mcd's swot analysis (2008)

McDonald's Corporation

Company Profile

Publication Date: 21 Jul 2008

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McDonald's Corporation

TABLE OF CONTENTS

Company Overview..............................................................................................4

Key Facts...............................................................................................................4

SWOT Analysis.....................................................................................................5


McDonald's CorporationTABLE OF CONTENTS

COMPANY OVERVIEW

McDonald's Corporation (McDonald's) is the world's largest foodservice retailing chain.The companyis known for its burgers and fries which it sells through over 31,370 fast-food restaurants in over 118countries. A majority of McDonald's restaurants are operated by its franchisees. The company alsooperates restaurants under the brand name 'The Boston Market'. The company operates primarilyin the US and the UK. It is headquartered in Oak Brook, Illinois and employed 390,000 people ason 31st December 2007 (FY2007).

The company recorded revenues of $22,786.6 million during the FY2007, an increase of 9.1% overFY2006. The operating profit of the company was $3,879 million during FY2007, a decrease of12.5% compared with FY2006. The net profit was $2,395.1 million in FY2007, a decrease of 32.4%compared with FY2006.

KEY FACTS

McDonald's CorporationHead OfficeMcDonald's PlazaOak BrookIllinois 60523USA

1 630 623 3000Phone

1 630 623 5004Fax

http://www.mcdonalds.comWeb Address

22,786.6Revenue / turnover(USD Mn)

DecemberFinancial Year End

390,000Employees

MCDNew York StockExchange Ticker


McDonald's CorporationCompany Overview

SWOT ANALYSIS

McDonald’s Corporation (McDonald’s) operates fast food restaurants all over the world.The companyhas over 31,370 fast food restaurants in over 118 countries. All McDonald's restaurants offer astandard menu, which comprise food items such as hamburgers, cheeseburgers, chicken sandwiches,French fries, salads, milk shakes, desserts and ice cream sundaes. McDonald's has a well-establishedbrand that appeals to customers of all age groups and nationalities. It is ranked number one inFortune magazine's 2008 list of most admired food service companies. Strong brand draws customersto the restaurants of the company and provides it acceptability in new markets. However, a renewedthreat of the spread of bird flu across various parts of the globe could lead to a slowdown in therevenue growth of McDonald's.

WeaknessesStrengths

Fluctuating operating and net profitsGlobal brandDiversified geographic presenceStrong supply chain capabilitiesLarge scale of operation

ThreatsOpportunities

Change in commodity pricesGrowth of franchisee operated restaurantsFood safety and food-borne illness concernsNew productsFresh threat of bird fluBeverages market

Strengths

Global brand

McDonald's has a well-established brand that appeals to customers of all age groups and nationalities.More than 70% of McDonald's restaurants worldwide are owned and operated by independent localmen and women. It is one of the world's most well-known and valuable brands and holds a leadingshare in the globally branded quick service restaurant segment of the informal eating-out market invirtually every country in which it does business. Some of the famous products from the companyinclude French Fries, Big Mac, Quarter Pounder, Chicken McNuggets and Egg McMuffin. Theseproducts have become brands in their own right. McDonald's has risen from its second rank inFY2007 to the first in Fortune magazine's 2008 list of most admired food service companies. Theannual Fortune most admired list is a widely recognized report card on corporate reputation. InFY2006, McDonald's figured at the ninth place in the top 100 global brands ranking of BusinessWeek magazine and Interbrand, a branding consultancy. McDonald's makes substantial investmentsin advertising and promotions to improve its brand image. McDonald's continues to be recognized


McDonald's CorporationSWOT Analysis

as a premier franchising company around the world. Strong brand draws customers to the restaurantsof the company and provides it acceptability in new markets.

Diversified geographic presence

McDonald's has a diversified geographic presence. McDonald's operations are backed by strongsupply chain capabilities. In FY2007, the company operated 31,370 fast food restaurants in over118 countries in the following geographic segments: the US; Europe; Asia Pacific, Middle East andAfrica (APMEA); Latin America; and Canada.

Europe, McDonald's largest geographical market, accounted for 39.2% of the total revenues inFY2007.The company's second largest market, the US, accounted for 34.7% of revenues in FY2007.In the same period, Asia Pacific, Middle East and Africa (APMEA) accounted for 15.8% of the totalrevenues.While other countries and corporate, which includes Canada and Latin America accountedfor 10.3% of revenues in the same period. Diversified geographic presence reduces the McDonald'sbusiness risk and leads to stable revenue growth.

Strong supply chain capabilities

The company and its partners purchase food and related items from an approved group of suppliers.The company's quality assurance process not only involves ongoing product reviews, but also on-siteinspections of suppliers' facilities. Further, a quality assurance board, composed of the company'stechnical, safety and supply chain specialists, provides strategic global leadership for all aspects offood quality and safety. In addition, the company works closely with suppliers to encourage innovation,ensure best practices and drive continuous improvement.

McDonald's has specified quality standards to be met by the suppliers.The company enforces thesequality standards through quality assurance labs around the world. Strong supply chain capabilitiesenable the company to serve food of consistent quality across the globe.

Large scale of operation

With revenue in excess of $22.7 billion, McDonald's has large scale of operation. The company isthe world's largest food service retailing chain, preparing and serving a range of foods.The companyoperates its restaurants in more than 118 countries around the world. McDonald's generates revenuesthrough company operated restaurants and franchisee restaurants. Of the company's total restaurants,over 6,900 are operated by the company and another 20,500 are operated by franchisees. Theremaining 3,960 restaurants are operated by affiliates. The company as a part of restaurantdevelopment selects the best locations within the marketplace to provide its customers withconvenience.The company builds restaurants in neighborhoods as well as at airports, malls, tollways,and colleges at a value for its customers.

Moreover, McDonald's has bigger scale, in terms of revenues, to compete with other players in themarket. McDonald's generated total revenues of $22,787 million in FY2007, which is significantlyhigher than that of its competitors like Wendy's International Inc. (WII) and Burger King Corporation



(BKC). WII and BKC generated revenues of $2,450.2 million and $2,234 million, respectively, inFY2007. The company's large scale of operation allows it to feed upcoming markets with relativeease and enhances its revenue generation capacity.

Weaknesses

Fluctuating operating and net profits

The company has reported fluctuating operating and net profits during 2005–2007 period. Theoperating and net profit has registered decline in every alternate year. Operating and net profits ofthe company increased from $3,984 million and $2,602 million in 2005 to $4,433 million and $3,544million in 2006. Again in 2007, operating and net profit declined to reach $3,879 million and $2,395million. Fluctuating operating profits and declining net profits would negatively impact the investorconfidence.

Opportunities

Growth of franchisee operated restaurants

In future, McDonald's is planning to significantly increase its count of franchisee operated restaurants.In FY2007, the company made significant progress enhancing the mix of franchised andcompany-operated restaurants, including executing developmental license strategy, to maximizelong-term brand performance and returns.

Under a developmental license, a local entrepreneur owns the business, including control of the realestate, and uses their capital and local knowledge to build the McDonald's Brand and optimizelong-term sales and profitability. The company collects a royalty, which varies by market, based ona percent of sales, but does not invest any capital for new restaurants or reinvestments.The companyhas successfully used this structure for more than 15 years and had it in place in 59 countries atFY2007.

In August 2007, the company completed the transition of 1,571 restaurants in Brazil, Argentina,Mexico, Puerto Rico, Venezuela, and 13 other countries in Latin America and the Caribbean to adevelopmental license structure. The company refers to these markets as Latam.

The buyers of the company's operations in Latam have entered into a 20-year master franchiseagreement that requires the buyers, among other obligations, to pay monthly royalties commencingat a rate of approximately 5% of gross sales of the restaurants in these markets, substantiallyconsistent with market rates for similar license arrangements; to add approximately 150 newMcDonald's restaurants over the first three years and pay an initial fee for each new restaurantopened; and to spend specified annual capital expenditures for existing restaurants.



In addition, the company transitioned another five small markets in Europe with a total of 24restaurants to the developmental license structure in 2007. The company also made progress infranchising certain company-operated restaurants in key markets. As a result of its developmentallicense strategy and franchising initiatives, the percent of franchised and affiliated restaurantsworldwide increased from 74% at year-end 2006 to 78% at FY2007. The transition ofcompany-operated restaurants to franchisees and developmental license structure is likely to increasethe overall profitability of McDonald's.

New products

McDonald's launched many new products during FY2007. In the breakfast category, the companyintroduced new products such as the southwest salad, cinnamon melts and the McSkillet burrito, inthe US. Additionally, it also extended its snack wrap line and offered beverage choices includingpremium roast iced coffee and sweet tea.

In 2008, the company's key areas of focus will be breakfast, chicken, beverages and convenience.In 2008, the company expects to extend its leadership in the chicken category with the launch ofthe southern style chicken biscuit sandwich for breakfast and the southern style chicken sandwichfor the remainder of the day. In addition, as part of a comprehensive, multi-year beverage businessstrategy, it will begin introducing hot specialty coffee offerings in 2008, on a market-by-market basis.These initiatives, along with longer operating hours and everyday value, could drive increasedcustomer visits and increased sales. New products could increase customer traffic to older restaurantsin developed markets and attract customers to new restaurants in developing markets.

Beverages market

According to Datamonitor estimates, the global hot drinks market was valued at $63.4 billion, inFY2006. In 2011, the market is forecast to have a value of $71.4 billion, an increase of 12.7%compared to FY2006. In the US alone, hot drinks market is expected to increase by 5.5, to be valuedat $9,565.8 million, in 2011. Coffee sales dominate the US hot drinks market, accounting for 70.8%of the total value.

As part of a comprehensive, multi-year beverage business strategy designed to take advantage ofthe growing beverage category, McDonald's will begin introducing hot specialty coffee offerings in2008, on a market-by-market basis. By 2009, the company expects to recognize the full sales benefitof its beverage opportunity. This first component of its beverage business may require construction,new equipment, new processes and training in restaurants; all of which will serve as a platform forthe anticipated future introduction of smoothies, frappes and other beverage options. The expectedgrowth in beverages category will offer the company opportunities for expanding its revenue base.

Threats

Changes in commodity prices



McDonald’s, because of its nature of business may get affected by price fluctuations in beef, chickenand cheese, which are critical ingredients of the company's menu.The company remains susceptibleto increases in food costs as a result of factors beyond its control, such as general economicconditions, seasonal fluctuations, weather conditions, demand, food safety concerns, product recallsetc. The company may not be always in a position to pass on an increase in commodity price to itscustomers because of competition and the nature of the business. Any increase in these commodityprices will have an impact on the operating costs of the company.

Food safety and food-borne illness concerns

The company has to ensure that food safety and quality are of highest standards. However, thereis always a scope for food borne illnesses such as E. coli, Hepatitis A, Trichinosis or Salmonella tooccur. If such instances of food-borne illness or other food safety issues were to occur at any of itsrestaurants then the company may face negative publicity, which could adversely affect its salesand profitability or lead to more serious consequences. Additionally, the occurrence of food-borneillnesses or food safety issues could adversely affect the price and availability of affected ingredients.

Fresh threat of spread of bird flu

The threat of bird flu has been on rise once again through out the world. For example, in January2008, the Indian government confirmed that the latest outbreak of bird flu in poultry, in eastern partof India, was of the virulent H5N1 strain. Further, in March 2008, Russian health officials warnedthat the threat from the deadly bird flu virus is growing as countries are failing to implement effectivedisease control measures to deal with the crisis. The threat is growing as the measures taken,particularly in Indonesia and Egypt, are ineffective and the virus is constantly present in wild birdsand circulates in domestic birds, which leads to the development of the virus.

The outbreak of diseases such as bird flu and mad cow disease exerts a downward pressure on theconsumption of poultry and meat products all over the world. Chicken products such as ChickenMcNuggets are a central part of McDonald's offerings. More importantly, chicken products havebecome strategically important to McDonald's in markets such as India where a majority of populationdo not consume beef products. If these diseases assume epidemic proportions the revenue growthof the company is likely to slow down.



mcd's swot analysis (2008)

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