The reach of the McDonald’s brand has posed growth challenges in recent years, as saturation presents limits to opportunities for unit growth in the US, the company’s main market. The company initially turned to a strategy of diversification, evident in its acquisitions of Chipotle and Boston Market, and, most recently, McDonald’s has focused on boosting unit same store sales through new product innovation and its value menu. Recent product additions include a line of premium chicken breast sandwiches and premium salads, as well as its 2006 addition of the Chicken Snack Wrap, which includes a piece of crispy chicken, cheddar jack cheese with ranch dressing wrapped in a soft tortilla.
McDonald’s Chipotle brand is considered a leader in fast casual Latin American fast food. While Taco Bell dominates the Latin American fast food category, Chipotle is the largest fast casual Latin American restaurant, in large part due to McDonald’s funding. McDonald’s plans to completely divest Chipotle by the end of 2006, in order to focus on its fast food hamburger chain and allow the company to buy back McDonald’s shares using highly appreciated Chipotle stock with no tax on the appreciation. ()
Fast food chicken chain Boston Market, originally purchased by McDonald’s for its real estate, has since become a valuable brand for the company as it has diversified its business. Since McDonald’s acquisition of the brand in 2000, the company has seen sales increases. Boston Market does not compete directly with other fast food chicken chains, like KFC, which offer mainly fried chicken items, as it focuses on providing high quality home meal replacements like rotisserie chicken. With growing consumer demand for convenient meal options, especially healthy and high quality food, the Boston Market concept is expected to do well.
Strategic Direction
McDonald’s provides a core menu of traditional burgers, premium products and everyday value items in an attempt to appeal to the widest possible customer base. The company strives for continued unit expansion as well as same-store value sales growth. McDonald’s strategy is to focus on its customers and maximize system profitability by capturing opportunities within five fundamental drivers – people, products, place, price and promotion. Each fundamental is intended to maximize customer relevance and system profitability. Long-term, McDonald’s looks to create a variety of customer experiences that build brand loyalty and drive profitability.
As the largest restaurant chain in the world, McDonald’s is challenged by continual scrutiny, amplified further by the media, regarding the food it serves. Consequently, the company has committed itself to promoting balanced, active lifestyles and adding healthy menu options. In 2006, McDonald’s was the first fast food restaurant to print the foods nutrition information on the package. McDonald’s also focused its appeal on winning back mothers with new premium salads, chicken sandwiches and apple slices. The company has also used athletic role models, such as tennis stars Venus and Serena Williams, in a global campaign tied in with the Olympics to talk about exercise and nutrition. Despite these efforts, the company continues to face negative publicity and is likely to continue to do so as the obesity epidemic in the US continues to escalate.
While McDonald’s faces several challenges, the company is expected to maintain its strong market presence and continue to see value growth and outlet expansion globally as a result of its strong brand recognition, rapid outlet penetration, continual menu innovation and low price offerings, all backed by its considerable annual marketing and advertising investment.
SWOT analysis
Strengths
- McDonald's has an almost unassailable position in consumer foodservice, with sales nearly twice those of its nearest competitor.
- McDonald’s currently has a rejuvenated corporate identity, having implemented its new slogan “I’m lovin’ it” at every level.
- McDonald's benefits from a wider geographical spread than other competitors and is thus less reliant on mature and competitive US fast food.
- Following its sale or closure of a number of non-core interests, the company now has a considerably more streamlined portfolio.
- Due to its size, McDonald’s benefits from economies of scale and is able to draw on impressive financial strength.
Weaknesses
- While McDonald's achieved an excellent performance in profits in 2006, there is still much progress to be made before it recovers ground lost during the middle of the review period.
- The company currently owns Boston Market and Chipotle, two non-core brands with an undecided future.
- McDonald’s initial results to menu and marketing changes were excellent in 2006. However, the brand is planning more innovation in 2006 and it will require considerable skill to shift the emphasis of the brand whilst retaining consumers and brand identity.
Opportunities
- McDonald’s revitalization strategy and new global marketing campaign appear to be resulting in strong growth, which seems set to continue in the near future.
- The introduction of a new salad range and a healthier menu focus in Europe is likely to result in good growth for year end 2007 and could influence menu innovation globally.
- McDonald's holds a leading position in many of the world's major long-term growth markets, including Russia, India, Brazil and China.
- McDonald’s McKids licensing range should provide excellent growth in 2007, if it is successfully positioned to appeal to both children and adults.
Threats
- As the leading brand in consumer foodservice and a leading US brand, McDonald’s remains under attack from many sources and must continue to face challenges including boycotts, media attacks and even physical attacks on outlets.
- Consumer concerns regarding weight and nutrition are high and rising, which could prove challenging for McDonald’s core burger offering and may result in damaging legislation being introduced in key countries.
- Although McDonald’s does not currently face any competitor of its size, it could experience long-term erosion by smaller or innovative players with perceived healthier products.
Positioning vis-à-vis competitors
McDonald’s is the leading global player in terms of consumer foodservice system-wide sales and far exceeds its nearest competitor Yum! Brands. Yum! Brands lead in terms of unit volume, although this is unlikely to worry the company in the near future, with its current emphasis on growing same-store sales rather than unit volume. Within burger fast food, McDonald’s dwarfs its competitors, with system-wide sales more than three times the size of its nearest competitor Burger King. However, while McDonald’s continues to outrun the competition, it remains mindful of competition from other global brands such as Burger King and Wendy’s. McDonald's also faces a major threat from local chains, such as the Quick burger chain in France and Belgium. In the US, it faces competition from players Berkshire Hathaway and CKE, along with a host of smaller chains and independents and the emerging fast casual chains. Burger fast food is an increasingly crowded and mature area, particularly in key countries such as the US. ()
McDonald’s closest competitors in burger fast food is Wendy’s and Burger King, with the latter being the only brand with a strong international focus. Burger King and McDonald’s have a strong and historic rivalry and their price wars continue in the US. 2006 saw Burger King innovate ahead of McDonald’s by introducing a low-carbohydrate burger, and McDonald’s introduced the option of burgers without buns, in response to heightened concerns about high levels of carbohydrates in foods. KFC acts as a strong rival to McDonald’s in Asia-Pacific, with its sales far exceeding McDonald’s in China in 2006. While KFC is positioned in chicken, its increasing emphasis on chicken burgers places it in competition with McDonald’s, particularly in regions with a cultural or religious aversion to beef.
McDonald’s expansion into more diverse brands brought it into competition with a wider range of competitors. Chipotle faces competition from Mexican fast food leader Taco Bell in the US, although it is positioned more in competition with “fresh-Mex” fast casual restaurants, such as Wendy’s Baja Fresh. Boston Market is a chicken fast food brand but competes with traditional full-service restaurants such as Applebee’s.
Recommendations and Conclusion
McDonald’s entered a new phase in 2006, with a streamlined single-brand focus and rejuvenation under one global marketing strategy. The company is currently in the middle of implementing major structural and conceptual changes, which makes estimates of its future performance difficult. However, McDonald’s appears to be well placed for an excellent short-term performance. Its close single-brand focus led to excellent growth in 2006 for both sales and profits, and the removal of non-performing or non-core elements should result in a solid foundation for future growth. Its “I’m lovin’ it” campaign appears to be successfully broadening its appeal to young adults and offering it a more contemporary image. McDonald’s own growth targets for 2006 and beyond are to increase annual system-wide sales and revenue by 3-5% in constant value terms, with sharper growth in operating profit of 6-7%. The company has ambitious and promising plans for 2007, including the launch of its multi-level licensing range McKids and an overhaul of its menus with an emphasis on health, quality and value. The company also plans to introduce new global packaging to reinforce its marketing campaign and new corporate identity.
However, McDonald’s will continue to face a number of challenges. Its leading position in consumer foodservice unfortunately results in the brand bearing the brunt of anti-globalization and anti-US campaigns. Additionally, there is currently strong media and governmental concerns regarding levels of obesity in many countries. A number of governments, including the UK, are currently considering a tax on high-fat food, which would present a major problem to McDonald’s. The company will also continue to face competition from major rival Burger King and the combined force of a myriad of smaller players. Burger fast food is becoming increasingly competitive and mature and all players are focusing on innovation in order to stay ahead.
Works Cited
McDonald’s Retrieved from on March 28, 2007
Retrieved from on March 28, 2007
Retrieved from on March 28, 2007
Appendix
Income Statement
Source: Yahoo Finance
Balance sheet
Source: Yahoo Finance
Cash Flow
Source: Yahoo Finance