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VIVEK COLLEGE OF COMMERCE
CHAPTER-1
INTRODUCTION
1.1 COMPANY PROFILE
McDonald's Corporation is the world's largest chain of hamburger fast food
restaurants, serving around 68 million customers daily in 119 countries.
Headquartered in the United States, the company began in 1940 as a barbecue
restaurant operated by Richard and Maurice McDonald; in 1948 they reorganized
their business as a hamburger stand using production line principles.
Businessman Ray Kroc joined the company as a franchise agent in 1955. He
subsequently purchased the chain from the McDonald brothers and oversaw its
worldwide growth.
A McDonald's restaurant is operated by a franchisee, an affiliate, or the corporation
itself. The corporation's revenues come from the rent, royalties and fees paid by the
franchises, as well as sales in company-operated restaurants. McDonald's revenues
grew 27 percent over the three years ending in 2007 to $22.8 billion, and 9 percent
growth in operating income to $3.9 billion. McDonald's primarily
sells hamburgers, cheeseburgers, chicken, frenchfries, breakfastitems, soft
drinks, milkshakes and desserts. In response to changing consumer tastes, the
company has expanded its menu to include salads, wraps, smoothies and fruit.
1.2 HISTORY
The business began in 1940, with a restaurant opened by brothers Richard and
Maurice McDonald at 1398 North E Street at West 14th Street in San Bernardino,
California . Their introduction of the "Speedee Service System" in 1948 furthered the
principles of the modern fast-food restaurant that the White hamburger chain had
already put into practice more than two decades earlier. The original mascot of
McDonald's was a man with a chef's hat on top of a hamburger shaped head whose
name was "Speedee". Speedee was eventually replaced with Ronald McDonald by
1967 when the company first filed a U.S. trademark on a clown shaped man having
puffed out costume legs.
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McDonald's first filed for a U.S. trademark on the name "McDonald's" on May 4,
1961, with the description "Drive-In Restaurant Services", which continues to be
renewed through the end of December 2009. In the same year, on September 13,
1961, the company filed a logo trademark on an overlapping, double arched "M"
symbol. The overlapping double arched "M" symbol logo was temporarily disfavored
by September 6, 1962, when a trademark was filed for a single arch, shaped over
many of the early McDonald's restaurants in the early years. Although the "Golden
Arches" appeared in various forms, the present form as a letter "M" did not appear
until November 18, 1968, when the company applied for a U.S. trademark. The
present corporation dates its founding to the opening of affranchised restaurant
by Ray Kroc, in Des Plaines, Illinois, on April 15, 1955, the ninth McDonald's
restaurant overall. Kroc later purchased the McDonald brothers' equity in the
company and led its worldwide expansion, and the company became listed on the
public stock markets in 1965. Kroc was also noted for aggressive business practices,
compelling the McDonald brothers to leave the fast food industry. The McDonald
brothers and Kroc feuded over control of the business, as documented in both Kroc's
autobiography and in the McDonald brothers' autobiography. The San Bernardino
store was demolished in 1976 (or 1971, according to Juan Pollo) and the site was sold
to the Juan Pollo restaurant chain. It now serves as headquarters for the Juan Pollo
chain, as well as a McDonald's and Route 66 museum. With the expansion of
McDonald's into many international markets, the company has become a symbol of
globalization and the spread of the American way of life. Its prominence has also
made it a frequent topic of public debates about obesity, corporate
ethics and consumer responsibility.
1.3 KEY DATES
1948: Richard and Maurice McDonald open the first McDonald's restaurant in San
Bernardino, California.
1954: Ray Kroc gains the rights to set up McDonald's restaurants in most of the
country.
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1955: Kroc opens his first McDonald's restaurant in Des Plaines, Illinois; he
incorporates his company as McDonald's Corporation.
1960: The slogan, "Look for the Golden Arches," is used in an advertising campaign.
1961: Kroc buys out the McDonald brothers for $2.7 million.
1963: Ronald McDonald makes his debut.
1965: McDonald's goes public.
1967: The company opens its first foreign restaurant in British Columbia, Canada.
1968: The Big Mac is added to the menu.
1973: Breakfast items begin to appear on the menu, with the debut of the Egg Mc
Muffin.
1974: The first Ronald McDonald House opens in Philadelphia.
1975: The first McDonald's drive-thru window appears.
1979: The children's Happy Meal makes its debut.
1983: Chicken Mc Nuggets are introduced.
1985: McDonald's becomes one of the 30 companies that make up the Dow Jones
Industrial Average.
1998: The company takes its first stake in another fast-food chain, buying a minority
interest in Colorado-based Chipotle Mexican Grill.
1999: Donatos Pizza Inc. is acquired.
2000: McDonald's buys the bankrupt Boston Market chain.
2002: Restructuring charges of $853 million result in the firm's first quarterly loss
since going public.
2003: McDonald's sells Donatos in order to refocus on its core hamburger business.
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1.4 HEADQUARTERS
The McDonald's headquarters complex, McDonald's Plaza, is located in Oak Brook,
Illinois. It sits on the site of the former headquarters and stabling area of Paul Butler,
the founder of Oak Brook. McDonald's moved into the Oak Brook facility from an
office within the Chicago Loop in 1971.
1.5 PRODUCTS
McDonald's predominantly sells hamburgers, various types
of chicken sandwiches and products, French fries, soft drinks, breakfast items,
and desserts.
In most markets, McDonald's offers salads and vegetarian items, wraps and other
localized fare. On a seasonal basis, McDonald's offers the McRib sandwich. Some
speculate the seasonality of the McRib adds to its appeal. Various countries,
especially in Asia, are currently serving soup. This local deviation from the standard
menu is a characteristic for which the chain is particularly known, and one which is
employed either to abide by regional food taboos (such as the religious prohibition of
beef consumption in India) or to make available foods with which the regional market
is more familiar (such as the sale of McRice in Indonesia). In Germany, McDonald's
sells beer.
1.6 FACTS AND FIGURES
McDonald's restaurants are found in 119 countries and territories around the world
and serve 58 million customers each day. McDonald's operates over 34,000
restaurants worldwide, employing more than 1.7 million people. The company also
operates other restaurant brands, such as Piles Café.
Focusing on its core brand, McDonald's began divesting itself of other chains it had
acquired during the 1990s.
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The company owned a majority stake in Chipotle Mexican Grill until October 2006,
when McDonald's fully divested from Chipotle through a stock exchange. Until
December 2003, it also owned Donatos Pizza. On August 27, 2007, McDonald's
sold Boston Market to Sun Capital Partners.
Notably, McDonald's has increased shareholder dividends for 25 consecutive
years,making it one of the Aristocrats. In October 2012, its monthly sales fell for the
first time in nine years.
1.7 GLOBAL OPERATIONS
McDonald's has become emblematic of globalization, sometimes referred to as the
"McDonaldization" of society. The newspaper uses the "Big Mac Index": the
comparison of a Big Mac's cost in various world currencies can be used to informally
judge these currencies' purchasing power parity. Norway has the most expensive Big
Mac in the world as of July 2011, while the country with the least expensive Big Mac
is India (albeit for a Maharaja Mac—the next cheapest Big Mac is Hong Kong).
Thomas Friedman once said that no country with a McDonald's had gone to war with
another. However, the "Golden Arches Theory of Conflict Prevention" is not strictly
true. Exceptions are the 1989 United States invasion of Panama, NATO's bombing of
Serbia in 1999, the 2006 Lebanon War, and the 2008 South Ossetia war.
Some observers have suggested that the company should be given credit for
increasing the standard of service in markets that it enters. A group of anthropologists
in a study entitled Golden Arches East looked at the impact McDonald's had on East
Asia, and Hong Kong in particular. When it opened in Hong Kong in 1975,
McDonald's was the first restaurant to consistently offer clean restrooms, driving
customers to demand the same of other restaurants and institutions. McDonald's has
taken to partnering up with Sinopec, the second largest oil company in the People's
Republic of China, as it takes advantage of the country's growing use of personal
vehicles by opening numerous drive-thru restaurants. McDonald’s has opened a
McDonald's restaurant and McCafé on the underground premises of the French fine
arts museum, the Louvre. The company stated it will open vegetarian-only restaurants
in India by mid-2013.
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1.8 CRITICISM
As a prominent example of the rapid globalization of the American fast food industry,
McDonald's is often the target of criticism for its menu, its expansion, and its business
practices. The Mc Libel Trial, also known as McDonald's Restaurants v Morris &
Steel, is an example of this criticism. In 1990, activists from a small group known
as London Greenpeace (no connection to the international group Greenpeace)
distributed leaflets entitled What's wrong with McDonald's?, criticizing its
environmental, health, and labor record. The corporation wrote to the group
demanding they desist and apologize, and, when two of the activists refused to back
down, sued them for libel in one of the longest cases in British civil law. A
documentary film of the Mc Libel Trial has been shown in several countries.
Despite the objections of McDonald's, the term "McJob" was added to Merriam-
Webster's Collegiate Dictionary in 2003. The term was defined as "a low-paying job
that requires little skill and provides little opportunity for advancement". In an open
letter to Merriam-Webster, Jim Cantalupo, former CEO of McDonald's, denounced
the definition as a "slap in the face" to all restaurant employees, and stated that "a
more appropriate definition of a 'McJob' might be 'teaches responsibility.'" Merriam-
Webster responded that "we stand by the accuracy and appropriateness of our
definition."
In 1999, French anti-globalization activist José Bové vandalized a half-built
McDonald's to protest against the introduction of fast food in the region.
In 2001, Eric Schlosser's book Fast Food Nation included criticism of the business
practices of McDonald's. Among the critiques were allegations that McDonald's
(along with other companies within the fast food industry) uses its political influence
to increase its profits at the expense of people's health and the social conditions of its
workers. The book also brought into question McDonald's advertisement techniques
in which it targets children. While the book did mention other fast-food chains, it
focused primarily on McDonald's.
McDonald's is the world's largest distributor of toys, which it includes with kids
meals. It has been alleged that the use of popular toys encourages children to eat more
McDonald's food, thereby contributing to many children's health problems, including
a rise in obesity.
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In 2002, vegetarian groups, largely Hindu and Buddhist, successfully sued
McDonald's for misrepresenting its French fries as vegetarian, when they
contained beef broth.
People for the Ethical Treatment of Animals (PETA), continues to pressure
McDonald's to change its animal welfare standards, in particular the method its
suppliers use for slaughtering chickens. Most processors in the United States shackle
the birds upside down, then run them through an electrically charged water tub to
render them unconscious before slitting their throats. PETA argues that using gas to
kill the birds (a method known as "controlled atmosphere killing" or CAK) is less
cruel. Both CAK and "controlled atmosphere stunning" (CAS) are commonly used in
Europe.
Morgan Spurlock's 2004 documentary film Super Size Me said that McDonald's food
was contributing to the epidemic of obesity in society, and that the company was
failing to provide nutritional information about its food for its customers. Six weeks
after the film premiered, McDonald's announced that it was eliminating the super size
option, and was creating the adult happy.
The soya that is fed to McDonald’s chickens is supplied by agricultural
giant Cargill and comes directly from Brazil. Greenpeace alleges that not only is soya
destroying the Amazon rain forest in Brazil, but soya farmers are guilty of
further crimes including slavery and the invasion of indigenous peoples’ lands. The
allegation is that McDonald's, as a client of Cargill's, is complicit in these activities.
1.9 ARGUMENTS IN DEFENSE
In response to public pressure, McDonald's has sought to include more healthy
choices in its menu and has introduced a new slogan to its recruitment posters: "Not
bad for a McJob". (The word McJob, first attested in the mid-1980s and later
popularized by Canadian novelist Douglas Copland in his book Generation X, has
become a buzz word for low-paid, unskilled work with few prospects or benefits and
little security.) McDonald's disputes this definition of McJob. In 2007, the company
launched an advertising campaign with the slogan "Would you like a career with
that?" on Irish television, outlining that its jobs have many prospects.
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In an effort to respond to growing consumer awareness of food provenance, the fast-
food chain changed its supplier of both coffee beans and milk. UK chief executive
Steve Easterbrook said: "British consumers are increasingly interested in the quality,
sourcing and ethics of the food and drink they buy". In a bid to tap into the ethical
consumer market, McDonald's switched to using coffee beans taken from stocks that
are certified by the Rainforest Alliance, a conservation group. Additionally, in
response to pressure, McDonald's UK started using organic milk supplies for its
bottled milk and hot drinks, although it still uses conventional milk in its milkshakes,
and in all of its dairy products in the United States. According to a report published
by Farmers Weekly in 2007, the quantity of milk used by McDonald's could have
accounted for as much as 5% of the UK's organic milk output.
McDonald's announced on May 22, 2008 that, in the U.S. and Canada, it would
switch to using cooking oil that contains no trans fats for its french fries, and canola-
based oil with corn and soy oils, for its baked items, pies and cookies, by year's end.
With regard to acquiring chickens from suppliers who use CAK or CAS methods of
slaughter, McDonald's says that it needs to see more research "to help determine
whether any CAS system in current use is optimal from an animal welfare
perspective."
1.10 ENVIRONMENTAL RECORD
In April 2008, McDonald's announced that 11 of its Sheffield, England restaurants
have been using a biomass trial that had cut its waste and carbon footprint by half in
the area. In this trial, waste from the restaurants were collected by Veolia
Environmental Services and used to produce energy at a power plant. McDonald's
plans to expand this project, although the lack of biomass power plants in the U.S.
will prevent this plan from becoming a national standard anytime soon. In addition, in
Europe, McDonald's has been recycling vegetable grease by converting it to fuel for
its diesel trucks.
Furthermore, McDonald's has been using a corn-based bioplastic to produce
containers for some of its products. Although industries who use this product claim a
carbon savings of 30% to 80%, a Guardian study shows otherwise.
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The results show that this type of plastic does not break down in landfills as
efficiently as other conventional plastics. The extra energy it takes to recycle this
plastic results in a higher output of greenhouse gases. Also, the plastics can
contaminate waste streams, causing other recycled plastics to become unsalable.
The U.S. Environmental Protection Agency has recognized McDonald's continuous
effort to reduce solid waste by designing more efficient packaging and by promoting
the use of recycled-content materials.[60] McDonald's reports that it is committed
towards environmental leadership by effectively managing electric energy, by
conserving natural resources through recycling and reusing materials, and by
addressing water management issues within the restaurant.
In an effort to reduce energy usage by 25% in its restaurants, McDonald's opened a
prototype restaurant in Chicago in 2009 with the intention of using the model in its
other restaurants throughout the world. Building on past efforts, specifically a
restaurant it opened in Sweden in 2000 that was the first to intentionally incorporate
green ideas, McDonald's designed the Chicago site to save energy by incorporating
old and new ideas such as managing storm water, using skylights for more natural
lighting and installing some partitions and tabletops made from recycled goods.
When McDonald’s received criticism for its environmental policies in the 1970s, it
began to make substantial progress towards source reductions efforts. For instance, an
“average meal” in the 1970s—a Big Mac, fries, and a drink—required 46 grams of
packaging; today, it requires only 25 grams, allowing a 46% reduction. In addition,
McDonald’s eliminated the need for intermediate containers for cola by having a
delivery system that pumps syrup directly from the delivery truck into storage
containers, saving two million pounds of packaging annually. Overall, weight
reductions in packaging and products, as well as the increased usage of bulk
packaging ultimately decreased packaging by 24 million pounds annually.
1.11 LEGAL CASES
McDonald's has been involved in a number of lawsuits and other legal cases, most of
which involved trademark disputes. The company has threatened many food
businesses with legal action unless it drops the Mc or Mac from trading names.
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In one noteworthy case, McDonald's sued a Scottish café owner called McDonald,
even though the business in question dated back over a century (Sheriff Court
Glasgow and Strath kelvin, November 21, 1952). On September 8, 2009, McDonald's
Malaysian operations lost a lawsuit to prevent another restaurant calling
itself McCurry. McDonald's lost in an appeal to Malaysia's highest court, the Federal
Court.
It has also filed numerous defamation suits. For example, in the Mc Libel case,
McDonald's sued two activists for distributing pamphlets attacking its environmental,
labor and health records. After the longest trial in UK legal history, the judge found
that some claims in the pamphlet were untrue and therefore libelous. The company,
however, had asserted that all claims in the pamphlet were untrue, essentially obliging
the judge to publicly rule on each one. Embarrassingly for the company, several of the
specific allegations were upheld.
McDonald's has defended itself in several cases involving workers' rights. In 2001 the
company was fined £12,400 by British magistrates for illegally employing and over-
working child labor in one of its London restaurants. This is thought to be one of the
largest fines imposed on a company for breaking laws relating to child working
conditions. In April 2007 in Perth, Western Australia, McDonald's pleaded guilty to
five charges relating to the employment of children under 15 in one of its outlets and
was fined A$8,000.
Possibly the most infamous legal case involving McDonald's was the 1994 decision
in The McDonald's Coffee Case where Stella Liebeck was awarded several million
dollars after she suffered third-degree burns after spilling a scalding cup of
McDonald's coffee on herself.
In a McDonald's American Idol figurine promotion, the figurine that represents "New
Wave Nigel" wears something that closely resembles Devo’s Energy Dome, which
was featured on the band's album cover, Freedom of Choice. In addition to the
figurine's image, it also plays a tune that appears to be an altered version of Devo's
song "Doctor Detroit". Devo copyrighted and trademarked the Energy Dome and is
taking legal action against McDonald's.
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1.12 CHARITY
MCHAPPY DAY
Mc Happy Day is an annual event at McDonald's, where a percentage of the day's
sales go to charity. It is the signature fundraising event for Ronald McDonald House
Charities.In 2007, it was celebrated in 17
countries: Argentina, Australia, Austria, Brazil, Canada, the United
States, Finland, France, Guatemala etc. According to the Australian McHappy Day
web site, McHappy Day raised $20.4 million in 2009. The goal for 2010 is $20.8
million.
MCDONALD'S MONOPOLY DONATION TO ST. JUDE
In 1995, St. Jude Children's Research Hospital received an anonymous letter
postmarked in Dallas, Texas, containing a $1 million winning McDonald's Monopoly
game piece. McDonald's officials came to the hospital, accompanied by a
representative from the accounting firm Arthur Andersen, who examined the card
under a jeweler's eyepiece, handled it with plastic gloves, and verified it as a
winner. Although game rules prohibited the transfer of prizes, McDonald's waived the
rule and has made the annual $50,000 annuity payments, even after learning that the
piece was sent by an individual involved in an embezzlement scheme intended to
defraud McDonald's.
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CHAPTER -2
GLOBAL CHALLENGES AND STRATEGIES
2.1 THREE CHALLENGES TO MCDONALD'S GROWTH
McDonald's has long been the darling of Wall Street, posting increases in same-store
sales for 30 consecutive quarters since early 2003. Even during the depths of the
recession in 2008, same-store sales rose by 6.1%.
Time and time again, the fast-food global chain has found success by being something
to virtually everyone. It tweaked its menu beyond its core offerings of burgers and
fries, grabbing all kinds of new customers, from the health conscious with its latest
oatmeal breakfast to the cost conscious with its dollar menu items. And watch out
Starbucks McCafe's specialty coffee drinks now satisfy those who want more than
just a standard cup of Joe.
Next Monday, when McDonald's announces its earnings for the last three months of
2010, analysts expect the chain's winning streak to continue. Wall Street expects the
chain will end the fourth quarter at about $1.15 per share, up 12% from the same
period a year ago.
Shareholders have reaped the benefits -- McDonald's stock has risen nearly 40% in
the past three years. But how long will the run last? While Wall Street
overwhelmingly maintains a 'buy' position on the stock, some analysts are beginning
to point to factors that could start to work against the world's largest burger chain.
Here are three headwinds to watch for in 2011.
RISING FOOD PRICES:
Higher food commodity and energy prices have recently pushed up wholesale and
retail food prices. The US Department of Agriculture predicts that prices will continue
to accelerate during the first half of 2011, leading to a 2% to 3% rise in food price
inflation for the year. McDonald's and other big burger chains have largely been
unaffected so far, but that might soon change.
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In a report last week, RBC Capital Markets analyst Larry Miller said McDonald's will
raise prices by 2% to 3% to help offset its higher food costs. McDonald's declined to
comment, citing a quiet period ahead of earnings next week. However, the chain's
CFO Pete Bensen told analysts in October that while prices for beef and other
ingredients were rising, the burger chain could deal with the increase.
But it may be too early to conclude that the Golden Arches will survive the
inflationary pressures unscathed. Rising food prices could be a risk for McDonald's,
says analyst Andy Barish of Jefferies and Company, even though the chain is largely
safeguarded from such volatility because the vast majority of its operating profits,
about two-thirds, come from franchises and royalties. While individual franchises
might have a harder time dealing with rising prices given the sensitive demand of cost
conscious consumers, it could eventually hurt profits of the overall chain if prices rise
to levels where it makes it difficult for franchises to expand.
Barish doesn't see any major disappointments in sales or earnings this year, but rather
a gradual slowing of earnings growth. He expects McDonald's to post 16% earnings
growth in 2010, followed by 10% growth in 2011.
LIMITATION OF BEVERAGES OVER BURGERS:
McDonald's increasingly diverse menu has helped it become the nation's best-
performing restaurant company during the economic slump. The chain realized
quickly that consumers have lots of options when it comes to food and drink and they
want the option to stop at McDonald's for snack time as opposed to just regular meals.
Creative drinks are the product du jour at the chain, with everything from fruit
smoothies and specialty coffee drinks.
But beverages might only take the company so far. The Wall Street Journal recently
cited a company email that disclosed that McDonald's peak lunch-hour business has
been flat for five years. And the few analysts taking a bearish view of McDonald's
2011 outlook say real growth of the company's core business -- the burgers and fries
part -- is overstated.
Howard Penney, restaurant industry analyst with investment research firm Hedgeye
and a Fortune contributor, believes the chain has expanded too broadly into
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beverages, and the plan will eventually catch up with the company -- helping send
U.S. same store sales to negative levels during the second, third and fourth quarters
this year. Much of McDonald's success in beverages has come from specialty coffees
such as lattes, which are sold at relatively higher prices. Penney says year over year
sales growth of the pricier beverages has flattened.
"McDonald's makes a lot of its money on fries and beverages," Penney says. "So
selling beverages is good but it makes operations more complex. It takes more to
make a latte than to pour a Coke. To continue peak service time you have to add
labor."
RETURN ON INVESTMENT:
Some franchises worry that their investments will not pay off, according to an
October McDonald's franchisee survey by Janney Montgomery analyst Mark
Kalinowski, who maintains a buy rating on the stock. A poll of franchisees shows
some concern that corporate demands to redo stores and sell more coffee cost too
much and might not pay off in the end.
One franchisee writes: "Very concerned about reinvestment issues and whether the
Corporation is paying a fair share of McCafe, upgraded technology platforms ..."
According to the Wall Street Journal, the McCafe machines cost $100,000 to install,
with McDonald's covering just $30,000 of that.
The criticism might appear typical for any large corporation with a significant
franchise business, but if the concerns by some franchise owners begin to snowball,
McDonald's could face a problem that no amount of caffeine can fix.
2.2 MCDONALD’S REPORTS UNEXPECTEDLY SHARP DROP IN SALES
McDonald’s, the world’s largest fast-food chain, reported a decline in an important
global sales figure, the first such drop in almost a decade.
Monthly sales in stores open at least 13 months fell around the world by 1.8 percent in
October, reflecting “the pervasive challenges of today’s global marketplace,”
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according to Don Thompson, who was appointed chief executive of McDonald’s in
July. The last decline was in April 2003.
Same-store sales fell 2.2 percent in the United States and Europe and declined 2.4
percent in the Asia Pacific, Africa and Middle East regions. Jack Russo, a stock
analyst who follows McDonald’s at the financial adviser Edward Jones, said Wall
Street had been expecting a dip in sales figures from McDonald’s, but not such a
sharp one.
In addition to weak markets around the world, Mr. Russo blamed the calendar. “There
was one less Sunday and one less Saturday in the month, and those are big sales
days,” he said. “If you make an adjustment for that, sales would have been slightly
positive but still decelerating.”
The chain is also facing stiffer competition from its longtime rivals Burger King and
Wendy’s, which have new owners. Both chains have been adding to their menus and
remodeling stores.
Burger King is currently featuring a gingerbread cookie shake, while Wendy’s new
Garden Sensations salads are doing well. On Thursday, Wendy’s announced that its
same-store sales in North America were up 2.7 percent in the third quarter, although it
reported a loss of $26.2 million, or 7 cents a share, in contrast to a loss of $3.97
million in the same quarter a year ago.
At the same time, demographic shifts are favoring chains that traditionally have
competed less directly with McDonald’s, like Taco Bell and Chipotle. All of the
hamburger chains have been working to capitalize on lower bacon prices. Burger
King has a White Cheddar Whopper sandwich with bacon, and Wendy’s is offering a
Bacon Portabella Melt sandwich.
McDonald’s has also been aggressively using social media platforms, like Twitter, to
promote its new Cheddar Bacon Onion burger, or C.B.O. It also heavily advertised its
Dollar Menu and its Monopoly promotion, but Mr. Thompson said those efforts to
drive sales had fallen flat in the face of “modest consumer demand.”McDonald’s
stock was down about 2 percent Thursday, while Wendy’s was up about 3 percent.
Burger King was also down slightly.
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2.3 MCDONALD'S SUPPLIERS MAKE PROGRESS ADDRESSING GLOBAL CHALLENGES
McDonald's received more than 400 submissions from 172 different suppliers,
making the 2012 selection process the most difficult yet impactful to-date. Supply
chain achievements spanned diverse areas including meeting zero waste-to-landfill
targets, taking the plastic out of plastic bottles, teaching orphans how to raise
chickens, helping employees attain further education, and more. Collectively, they
demonstrated the power of sharing responsibility by letting employees lead; sharing
experience by applying global lessons locally; and sharing expertise through
partnerships.
A panel of executives and external experts, including BSR, Conservation
International, Food Animal Initiative (FAI) and World Wildlife Fund (WWF) selected
the final 2012 Best of Sustainable Supply winners. These projects were selected based
on either measurable results or innovation.
"One of our core values is taking seriously the responsibilities that come with being a
leader, and using our size, scope and resources to help make the world a better place.
Nowhere is that commitment more evident than in our supply chain," said Jose
Armario, executive vice president, McDonald's Global Supply Chain, Development &
Franchising. "The submissions in this year's report demonstrate that McDonald's
supply chain is world class in its ability to provide safe, sustainable, and assured
supply of food and products our customers love."
Best of Sustainable Supply Report highlights include:
Integrated Pest Management
Leading competitive North American potato suppliers (ConAgra Lamb Weston,
McCain Foods, J.R. Simplot Company) collaborated to identify and measure the
implementation of best practices to reduce pesticide, fertilizer and water use.
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Animal Welfare Training
Gen OSI Inc. (an OSI Group partner in the Philippines) trained government
animal welfare officers and meat inspectors in the Philippines. Judges selected
this entry as an example of leadership that extends beyond a company's scope of
responsibility to drive systemic change.
Sustainable Wheat Farming to Reduce Carbon Footprint
Fresh Start Bakeries in Europe worked with suppliers to reduce the carbon
footprint resulting from the agricultural practices used to produce its main raw
material: wheat. This example reflects the highest aspirations of McDonald's
Sustainable Land Management Commitment.
Reducing the Use of Fossil Fuels and Supplying Energy to the Community
Grupo Melo, a Central American supplier, built and optimized hydro power
turbines that produce excess power for the surrounding community during the
rainy season.
The majority of any given company's social and environmental impacts are in its
supply chain. McDonald's recognition of its suppliers is an important means to
highlighting innovative solutions that drive sustainability commitments and encourage
leadership within the industry," said Sonal Pandya-Dalal, Conservation International's
Senior Advisor, Corporate Leadership Strategies, Center for Environmental
Leadership in Business. "McDonald's Best of Sustainable Supply recognizes the
importance, and thereby encourages, the development of sustainable initiatives within
the supply chain," said Roland Bonney, director of Food Animal Initiative.
McDonald's Armario added, "Leadership throughout our supply chain is increasingly
critical as we work to integrate sustainability actions across all areas of our business
to help make the world a better place for everyone. We sincerely appreciate all of our
suppliers' efforts."
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2.4 GLOBAL GROWTH AND SUCCESS STRATEGIES
Since the start of the company in 1973, McDonald’s Corporation began spreading
domestically throughout the United States thus establishing its brand recognition. Its
initial strategy began by advertising directly to the middle and upper class citizens, as
can be seen in countries such as India and China. However, with its many bargain
deals on several of its food items, McDonald’s began to cater to several people
belonging to the lower class.
China was McDonald’s first global country in which it researched heavily before
opening up restaurants. In fact, through globalization and internationalization,
McDonald’s was able to develop marketing strategies, while at the same time
customizing them for different regions in accordance to the cultural and national
variations in order to serve specific target markets. The company conducts heavy
research in regions where it desires to open locations based upon a few elements,
including social, cultural, technological, political, and economic situations.
McDonald’s key to success is its business mantra of “think global, act local”. This has
allowed the company to achieve financial success in every region it opens its fast food
restaurants.
Internationally, McDonald’s earns high revenues is India. India is one of the toughest
markets to enter for foreign businesses, due to the governmental hardships imposed
upon by the Indian government. The reason behind such hardships is solely based on
the Indian government seeking to protect its domestic businesses, and employment for
its citizens. Vasant Vihar, a prosperous residential area in New Delhi, was the initial
location that McDonald’s opened up its first store in India in 1996. Since then, almost
60 McDonald’s restaurants have been opened. One of the most successive strategies
that McDonalds uses before opening up its stores is research and development of its
foods. Tastes and preferences vary across the globe, therefore, the company
thoroughly analyzes the preferred tastes, especially to not offend local cultures. For
example, India is a nation where beef is highly unpopular due to religious purposes;
therefore, the company had to come up with burgers that were not made with beef, but
rather with chicken or lamb. Furthermore, the company had to create flavors that were
spicy in order to meet the general taste preferences. In order to further emphasize the
globalization element incorporated by the company, the success strategies include:
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Emphasis on Local Management
Throughout the world, McDonalds prides itself in hiring locals, specifically
management in order to gain acceptance into the country by its citizens. The emphasis
is based on the “think global, act local” theme of the company. For instance, the
company decided to establish two joint ventures with two local entrepreneurs in New
Delhi, who were selected to manage the fast food restaurant. This strategic move
allowed the company to gain easy access to the bureaucracy associated with the
country’s government.
Politically Sensitive Strategy
One of the company’s major concerns was to develop ways to avoid political
confrontation with the Indian government. The other major concern was to be careful
of the religious sensitives in India. Almost 80% of Indians do not eat beef, and over
150 million Indian Muslims do not eat pork, therefore, instead of supplying the
normal Big Mac, which consists of beef, the company developed the Maharaja Mac
that is made of two lamb patties. Other foods were also added to the non-standardized
menu including McAloo Tiki Burger, and other common Indian dishes.
Employment Opportunity
Foreign enterprises are often reluctant to hire locals in their companies, specifically at
the managerial positions, however, McDonald’s research concluded that in order to
survive the brutal Indian government, it would have to hire locals as cashiers, cooks,
managers, etc., as well as provide jobs for the country’s agricultural workforce. In
fact, McDonald’s outsources its products to several Indian companies throughout
India. This provides evidence to the Indian government that McDonald’s is not only
customer friendly, but also employee friendly.
Environmental Friendliness
In order to achieve a positive reputation, as well as follow local and national policies
of a country, McDonald’s tries to establish services that are environmentally friendly.
India is an example where the company provides financial contributions and sponsors
several community related activities in order to promote environmental protection.
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This is primarily seen within schools; thus indicating that the company also supports
local schools.
Corporate Citizenship
In order to better its reputation, this multinational firm gives back to the local citizens
in all countries it operates. For example, the company provides several financial
donations to local organizations. This is one way to encourage consumers to eat at its
restaurants, as it is an incentive that is used to spread the name.
Pricing
As the value of currencies varies worldwide, McDonald’s is often forced to change its
pricing strategy in accordance to its target market. For instance, the value of a Big
Mac varies worldwide (see Chart 1). In Switzerland, the Big Mac is valued $.60 over
the U.S. (price base of the product). However, in China, it is undervalued by $0.60 in
comparison to the price of the Big Mac in the U.S. It seems that the company tries to
maintain a price range on all its products based on the location, income distribution
and it is for this purpose that the company opens up most of its restaurants in major
cities such as New Delhi, Shanghai, Beijing, and so on. Its primary goal is to initially
attract middle and upper class citizens, as they can afford McDonald‟s prices. After
this, they slowly target the lower middle class citizens. In the United States, for
example, the restaurant chain has appealed equally well to all classes ranging from the
poor to the upper class; however, its popularity continues to be among the lower,
middle and upper middle class.
Chart 1: The Big Mac Index
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2.5 CHALLENGES THE MCDONALD’S HAS OVERCOME
The company has grown through several challenges that have come its way, including
adapting to its local environments; this is an ongoing challenge that it will face as it
continues to open up more restaurants worldwide. However, the biggest challenge the
firm faced was in 2001, when the company had hit a low point, specifically with the
new fad of eating healthy. This was primarily seen in its home country, the United
States. This fad continues today, and as a result, McDonald’s became one of the least
visited fast food restaurants. In fact, Subway increased in sales due to its low calorie
subs that were available. After 2001, the company changed its strategy: instead of
opening more stores, the firm decided to change its menu by introducing healthier
meals (see chart 2a). In fact, the company took a big dip in profits from 2000-2002.
However, since its introduction of the new menu, consisting of fruit snacks for
children, and healthier meals for adults, such as the grilled chicken flatbread, the
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company has begun to increase its revenues from the previous slow years. This can be
seen in Chart 2b, as revenues have begun to increase since 2003. Furthermore, in
order to fulfill federal health regulations, as well as meet its healthy requirements to
societies in which it operates, the company in 2004, begun to experiment with
products. It introduced new oven baked sandwiches, which were healthier and tastier
for its consumers. In 2004, as a result of overcoming its challenges, the company
increased its shares by 11% to 12%. McDonald’s in Australia, for example,
introduced the Mc Cafe, its gourmet coffee for its customers. This proved to be a big
hit.
Chart 2a: Sales Growth (Economist.com, 2004)
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Chart 2b: Total Revenue (Economist.com, 2004)
Another way the company begun to increase profits was to introduce its dollar menu.
This became popular very quickly, as it allowed even the lower class citizens to eat at
McDonald‟s, not just in the United States, but in countries such as India and China.
With its new campaign, larger sizes or portions were introduced at a dollar value,
including sodas, fries, salads, and desserts (Eisenberg, 2002). It seems that during the
initial years, when the company first began to spread domestically, there were little
worries on healthy eating, however, as times have changed and competition has
increased, the company has been forced to seek new and innovative ways to not only
increase its shares and revenues, but to also fulfill its obligation to the societies in
which it operates in.
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2.6 MCDONALD’S ADAPTING TO NEW MARKETS
The McDonald Corporation has been able to cater to the needs of their customers in
various markets by adjusting their projects, ads and work processes. As the multi-
billion dollar company continues with its spread into the international waters, it has to
first research, and then develops its products. Its most recent locations have been
India and China. As noted earlier, the company thoroughly conducted in-depth
analysis among several states in India in order to meet the preference requirements.
For instance, in the state of Gujarat, most citizens are vegetarians, therefore, when the
company opened up a location there, it introduced veggie burgers, and other
traditional Indian dishes, such as samosas, dosa, vada, and so on. This was not the
case in New Delhi, where the company introduced several meat burgers, including
Maharaja Mac, kabas, etc. (Dash, 2005). Therefore, in an effort to adapt to the local
environment, the company created foods that were more in line with the taste buds of
the Indians. This can also be seen in countries such as China, Israel, Venezuela,
Mexico, and so on.
Recently, the company opened up a retail store, Mc Kids, a clothing retail store in
China which appeals to children on the basis of toys, casual modern clothing,
interactive books and videos. Other stores were also opened in Europe and the United
States in 2005 (People’s Daily, 2004). Furthermore, China is the country where high
sales are normally generated; and in an effort to keep up these sales, the company has
decided to create a new feel for the Chinese people. The Chinese society usually seeks
to be more westernized and in an effort to enhance their image and serve the demands
of their clients, the company has placed more of an emphasis on beef, which is a
luxury item to some customers. The firm has introduced and heavily advertised beef
burgers, such as the Quarter Pounder. In fact, in order to exhilarate the image of
eating beef, it has been advertised that eating beef increases sex appeal. This is only
one of many such ways that the company is promoting its products through its
adaptation strategy of becoming local (Towns, 2006).
The latest trend in China has been the growth of fast paced restaurants such as
McDonald’s, which is second in line with the highest number of restaurants in China
of over 120, where the majority of these are located in Shanghai.
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This U.S. based company owns more stores worldwide (about 19,700) than it does in
its home country, thus indicating its appeal of internalization. In 2005, the company
opened its first drive- thru restaurant in China, with the hope of opening up at least
100 drive-thru outlets by the next two years. In fact, the company expects to increase
the number of total restaurants to 1,000 by 2008 (Goldkorn, 2005). The company’s
adaptation to the local environments in which it operates stores and restaurants have
allowed it to achieve success, as well as maintain it.
In fact, McDonald’s success has been largely due to its envelopment of globalization,
specifically through its adaptation of the local tastes and preferences. Food,
specifically fast-food seems to be a weakness among the human race, especially,
when it is cheap, convenient and tasty. Yet, this has also led to the company’s
downfall in its home country during the healthy fad and the growing concerns of
obesity among children and adults that the U.S. is going through. However, the
company changed its menu in order to accommodate the much desired healthy
lifestyle, as well as fulfilling its obligations to provide healthier meals for children.
The healthy menu thus carried on over to its global restaurants, where it was tweaked
to meet the tastes of the local people. The research and development conducted by the
team experts of McDonald’s has allowed for a high growth in the company. In the
most recent 2006 report, the company announced that it had grown significantly from
the previous year. In the United States, the multinational firm grew by 4.7% and 4.9%
in Europe. Its largest growth was in the Asian/Pacific region, the Middle East and
Africa with 5.7% (McDonald’s.com, 2006). This growth illustrates McDonald’s
successive strategies of not only adapting to the local environments in which it
operates, but also fulfilling society’s obligations for healthy lifestyle, donating large
funds to various countries and the environment.
2.7 RETAINING LOYAL CUSTOMERS
Experts suggest that if you want loyal customers, then dont stop at customer
satisfaction as it takes much more than simply having a few satisfied customers to
operate a successful business. The McDonald brand has differentiated itself from
competitors not just through customer loyalty, but also through quality, consistency,
and standardization to name but a few variables. Author Todd Beck, his article
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entitled Want loyal customers? Don’t Stop at Satisfaction,1 states that “Basic service
delivery is not enough to differentiate an organization in today’s competitive
marketplace” (Beck, 2005). Beck states that managers need to understand which
service qualities customers‟ value, and then lead employees toward incorporating
these qualities into their daily interactions. The creation of a culture that emphasizes
and delivers these values can propel an organization beyond customer satisfaction to
the type of loyalty that can drive business growth. According to Beck, over the years,
business leaders‟ focus on improving customer service has produced a host of
messages, well-worn phrases or value propositions such as “anything for the
customer” and “the customer is always right.” According to Beck, as customers
become increasingly savvy, products more commoditized and choices more abundant,
companies are finding that simply meeting customer expectations (i.e., creating
customer satisfaction) does not automatically translate into repeat business. Beck
writes that “Indeed, among customers who switch to a competitor, up to eighty
percent report being satisfied before making the move. It is when customers feel loyal
to an organization that they behave in ways that help grow the business.” Companies
that guess at what the customer values often miss. Even those that hire expert
consultants to do much of formal research can find that they missed something major
in their analysis.
Beck states that with all of the “lip service” paid to customer loyalty in today’s
marketplace, one would think that organizations understand the value of a loyal
customer base. Why then do so few provide the kind of customer service that
generates loyalty? “The challenge lies in human nature and in the ability of service
providers to develop the right attitudes and supporting behaviors” (Beck, 2005). In
order to “deliver service performance that inspires customer loyalty, organizations
must first understand what customers really want from a service transaction. Research
has shown that, regardless of industry, product, age, gender or location in the world,
consumers want the following four qualities”
Seamlessness
Service provider must have the ability to manage service factors that are behind the
scenes and invisible to the customer, sparing customers the need to deal with multiple
organizational layers or complicated procedures.
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Trustworthiness
Customers wish to feel they are in capable hands and that commitments will be kept.
They want and expect things to be correct the first time. Should something go amiss,
they expect a quick and thorough recovery.
Attentiveness
“Customers want to be recognized quickly, politely and with respect. Although this
may seem a basic tenet of customer service, attentive service--the quality valued most
highly by some customers--tends to be the point at which many organizations fall
short” (Beck, 2005). We know from experience that if someone tells a story about
being ignored by a representative, listeners often respond with their own “horror
stories,” each worse than the one before.
Resourcefulness
Providers who take a fast, flexible approach to the service interaction appeal to
customers‟ desires for resourceful service. If needed, customers also expect prompt
and creative problem solving in the service recovery.
Once an organization fully understands what customers expect from a service
transaction, then “the next step is to ensure employees both understand and commit to
service improvement goals” (Beck, 2005). Beck agrees to generate employee
acceptance and to ensure that frontline service delivery reflects the qualities
customers value most, organizations should consider the following actions.
Communicate
According to Beck, impart a vision of customer service to your employees that
includes clear and understandable long-term goals. “Once employees know the
direction the organization plans to take, they are more likely to get behind the effort”
Empower
Encourage employees to exercise the flexibility and judgment that customers‟ expect.
Employees need to be able to answer a customer’s questions and to make routine
decisions.
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Guide
The key is to hold supervisors and managers responsible for modeling the skills you
expect to see in frontline service personnel.
Show value
The best result is to make sure that “employees who understand the pay-off are more
likely to support the organization’s service improvement goals.” The most critical
factor is to “Help employees see how creating a positive customer experience benefits
them, their customers and the organization.”
Equip
Provide the resources your staff requires to succeed, including coaching and training.
Evaluate and compensate
Establish specific and objective evaluation factors to both measure and encourage
behaviors that create positive experiences for customers.
Build for the future
Recruit, hire and develop employees whose values and priorities are in harmony with
the organization. Most businesses, and the people who run them, assume they know
what their customers value, when in fact they have never really made finding out a
matter of top priority, this leaves organizations vulnerable. Companies that do not
determine-and then regularly take the blinders off and re-determine- what their
customers‟ value often miss fundamental changes. To determine how customers
experience value requires more than mere objective, quantitative research. It also
requires fresh, unfettered thinking- and listening to maintain loyal customers.
Gathering strategic information on your customer, discovering their unique needs,
creating loyalty and guaranteed service program and looking for patterns among
former customers are all helpful methods of raising customers‟ loyalty rates. And in
the value-added era, when customers are less loyal than ever, retaining customers is
putting money in the bank.
The true customer loyalty approach can be one of the most powerful tools any form of
industry can follow which will help build a lasting customer relationship. According
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to Beck, to foster a loyal customer base, organizational leaders must understand that
simply satisfying customers won't differentiate their company from the rest of the
marketplace. Instead, leaders must commit to delivering the type of customer service
that exceeds expectations and inspires customers to continue doing business with the
organization. The McDonalds Corporation has consistently exceeded the expectations
of their customers by inspiring them to repeatedly count on the quality and taste of
their meals at any McDonald’s round the globe.
2.8 RE-BRANDING: THE MCDONALD’S STRATEGY
Between 1969 and 2005 McDonald’s management strategies were frequently
celebrated on the business pages of The New York Times – a testament no doubt to
the media relations department’s ability to spin the company’s mass-marketing
efficacy into a much repeated American success story in this very important US
newspaper. However, the brand was also often criticized in the news for the labour,
environmental and social externalities of its expanding empire. These critiques
underscored the most voiced concerns and anxieties: namely problems with youth
labour, its encroachment on community values, environmentalism, globalization of
culture, and children’s healthy lifestyles.
Young workforce
With well over one million employees, McDonald’s impact on the workforce has
been significant. By 2000, one out of eight Americans had, at some time in their life,
worked for this company. As labour was one of the largest expenses and most
unpredictable aspects of the McDonald’s system every effort was made to rationalize
the workforce. Apart from implementing technology to replace human labour,
McDonald’s decided to use a youthful Workforce.
Yet youth labour proved a double edge sword. McDonald’s treatment of its young
workers emerged as one of its earliest and most challenging public relations concerns.
Critics argued that youth’s lack of experience and eagerness to please leave them
vulnerable to corporate exploitation.
McDonald’s public relations experts have sought to legitimize its labour practices
with articles about employee incentive programmes. They have also been careful to
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feature happy and helpful servers in their marketing campaigns. The declining teen
population in the 1980s led the company to hire more new immigrant workers,
seniors, and disabled workers, helping to distance the corporation from the
controversy of youth labour.
Community and family values
McDonald’s began its expansion in the late 1960s in medium-sized towns, where its
appeals to cleanliness, value for money, friendly service and family looked in step
with the mainly white middle classes suburban inhabitants. Yet as the chain expanded
into city centres and small towns, it ran up against those for whom McDonald’s
suburban values provoked a negative register. In 1969, when a black community in
Cleveland boycotted McDonald’s restaurants, in protest over the corporation’s denial
of franchise opportunities for black people, McDonald’s value of mass inclusiveness
was challenged.
In 1974, the urban residence of Greenwich Village, New York, loudly protested that a
second McDonald’s chain would threaten local family owned shops, create more
traffic congestion, encourage loitering, and contribute to litter problems. Protesters
from Hell’s Kitchen New York, to Belmont in the Bronx, rallied against the opening
of McDonald’s restaurants. Every location McDonald’s failed to secure was more
than simply a loss of income; it was a blemish on corporate image. Public relations
staff worked tirelessly to turn around community opinion.
Environment issues
During the late 1980s the production of beef to feed the hamburger giant supply chain
lead to the charge that McDonald’s devastates the rainforest. Animal rights activists
were incensed by how McDonald’s promotional weight and availability promoted a
meat-based diet that resulted in the poor treatment and slaughter of masses of animals.
Yet, by and large press coverage reveals that the biggest environmental nightmare for
McDonald’s is its waste and packaging.
For 20 years, McDonald’s collared its burgers in cardboard, wrapped them in paper
and sold them in red cardboard boxes, yet in 1975, the corporation introduced a new
Styrofoam package aptly named the “clamshell”. Apart from being cheap, the
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clamshell kept the burger hot, the tomato and lettuce cold, and did not show grease
stains. Yet, through the 1980s, as landfills dried up and health professionals drew a
link between plastic and a suspected carcinogenic, the clamshell became public
enemy No. 1. In 1987, grass roots organizations launched a Mc Toxics Campaign
encouraging the public to picket, lobby, and boycott McDonald’s to stop their use of
plastic packaging.
In 1989, McDonald’s agreed to set up a $16 million national recycling programme for
its packaging and become a major purchaser of recycled materials. In a bid for
legitimacy, McDonald’s joined with three members of the Environmental Defense
Fund to research and draft recommendations for changing McDonald’s packaging and
waste. A year later McDonald’s outlined a 40-point plan to reduce its waste stream by
80 per cent, by measures such as trimming the size of its napkins and introducing
refillable coffee mugs. The most important point in the plan was the agreement to
eliminate foam packaging from its 8,500 US outlets and return to paper wrappings.
Fat kids and burger panic
In 1985, when the typical American’s diet reached 43 per cent fat, the National
Institutes of Health (NIH) announced that daily fat intake be reduced to 30 per cent to
avoid health complications. The NIH singled out the fast food industry as a major
contributor of fattening foods and asked them to market leaner meats and other foods.
By 1986, the American Medical Association had condemned the hamburger as the
leading source of saturated fat in the American diet. As of July 1990 fries and hash
browns were fired in 100 per cent vegetable oil instead of the beef tallow mixture of
much criticism by food campaigners. Low fat milk, new salads, and more fiber rich
breakfast options were added to the menu.
However, McDonald’s was also vulnerable to the charge that it did not warn
consumers of the dangers to their health that emerged from a burger rich diet.
Following the Center for Science’s 1980s request that fast food restaurants supply
ingredient information, in 1986 US Senator Chafee from Rhode Island proposed
legislation to require ingredient labelling on packaged fast food as a point of law.
McDonald’s countered that the law would increase costs and defeat the purpose,
given consumers received the information after the purchase. Fearing state regulation,
McDonald’s issued a pamphlet to educate individuals about their products, which
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include calories, protein, carbohydrate, fat, cholesterol, sodium, vitamins and
minerals.
In the summer of 1990, McDonald’s agreed to post charts outlining the nutritional
content of the food in its 8,000+ restaurants. In 1993 to improve the legitimacy of its
food information, McDonald’s enlisted the support of the American Dietetic
Association in its efforts to target food information to children. Special pamphlets
were distributed to children in Happy Meals, with accompanying toy food characters
and television commercials. However, McDonald’s also made claims, such as meat
“can make it easier to do things like climb higher and ride your bike farther”.
McLibel
Nowhere were the converging discontents which surrounded McDonaldization more
clearly revealed than in the 1989 McLibel court case. Against the back drop of
aggressive McDonald’s expansion in Britain, a group of British Greenpeace activists
decided to bring the “irrationalities of McDonaldization” to public attention
distributing a leaflet entitled “What’s wrong with McDonald’s?” that argued
McDonald’s quest for profit had extended American imperialism into the third world,
encouraging labour exploitation and antiunionism, devastated the environment and
gulled children into unhealthy diets.
The authors pointed to medical evidence that linked: “a diet high in fat, sugar, animal
products and salt, and low in fibre, vitamins and minerals – which describes an
average McDonald’s meal” to fatal illnesses such as cancer and heart disease. The
leaflet encouraged consumers to boycott McDonald’s, enjoy vegetarian diets utilizing
home-grown vegetables and eat wholesome slow food together.
Fiercely protective of its corporate image, McDonald’s lawyers served writs on the
five campaigners claiming libel. The McLibel case became the longest trial in British
history, lingering in the courts for ten years as £10 million of McDonald’s legal might
battled two environmental advocates who defended themselves (with the help of a
vast number of witness supporters) over their rights to publish criticism of the
corporation. In 1997, the judge ruled in McDonald’s favour on several counts and
fined the plaintiffs £96,000. However, the judge also ruled that it was not libelous to
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claim that McDonald’s suppressed labour markets, made deceptive claims about its
food, posed a health threat to its long-term customers and exploited children's
credulity with its promotions. If anything, the court case only served to illustrate the
activists’ claims that this corporation used its position of global wealth and power to
pummel those who would challenge its public image.
The end of an empire
The cumulative weight of negative publicity, coupled with burger fatigue, and stiff
competition from Subway and Starbucks (both of which offered healthy sandwich
options) was showing up on the bottom line of the McDonald’s Corporation as
globalization, competition from other restaurants, and changing tastes and lifestyles
began impacting the fast food restaurant market. Between 1998 and 2002,
McDonald’s experienced declining rates of growth and its actual share of the fast-
food market fell more than three per cent. Sales were stagnant since 2000 and
plummeted 2.8 per cent in 2002, representing the first ever decline in the
corporation’s history. In Europe too, stiff competition from other fast food chains and
anti McDonald’s sentiments began to affect the bottom line. After 30 years of
phenomenal growth in Britain, McDonald’s, who directly controls two thirds of the
1,235 UK restaurants, reported a £61 million decline in their profits from the previous
year. But most tellingly McDonald’s stock lost about 70 per cent of its value.
Moreover, it was now paying the price for its litigious folly. Way back in 1990,
McDonald’s had announced that it would replace the beef tallow with pure vegetable
oil. But a decade later activists found that because the oil change proved costly and
altered the flavour of the fries, McDonald’s had not followed through on this
commitment.
In 2000, John F. Banzhaf III, a law professor at George Washington University
encouraged his students to work with him to launch court cases on behalf of
vegetarians and religious non meat eaters who claimed they had been falsely mislead
by the company. In 2002 the judge ruled in favour of vegetarian and religious groups
and McDonald’s was fined $10 million in a master settlement agreement that
controlled the terms of pending cases.
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The turn of the millennia brought the World Health Organization’s (WHO) public
declarations of a globesity crisis which fuelled criticism of fast food culture. Given its
market leader status and super-sized marketing budgets, parenting advocates around
the world condemned McDonald’s for its excessive marketing to children.
McDonald’s not only found itself having to defend its right to advertise to children in
the UK, but in the USA, crusading lawyer Hirsh brought forward a law suit on behalf
of the parents of two overweight teenagers who claimed their children were not aware
that McDonald’s food was fattening. In this instance, the Judge dismissed the case.
Hirsh then filed a revised complaint accusing the fast food giant of making misleading
nutritional claims. The complaint not-only included the two original girls, but was
filed on behalf of “hundreds of thousands of New York state residents under the age
of 18” who suffer health problems as a result of eating McDonald’s food.
McDonald’s lawyers contended that it would be impossible to establish whether
eating at McDonald’s was a major cause of these children’s ailments because
genetics, medical conditions and sedentary lifestyles could also be factors. So it is the
parents, not the fast food industry’s fault if kids are eating improperly and are not
active enough. The court agreed with McDonald’s noting that it was reasonable to
assume that most people were aware that McDonald’s food was fattening. However, it
was the release of a documentary, which shows filmmaker Morgan Spurlock
damaging his health by eating nothing but McDonald’s food for a month that became
the straw that broke the camel’s back. Faced with shareholder dismay at its declining
profitability, McDonald’s once again opted for a public relations turn around.
Re-branding
The head office decided it was time to stop the decline in global profits and the
bleeding of customers to healthier options, and charged its communications specialists
to respond to the changing climate of opinion. This McDonald’s did with great fanfare
devoting billions of dollars in a global corporate re-branding intended to blunt
McDonald’s association with unhealthy kids.
Charlie Bell, the CEO of McDonald’s whose “plan to win” approach was a revival of
the five P’s of marketing price, people, product, place and promotion. At an
operational level, McDonald’s stores were to be given new interiors, revamped staff
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uniforms and packaging, and new menu items. In their UK print and outdoor
campaigns, a golden question mark now replaced the Golden Arches explained by the
tagline “McDonald’s. But not as you know it”.
Menu changes alone could not achieve the turn around, however, so McDonald’s also
developed a two-pronged global marketing strategy. They decided to sidestep the
child market by targeting teens rather than children, ironically returning to the burgers
original fans. Their first ad in the global youth campaign featured, global pop star
Justin Timberlake singing its new “I’m Lovin’ it” strapline. This youth campaign
focus unfolded with growing sponsorship of MTV show Advance Warning followed
by ads employing hip yet dynamic teen icons like skater legend Tony Hawks to speak
to its new youthful targets based around four core areas: music, sport, fashion and
entertainment.
Future struggles
The David and Goliath struggles between the public and corporations are likely to
remain endemic to the future politics of the global marketplace. Clearly the defence
and maintenance of a corporate legitimacy must now go well beyond spinning
positive media stories and promoting happy lifestyles: brand mythmaking today is a
multiplex and volatile affair which includes brand advertising, community relations,
social marketing, government lobbying, and even litigation as key elements of
corporate survival.
However, unlike the issues raised by student and environmental advocates, the
lifestyle anxieties encountered in the globesity debates arise from the middle class
worries of stressed out parents who have trouble childrearing. These are not likely to
dissolve in a flurry of lifestyle advertising. So perhaps there remains an accumulated
cost of public trust emerging from a deepening parental scepticism towards the
corporate ethos of McDonald’s.
CHAPTER -3
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FRANCHISING STRATEGIES AND SUCCESS
3.1 THE MCDONALD’S FRANCHISING MODEL
When analyzing a McDonald’s franchise there are a variety of terms and conditions
that come into play with regard to individual store franchise fees. For each
McDonald’s restaurant, there is an operator’s lease with an assortment of fees and
conditions appropriate to that specific restaurant. A portion of the table of contents
from an Operator’s Lease with various articles is shown as. The Operators Lease is a
legal document signed by the franchisee that specifically states the rents and fees for
that specific McDonald’s restaurant. Each individual store will have a separate and
specific operator’s lease. In order to understand the full magnitude of this lease and its
fees, three basic agreements that can originate in the Operator’s Lease become
important and need to be further analyzed and discussed. These three agreements are
the Conventional Franchise, the Business Facilities Lease and the Joint Venture.
Conventional Franchise
The majority of McDonald’s franchises are termed “Conventional Franchises.” This
agreement is based on a 20 year agreement between the franchisee and McDonald’s
Corporation. The Operator’s lease for a Conventional Franchise usually includes an
ongoing service fee of approximately 4 % of the monthly sales/revenues of that
particular store. This 4% is used for advertising and marketing. This may also be
referred to as the advertising fee. This money is used for TV, radio, internet
advertising/promotions, as well as other marketing choices. In addition to this 4%,
there is an ongoing “monthly fee” (percent rent) of 8.5% to 13% of monthly revenues
due to McDonald’s Corporation for use of the building which is owned by
McDonald‘s. This percent rent is also based on McDonald’s Corporation owning the
land and building for that particular restaurant. This rent percent can be reduced in
rare cases where the franchisee owns the building. There may be a few cases where
the franchisee owns both the building and the land, but it appears McDonald’s
Corporation usually owns the land and the majority of buildings where McDonald’s
restaurants are located. Hence, McDonald’s has become one of this country’s largest
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real estate holding companies; owning thousands of prime commercial locations
throughout the United States. An example of estimated monthly fees is found.
There are some initial costs, in addition to the “service fee” and “percent rent fee,”
that are also required to be paid for a conventional McDonald’s franchise. These costs
include a security deposit (one-time payment of $15,000) and the initial franchise fee
of $45,000. These costs are tied to the Operator’s Lease Agreement for each
individual store. These monthly fees and deposits are in addition to the purchase price
of the actual restaurant. The purchase price reflects the fair market value paid for an
existing restaurant. Although there is no set purchase price, a broad rule of thumb
usually sets the purchase price between 50% - 75% of the store’s past annual sales for
an existing and established store. McDonald’s usually requires the franchisee to invest
25% of the negotiated purchase price of a restaurant from personal funds. The
Conventional Franchise is further defined in Table III for purchase of a new restaurant
and for the purchase of an existing restaurant.
Business Facilities Lease (BFL)
A second agreement for purchasing a McDonald’s restaurant is known as the Business
Franchise Lease (BFL). The BFL is a program to help outstanding individuals become
franchisees who may lack the funds to qualify under the Conventional Franchise
Agreement. The BFL is a program for franchisees lacking the $45,000 for the
franchise fee and/or the 25% down of the purchase price of a restaurant. The
individual who is selected by McDonald’s for the BFL will usually pay a higher base
rent rate of 13% or more for 2 - 3 years until the franchisee is able to save-up the
required 25% down of the purchase price of the restaurant. Since the BFL is usually
purchasing a restaurant owned by McDonald’s Corporation, the final sale price will
again be determined by the sales volume of the restaurant. The sales price is usually
between 42% - 52% of the past year’s annual sales. The BFL is a popular agreement
used for existing outstanding McDonald’s employees who wish to become
franchisees. The BFL is further defined in.
Joint venture
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In the late 1990’s, another program was started by McDonald’s to enable franchisees
to purchase a McDonald’s known as the Joint Venture. This program was offered to
existing franchisees as a way to rapidly expand with less up front capital expense.
Joint Venture franchisees are essentially partners with McDonald’s Corporation. For
example, if McDonald’s had corporate stores that they wished to sell, they may offer
them to an existing franchisee as a joint venture. The agreement establishes the
payment of a management fee to the franchisee from McDonald’s of approximately
$5,000 per month for each store involved in the joint venture agreement (as many as
10 locations could be involved). In addition, the franchisee may get a percent of the
bottom line of each store (40% - 60% - depending on the agreement in place with
each joint venture franchisee). Today there is evidence that McDonald’s is mainly
using the joint venture agreement with franchisees in countries outside the U.S.
Additional McDonald’s options
McDonald’s has also located restaurants in various retail stores within the past 10 to
15 years. Locations like Wal-Marts, airports, hospitals and universities that house a
McDonald’s restaurant are usually called satellite locations, and usually are awarded
to existing McDonald’s franchisees in the vicinity of the satellite location. The fees
and expenses for satellite locations differ from the conventional McDonald’s stand-
alone store locations and could serve as the basis for an entirely separate study of this
type of franchising fee structure.
Conclusion
Base rents, percent rents, security fees, service fees, franchise fees and royalty fees
are all terms used to discuss franchising costs. When looking at the fees and expenses
associated with any company’s franchise, a good place to begin an analysis is with a
comparison to McDonald’s Corporation. In this paper we have laid out the 3 basic
agreements McDonald’s Corporation uses when franchising: the Conventional
Franchise, the Business Facilities Lease (BFL) and the Joint Venture with all like
associated fees. These three agreements serve as an excellent cornerstone for
analyzing all companies that offer franchising opportunities. Herein, the authors have
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attempted to elucidate and explain the various terms associated with the numerous
fees.
One must also recognize McDonald’s, as with most franchises, makes money from
the monthly expenses (percent rent) to the franchisee based on the restaurant’s “total
revenues” (and not just profits). Each individual McDonald’s franchise is carefully
researched prior to completion. McDonald’s corporation attempts to reduce its
corporate risk exposure as much as possible. If the franchise holder is successful,
McDonald’s corporation is successful. This concept appears to work very well for
McDonald’s and equally well for the motivated franchisee. Franchising is not for the
“weak-of-heart” or for someone looking for an easy way to become a small business
owner.
In addition to the financial requirements that one must consider when analyzing
various franchise opportunities, there are numerous other basic requirements
McDonald’s mandates of anyone attempting to become a franchisee of McDonalds’s.
These McDonald’s corporate requirements include such restrictions as not allowing
partners (operationally or financially) when purchasing a franchise. There are also
extensive training programs that franchisees must complete in order to become a
McDonald’s franchisee. This training can take up to two years with no compensation
to the trainee franchisee. A more complete analysis of the many and varied
requirements of the McDonald’s franchise model definitely should be pursued as an
avenue for future research.
3.2 REQUIREMENTS TO OPEN A MCDONALD'S
McDonald's has more than 2,400 owner/operators in the United States, and selling
franchises is an important part of McDonald's business strategy. The company is very
selective in granting franchises, and prospective franchisees need to demonstrate a
solid commitment to McDonald's, as well as possess substantial business or restaurant
experience and sufficient liquid assets. Only about 1 percent of applicants are
accepted as McDonald's franchisees.
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Personal Qualifications
McDonald's has minimum personal requirements that must be met by all potential
franchisees. These include business experience at the managerial level and a
demonstrated ability to develop and carry out a business plan. A commitment to
franchising, an understanding of business finance and a willingness to work on site in
the restaurant are also important. Potential restaurant owners must also be willing to
train with McDonald's for up to nine months before opening their restaurant, and must
demonstrate the ability to manage and motivate employees.
Financing
Franchisees must make a down payment when buying a McDonald's restaurant. This
is equal to 40 percent of the total cost of a new restaurant, or 25 percent of the total
cost of an existing restaurant. This money must be paid using non-borrowed liquid
assets, such as cash, securities, bonds or business or real estate equity other than your
own home. Before you can be considered by McDonald's, you will need to
demonstrate that you have at least $500,000 in non-borrowed liquid assets.
McDonald's does not provide financing for its franchisees, so you will also need to
arrange additional financing.
Application
The process for opening a McDonald's begins with your application to McDonald's
Corporation. If you meet the company's initial personal and financial qualifications,
you will be asked to spend three days in a McDonald's restaurant, working and
learning about the business. If the company is satisfied with your performance during
this time, you will be invited to a further interview to discuss training and finance.
Training
Before you can open a McDonald's franchise, you must complete a training course
run by McDonald's Hamburger University. The training program is conducted in part
at the Hamburger University campus in Oak Brook, Illinois, in part online and in part
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in individual McDonald's restaurants. Trainees must complete a range of learning
objectives before they can qualify to own a franchise. Depending on previous
experience, the complete training program can take between nine and 24 months.
Training may be taken on a full-time or part-time basis.
3.3 MCDONALD'S FRANCHISE LOCATION REQUIREMENTS
With more than 33,000 locations across the world, McDonald's golden arches are
among the most recognizable corporate logos in the world. Millions of people visit the
fast food restaurant every day, attracted by convenience, product familiarity,
competitive prices and the relative ease of finding a McDonald's location almost
anywhere you find yourself. McDonald's began its franchise operations in 1955. For
franchise owners, the company has very specific requirements for where a restaurant
can be located.
McDonald's Franchises
McDonald's is known around the world for its burgers, fries and shakes. Its huge
worldwide success and recognition ensure a McDonald's franchise is a strong
candidate to make money. Most franchisees buy existing restaurants from the
corporation or from other McDonald's owner/operators. Only a few purchase and
build on a new site. As of 2011, 87 percent of McDonald's franchisees own more than
one restaurant. All current franchisees are owner/operators; the company does not
permit absentee ownership of its franchises. When considering a site, be aware that
McDonald's usually will give preference to a proven franchisee over a new one when
awarding select, demonstrably successful sites.
Location Requirements
The location of each unit is a major element of its potential success. For that reason,
the company keeps a close watch on where its stores can be located. The ideal site for
a stand-alone restaurant will be 50,000 square feet, although units have been
developed on both smaller and larger sites. A corner location with the option to put up
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signs visible from two major streets is considered optimal, as is a site near a major
intersection with traffic signals. Ample parking space is required and must meet all
applicable local parking codes. Size and space requirements are adapted for mall,
airport and some downtown locations.
Facility Considerations
Your McDonald's location will have to meet stringent inspections to ensure its food
preparation, storage and counter areas are safe, clean and sufficiently large to meet
client demand. The seating area is subject to safety and health inspections, and will be
reviewed in terms of traffic flow and maximum capacity. Each location is required to
have restroom facilities for males and females. Drive-through locations must meet
local traffic and safety requirements, including clear markings for drive-through lanes
and vehicle size restrictions. Additional space is required for restaurants at which the
franchisee wants to have a McDonald's Play Place. Space requirements vary
depending on whether the play area is inside or outdoors.
Financial Requirements
Because of its international name recognition and record of success, purchasing a
McDonald's franchise requires a major financial commitment. The franchise fee alone
is $45,000, with the total investment required ranging between $1 million and $2
million, according to Entrepreneur Magazine. The term of the franchise agreement is
typically 20 years, at which time it can be renewed. McDonald's requires potential
investors to demonstrate a minimum of $500,000 in non-borrowed liquid assets to
even be considered for a franchise. The down payment is typically 25 percent of the
total cost to purchase an existing restaurant and 40 percent for a new restaurant. Other
fees include annual service fees and rental costs.
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3.4 THE INITIAL MCDONALD'S FRANCHISE FEE COVER
The Secret Recipe
Not only does your initial franchise fee buy you access to all of McDonald's recipes,
but it gives you access to the company's successful business plan. Think of your
franchise fee as insurance. Instead of worrying about how much garlic to use, you can
relax knowing that your burgers will be exactly what your customers are looking for.
In addition, McDonald's corporate takes the guesswork out of your location, your
decor and image and your procedures. Instead of paying a team of consultants to help
you plan and design a start-up, your franchise fee pays for a package with proven
results.
Marketing: Opening with Instant Name Recognition
If you were to open a restaurant on your own, without the support of a franchise, more
than half of your initial battle would be reaching customers and creating a name for
yourself. Your burgers might be a thousand times better than those served by
McDonald's, but if no one tastes them you cannot make a profit. Your initial franchise
fee helps you circumvent that challenge by including your restaurant in a chain with
the advantage of instant name recognition. It gives you a legal right to use the
McDonald's logo and branding materials and the benefits of years of successful
advertising that guarantees customers will recognize your business as they drive past.
Consistency: Meeting Customer Expectations Every Time
A McDonald's franchise offers its owner more security than many other new business
ventures because of its long-standing successful track record and the company's
scrupulously strict standards. Customers know that if they drive through a
McDonald's while on vacation across the country, they will receive an identical
burger to the one they would have been served in their local restaurant. This kind of
consistency requires substantial corporate supervision, which is paid for by your
franchise fees and dues. A substantial portion the training provided to franchise
owners is devoted to the recipes and standard business practices that ensure high
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levels of consistency across the chain. Franchise fees pay for the team of people that
not only support and train new owners but also supervise their efforts.
Training: Ensuring Your Ability to Successfully Meet McDonald's
Standards
A study reported in Small Business Trends found that a significant portion of small
businesses fail because their owners lack the experience and knowledge to create
something that can compete with existing businesses. McDonald's enhances the
competitiveness of its franchisees by providing extensive training. Each potential
franchise owner attends an intensive nine-month training program, the cost of which
is partially offset by your initial franchise fee. None of your living or travel expenses
come out of your fees, but some of the actual costs of training do. Your fees also pay
for ongoing corporate support.
3.5 CONDITIONS UNDER WHICH A MCDONALD'S FRANCHISE AGREEMENT CAN BE TERMINATED
"Entrepreneur" magazine rated McDonald's as the third-best franchise to launch, but it
can be expensive, costing as much as $1.9 million in 2011. With 12,465 United States
franchises, and more than 30,000 restaurants worldwide, McDonald's is one of the
most well-known brands in the world. Managing a franchise for the company that
brought the world golden arches, Happy Meals and hamburgers is a significant
undertaking. However, under certain conditions, a McDonald's franchise agreement
can be terminated by the company.
History
Ray Kroc is often credited with founding McDonald's, however his idea was hatched
from the work of two brothers in California, Dick and Mac McDonald, who owned a
popular hamburger stand in California. Convinced that the brothers' business idea
could be expanded and applied elsewhere, Kroc persuaded them to go into business
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with him. The first McDonald's restaurant opened in 1955 and the first franchise was
sold that year.
Franchise Agreement
Most McDonald's restaurants are owned by independent operators who enter into a
franchise agreement with the company. Franchisees must have a business background
and the capital required to open a restaurant. "Entrepreneur" listed McDonald's
restaurant startup costs from $1,068,850 to $1,892,400. Franchise agreements are for
20 years and include a number of standards and legal requirements that franchisees
must follow, including adhering to menu items, employee training, and the use of
company products, such as soft goods. McDonald's has terminated franchise
agreements for a variety of infractions.
Mc Victim's Rights
In 1972, Joan and Fred Fiore opened their first McDonald's restaurant in Long Island
City, N.Y. Eventually, the Fiores had five restaurants in that area. In a letter to the
Federal Trade Commission, Joan Fiore outlined how McDonald's began a defranchise
process that commenced just before the couple's 20-year franchise agreement was to
end. The Fiores claimed that McDonald's devalued one of their restaurants because no
double-drive through was present, costing the couple $75,000 and forcing them to sell
off all five restaurants. Effectively, the franchise agreement was terminated because
the Fiores did not make mandated improvements to one or more stores.
Financial Difficulties
In 1993, a pair of Mississippi McDonald's restaurants were relinquished by its owners
with one restaurant returned to McDonald's and the other restaurant surrendered to the
Internal Revenue Service to cover unpaid taxes. In a 1995 suit, McDonald
Corporation v. Watson, the hamburger chain alleged that the two defendants had
difficulty managing their restaurants and "were unable to honor their financial
obligations to McDonald's in a timely fashion." McDonald's cited several material
breeches to the McDonald's agreement that took place with subsequent notice served
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by the company to the franchisees of its intent to terminate the franchise agreement.
McDonald's sued for damages as well as for "trademark infringement, rents, service
fees, repair costs, and attorneys' fees."
State Regulations
A McDonald's franchise may be affected by where it is located, as some states
regulate the sales of such franchises. The Federal Trade Commission outlines the
steps that must be taken before a franchise can be sold. In some states, disclosure and
registration also is required, with state officials reviewing such transactions before
they can be approved. State intervention can make it more difficult to establish a new
franchise, but it could also protect the franchisee who might be pressured to giving up
his restaurant.
3.6 ADVANTAGES AND DISADVANTAGES OF A MCDONALD'S
FRANCHISE
McDonald's has been a leader in the fast-food market for decades, boasting one of the
U.S.’s most memorable brands, products and mascots. Owning a McDonald's
franchise can be safer than lesser-known franchises, since the McDonald's name and
operational model comes packaged with its own legion of loyal customers and
industry-best practices for restaurant success.
Significance
Owning a franchise is a dream come true for many entrepreneurs. A franchise store
such as McDonald's can help business owners to achieve financial independence by
getting on board with an international powerhouse that can almost guarantee a certain
degree of success.
History
The McDonald's brand began in 1940 when two entrepreneurs in San Bernardino,
California, open the doors of “McDonald's Bar-B-Que.” In 1948, the pair eliminated
the barbeque options, slimming the menu down to focus on hamburgers, soft drinks
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and potato chips. Over time, McDonald's has grown to be one the world's largest
corporations, with outlets in at least 119 countries.
Benefits
Franchise organizations eliminate a great deal of the risk that most small business
owners face, since franchises come with financing options, building and training
assistance, marketing assistance and detailed methodologies that have been proven
successful on the front line for years. Franchisees are required to meet stringent up-
front requirements for capital contributions and management experience, improving
the chances of success even further.
Warning
A wide range of business types operate under the franchising model. Fast-food
franchises, in particular, may not always be the best choice for a franchise agreement.
Fast-food companies such as McDonald's have been targeted in a battle against what
has been termed the obesity epidemic, casting McDonald's outlets -- along with their
owners -- in a highly negative light in the media and their communities. McDonald's
and its peers respond to this negativity by attempting to add healthy options to their
menu, but the stigma is likely to linger.
Process
The process of opening a McDonald's franchise can be challenging, but McDonald's
will assign you a franchise representative who will walk you through the process step
by step. Begin the franchising process by reviewing the information on their website
under “Franchising” at AboutMcDonalds.com and setting up an appointment with a
representative. The representative will walk you through the process of making sure
you meet all of the requirements, selecting a site, building or purchasing a store,
setting up your store and hiring your first employees, as well as helping you to obtain
any necessary licenses and permits for your state and community.
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3.7 MCDONALDS FRANCHISE IN INDIA REDESIGNS AND REPRICES TO WOO MORE CUSTOMERS.
Stung by a consumption slowdown and cut-throat competition from other quick-
service chains, Big Mac is trying hard to give customers more reasons to come to its
stores. So its latest India menu now comprises a differential pricing strategy and better
in-store experience.
While Vikram Bakshi’s Connaught Plaza Restaurants, which has a joint venture with
McDonald’s and has rights for the north and east, cut prices by 6-15 per cent from
August 1 to boost sales, Hardcastle Restaurants, a development licensee of
McDonald’s which runs West and South India operations, has refrained from doing so.
“When customers are feeling the pressure of inflation from all sides, we thought it is a
good time to rationalise prices,” says Bakshi. He claims the chain has seen 10 per cent
increase in sales, though it has taken a hit of 40 basis points in its margins after it cut
prices. “We think 10 per cent growth is far superior than a 40 basis points hit on
margins.”
Bakshi may have a point as early this year, Pizza Hut, run by Yum Restaurants India,
launched the ‘Rs 29 pizza’ and KFC added two snacker burger and new beverage
Krushers Frappe to its Streetwise Menu which starts at just Rs 25.
But Hardcastle’s Amit Jatia has a different take. “We do not need to reduce prices as
we are seeing a strong comparable sales growth in our stores in the south and west.
We believe consistency in offering ‘everyday low value’ has paid off for us,” says.
Doesn’t such differential pricing create confusion in the minds of consumers? Jatia
does not think so. “Anyway, different states have different taxes which make prices
different. The consumers’ perception of value is also different,” he adds.
Even retail consultants such as Devangshu Dutta, chief executive, Third Eyesight, see
logic in the move. “Firstly, in India, McDonald’s has two JVs with separate P&Ls –
so the opinions of the partners in their respective regions would have more weight
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than a simple franchisee’s would. Secondly, local relevance of product mix and
pricing is a key driver of success in all retail products.”
Besides pricing, McDonald’s is also experimenting with different formats to woo
customers. While Jatia’s Hardcastle is looking at bigger restaurants of 4,000 sq ft ,
Bakshi recently launched smaller-sized ‘remote kiosks’ which are within three to four
kms of a “mother store” and located at metro stations, hypermarkets and high streets.
While Hardcastle has around 35 kiosks and 26 drive thru’s, it plans to have 25-30
kiosks and a similar number of drive thru’s in the next two-three years. It plans to
open 35 to 40 restaurants this year.
McDonald’s is also opening new stores and revamping the existing ones under new
designs to make them more appealing. So you have cushioned bar stools, plush LED
lights and POS/EDC terminals from the earlier stainless steel furniture and dim
yellow lightings. “We have learnt that design has to keep up with consumer
demands,” says Jatia.
Being modern and contemporary also led McDonald’s to increasingly accept credit
cards at almost all its new outlets.
Experts, however, say the improvement of McDonald’s stores should have happened
much earlier. QSRs, which focus on coffee, have overtaken McDonald’s. There is no
doubt that McDonald’s needs to look contemporary, soft and modern with cutting
edge,” says Harish Bijoor CEO of Harish Bijoor Consults Inc.
Even for Shripad Nadkarni, founder director, MarketGate Consulting, a brand
consulting firm, McDonald’s stores had begun to look “dull” for some time now.
“One of McDonald’s’ biggest successes is understanding the Indian palate. They draw
on ‘glocal’ products which have been a huge success for them. However, where
McDonald’s was lacking was in-store experience. Their stores needed improvement.
It now seems the in-store experience is moving along the consumer preferences,” says
Nadkarni.
When compared to its peers like Subway and KFC, McDonald’s also has to keep its
target audience in mind while planning the in-store experience. “Subway caters to an
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adult audience, KFC looks to focus mostly on non-vegetarians while McDonald’s is
about family and kids. Subway’s appeal is more towards a mature consumer segment
while McDonald’s is more about family time,” says Nadkarni. Needless to say,
McDonald’s’ new stores offer ample space for kids’ play area, thereby tapping its
consumers’ family time.
The chain will first renovate those that are more than 10 years old. For the rest, it will
adopt a ‘mini-market’ approach. “If we have five stores in the same area, then we’ll
partially renovate all of them so that some consistency is managed in the design,”
Bakshi says.
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3.8 THE SUCCESS OF THE MCDONALD'S FRANCHISE
The success of McDonald's is the business equivalent of the American Dream. While
McDonald's was not the first franchise business, it has possibly become the premier
example of the business model. With roots that trace back to a single drive-in started
by a pair of brothers, Dick and Mac McDonald, in Southern California, McDonald's
has grown to a network of well over 30,000 locations in more than 100 countries.
So how did the chain grow from a single restaurant into the expansive corporation it is
today? It's not a question that can be answered concisely because McDonald's is first-
class in every segment of its operation. With that in mind, this article focuses upon
three of the characteristics which stand out when speaking about the success of
McDonald's: consistency, innovation and resiliency.
Consistency
It doesn't matter if you're visiting a McDonald's in California or Connecticut, America
or Australia – you're going to have a similar experience wherever you are. This
highlights Ray Kroc's vision for McDonald's from the beginning. Kroc was a
salesman from Illinois who ventured to San Bernardino, California in 1954 when he
noticed a larger than normal order for the milkshake multi-mixers he was selling came
in.
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When he arrived in Southern California, he was intrigued with what he witnessed – a
restaurant that was efficiently serving a large number of customers who seemed
pleased with the food they were receiving. Sensing a business opportunity, he made a
proposal to the McDonald brothers to begin franchising their restaurant concept,
which the brothers eventually accepted. Kroc opened his first McDonald's in 1955 in
Des Plaines, Illinois.
“Quality, Service, Cleanliness and Value” was Kroc's motto. His belief in this motto
was so strong he went on to found a training school, Hamburger University, in 1961
whose curriculum is based upon the four concepts, as well as lessons he had learned
from his initial years in operating the franchise. Consistency, of course, is the
lynchpin of any franchise system and Hamburger University has systematically taught
future franchisees how to run a McDonald's restaurant the way Ray Kroc
envisioned.1 Customers know what to expect and can take comfort in that knowledge
when making a decision on where to eat. These efforts towards process repetition and
efficiency not only set the basis for McDonald's success from the standpoint of
customers' expectations, but also help McDonald's stay on top in a culture where
producing at a quick pace is commonly expected.
Innovation
At first, the characteristics of consistency and innovation seem to contradict one
another. But in fact, they work together to allow for McDonald's continued growth.
Staying consistent on the core components of your business doesn't mean the products
you sell, or even the way you deliver them, have to stay the same. It's a delicate
balance. However, if you take the necessary steps, and put the work in ahead of time,
you can tweak your product without causing disruptions, and potentially better serve
your customers. Innovation stemming from responsiveness to customers and
franchisees has played a big role in McDonald's fending off stagnation over the years.
For example, in 1975 a group of potential McDonald's customers had a problem: at
that time, soldiers in a certain locale weren't permitted to get out of their cars while
wearing their fatigues. After learning of this problem, McDonald's came up with a
solution: add a drive-thru. The first McDonald's drive-thru was located near military
base Fort Huachuca in Sierra Vista, Arizona to serve the soldiers with additional
drive-thru locations in Georgia and Oklahoma City soon following.
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In addition, McDonald's product offerings have evolved over the years alongside the
tastes of their customers thanks in part to some observant and innovative franchisees.
A few examples of products that were introduced after being developed by
McDonald's franchisees or owner/operators are:
Filet-O-Fish
Big Mac
Hot Apple Pie
Egg McMuffin
McFlurry
These menu innovations (along with items developed in their test kitchen) have
allowed for McDonald's to hold product offerings for all meal times, and the snack
periods that fall in between, allowing for greater profitability. But McDonald's takes
great care not to effect the consumer experience when a new item is introduced. As
McDonald's CEO James Skinner said in a 2010 interview with CNBC, “[McDonald's
doesn't] put something on the menu until it can be produced at the speed of
McDonald's.”
Resiliency
Though the trajectory for McDonald's has been primarily upward throughout its
existence, the company has had to weather several challenges and controversies. For
decades, McDonald's has had many lawsuits directed at them for various issues, and
has been the subject of a large amount of negative press. What does McDonald's do
combat this negativity? It appears part of their strategy entails acknowledging the
concern, and then dedicating resources in-house to staying on top of the issue as the
following examples illustrate.
Many of the challenges McDonald's has faced over the years are related to health
concerns, particularly related to children. In response to these concerns, McDonald's
formed the Global Advisory Council (GAC) in 2004. The GAC is an international
team of independent experts assembled by McDonald's to provide us with
professional guidance in the areas of nutrition and children's well-being.4 Several
additions to their menu items have come in answer to critics' and consumers' desire
for healthier choices.
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Some examples of these choices include an increased variety of salads, fruit and
maple oatmeal, and the option of being able to order a Happy Meal with apple dippers
and apple juice or 1% low-fat milk as the drink. In addition, McDonald's was one of
the first fast food restaurants to provide nutrition facts on their packaging, beginning
in 2006.
When it comes to sustainable environmental practices, activists have been raising
concerns over McDonald's policies for decades. In the mid-1980s, McDonald's began
facing one of its staunchest challengers in the activist group London Greenpeace (not
affiliated with the international Greenpeace organization). In a leaflet entitled “What's
Wrong with McDonald's?” the group alleged that the food that McDonald's served
was bad for people's health and that actions used to produce their food products and
packaging contributes to the destruction of rainforests, among other things.5 In
response, McDonald's formally established a Global Environmental Commitment in
1990 that outlines the steps they have taken to reduce solid waste, conserve and
protect natural resources, along with encouraging others to be accountable for their
actions.6 One of results of this commitment is that currently 82% of McDonald's
consumer packaging is made from renewable materials.7 But, McDonald's did take a
big PR hit through the actions of members of the London Greenpeace group that is
well documented by the “Mc Libel” case and subsequent accounts of the litigation.
In spite of these and additional controversies, McDonald's ranked in the top 10
overall, and number one in food services, in CNNMoney.com's survey of the World's
Most Admired Companies for 2011.8 How can McDonald's turn these tribulations into
bumps in the road instead of them have a devastating impact on business? Part of the
reason McDonald's can be resilient when they are challenged is an established rapport
within the community. When controversies arise, having goodwill with consumers
can help any company weather the storm. Ways McDonald's cultivates goodwill with
consumers include their involvement in youth sports programs and charity programs
such as Ronald McDonald House charities.
Very few companies will ever come near the magnitude of operation McDonald's has
achieved. However, the lessons the corporation showcases are on display to be
learned by entrepreneurs striving to make their company the best it can be.
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The success of McDonald's can be attributed to many more factors that have been
discussed in this article, but these are three which have contributed heavily to it. Here
are some takeaways from the discussed factors that can be applied to virtually all
businesses:
Developing strong, efficient processes and procedures and remaining consistent on
them allow for businesses to develop consumer confidence in the brand.
Having the foundation of consistent processes allow businesses the flexibility to
innovate and adapt to consumers' concerns, and improve the brand with minimal
disruption.
Problems and downtimes will happen in business. Having an established rapport
with consumers can help businesses be resilient when difficulties arise.
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CHAPTER -4
CONCLUSION
McDonald’s is one of the largest fast food companies in the world. They continue
their path for success by keeping their consumers in mind regarding their product
selection as well as their prices. They encourage their employees to do a good job,
usually promote from within, and offers several scholarships to encourage education.
Though McDonald’s is a centralized, “wait and see” company they find ways to use
technological products that will increase their productivity, service, and sales,
everywhere from using the Nintendo DS to train staff to suing Mew POS touch screen
registers. McDonald’s will certainly be around for plenty more years to come.
McDonald’s has been successful in operating within the food service industry through
efficient strategies and quality standards which enables them to gain competitive
advantage. As evidenced by its international market growth, McDonald’s has already
been efficient in gaining entry even in the most challenging markets like Britain.
Through its strong sense of quality service and customer satisfaction, McDonald’s
was able to offer its products to the Britain market. Products were modified to suit the
British taste and preferences; affordable prices were implemented; effective
promotions and offers were done.
These are some of the strategies involved in the company’s business strategy which
allowed McDonald’s to gain the Britain support. Despite these successes, the
company should take into consideration the growing level of competitiveness in the
food service industry.
In Britain, several foreign fast food chains offering similar products are also being
supported by the Britain consumers. Constant strategic change is then necessary to
ensure that the company would sustain their competitive advantage.
In conclusion, McDonald’s has been successful because of the value the company
gives for its customers. Hence, despite the controversial beginning of McDonald’s in
Britain, the company managed to adapt to its people’s cultural needs. Indeed,
McDonald’s is a learning organization, one that is willing to learn and open to change.
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