in the country. Foreign direct investment is done for many reasons including to take advantage of cheaper wages in the country, special investment privileges such as tax exemptions offered by the country as an incentive to gain tariff-free access to the markets of the country or the region. Foreign direct investment is in contrast to portfolio investment which is a passive investment in the securities of another country such as stocks and bonds. As a part of the national accounts of a country FDI refers to the net inflows of investment to acquire a lasting management interest (10 percent or more of voting stock) in an enterprise operating in an economy other than that of the investor. It is the sum of equity capital, other long-term capital, and short-term capital as shown the balance of payments. It usually involves participation in management, joint-venture, transfer of technology and expertise. There are two types of FDI: inward foreign direct investment and outward foreign direct investment, resulting in a net FDI inflow (positive or negative) and "stock of foreign direct investment", which is the cumulative number for a given period. Direct investment excludes investment through purchase of shares.] FDI is one example of international. Types 1. Horizontal FDI arises when a firm duplicates its home country-based activities at the same value chain stage in a host country through FDI. 2. Platform FDI 3. Vertical FDI takes place when a firm through FDI moves upstream or downstream in different value chains i.e., when firms perform value-adding activities stage by stage in a vertical fashion in a host country. Whereas Horizontal FDI decrease international trade as the product of them is usually aimed at host country, the two other types generally act as a stimulus for it. Methods The foreign direct investor may acquire voting power of an enterprise in an economy through any of the following methods:

by incorporating a wholly owned subsidiary or company by acquiring shares in an associated enterprise through a merger or an acquisition of an unrelated enterprise Participating in an equity joint venture with another investor or enterprise...

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FDI in India The steadily growing one of the major economies of the world, India has been enjoying huge and regular FDI from diverse investors of all around the world for the last few decades. According to a recent UNCTAD (United Nations Conference on Trade and Development) Survey, India has emerged out as the second most famous and popular destination in the world for FDI, after China. Majority of this foreign direct investment in India is made in the sectors of telecommunication, computer hardware and software, construction, and services, by investor companies from USA, UK, Singapore, Mauritius, etc. The foreign direct investment in India can be made in a variety of ways and in a rather wide range of economic sectors. Worldwide prominent Global Jury has been helping individuals, associations, private and public companies/organizations, and institutions of diverse sectors for making their cherished FDI in India, through both the Automatic and Government Routes, for a long time.

Global Initiatives by Mc Donalds McDonalds started its global diversity journey by creating the Global Womens Initiative in 2009. This initiative is active in all of McDonalds operating areas of the world and is sponsored globally by Don Thompson, McDonalds COO. In each part of the world, this initiative supports the recruitment, development, and advancement of women at all levels of the company while creating a culture where women have the opportunity to succeed and grow. In 2011, the Catalyst organization recognized the Global Womens Initiative as an innovative and systemic means through which women can thrive in the McDonalds system and awarded the company the prestigious Catalyst Award. As a result of the global concentration, womens business networks have been formed and have quickly grown.

Asian, Pacific, Middle East and Africa Womens Leadership Network European Womens Leadership Network

Canada Womens Leadership Network Latin America Womens Leadership Network U.S. Womens Leadership Network Global Strategy Customer driven, goal oriented Achieving sustainable,

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profitable growth Designed to increase restaurant visits and grow brand loyalty among new & existing customers Further build financial strength Plan to Win Built around 5 key drivers of exceptional customer experiences- People + 4Ps Founded on the belief of 3 success components Operational Excellence Leadership Marketing Innovation McDonald's India - A Profile A Locally Owned Company: McDonald's is the world's leading global foodservice retailer with more than 33,000 locations serving approximately 64 million customers in 118 countries each day. More than 80% of McDonald's restaurants worldwide are owned and operated by independent local men and women. In India, McDonald's is managed by two Indian entrepreneurs. Amit Jatia, Vice Chairman, Hard castle Restaurants Pvt. Ltd. owns and spearheads McDonald's operations in West & South India. Hard castle Restaurants was appointed Development Licensee for McDonald's in India in 2010, a progression from Joint Venture partner. Vikram Bakshi, MD and Joint Venture Partner, Connaught Plaza Restaurants Private Limited, owns and operates McDonald's in North and East India Celebrating over 15 years of leadership in food service retailing in India, McDonald's now has a network of over 235 restaurants across the country. Financial Muscle- Y-2002-03 $ 41.5 billion in sales$ 25.7 billion (62%) - sales of franchisees $ 2.1 billion operating profit$ 893 million Net profit Assets- $ 24 billion 8th Most valuable brand in the world, ahead of Sony, Nokia, Toyota in 1999Among Top 100 companies worldwide in 2000 Challenges Faced by Mc Donald in entry in Indian market Indian Market Huge Sub-continent 4 times the population of the US Middle Class estimated at 300 Million Per Capita GDP $ 400- but at PPP- $2540 13

4thlargest economy- ahead of France, Russia, UK, and Asias 3rd Largest-Behind China &Japan (PPP) Indian Market Size of Eating Out market- substantial Indias food expenditure- $77 Bn / world $ 4000Bn (2%) highly fragmented food market Millions of roadside stalls / carts- major market share Udipi, Sandwich, PavBhaji, Chaats, Chinese, Namkeens, Pizza Organized chains- Narulas, Wimpys, Udipis

Social Diversity 20 major languages, 800+ dialects50% population literate Advertising-Billboards Print, Electronic 8 Languages for National launch Infrastructure Poor roads Power situation grim even in New Delhi (Capital) and Bangalore (Silicon Valley) Political Worlds largest democracy Fairly stable governments Armed Forces- Neutral Bureaucratic red tape omnipresent Economic Entry & Exits in sectors controlled by Govt MNC restrictions Deregulation since 1991 but socialist / swadeshimindset continues MPs comment on MNC in consumer sector We want computer chips, not potato chips Pressure Groups Anti- Western / MNC factions Health activists

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Environmentalists Animal welfare activists Sons of the soil campaigners 1991- MNC Invasion Indian economy open to FDI Huge potential Over confidence Faulty Market Research inputs cost dear Major failures, Peugeot closed shop Repositioning & price reduction helped Lack of demand Targeting Markets Initial focus on metros- Mumbai, Delhi Relatively high incomes Exposure to western food & culture Move to smaller satellite towns (Gurgaon, Pune) Positive spillover effects of reputation Jaipur & Agra- To attract foreign tourists India-Entry Strategy Wholly owned subsidiary- MIPL Incorporated in 1993 McDonald's opened its doors in India in VasantVihar, New Delhi in October 1996 Entered into two 50:50 JVs with Connaught Plaza Restaurants-Vikram Bakshi- North &Hard castle Restaurants-Amit Jatia- West Trained extensively, along with their Indian management team, in McDonald's in Indonesia and the US before launch Product Adaptation-The Indian Challenge Much higher degree of adaptability 40% Vegetarians Vegetarian selections to suit Indian taste Maharaja Mac replaced Big Mac, Chicken Patty instead of Beef Respect for local culture- Special Indian menu, No beef or pork items in India McAloo burger, Veg Salad Sandwich, McMasala& McImli sauces Product Adaptation-The Indian Challenge Common Menu- Chicken Nuggets, Fillet-O- Fish, fries, sodas, shakes Garlic free sauces to get in hard core vegetarian customers Re-formulated own products using spicesfavoured by Indians 15

Eggless sandwich sauces, Soft serves &Mistakes Freshest chicken, fish and vegetable products Only vegetable oil used as a cooking medium Menu Development 1998- Menu development team Consumer feedback & research findings Do not entirely localize menu Wider product range More Hot food Low entry level pricesVeg Pizza McPuff India-75% localised menu, 33% in Asian countries, other countries < 5% International Standards India's local suppliers provide highest quality, freshest ingredients. Adherence to Indian Government regulations on food, health and hygiene, benchmarking with own international standards. Fast, friendly service - the hallmark of McDonald's restaurants world over Stringent cleaning standards, trays sanitisedseveral times each hour. Meticulous attention to cleanliness beyondlobby, kitchen to pavement & area outside Family Restaurant

The McDonalds XP for the family Focus on kids, gifts galore High chair concept Brightly lit, casual, comfortable & contemporary look Friendly, smiling, fast service Emphasis on cleanliness Value Pricing Happy Meal- Small Burger, fries, coke+ toy Medium Meal Combo- Burger, fries, coke-Veg Rs 75, Maharaja Mac meal- Rs 94 Family dines under Rs 300 (2003) Pricing lower than Pak, SL, 50% lesser than US Cost Control / Pricing Strategy Customers attracted purely by these unsustainable but attractive low prices would not pay repeat visits Development of a low cost supply chain crucial enabling factor

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Competitive Pricing

KFC-Rs 59- Rs 79 (Burger/KFC, Drink) Chicken, rice, gravy meal for Rs 39 Pizza Hut-Family meal (2 medium pizzas, Pepsi- Rs 350Wimpys- Mega meals starting @ Rs35 McDonalds-Value meals @ 39, Quickies @ 25, Soft serve ice creams @ Rs8 Even these low prices afforded a 40%margin

Widening the Customer Base Surveys indicated Perceived as Premium Ensure trials thro selective price cutting &periodic promotions Harness the prosperity & feel-good-factor around festivals across regions & religions Marketing Strategy Promotional strategy to convey world class xp, Indian adaptations, freshness, nutrition & value Shift from worldwide positioning of drive-inconvenience and speedy service Segment- The Young family (<30 years) Target- The young family who eats out Focus- Attracting children, so family follows Positioning- McDonalds mein hai kuch baat a place for the entire family to enjoy Differentiation- highlighting brand, food & variety Happy meal film on Cartoon Network, Zee Special promotions during festivals Promo Spends June00- Rs 10 Crore March01- Rs 20 Crore- Doubled March02- Rs 18 Crore March03- Rs 24 Crore Emphasis on generating repeat visits Positioning changes from McDonalds mein hai kuch baat To To aaj McDonalds ho jaaye A Shift from Special To Acceptable and enjoyable

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McDonalds positioned as a comfort zone for young families Target Markets Only< 10%population- possible target market We want to first concentrate on metros, then open branches in other cities. We want to set up outlets only in cities where we can ensure the quality of products Vikram Bakshi Phase IFocus on cities of relatively high incomes where citizens are exposed to western food & culture Phase IIMove to smaller satellite towns (Gurgaon, Pune) - Positive spillover effect of reputation Jaipur & Agra- To attract foreign tourists Phase IIIMalls, Multiplexes, Highways, Stations &Airports No plans for South, East, Goa?

Supply Chain Critical for success Local network for supply chain & distribution Local suppliers, distributors to match international quality Operations & training to match international quality and hygiene standards Invested Rs 50 core in setting up, before opening 1stoutlet By 2000- Investment in supply chain Rs 300Crore Cold Chain Integral to Supply Chain Network- Food procurement, warehousing, transportation and retailing under controlled temperatures Cold Chain cuts down on operational wastage Necessary to maintain food temperatures to retain their freshness and nutritional value. Products to be used on a daily basis, stored within a temperature range of 18C to 4C . 52% food products need to be stored under these conditions before they are used. Geographically diverse sourcing Buns from North Chicken & Cheese from West Fish, Lettuce & Pickles from South 98% paper, locally sourced French fries imported from Indonesia

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40 suppliers in the chain Investment / outlet excluding real estate- Rs 3 Cr Jun 2003, 50 outlets, Planned- 80 outlets by end 2003 30 additional outlets = investment > 100 Cr Area, Location, Size, Seating- Crucial but expensive Scale back expansions by 20% to 64 outlets in India, close 250 outlets in emerging markets Can lead to delayed Break-even as huge investments in supply chain, branding, infrastructure Recent lackluster financial performance of parent Critical juncture in evolution Benefits of its fdi Ratio Analysis and Forecasting Introduction to Ratio and Forecasting Analysis In order to get an accurate perspective of McDonalds and provide some perspective on the future of the company, a ratio analysis was conducted to assess the value of thecompany. By conducting ratio analysis, were able to analyze the financial trends of previous years and extrapolate those trends into future years for McDonalds and its core competitors within the industry. Ratio analysis allows users to dissect and analyze the financial statements into three areas: profitability, liquidity, and capital structure of the company. Liquidity ratios are used to determine how liquid the firm is, and how it will meet its obligations. This also helps us determine how risky the firm is by determining if the company is employing an adequate amount of liability or risk to generate profit. Profitability ratios give us a perspective of how profitable he firm is operating. Is the firm operating efficiently or is money being wasted? Lastly,capital structure ratios give a view of how well the company has thought-out its capitalization plans by the use of debt and equity. With the use of these ratios, well be able to accurately valuethe company at its current condition, compare its performance against competitors, and project the future results of the company.

Ratio Analysis

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In our ratio analysis we conducted the 14 ratios for Liquidity, Profitability, and Capital Structure. We also included the NOPAT Margin Ratio because its a relevant ratio for McDonalds and the entire fast food industry. The NOPAT Margin Ratio gives us a better perspective of the companys overall operating efficiency by including net income, net interest expense, and sales. The Liquidity Ratios are very important to our company because the fast food industry

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has a high turnover of goods. The current ratio and the quick asset ratio enable us to see McDonalds capabilities in covering their current liabilities. Over the five year analysis, these two ratios increased every year, except for a slight decrease from 2001 to 2002. The large increase over time shows current assets are increasing faster than current liabilities which is good for the company. The accounts receivable turnover decreases between 1999 and 2001, but then substantially increases over the next two years, which shows McDonalds capabilities in collecting accounts receivables. This shows the inverse relationship of the days supply of receivables decreasing over time, resulting in a positive impact on cash. The inventory turnover steadily decreased over time which implies the company invested more money in inventory relative to sales at an increasing rate every year. This creates an increase in days supply of inventory from 1999 to 2003, because inventory is being turned over at a slowrate. McDonalds working capital is negative in all five years because they continue to have more current liabilities than current assets. Therefore the working capital turnover is negative and decreases over time. This isnt necessarily bad for the company because of theindustrys high turnover of current assets and the companys steady increase in sales. The Profitability Ratios examine the Income Statement to see how efficiently the company is operating. In this highly competitive industry, its crucial to maintain efficiency in order to have a competitive edge. The gross profit margin remains fairly constant as it only decreases 1% over the five years. The steady ratio indicates that McDonalds maintaina consistent balance between profit and sales. The operating expense ratio increases by about 10% from 1999 to 2002, and then decreases 3% in 2003 to 83.48%. The high percentage of expenses to sales is not too large relative to other companies in the industry. The high cost of operating expenses is necessary to create a large amount of incremental sales. The net profit margin, which indicates the amount of income generated for every dollar of sales, decreased 23 about 9% from 1999 to 2002 and then increased 3% in 2003. The four year decrease wasnt a good sign for the company, but the increase to 8.58% suggests a promising future. The asset turnover remains extremely steady and only increases 0.04 to 0.67 in 2003. This 0.67 of sales that each dollar of assets produces is relatively low in the industry and raises questions on their amount of assets. The return on assets declines significantly from 1999 to 2002 andincreases slightly in 2003. This ratio is also very low for the fast food industry and shows that the company could be using their assets more efficiently. The return on equity is high in 1999 and goes down about half to 2002, and then increases 4% to 2003. This possibly indicates that McDonalds isnt relying on equity to generate income as much as in previous years. The pattern for most of the profitability ratios was a decrease from 1999 to 2002 and an increase from 2002 to 2003. This shows that the company has changed the way they utilize their resources in a positive way. The Capital Structure Ratios allow us to get a perspective on how well McDonalds is managing their debt and equity. The debt to equity ratio increased for several years, but has slightly decreased over time. The decline to 1.13 is a good indication that their equity funds have grown and allowed them to hold on to less debt. The times interest earned slightly decreased over time with a small increase between 2002 and 2003. However, with a ratio of 6.05 in 2003, it proves that their income from operations is more than enough to cover their interest expense. The debt service margin goes from 2.8 in1999, to 14.54 in 2001, and then drastically jumps to 9633.67 in 2002. This is because in 2002, their notes payable declined to just $300,000. By 2003, there was no current notes

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payable, providing a much greater profit in operating cash flow. Conclusively, McDonalds capital structure has strengthened, making it easier to cover their debt.

RecommendationUndervalued Security: After extensive research, analysis and valuation, it is found that McDonalds corporation is currently an undervalued company and rated as a Market Outperform and thus we recommend this stock as a Buy.. McDonalds has a long standing history of business, and has built a loyal customers base with the companys continued dedication to customer service. The food service industry is one of high competition; however, McDonalds has been able to obtain the position as the leader in market capitalization with a market capital of $39.37B. While McDonalds has deployed high amounts of capital, the company manages its asset base withhigh inventory turnover while also maintaining cost efficiency. McDonalds also owes muchof its success to product development to conform to customer needs and a changing society. Industry Demand Drivers: The market of the food service industry attributes much of its growth to global sales and revenue. McDonalds announced recently their first quarter earning per share of 0.56. When adjusted for a one time tax settlement of $179 million or $0.13 per share, McDonalds ended the quarter with EPS of $0.43 which is in line with consensus estimates of $0.44. This resulted in an adjusted earnings growth of 10% over the same quarter a year ago which is due to an outstanding increase of their global comparable sales by 4.6%, which in turn drove an increase in revenue of 9%. McDonalds customer relevance in the U.S. is attributed by their menu and prices, choices and variety, and customer service. Globally, McDonalds caters and adapts to different cultures and societies, while still providing them with the same McDonalds experience. With a significant portion of McDonalds sales derived from international stores, foreign denominated sales should generate additional earnings leverage given the weakening of the US dollar against other currencies. McDonalds is Well Positioned: McDonalds is able is maintained a loyal customer base, and compete with the existing competitors by introducing variation to their menu, such as the Dollar Value Menu. Also, in order to adhere to a more concerned health concise society, McDonalds has implemented a Light and Healthy menu. The Happy Meal, which has been a long standing childs favorite, 5 now has options such as fruit instead of French Fries and all white meat chicken nuggets. As for one McDonalds company goals is to adhere to outstanding customer service, strengthens the maintenance of long standing customers, as well as develop new relationships with customers of a new generation. McDonalds Corporation has also acquired Boston Market, and Chipotle Mexican Grill. With the acquisition of these two companies, McDonaldss has implemented a focused growth platform that is to bring long term growth and benefits to McDonalds. Margin Expansion: In 2004, McDonalds margin increased by 40 basis points and their profit margin is 22

11.95% for the trailing twelve months. The growth in global comparable sales is one of the main factors that has attributed to this extensive growth, because the increasing comparable sales helps offset high commodity costs. Throughout extensive valuation the margin for growth is looking promising, and in conjunction with such a large market capitalization this would result in a steady growth of large amounts of capital. Healthy Financials: One of the core competencies of McDonalds Plan to Win, is a goal to strive and adhere to strict financial discipline. McDonalds is able to obtain Revenues of $4,802.8 million in just the first quarter of 2005, by managing costs and using their large amounts of cash flows to reinvest in the company. The reinforcement of this action enable McDonalds to strength their balance sheet, and company. Recently, McDonalds has been a leader in adopting accounting polices such as FASB No. 123. In addition to the current expensing of stock options, they have also ceased using straight line depreciation for their rent expense and changed to an amortize improvements of the leased property. The end result of this change has accelerated recognition of rent expense, and also resulted in a tax benefit of $179 million. Valuation: After extensive valuation and analysis, it is conclusive that McDonalds actual share price is currently undervalued. The analysis conducted compared McDonalds to competitors in the industry on a number of relevant factor and ratios, as well as the use of past financial data to 6 forecast and predict the future growth of McDonalds Corporation. As of April 1, 2005 the actual closing share price was $31.00; however, our valuations predict the company to grow as estimated 10-15% driving the growth of the share price to a range of $35-$40 per share. Foods are a defensive stock, being that they are usually that of slightly slower growth, but they are less susceptible to adverse market swings. With the recent quarter press release already showing favorable signs of growth, it makes McDonalds an attractive company to currently invest in with promising revenue and earnings growth. Looking Good on other Criteria: McDonalds stock prices have produced the highest percentage growth of the industry. The past year their stock prices grew by about 23.3%. Also, at the end of this quarter McDonalds announced that they had consecutive positive growth for the past twenty-four months. Risks: McDonalds did face litigation, over obesity claims, similar to that of the Tobacco industry. However, recently the law suits have been dismissed. Even with the recent litigation and legal fees, McDonalds was able to sustain a pace of positive and fortuitous growth. Corporate Responsibility of the food industry has prompted much of the menu changes for a

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more health concise society. Global economic risks are also associated with the wide globalization of McDonalds Corporation. The fact that the franchises are now spread across over 100 countries makes the economic stability of those countries vital to the success of the global market. Inflation and the current currency exchange could have a great effect on the global revenues of McDonalds. Furthermore, the global market has many factors that are important to monitor; however, much of the growth in revenues is due to the global sales. 7 Business and Industry Analysis: Business Overview McDonalds Corporation operates and franchises restaurants in the food service industry all over the world. They are the leading global food service retailer by means of over 30,000 restaurants in more than 119 countries, serving about 50 million people every day. Franchising plays a major role in McDonalds system with over 2,400 franchise owners, making up about 25% of their total revenue. Their total revenue in 2004 was $19.06 billion. McDonalds success in the fast food industry stems from their main success factors which are cost efficiency, product development, marketing and promotions. These success factors are used to promote McDonalds brand image, provide customers with quality products and differentiate themselves from other competitors. These main success factors are important to the company since the fast food industry is highly competitive and competitors compete for market share due to the fact its easy to enter the industry. McDonalds also has operations in other fast food restaurants such as Boston Market and Chipotle who make about $800 million together in revenues a year and these additions provide McDonalds with growth opportunities. Industry Overview The food service industry continues to grow in volume and revenue every year and typically divides itself into two categories: full-service restaurants and fast-food restaurants. Each individual restaurant is in competition with other food service operations within the same geographical area. The fast food restaurant industry is highly competitive. McDonalds competes with other restaurants through the quality, variety and value perception of food products offered. McDonalds Corporations main competition comes from other fast-food restaurants; most notably, YUM! Brands Inc, Wendys International and Burger King. Five Forces Model Rivalry Among Firms: Currently in the fast food industry, there is intense competition for growth in the market. The market growth is rising because of the convenience factor and busy consumers not having enough time to cook a meal. The restaurant industry is also growing rapidly due to opportunities in other global markets. In McDonalds case, they actually have a competitive advantage because they have already entered many different countries and are succeeding in these countries. Each firm within the food-service industry is susceptible to losing customers because there are relatively no switching

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costs for consumers, therefore the industry has to rely heavily on their brand image and quality of products. McDonalds has a number of competitors; however they are currently the leader of the industry in market capitalization with a cap of $39.31 billion. Threat of New Entrants: The threat of new entrants in the fast food industry is high because there are no legal barriers which would keep them from entering the industry. The major barriers in which a firm faces in the industry are the economies of scale and the access of the distribution. In order for a firm to enjoy success in the industry, they must spend a large amount of capital on advertising and marketing. The industry is very competitive because firms are always attempting to steal customers from each other. Access for distribution is crucial in the restaurant industry because if the customer cant see you or access you easily its possible that they wont go out of there way to eat there. Franchise options also make is easier to enter the market, for example Subway has built their strategic plan around franchise options. Therefore, initially the only cost to enter the market is the starting capital required to open a restaurant. However, it can cost upwards of millions of dollars for all the equipment, licensing, and the property. This costly barrier is the most probable reason that people do not enter this business. The food-service industry doesnt have any exit barriers, which allow firms to easily leave the industry if theyre not successful, at virtually only the cost incurred. Threat of Substitute Products: McDonalds is known for their famous French Fries, Big Macs, and Happy Meals. Competitors of the industry also try to compete with similar products; therefore, leading to price wars. McDonalds created a Dollar Value Menu, in response to competitors such as Wendys 9 cent menu. Overall, the industry has tried various product differentiations in order to accumulate greater market share, but most consumers are drawn to the classics for which the establishment is known for. However, growing concern to achieve a healthier society has led McDonalds, as well as other competitors, to make extensive menu changes, in order to conform to a more concerned society. McDonalds is doing more and more to compete with health focused restaurants like Subway. Nutritionist and other leading experts have been hired to join the McDonalds team in order to ensure that the correct items are added to the menu, while still keeping and improving the classics that they are famous for. For example, the chicken nuggets that we all grew up on are now 100% white meat. McDonalds is flexible in their menu to conform to the changing tastes of society, but they always serve with a smile! Bargaining Power of Customers: McDonalds, and the industry, has attempted to gain market capitalization, by keeping the customer satisfied, due to the fact there are relatively no switching costs. For this reason, they have adopted the slogan, the customer is always right. The industry must try to maintain a hold on the market by conforming to a changing society as well as maintaining high quality. One of the industrys most recent concerns is that of creating a healthier society and prevention of obesity. McDonalds corporation has faced previous law suits on being held accountable for obesity, similarly following the litigation process of cigarettes and tobacco companies. The courts ruled against this issue in McDonalds favor, making this a remote future risk factor. McDonalds has had to paid legal fees in order to defend itself in this type of litigation;

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however, even with this incremental cost they are still achieving a significant rate of earnings growth. In addition, McDonalds, in its effort to be a more socially responsible corporate citizen by upporting a healthier society, has developed light and healthy menu items in order to give customers additional eating options and in doing so, broadening the array of its customer base while offering its existing customer base with healthier menu options. Bargaining Power of Suppliers: It can be said that McDonalds has a large bargaining power because of the fact that they spend 4.852 billion dollars in food and paper in 2004. This can be argued that the companies that McDonalds buys from could be largely dependent on McDonalds business. Although in recent years the industry has had a small problem with beef, because of the outbreak of the mad cow disease. This problem raised the cost of beef in Europe tremendously but the cost actually went up around the world because of the beef shortage in Europe. In this case it can be argued that the suppliers of beef have a strong voice as well. The suppliers that sell to McDonalds have a strong voice also because of the fact that the switching cost for McDonalds as a whole would be so tremendous that they would not want to make that change, so any problems or disputes would be worked out with there suppliers. Also, with the competition and the number of buyers in the market place, losing a large company like McDonalds could destroy any supplier but there are other prospects out there to buy that product like Wendys, Jack in the Box, Burger King and a few others that they may be able to salvage there losses. As for the paper goods that McDonalds buy from the manufacturers, if McDonalds were to change manufacturers the supplier could easily change there manufacturing to note book paper by just re-adjusting the machines but it would come at a great cost. Key Success Factors McDonalds key success factors are cost efficiency, product development, marketing, and promotions. To ensure McDonalds remained consistent with these factors, they sold Donatos Pizzeria, a company they owned for the past four and half years, due to the costly operations of running the company. This allowed McDonalds to address the issues of slumping sales they experienced in the past and focus their attention on their operations. In 2003, McDonalds introduced a new revitalization plan aimed to help market itself to todays health conscious consumers and to improve its financial position through discipline. In previous years

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Sources G inding it Out: The Making of McDonalds by Ray A. Kroc, Ray A. Kroc 1977. 1. McDonalds: Behind the Golden Arches by John F. Love John F. Love 1995. 2. 3. aboutmcdonalds.com 2009.

4. 1. www.Yahoo.finance.com 5. 2. www.McDonalds.com 6. 3. http://www.wendys-invest.com 7. 4. www.Yum.com 8. 5. www.morningstar.com 9. 6. www.edgarscan.com 10. 7. Business Analysis and Valuation Using Financial Statements. Palepu, Healy, Bernard.

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