Memo McDonalds

MEMO 1

To:

From:Zach

Session:

RE:

ExecutiveSummary

McDonald’s has continued to lose itsgrip as a leading brand in the global fast food industry, mainly dueto heightened competition from international brands as well as localfast foods shops that are rapidly catching up with the bigger brands.McDonald’s has high brand value in the industry with a largecustomer base. The paper has used a SWOT analysis to outlineMcDonald’s weaknesses and threats such as negative public imagesand declining popularity of its products. Strengths and opportunitiesidentified are presence of market opportunities in terms new consumerpreferences, improvement of consumer experience and need to expand todeveloping markets in Asia Pacific, Africa and the Middle East.Financial analysis has been used to describe McDonald’s financialperformance in comparison with its largest competitors. Findingsindicate that McDonald profits are on the decline in 2012 and salesshould be increased through introducing new marketing strategies. Thefast food industry has been analyzed using the Porter Five Forcesthat outlined that the industry is highly competitive but stillattractive for investments. Most important factor that McDonaldshould consider is to improve on product differentiation and increasecustomer experience. PEST analysis has also been incorporated whichdemonstrates that macro environment factors highly influence thecompany’s success. A competitor analysis also has been used toindicate the impact of competitors in the fast foods market.Solutions that have been highlighted include focusing on young adultcustomers, which the company is losing rapidly to its competitors.The paper has provided three options that include putting measures tohelp the company regain its competitive position among the youngadults “millennial” which form an important section of the fastfood market through developing menus that will help the company tokeep pace with changing customer preferences. The second option is toimprove customer experience through addressing serious customerservice issues from its staff. Thirdly, the company needs renovateexisting stores and improve service delivery as opposed to openingnew.

Table of Analysis

Analysis

Implications

Options

SWOT Analysis

Exploit the available growth opportunities

Introduce healthy foods

Improve customer experience

Financial Analysis

Declining volume sales

Increase sales, reduce production, and operation costs.

Porters Five Forces Model

Industry is very competitive but still attractive

Dwell healthy food items on menus

PEST Analysis

Highly affected by Macro environment factors

Prevent lawsuits resulting from issues related to unhealthy foods and incorporate government policies to its strategy

Competitor Analysis

Largest competitors are involved in similar markets

Focus on local market

Increase menu options

Cut on costs

Statementof Problem

Despite having being a leader in the fast foods market for over adecade, McDonald’s is experiencing intense competition from largeand small brands in the industry. There is a need to rethink itsposition in the market and develop a new strategy to retake itsposition. It is critical for the company rethink on the markets toinvest more resources into and the products to include in new menusto its strategy. Finding working alternatives to keep up withchanging customer preferences are a priority.

ANALYSIS

SWOTAnalysis

Strengths

1.0A large global fast food brand with unique and effective managementphilosophy

McDonald’s is by far the largest fast food chain in the US withover 34,000 restaurants in 118 countries serving over 69 millioncustomers daily. The company has developed a strong global brandsupported by its franchising strategy and high efficiency on how itworks with its suppliers.

4.0Targeting mothers, children and young adults

McDonalds has successfully targeted families, children and youngadults. Families on the go consider McDonald’s services as quickand easy and prefer to visit the stores with their children. The keysection of the fast food market comprises of young adults in who takemore fast foods than any fast food customer demographic groups.

Opportunities

1.0New trends for healthy foods

Eating healthy is becoming popular and players in the fast foodindustry are following suit in their menus. McDonald has a betterchance to gain from these changes and introduce a variety of healthyfoods to its menus.

2.0Emerging markets

Goodopportunities in Pacific Asia, Africa and the Middle East marketswith large rapid growing middle class economies are new destinationsMcDonald’s could expand to.

Weaknesses

  1. Ever changing consumer preferences

Changes being made in menu items are taking too long to developeffective production processes and standardizing recipes. Any changeson ingredients in menus calls for massive supply requirements to meetdemand throughout the year. Finding the right names for new productshas also been a challenge.

2.0Service and Staffing Issues

Complaints from customers are increasing and mostly resulting frompoor customer service from its employees. Customers unsatisfied withdisorderly order taking and workers unable to cope with high customertraffic during peak hours. High employee turnover rate with moreworkers finding alternative less stressful and higher paying jobs.

Threats

  1. Complexity and costs implications to changes being made

Introducing more items on McDonald’s menu is slowing down orderprocess, stressing out employees and increasing customer complainsdue to delayed order delivery. New products also increase proceduresin preparation increasing delays on queues for freshly preparedfoods. Addition of new ingredients requires massive deliverylogistics to all the 188 countries in a timely manner. Every timechanges are made, finding reliable supplies is increasingly becominga challenge.

2.0Pricing and convenience strategy no longer an effective strategy

Customers prefer healthy foods as opposed to low price items on themenus. The need for increasing menu items is negatively affecting thecompany’s employees and production processes. More effectivestrategy is needed to enable McDonald remain competitive and maintainlow production and operation costs to remain profitable.

STRATEGIC IMPLICATIONS

Conclusion: McDonalds still has a large market share and only needs to adjust its product mix to curb challenges emerging from new trends and customer habits in the market. The company should put more effort on redeveloping its menu items and improving customer experience.

Possible New strategy: Develop effective production processes that are less straining to the staff and ensure adequate staffing in its restaurants. This may require introduction of innovative ways such as use of machines and equipment that can reduce workload and increase efficiency.

Rationale: This will help to improve customer service and reduce employee workload hence reduce employee turnover. Less stressed employees are more likely to give better services.

Financial Analysis

1.0Competitors Financial

McDonald’s revenue in 2012 improved slightly by 2%, which was worth$27.57 billion from the record $27.00 billion in 2011. This indicatedan upward trend its earnings in stock from 2012 into 2013. Yum!Brands sock performance has been on a higher trend 2012 with peaks of25 in April 2012 and November 2013. S&ampP 500 and burger King alsoentered 2013 with positive changes in stock prices. Subways managedto reach $18.1 billion in 2012 sales.

2.0Product performance

Quick service customers mostly prefer convenience, best value formoney, good taste and fresh foods to services such as free WiFi ofonline ordering services. Majority of customers especially those inmiddle income earning groups of households prefer mixed menus withboth order dollar and value menus.

3.0Regional Performance

Statistics show that sales prospects in the general U.S. Quickservice are on an increase and forecast indicate that the figures maysurpass the $183 billion mark reached in 2012.

STRATEGICIMPLICATIONS

Conclusion: McDonald market volume sales are on the slow and the company needs to expand its market base. The main focus market should be on introducing menus with more options from customers in terms of type of product and pricing.

Rationale: This will compensate for the lost market share in important customer groups such as the young adults who are both economic and health conscious.

PortersFive Forces Model

1.0Threat of competition in the fast foods industry is high

The fast food industry in both developed and developing countries ishighly competitive. More brands have entered the international marketand are offering competitive products and services putting McDonaldunder pressure to improve its product portfolio in terms of quality,type of foods and pricing. Competitors both local and those operatingon a global scale are putting in large budgets in advertisements andtaking more media coverage diminishing McDonald dominance.Competitors like Burger King and Subways are gaining popularityovertaking McDonalds in key markets due to their ability to positiontheir outlets in strategic locations in major cities.

2.0Threat of New Entrance in the fast food industry is high

In developing countries such as South East Asia and South America,which are considered emerging potential markets, governments have notset up fully stable regulatory structures to support complexbusinesses like fast food franchises. This increases the risk ofentering such markets. In some countries, lack of restrictions andcontrol of the industry has made it easy for small startup companiesto emerge, which are competing with global brands like McDonaldsdirectly eating into their dominance. Subways have managed to takeeasily advantage of this market conditions operating at high-riskmarkets but thriving in revenue and profits.

3.0Threats of Substitutes is moderate

Most people especially in urban areas prefer readymade meals.Students and families in holidays also prefer to take ready meals andspecifically to take the meals where children can play or adults canfreshen up makes fast food joints like McDonald convenientalternatives.

4.0Power of Suppliers is low in fast food business

Fast foods chains budget for large amounts of supplies on acontinuous basis throughout the year. This gives them an upper handover suppliers. Fast foods chains can control the costs of rawmaterials to maintain high competitive prices on their menus.

5.0Power of Buyers is low

Most of the foods in fast food chains are precooked leaving customerswith no room for changing the menus. Customers only purchase smallportions of foods and many already identify their tastes withspecific brands making it difficult to switch to competitor brands.This totally limits buyers bargaining powers.

STRATEGICIMPLICATIONS

Conclusion: Fast foods industry remains lucrative with lots of opportunities for companies to venture into. Despite being a highly competitive industry, companies have high bargaining power an over suppliers and customers.

Possible new Strategy: Companies in the fast foods industry including McDonalds should dwell on product differentiation especially through adopting more local menus.

Rationale: With high competition from new entrants especially local brands, localization of menus will enable global brands to compete on the same platform with local brands.

CompetitorAnalysis

1.0Subway

Subway closely challenges McDonald in terms of U.S. market share infresh fast foods. Subway has over 36,618 restaurants globally with25,936 base in the U.S. market. It is expected to reach over 100,000locations globally by 2030.

2.0Burger King

Being the third largest fast food company chain in the U.S based onsales volume, Burger King has managed to maintain 6.4% growth rate insales in 2012. It has 12,700 restaurants with presence in 73countries. It has highly modernized stores providing customers withvariety of menu items and ambient environment.

3.0Wendy’s

Runs over 6,550 fast food restaurants in 28 countries and is renownedfor its high quality foods. It is focused on long-term branddevelopment through rebranding and more menu items. It has highlyinvested in rebranding and remodeling its stores with a budget ofover $225 million. The company has continued to reduce its corporateownership in more branches to its franchisers.

4.0Taco Bell

Taco Bell is one of the brands owned by Yum Brands with over 5,800locations mainly in the U.S. it has managed to recover from its 2006food poisoning incident case and now growing at 13% in sales. Hasnewly introduced products such as the Doritos Locos Tacos and variousbreakfast delicacies. Its revenue is expected to reach $14 billion by2025.

STRATEGICIMPLICATIONS

Conclusion: Competitors are eating into McDonald’s global market share. Other than maintaining the right numbers in terms of locations, there is need to revitalize its brand and product range to compete with emerging brands.

Possible New strategy: Redevelop menus in high competitive markets to cover increasing culture diversity

Rationale: Most of the potential markets are highly influenced by culture. Adopting menus that include these values will help the company to blend in faster with local markets in the U.S market.

OPTIONS

Option1: Regain its competitive position among the young adults“millennials” market.

This forms an important section of the fast food market throughdeveloping menus that will help the company to keep pace withchanging customer preferences. This forms the largest and highestspenders on fast foods products. Existing challenges from unhealthyfoods including possible lawsuits is a wakeup call for McDonald’sto review its approach in menu development. Concerns by governmentand concern parties that are on the forefront in campaigning againsthealth related diseases especially those affecting children willcontinue to influence the public on how they view fast foods.Customers aged between 18 and 35 years are high couscous on theirdiets are willing to pay more for healthy food options. Providingmenus that offer a wider variety of items with healthy foods willattract more customers in this group to McDonald’s restaurants.This will help McDonald’s to take back its position in the marketas the most preferred by the young population.

Pros

Cons

  • Predictable growth opportunity

  • Increases focus on local market

  • May increase complexity in food processing

  • Will increase cost of production

Option2 Improve customer experience through addressing customer serviceissues

Fast food customers are mostly attracted by the fact that therestaurants serve food easily and faster. It is important thatcustomers are given the best service at all times. This will need thecompany to ensure adequate employees in all restaurants to preventdelays in delivery processes. Renovating the restaurants will alsoensure that customers take their food in good atmosphere comfortably.

Pros

Cons

  • Eliminate high employee turnover

  • Increase customer satisfaction

  • Reduce costs

  • Takes a long time to change the organizations culture

  • May need to be highly selective during hiring

  • Will require frequent employee training

Option3: Ensure frequent menu innovations by increasing number of healthyfoods

McDonald should develop a more dynamic product mix. This will enablethe company to have high flexibility in satisfying customer needs.Focusing on customer value is important in new markets rather thansticking to conventional standards. This will widen local restaurantscustomer base hence increasing sales while encouraging consumerspending. Introduction of healthy menus will help mend the alreadyspoilt reputation in leading markets for the McDonald brand. Thiswill also give customer more choices on how they order their foods.

Pros

Cons

  • Give customers with more options to choose from

  • Increased satisfaction from customers

  • Positive public Image

  • Increase production cost

  • Disrupt already standardized processes

Recommendation

Option 2, which is to improve customer experience through addressingcustomer service issues, is more important than Option 1, which optsfor regaining the company’s competitive position among the youngadults “millennials” market. Customers are highly sensitive onhow they are attended to and regardless of the price or the qualityof goods or service. It is also highly important that the companymends its public image by ensuring that its reputation is notdestroyed by poor service delivery by employees.

Option 2 is also more important than Option 3, which is to ensurefrequent menu innovations by increasing number of healthy foods. Thisis because as much as the company is able to offer the desiredproducts and services to its customers, if the customers are notsatisfied in the manner in which they are treated, they can easily goto other restaurants where they are treated better. Delays in queueshighly affect customers will to return, which makes it important thatMcDonald’s undertakes a detailed audit on the capacity of itsemployees to undertake given tasks and if stiffing is inadequate,then more personnel should be added to the production and deliveryprocess to increase efficiency.

Implementation

Increasing McDonald’s market base in areas that it has alreadyestablished is very important and having a positive public image iscritical to this success. Considering that there is much to be doneon product development on the menus and cutting on costs in theproduction process, putting in place a highly educated workforce ispriority for McDonald’s to achieve the desired success. Changingemployee attitude will involve organizational restructuring in thecompany in terms of cultural behavior change. This will have toinclude all the branches McDonald’s own and its franchisedrestaurants. Trainings will have to be undertaken and a betterremuneration strategy be developed to ensure that employees are paidcompetitive wages and are not subjected to overwork. This will reduceemployee turnover and help to improve relationship between theworkers and the company. As much as it will take more time, itsimpact is long-term and benefits will be immediate as it affectscustomers experience directly.

Exhibits

Exhibit1

FinancialAnalysis

McDonald’sStock Performance, January 2012-March 2013

Source(Arthaud-Day, Rothaermel &amp Collins, 2015).

Exhibit2

Numberof McDonald’s Outlets in Selected Countries

Exhibit3

U.S.Quick-Service Sales and Fan Chart Forecast (in $ billions)

Source(Arthaud-Day, Rothaermel &amp Collins, 2015).

Exhibit4

Quick-ServiceSelection Factors, by age, May 2012

Source(Arthaud-Day, Rothaermel &amp Collins, 2015).

Exhibit5

McDonald’sFinancial Data (in $ millions, except EPS data)

Source:(Arthaud-Day, Rothaermel &amp Collins, 2015).

References

Arthaud-Day, L.M. Rothaermel, T.F. &amp Collins J. (2015). McDonald’s (in 2013): how to Win again? McGraw Hill Education.