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McDonald's (MCD)Stock (Fast Food Restaurants Industry, Food Industry)
 In addition to its signature restaurant chain, McDonald’s Corporation holds minority interest in Pret A Manger (a UK-based sandwich retailer), and owned the Chipotle Mexican Grill until 2006 and the restaurant chain Boston Market until 2007.[1] The company has also expanded the McDonald's menu in recent decades to include alternative meal options like salads and snack wraps in order to capitalize on growing consumer interest in health and wellness, and to avoid the "veto vote" where one member of a group might refuse to go because there are not enough healthy options on the menu. Each McDonald's restaurant is operated by a franchisee, an affiliate, or the corporation itself. The corporations' 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.[2]
[edit] Business FinancialsRevenues of both company-operated and franchise/affiliate operated stores have grown consistently since 2004, as have franchise/affiliate sales (which are not counted towards total revenues). Meanwhile, McDonald's operating income has fluctuated, increasing 9% from 2004-2007 but actually decreasing in 2007. This decrease is partly the result of rising commodities prices as well as the added costs of the company's continual expansion of its menu options.
[edit] Business OverviewBusiness Model McDonald’s Corporation franchises the majority of its restaurants. A franchisee, usually a local entrepreneur, requests permission from the Corporation in order to open a McDonald’s restaurant. The Corporation’s franchising agreement requires the franchisee to provide the initial capital for equipment, signs, seating and decorations. Meanwhile, the Corporation owns or obtains long-term leases for the building of the restaurant and the land. These franchises generate revenue for the Corporation through payment of rent, royalties based on sales, and initial fees. The Corporation then avoids having to invest a significant amount of capital in its restaurants[30]. Of the 31377 (a rapidly growing number) McDonald’s restaurants around the world, 20505 (65%) are operated by franchisees, 3966 (13%) are operated by affiliates, and 6906 (22%) are operated by the Corporation itself. 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[31]. Steering in this direction has resulted in greater cash flow (which increased by 12% in 2007)[32], reduced spending on operations, and less corporate exposure to rising commodities prices. [edit] Business StrategiesIn recent years, McDonald’s has been guided by two overarching business strategies. The first involves predicting and/or responding to changes in consumer tastes and preferences, as well as demographics and spending patterns. Pragmatically, it has manifested in many new menu 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 second general business strategy focuses on increasing sales at existing restaurants, instead of opening new ones.[33] As a result of this strategy, many restaurant buildings have been remodeled, kitchen efficiency has increased, and drive-thru ordering has been streamlined. 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.[34] [edit] Economy of ScaleEconomies of scale bring both advantages and disadvantages to McDonald's. Although McDonald’s caters to a geographically expansive range of customers, it offers a relatively uniform menu that include well-recognized items such as the Big Mac, Quarter Pounder with Cheese, Filet-O-Fish, Chicken McNuggets, Chicken Selects, McFlurry desserts, and French fries. These items are easily mass produced, so the cost of making each one is small. Consumers’ pervasive familiarity with these items also creates stability in sales: its revenues are consistent year-round and it always sells a certain volume of its highest profile menu items. For example, in 2007, quarterly revenues did not vary by more than 10%[35]. McDonald’s economy of scale also gives it an advantage when dealing with its suppliers, many of whom greatly depend on McDonald’s for their own sales. For example, 80% of Golden State Foods’s revenues come from sales to McDonald’s[36]. This allows McDonald's to purchase supplies at cheaper prices, which then translates into higher margins. The corporation’s size also helps it pool a large advertising budget, which is critical in a competitive industry. It's "I'm Lovin' It" campaign, produced by the advertising agency Omnicom Group (OMC), is well known to American TV viewers. The company has primarily invested in advertisements that focus on differentiating it from its competitors, such as television commercials of novel items that its competitors do not offer.[37] In the context of product promotions (such as with its Happy Meal toys), it also has an advantage in the relationships that it holds with media companies. The disadvantages of McDonald’s size is two-fold. Given the geographic diversity of its suppliers, McDonald’s must invest capital to ensure the quality of the materials that it uses. The company hires its own technical specialists to conduct product reviews and on-site inspections of all its suppliers’ facilities[38]. With so many markets to cover, however, McDonald's food will always be mass-produced, unlike smaller competitors like California's In-N-Out Burger, which aggressively advertises the freshness of its beef and potatoes. Another disadvantage of McDonald's size is it symbolic status as the king of the fast food industry. Public perception of McDonald's is often negative, and it is frequently the focus of public backlash concerning nutrition, cleanliness, labor tensions, and political issues. For example, Eric Schlosser’s Fast Food Nation and Morgan Spurlock’s Supersize Me have reached the popular mainstream and exposed the health risks of consuming large quantities of McDonald's food on a regular basis. [edit] International ExpansionInternationally, 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 China, and using lamb instead of beef in India. In neighboring China, McDonald’s has been selected as the Official Restaurant of the Beijing 2008 Olympic Games - an honor that will bolster its global reputation further.
[edit] Key Trends and ForcesChanges 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. Food safety issues tarnish McDonald's brand name: A single food safety issue, such as an isolated report of contaminated beef, will create severe negative publicity for McDonald’s, especially since consumers are already wary of eating at fast food restaurants. If the issue was not isolated (if, for example, the company had to recall a large amount of beef from several different regions), such an event could also hurt the company's balance sheet. Such an event will be headline news, and the resulting hit to the company's reputation could be very hard to repair, leading to drops in sales. To manage this risk, McDonald's has required numerous safety checks in its franchises, purchases supplies from established vendors, and launched publications that emphasize the cleanliness of its restaurants.[44] China is an important market: Recently, the corporation has launched the breakfast menu, extended store hours to 24 hours in major cities, and implemented drive-thru in China, which attest to the corporation's high expectations of growth in that market[45]. However, in China McDonald's faces competition from Yum! Brands, as well as higher risks of political instability, economic volatility and crime. Since some regions in China may lack well-established legal systems, settling legal issues may be difficult. Furthermore, differences in culture may affect how local populations react to new franchises and products. [edit] CompetitionAlthough 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:
In addition to the above restaurants, McDonald’s must compete 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's2004 Data 2005 Data 2006 Data 2007 Data 2008 Data Most Recent Data Available
[edit] Market ShareThe major players in the fast-food market, which generates around $120B[61] in annual revenues, are: Domino's, Inc.[62], Burger King Corporation[63], Wendy's International, Inc.[64], Jack in the Box, Inc.[65], Yum! Brands, Inc.[66], Doctor's Associates, Inc.[67], and McDonald's Corporation[68]. As can be seen, the fast food industry is somewhat fragmented. The seven major competitors only account for 45% of total revenues.
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