McDonalds Case Study Introduction McDonald’s is the most famous and well-known fast-food company in the world. It was started by Dick and Mac McDonald’s in 1940. Their concept of the restaurant was based on speed and therefore called ‘Speedee Service System’ in 1948, which in today’s times is known as the fast food concept (Wikipedia, 2009). McDonald’s serves fast food to approximately 47 million people in more than 30,000 restaurants located in 121 countries (Bized, 2009).
The product offering has chicken, beef, bread, milk, vegetables as the main ingredients which are composed into burgers (chicken, ham, beef, and vegetable), French fries, milk shakes, soft drinks, breakfast items, juices, and desserts. The major marketing moment for McDonald’s was provided by Ray Kroc, and the brand continues to be a major success by the hard work of its family of employees, suppliers, and franchisees. McDonald’s for years have continued with an extensive advertising campaign targeting children, healthy food, and convenience.
The advertising is done through television, radio, newspaper, billboards & signage, sponsoring sport and charity events, many local events throughout the world. ? Question 1 – Summarize the strategic situation confronting McDonald’s In 1973 Richard Steinig (27 years) became a junior partner in McDonald’s Corp. Franchisee in his 2 stores that generates 80,000 in annual sale and earns 15% from the profit. But since 1999, sales haven’t budged, but instead costs kept rising. McDonald’s began advertising the Big N’ Tasty burger). Instead of living the American Dream, Steinig says: ‘The business just isn’t nearly as profitable, I don’t think that McDonald’s has the waiting list it used to, and part of that reason is that the return on investment just isn’t what it used to be’. Prospective franchisee were once eager to get into the 2 year training program by waiting in line for hours, but no line exists today, and the current franchisee start to feels alienated.
The problem of McDonald’s is beyond cleaning up restaurant, but by facing rapidly fragmented market, and by fast growing restaurant called “Fast Casual” segment like Cosi & Quinzo. Immigrant made exotic food like sushi, barrios. Some quick meals of all sort can be found in supermarket, convenience store, vending machine. The Mickey D’s heyday didn’t help, 194 franchisees left the system, with 69 restaurants forced out for poor performance, the other 25 left seeking greener territory.
McDonald’s buys back franchises if they cannot be sold. Opening a McDonald’s franchise costs $500,000 to $800,000. McDonald’s would rent them the location and demand high corporate standards and in return, franchisees could become very rich. But many franchisees says that ownership of a McDonald’s restaurant is no longer the reliable cash cow it once was. In the past, franchisees who beat McDonald’s national sales average were typically rewarded with the chance to open or buy more stores.
McDonald’s gave millions of Americans their first jobs, and has long symbolized to some people the American way of eating, it is now struggling with an identity crisis. Even though it is still the nation’s most visited fast-food (more than 20 million people eat at McDonald), the company is facing a decline in its portion of the fast-food market and in the estimation of many of its customers, Jack M. Greenberg (60 years) introduce 40 menu items that creates no differences, instead he let the burger business deteriorate. Surveys shows delay in service & quality compare of those of rivals.
Back in the 90’s McDonald’s had done so well in capturing market share through their growth and perception of cleanliness and service The solution was to bring back James R. Cantalupo (59 years) who saw in the 80’s & 90’s the international success. But unfortunately McDonald’s recorded its first quarterly loss in the company 47 years history as a publicly traded business. Cantalupo & his team which included Charles Bell (42 years) and Mats Lederhausen (39 years), had plan to concentrate on getting service & quality right, by introducing “Up or Out” grading system.
Cantalupo is enforcing a “tough love” program, where McDonald’s is getting rid of the weakest franchises. And the owners that flunk the rating and inspection system will get a chance to clean up their act, but if they don’t improve themselves they’ll be fired. Since McDonald’s is living through the death of the mass market, Cantalupo had cut sales growth from 15% to 2 % annually, and added only 250 outlet in U. S. , and 30 % less new opening in Europe, including closing 176 stores from 2800 in Japan.
Some McDonald’s outlets are trying to draw more customers with improved services and products (some greets customers and opens the door for them, others built a resemblance to a French cafe, with a chef who makes custom panini sandwiches). McDonald’s receives funds from its franchises in two ways. There is monthly service fee that varies but most recently in 2002 was 4 percent of total monthly sales. Another manner in which McDonald’s receives funds from its franchises is in rent money. McDonald’s owns all property in which a McDonald’s outlet was built regardless if the location is a franchise or company owned.
It is estimated that McDonald’s generates more money from its rent than from its franchise fees. Investors have accepted that the growth day are over, they remain happily settled for a steady dividends. Many of McDonald’s franchisees have voiced disappointment with lower profits, expensive new cooking systems, and stressed relations with management. Now franchisees are jumping to rivals, like Paul Saber who was a franchisee of McDonald’s for 17 years, then has sold back his 14 restaurant when he realized that the eating habits is shifting and open Panera Brad Co. in 2008, a Health Magazine study, judged Panera Bread the America’s most healthy fast food restaurant). Now franchisees are jumping to rivals, like Paul Saber who was a franchisee of McDonald’s for 17 years, then has sold back his 14 restaurant when he realized that the eating habits is shifting and open Panera Brad Co. (in 2008, a Health Magazine study, judged Panera Bread the America’s most healthy fast food restaurant). Made For You was developed with computer software that gives operators the ability to anticipate orders based on sales volumes during peak periods, according to McDonald’s Corp. pokeswoman Anna Rozenich. So along with the entire hamburger category, the company has been losing market share to what the food industry calls the fast-casual restaurants like Panera Bread, Baja Fresh, Pret A Manger and Chipotle Grill (McDonald’s has an ownership stake in the last two) that have successfully domesticated exotic tastes for the mass audience. “We have a new growth strategy,” said Charlie Bell, McDonald’s president and chief operating officer. “We will grow by adding more customers to our existing restaurants … not restaurants to customers.
So that means our two top priorities are operational excellence and leadership marketing. ” 2003 could be more challenging for McDonald’s once it gets past the initial sales boost it has experienced recently from its two major production launches — the salads and the McGriddle sandwich. After months of sales declines, McDonald’s has begun to bounce back, recently reporting a 1. 3-percent increase in U. S. same-store sales in April followed by a 63-percent jump in May, which reflects the domestic market’s best performance in four years. Wall Street applauded McDonald’s for its US. esurgence, but some restaurant analysts noted that the company faces an uphill climb as the chain’s overseas markets continue to post negative comparable-restaurant sales. Uncomfortable points for franchisees is the top-down manner 1. fix pricing & menu problems 2. “made for you” kitchen upgrades in each restaurant 3. supposed to speed up orders & contain menu items Irwin Kruger, a veteran McDonald’s franchisee with six stores in Manhattan, has customized the hamburger chain’s Made For You cooking system for his high-volume urban restaurants that operate without drive-thrus. 003 could be more challenging for McDonald’s once it gets past the initial sales boost it has experienced recently from its two major production launches — the salads and the McGriddle sandwich. ”I have got to make sure that I’m not turning off a customer because I can’t deliver the service he or she wants,” said Kruger, who was involved in the development of Made For You. “I don’t see anything wrong with a small buffer at peak lunch hours. Greenberg insisted, however, that the majority of front-counter slowdowns are unrelated to Made For You, but instead are caused by inadequate staffing levels, which can lead to such problems as fry stations not being properly manned Kruger said one benefit of Made For You is that it has reduced food waste by 0. 25 percent to 0. 5 percent in his stores. He also emphasized that McDonald’s food quality has improved through such enhancements as toasted sandwich buns and the universal holding cabinets that keep all meat products hot until the sandwich is assembled.
Other service improvements Kruger has implemented in his restaurants include a designated traffic director, or “outside order taker,” who stands on the customer side of the counter and facilitates the ordering process. McDonald’s has promised an expanded menu before, but it has not had a blockbuster new product since the Chicken McNugget, which was introduced in 1983. Other attempts to diversify their hamburger offerings, like the McLean sandwich and the Arch Deluxe, have all gone to their respective McGraves.
This situation is a result of several aspects that include an increase in competition, poor management, bad marketing and lack of response to the changes in the needs of franchises and customers. One reason for this is a high employee turnover rate. McDonald’s has the highest employee turnover rate among its competitors. Another contributing aspect to the poor customer service is slow service at the drive-through window McDonald’s is struggling to overcome the longtime image problems stemming from its food and customer service, and wants to cultivate a cool reputation so it launched its first worldwide campaign “I’m lovin’ it. , which was a key component of its massive revitalization program, and that replaced the “We love to see you smile”. Question 2 – What initiatives can McDonalds’ take to strengthen relationships with franchisees? MacDonald’s is operating in more than 122 countries around the world and it has more than 30,000 locations that serve almost 51 million customers each day. But what makes McDonald’s a global brand is that about 70 percent of McDonald’s restaurants around the world are owned and operated by independent local businesspeople (www. thefranchisemall. com).
So that shows the important role of the franchise in expanding and increasing the footprint of McDonald’s around the world. The Franchisee is granted the right to operate McDonald’s for a period of 20 years in the franchise agreement. However, McDonald’s was not an attractive place for the franchisees back in the 90’s. There are many reasons that led franchisees to quit and cancel their agreement with McDonald’s back in the days which made McDonald’s to lose a tremendous amount of money that reached to approximately $292 million and closing 719 restaurants.
McDonald’s has forced and controlled their franchisees in a way that made them repel against them. The menu items and pricing were decided solely by McDonald’s corporation without considering the independent demands of the customers of the local franchisee. Additionally, the high cost of operating and maintaining the restaurants were imposed to the franchisee nonetheless, they were obliged to abide by the low pricing strategy which made them generate a loss instead of the revenue.
So McDonald’s had a problem maintaining their franchisee motivating them. Therefore McDonald’s has to take some initiatives to strengthen the relationship with its franchisees, and some of these are as follow: • They can lean up and hand over some more responsibilities for the franchisee to control their own store, in which giving them the choice of choosing and organizing the decor designs, signs and equipments. These compromises will increase the franchisee’s control in running the restaurant and hence strengthen the relationship with the franchisor. McDonald’s should permit the franchisee the ability of formulating and choosing the menu items which allow them to match the local demands with the items to generate the highest revenue. • McDonald’s should allow the franchisee to execute their own marketing and promotional activities depending on geographical area and provide assistance once needed. • McDonald’s should provide a free training program for the employees and lower managers to facilitate the operation and ensure the high quality and customer service and the brand image. McDonald’s should keep a close relationship with their franchisees by offering expert consultation, financial support, and an advice once needed. This approach will ease up the communication between the two parties and secure the franchisee in the rough times. • McDonald’s should encourage and reward restaurants not just for their best performance and profit, but also for their community supports and actions. This will motivate franchisees to compete between each other to better serve the communities which will in overall improve image of MacDonald’s.
So it is a Win-Win situation. ? Question 3 – Evaluate McDonald’s price discounting strategy. For any product or company, the price plays a vital role in terms of positioning the product or the company. Cravens and Piercy (2009, p. 349) believe that “pricing decisions need to be coordinated with decisions for all of the positioning components”. Since we have an understanding about the importance of pricing, it is necessary to analyze the factors that might impact the pricing situation. The following factors should be taken into consideration (Exhibit 11. , Cravens and Piercy, 2009: 353): • Pricing Objectives • Product Costs • Customer Price Sensitivity • Competitor’s Likely Response During 1997 McDonald’s decided to slash prices on their menu’s in order to attract more customers from their competition and retain the current ones. This triggered a price war between the fast food giants, and McDonald’s “sales fell over the next four months”, (Cravens and Piercy, 2009: 283). The fall in sales clearly indicates that McDonald’s consumers were price sensitive and perceived it as a cheap product rather than a high value product.
Although McDonald’s objective in a price discount strategy was to lure more customers to its brand, instead it deteriorated the brand value and assisted their competition in attracting those consumers. According to Nurseb911 (2008) some of the other brands such as Wendy’s and Subway instead increased their prices and “focused on quality, health related products and effective marketing of their products”. Consumers started seeing the increase in price of other competitors and perceived that it is healthier, and since McDonald’s had decreased prices recently, they could relate that lower prices means lower quality.
Over a period of time, prices discounts that were planned for short period of time become an expectation of a consumer in the long term. Initially the low priced burgers were an augmented product in a promotional scheme to attract more consumers, nonetheless, over a period of time of time they became expected products because each time McDonald’s “attempted to raise prices again in an effort to compete against surging competition, the consumer base went away” (Nurseb911 2008). Apart from the customer’s price sensitivity and competition response, McDonald’s should have considered the product costs across their chain.
As per Gogoi and Arndt, McDonald’s franchise owner Steinig rebelled at the price discount strategy because the “$1 menu featuring the Big N’ Tasty burger” actually cost him $1. 07 to make it. For every burger that is sold in that offer Steinig is losing 7 cents. Product costs are higher than product selling price. All the above show that McDonald’s had not taken into consideration while implementing the price discount strategy of how it might affect the customers, the competition response, the product costs, and above all the Brand value itself. ?
Question 4 – Discuss the threats to McDonald’s of the changes that are occurring in the fast food market. Since McDonald’s is the most popular brand in the product category of fast food chains, it has rising threats from its competitors and the changing world. These threats can reduce the growth percentage of McDonald’s, and also cause the end of the fast food giant. Firstly, the number of fast food chains is increasing rapidly, and therefore the number of competitors is increasing which are directly or indirectly in competition with McDonald’s.
This reduces the growth opportunities for McDonald’s as it is saturating the market. The new competitors are accompanied by the existing competitors who can create huge pressure on McDonald’s to stay ahead of the competition, and keep its loyal customers. Secondly, the existing and the upcoming food chains in the world are moving towards the healthy food. McDonald’s has started creating a line of healthy food but it is minimal. Also, people in general are becoming health conscious and trying to avoid unhealthy food.
Moreover, strong advertising and marketing campaign is required to inform consumers about the new healthy line of food available. Thirdly, the image of food available is negative. Consumers generally feel the food is the root cause of obesity, heart attacks, diabetes, and other health problems. This causes negative publicity and can cause people to avoid eating McDonald’s. Moreover, it has been displayed in movies like ‘Super Size Me’ and others that eating McDonald’s causes obesity which disturbs the positioning of McDonald’s (Press Release, 2004).
Fourthly, many people around the world are turning vegetarian due to many reasons like avoiding slaughtering of animals, diseases found in animals like bird flu, swine flu etc. But the McDonald’s menu does not provide a wide range of vegetarian products and most of their products are not completely vegetarian. For example, the French fries contain beef flavoring (Spiritual Guides, 2009). Fifthly, all the McDonald restaurants have similar seating and the quality of the restaurant is considered poor.
Today’s trend of restaurants has couches, plants, and better ambiance than McDonald’s which has plastic chairs, and poor quality ambiance. Moreover, there is a McDonald’s in nearby distance and mostly all of them look the same. This is creating a repetitive atmosphere and competition against each other. Lastly, negative publicity in news, movies, spam mails, etc spoil the image of the company. Examples of spam include McDonald attaching Kids Meal coupon with report cards, or issuing a fine for not finishing the meal (Barkham, 2008).? Conclusion
McDonald’s had become very successful during their initial days mainly because there was less competition and the costs were low which helped the franchisees to have better margins. Over the years, costs have been increasing at a quicker rate than the prices of the food McDonalds’ serve, therefore leading to decline in the margin. This is when McDonald’s started feeling the pinch and was forced to think of different strategies to sort out the problem at hand. Franchisee contracts were not renewed, underperforming franchisees were asked to leave, and overtime, people started becoming more health conscious and changed their eating habits.
One of the strategies implemented by McDonalds was the price discounting plan, where McDonald’s expected this strategy to increase the footfall in their stores, instead it reduced because people started perceiving McDonald’s as cheaper brand and started doubting on their quality of food. Competition took advantage of this situation by hiking their prices and focusing their marketing on healthier food items. Overall, looking at the size of McDonald’s, it is the first of its kind in that industry (fast food) to reach such a high level.
Therefore, none of their actions can be predicted because there is no case study for them to refer to unlike the new fast food chains today. Although we can blame the management for what went wrong during those years, but it would be inappropriate because the management itself isn’t experienced enough. Regardless of the problems McDonalds went through, they have survived and are still expanding throughout the world. References •Barkham, Patrick, “The Big McMakeover”, Date Published: 28th January, 2008, Date Accessed: 29th May, 2009, Link: http://www. guardian. co. uk/business/2008/jan/28/mcdonalds. ooddrinks •Bized, “McDonald’s Field of Operation”, Date Accessed: 29th May, 2009, Link: http://www. bized. co. uk/compfact/McDonald’s/mc1. htm •McSpotlight, “Whats wrong with McDonald’s? ”, Date Accessed: 28th May, 2009, Link: http://www. mcspotlight. org/campaigns/translations/trans_uk. html •Press Release, “Super Size Me Movie Review”, Date Published: 28th August, 2004, Date Accessed: 29th May, 2009, Link: http://www. futuremovies. co. uk/review. asp? ID=232 •Spiritual Guides, “McDonald’s Vegetarian & Vegan Options at Fast Food Restaurants”, Date Accessed:28th May, 2009, Link: http://www. egetarian-restaurants. net/OtherInfo/McDonalds. htm •Wikipedia, “McDonald’s”, Date Accessed: 29th May, 2009, Link: http://en. wikipedia. org/wiki/McDonald’s •Cravens D. W. & Piercy N. F. (2009) Strategic Marketing, 9th Edition, McGraw-Hill/Irwin, New York •Nurseb911 2008, Never Compete on Price: The Lessons of McDonald’s and Motorola, viewed 3rd June 2009, http://www. gurufocus. com/news. php? id=34744 •Gogoi P. and Arndt M. 2003, ‘McDonald’s Hamburger Hell’, Business Week, 3 March, p. 1, viewed 3 June 2009, http://www. businessweek. com/magazine/content/03_09/b3822085_mz017. htm