MCDONALD’S: IS CHINA LOVING IT?

Opportunities:

•Growing income and purchasing power of Chinese .•By building good relationships with local govt, by assisting the development of local agriculture, McDs could guarantee the quality of raw ingredients.\•The liberalization of the franchising sector will help them to expand business more confidently.•Despite less individual wealth among customers in less developed regions of rural China, McD’s China can still be profitable through large quantities of small transactions and low cost items , given that more than 700 million people live in less developed inland provinces. The earlier they enter this region, the more it will enjoy first mover advantage.•Westernization of youth and curiosity regarding the western culture.•China, potentially the worl’d fastest growing major auto market, will stimulate sale for McD’s drive through restaurants.•Growing usage of internet and mobile devices in china create additional marketing channels for the company to reach young consumers

•Threats:•Rising food and fuel prices heighten the cost of production.•There is increasing competition from both local and foreign restaurants.•Awareness of health issues•Growing social and environment concern of the public poses threat and involves closer scrutiny from both local and international social watchdogs.•Rising inflation forced them to increase prices which raised consumers concern.

Porter’s five forces

Threat of new entrants:With Chinese people’s growing appetite for western food, China offers great market potential for Western restaurants chains. However, new market entrants will require a great deal of capital and resources if they want to compete with McDonald’s .Considering the scale of operations of McDonald’s in China, which owns 800 stores , company enjoys economy of scale, making it difficult for new entrants to compete. New entrants would also find it difficult to establish network with local businesses and government agencies, which are crucial to success in China. Therefore in view of McDonald’s steady performance across China over the past years, the threat of new entrants may not be particularly significant to McDonald’s in the near future.

Porter’s five forces

Intense rivalry among Competitors:The most significant competitive threat is from existing fast food providers such as Burgerking, Wendy’s, KFC.Existing home grown chains such as Malan Noodle, Dininag Dumpling and YongHeKing may have less capital than McDonald’s but they could raise funds through capital markets or venture capital , and can expand rapidly.With competition from local Chinese chains, McDonald’s is still able to stay ahead of the competition with its strong financial background and decades of management experience in the fast food industry.

Porter’s five forces

Threat of Substitute products:Since many people tend to view food served at McDonald’s as unhealthy due to high fat contents , they are likely to look for healthy alternatives such as Subway which provides sandwiches and salads to fill the niche of healthy fast food.Further, many Chinese customers choose popular western chains as places to meet their friends or take a break. So, western style coffee chains such as Starbucks, which sells mainly beverages and a selection of baked food items, are also likely to pose a threat of substitution to McDonald’s. McDonald’s also faces threat of substitution from the fast casual dining restaurants e.g. Pizza Hut where customers have their orders brought to them in an upscale atmosphere .

Porter’s five forces

Bargaining power of Suppliers•As mentioned in the case, 95% of materials used by McDonald’s are sourced from China.As a leading fast food chain with over 800 outlets in China, McDonald’s has stronger bargaining power .•To reduce political risks and to guarantee food supplies, they have partnered with local state owned companies (such as companies belonging to the department of agriculture in Beijing) that own wide network of sources of food and have contacts in other governmental agencies.•With food prices rising, McDs can still enjoy economies of scale with the large quantities of materials it orders from local suppliers, whereas other smaller companies will bear much higher costs of production.

Porter’s five forces

Bargaining power of Buyers•Chinese buyers, especially those in urban areas, exercise a great deal of bargaining power due to growing purchasing power and the prevalence of fast food restaurants and other dining locations in the city. •For less developed cities, McD’s prices are still higher than those of home grown Chinese fast food restaurants. Consumers in these regions may opt for cheaper alternatives unless they have strong loyalty to McD’s .•Health conscious customers may shift to other healthier options.•Controversial issues surrounding McD’s China eg violation of minimum wage law, having inconsistent standards for environmental and social conduct globally and overcharging for its products in China may also influence the purchase decisions of some potential buyers.