Mcdonalds Swot Analysis

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McDonald’s Corporation

SWOT analysis 2014

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Table of Contents

Company overview 3

SWOT analysis 5

Strengths 5

Weaknesses 8

Opportunities 10

Threats 12

Sources 15

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Company overview

Business description

This is McDonald‟s Corporation business description taken from the company‟s financial report:

“General

The Company franchises and operates McDonald‟s restaurants in the global restaurant industry.

These restaurants serve a broad menu at various price points in more than 100 countries around

the world.

All restaurants are operated either by the Company or by franchisees.

The Company‟s operations are designed to assure consistency and high quality at every

restaurant.

Under the conventional franchise arrangement, franchisees provide a portion of the capital

required by initially investing in the equipment, signs, seating and décor of their restaurant

businesses, and by reinvesting in the business over time. The Company owns the land and

building or secures long-term leases.

Conventional franchisees contribute to the Company‟s revenue stream through the payment of rent

and royalties based upon a percent of sales. The conventional franchise arrangement typically

Name McDonald‟s Corporation

Industries served Restaurants (McDonald‟s, McCafé, McExpress, McStop)

Geographic areas served Worldwide (35,429 restaurants in 119 countries) [1]

Headquarters Oak Brook, Illinois, United States

Current CEO Don Thompson

Revenue $28,106 billion (2013) 2% $27,567 billion (2012) [1]

Profit $5,586 billion (2013) 2.1% $5,465 billion (2012) [1]

Employees 440,000 (2014)

Main Competitors

Burger King Worldwide, Inc., Darden Restaurants, Inc., Doctor's

Associates, Inc., Domino‟s, Inc., Yum! Brands, Inc., Starbucks

Corporation, Wendy‟s Company.

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lasts 20 years, and franchising practices are generally consistent throughout the world. Over 70%

of franchised restaurants operate under conventional franchise arrangements.

The Company and its franchisees purchase food, packaging, equipment and other goods from

numerous independent suppliers. The Company has established and strictly enforces high quality

standards and product specifications.

Customers

The Company‟s business is not dependent upon either a single customer or small group of

customers.

Number of employees

The Company‟s number of employees worldwide, including Company-operated restaurant

employees, was approximately 440,000 as of year-end 2013.”[1]

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SWOT Analysis

Strengths

1. Diversified income. One of the main McDonald‟s strengths is its diversified income. The fast

food chain‟s revenues come from various countries, regions and products. It doesn‟t rely on one

key source of income, unlike some of its rivals.

McDonald‟s sales from the company-owned restaurants were $18,875 billion or 67.15% of the total

revenues and the revenues from the franchisees were $9.231 billion or 32.85% of the total

revenues in 2013.[1] Few other rivals receive as much revenue from its franchisees as does

McDonald‟s.

Strengths Weaknesses

Opportunities Threats

1. Diversified income

2. Brand reputation combined with a largest

market share

3. Food menus adopted to meet the local

tastes

4. Large advertising budget

5. Efficient restaurant management

1. Inconsistent menus in different countries

2. Employment practices and low wages

3. Criticism and negative publicity

4. Image of a cheap place to eat at

5. Poor quality services and food

6. Competition based on prices rather than

differentiation

1. Improve public image

2. Expand McCafé network and separate it

from the traditional McDonald‟s restaurants

3. Expand McDelivery services

4. Expand „make your own burger‟ service

5. Growing middle class in China

1. Intensifying rivalry

2. Rising labor wages

3. Political sanctions

4. Strong U.S. dollar

5. New food safety and work regulations

6. Negative publicity

7. Declining demand for fast food

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Figure 1. Percentage of income from the franchisees

2013 McDonald’s[1] Yum! Brands[2] Burger King[3] Wendy’s[4]

Percentage of income from the franchisees

32.85% 14.5% 80.5% 12.9%

The numbers indicate that Yum! Brands and Wendy‟s has to rely on their directly owned

restaurants to generate most of the income, while Burger King (and probably Subway) has to rely

on the franchisees for its income. Both situations, when a company has to rely on one source of

income, aren‟t favorable to McDonald‟s competitors.

McDonald‟s income is also much more geographically diversified than its rivals‟.

Figure 2. Income from the different regions

2013 McDonald’s[1] Yum! Brands[2] Burger King[3] Wendy’s[4]

Income from U.S. 31.5% 18.9% 58% >98%

Income from Europe 40% 19.3% 29.3% 0%

Rest of the world 28.5% 61.8% 12.7% <2%

We can see that Burger King and Wendy‟s heavily rely on sales from U.S., while more than 50% of

Yum! Brands income comes from China.

McDonald‟s diversified income is a strength that allows the company to grow more steadily. The

company isn‟t affected by major demand changes in one or another region as much as other fast

food companies.

2. Brand reputation combined with a largest market share. McDonald‟s brand is one of the

most valuable brands in the world. Interbrand[5] and Forbes[6] have evaluated the brand by $42.3

billion and $39.4 billion, respectively. Both companies included the brand in to the list of top 10

world‟s most valuable brands, while no other company in the restaurant industry has even reached

the top 50.

McDonald‟s has the second largest network of restaurants (35,429 restaurants) in the world. It

serves the most people a day (70 million) and operates in more countries (119) than any other

competitor.

The benefit of a largest market share is an unmatched customer reach and reinforced brand

identity as well as reputation. Brand reputation increases customer loyalty, which results in more

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returning customers. It also enables the company to sustain market leadership position. No other

rival can match such brand awareness and enjoy its benefits.

3. Food menus adopted to meet the local tastes. The fast food chain is operating in many

diverse cultures where tastes in food are very different to those of U.S. or European consumers.

Therefore, an ability to adapt the food to the local tastes is very important if McDonald‟s wants to

attract new customers and gain local customers‟ recognition. The restaurant serves soup in Asia,

McRice in Indonesia, beer in most Western Europe countries, meat pies in New Zealand, Ebi

burger in Singapore and kosher food in Israel. In India, the restaurant doesn‟t sell any beef. Often,

the meals and their tastes are modified for different regions in the same country. [7] McDonald‟s is

able to adapt its menu to local tastes better than other international fast food chains.

4. Advertising budget. McDonald‟s has spent $883.8 million on advertising and costs related with

it in 2013.[1] According to Kantar Media,[8] the whole restaurant industry has spent only $6.449

billion on advertising over the same year. McDonald‟s accounted for 13.7% of the whole industry‟s

spending on advertising. This is more than what Yum! Brands ($607 million)[2], Burger King ($48.3

million)[3] or Wendy‟s (<$150 million)[4] have spent combined.

In general, the more a company spends on advertising the more customers and sales it will gain.

This is also true for McDonald‟s. No rival can match its huge spending on advertising and gain as

much brand awareness as McDonald‟s have.

5. Efficient restaurant management. Even though, McDonald‟s sales have slowed down recently,

its restaurants still make nearly twice as much as the next big competitor‟s restaurants. According

to BurgerBusiness,[9] on average, McDonald‟s restaurants were making $2.4 million a year in U.S.

At the same time Burger King‟s and Wendy‟s restaurants were making only $1.255 million and

$1.514 million a year, respectively. To manage larger flows of customers, McDonald‟s have to

operate more efficiently than other restaurants.

In addition, McDonald‟s has been working a lot to improve the performance of their drive-thru

service. A QSR‟s[10] study shows that McDonald‟s average order fulfillment time is 189.49 seconds,

which is below the average of 180.83 seconds for other fast food chains.

Figure 3. Average Service Time

Chain Average in Seconds

Burger King 198.48

Chick-fil-A 203.88

Krystal 217.89

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McDonald’s 189.49

Taco Bell 158.03

Taco John’s 181.19

Wendy’s 133.63

Summary 180.83

Source: QSR Magazine[10]

The increased average service time, has a lot to do with the new items that were added to the

menu. But McDonald‟s is working on that. In many restaurants, it has added the second lane to

drive-thru for ordering and expects to add a third line too. This should reduce the time it takes to

fulfill an order and would further increase the efficiency of McDonald‟s outlets.

Weaknesses

1. Inconsistent menus in different countries. While a localized menu is one of the key strengths

of McDonalds, it‟s also one of the chain‟s weaknesses. Wherever a customer visits a McDonald‟s

restaurant, he/she expects to be able to order the same type and quality of food. It‟s the promise

that the fast food chain emphasizes itself. The reality is different. It is possible to order a soup in

McDonald‟s in China, beer in Germany and McRice in Indonesia. But you won‟t get beer in China

or McRice in Germany, which most of the visiting Indonesians would expect in McDonald‟s in

Germany. For most customers, these differences are expected. More frustrating and disappointing

situation is when you can‟t order the same items at McDonald‟s restaurants in your local town. Due

to the menu differences between the different franchisees and directly owned restaurants, people

can no longer expect the same service or menu in each McDonald‟s restaurants. Often, you can‟t

order the same deli wrap or a McRib sandwich in every restaurant in your town. This leads to

disappointment, lost customers and sales.

2. Employment practices and low wages. In 2013, McDonald‟s has been heavily criticized over

its employment practices. Guardian[11] has exposed that 90% of McDonald‟s employees have

signed the 0 hour contracts in UK. Such contracts offer no guaranteed minimum hours of work or

minimum income for the employees and it significantly adds to their financial insecurity.

McDonalds is also heavily criticized for the low wages paid to its employees. Every year, the fast

food workers in U.S. (not only McDonald‟s employees) are receiving $7 billion worth of public

assistance (subsidies) for their low wages.[12] Which is the largest employer in a fast food industry?

McDonald‟s and it receives almost all of the criticism over the low wages in the fast food industry.

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The company has also been criticized for offering its employees to apply for food stamps or to sell

unwanted gifts to add to their income.[13]

It is true that most of the other fast food chains follow the same practices, yet, it is McDonald‟s

which is almost always blamed for it. It adds significantly to the negatives publicity and harms

company‟s reputation.

3. Criticism and negative publicity. As mentioned earlier, McDonald‟s receives lots of criticism

over its employment practices. Every year, the company receives negative publicity for many

different activities. In 2014 alone, the company has been criticized for its employment practices,

low wages, tax evasion in France, using chicken that was fed genetically modified animal food,

serving pink slime meat, expired meat, rising prices and etc. All this negative publicity that

McDonald‟s receive each year affects its reputation and sales. According to Interbrand,

McDonald‟s brand value grew by only 1% in 2014,[5] down from 5% growth in 2013. [14] McDonald‟s

sales have also suffered in part from this.

4. Image of a cheap place to eat at. Even when the company invested heavily in its premium

menu the company is still seen as a budget place to grab a quick bite. How does this hurt the

company? First, McDonald‟s $1 dollar menu has lost its appeal for quite some time as most of the

meals in the menu are priced well above $1 and up to $5 or even $7 for a meal.[15] Customers

whose income is low and who are the primary McDonald‟s customers are especially price

sensitive. The increase of prices significantly lowers the demand from such customers.

Second, McDonald‟s has invested heavily in redesigning its traditional restaurants, introducing

premium menu and expanding the network of McCafé restaurants, which purpose was to attract

more premium customers that can afford to spend $5 or $7 for a meal. Yet, few customers were

attracted due to the chain‟s association with a cheap food and poor quality services.[16]

5. Poor quality services and food. McDonald‟s key selling proposition was its cheap and quick

meals. Standardization of the processes, food quality, menu and services allowed the restaurant

chain to make the burgers and fries fast, with little cost and as quickly as possible. Right now,

McDonald‟s advantages have disappeared. With so many additional items in its menu the

restaurant cannot process the orders as fast as it used to. Customers have to wait longer in lines to

get what they want. According to the study done by QSR, the customers had to wait an average of

3 minutes to receive an order after placing it.[17]

A Consumer Report survey [18] revealed that 32,000 respondents identified McDonald‟s as the

worst fast food chain from the list of 21 largest fast food chains. The main complaint was about the

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poor food quality. Consumers are more likely to pay more for the good quality food and according

to them, McDonald‟s sells the opposite of that.

McDonald‟s has also seen the increase of complaints about the employee unfriendliness.[17]

6. Competition based on prices rather than differentiation. McDonald‟s competition is based

on low prices, which is clearly emphasized by the company‟s $1 menu (although nowadays few

things can be ordered for $1). McDonald‟s is no longer able to substantially differentiate itself from

other fast food chains (at least not enough to gain some market share) and opts to compete on

prices. This is the weakness that must be overcome in order to sustain the future growth.

The survey published in Motley Fool and conducted by NPD Group [16] reveals that the overall

traffic to the restaurants from 2013 June to 2014 June was the same as the year before in US.

Figure 4. Customer traffic growth rate

Spending Traffic

$0 to $9 (1%)

$10 to $19 5%

$20 to $39 6%

$40 or more 11%

Source: NPD Group [16]

In addition, the survey reveals that more and more consumers are choosing to spend more for their

food and eat at fancier diners or restaurants rather than going to budget places. The traffic to the

budget places, like McDonald‟s, has actually decreased. This is where McDonald‟s strategy

becomes its weakness. If McDonald‟s wants to attract the customers who spend more for their

food, it has to reposition itself as a chain that serves quality food and provides quality service.

Opportunities

1. Improve public image. McDonald‟s could convert its negative publicity weakness into strength

by improving its public image. There are few ways McDonald‟s could do this:

The company could change its employment policies, raise wages, provide more career

opportunities and add other benefits that would motivate its employees. This way the chain

wouldn‟t receive criticism over its employment practices and may benefit from positive

publicity the same way as Target supermarket chain does.

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It could improve the quality of its food and buy the raw materials only from the responsible

suppliers.

McDonald‟s should engage into more corporate social responsibility programs that help

local communities and increase the charity donations.

2. Expand McCafé restaurant network and separate it from the traditional McDonald’s

restaurants. McCafé is McDonald‟s café-style restaurant, usually located within the current

McDonald‟s locations. McCafé was introduced to compete with Starbucks and to satisfy the new

trend for higher quality coffee, service and better design of the restaurant. There‟s no exact

number of how many McCafé restaurants are currently opened, but the estimates show that

McCafé numbers make less than 10% of all McDonald‟s restaurants. Why McDonald‟s should

expand its McCafé restaurant chain?

First, the report done in 2003 indicated that McCafé outlets generated 15% more revenue than

regular McDonald‟s restaurants.[19] Therefore, having McCafé in addition to McDonald‟s could

increase the overall company‟s sales.

Second, McCafé aims at serving higher income customers that appreciate quality food, drinks and

service, which is the opposite of how most of the customers see McDonald‟s restaurants. By

expanding the network of McCafé outlets, the company would be able to:

Differentiate itself from its current image of a cheap place to eat at.

Target the growing consumer segment.

Grow company‟s decreasing sales.

3. Expand McDelivery services. The company has introduced its food delivery service in 1993 in

U.S., but since then, rapidly expanded it into many Asian, Middle Eastern and Latin American

countries. McDelivery is now available in 27 countries. In U.S. McDelivery service is only available

in Manhattan.

Food delivery and takeaway industry has reached $32.2 billion market size in U.S. in 2013,

according to Statista.[20] This equals to 18% of the total $190 billion fast food industry‟s market

value. McDonald‟ which has the experience in delivery services and is the largest fast food chain in

the U.S., could take an advantage of the growing delivery industry to increase company‟s declining

sales.

4. Expand ‘make your own burger’ service. Recently, McDonald‟s has introduced its gourmet

burger, which you can make yourself by choosing your own bun and topping from a 19-ingredient

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list. The restaurant first offered such service in Australia, Sydney, where the owners told that this

service is offered because the customers required it.[21]

By introducing this service, McDonald‟s is moving one step further into adapting its menu to satisfy

customer‟s tastes. Now the customers can make their own meal and choose the ingredients that

they like the best.

By expanding this service, McDonald‟s would directly challenge Subway fast food chain and could

win larger market share from its competitor.

5. Growing middle class in China. China is still a growth market and is the largest market in the

world in terms of the number of consumers. The middle class, which is the primary consumer

segment for McDonald‟s, is expected to account for 70% of 1 billion China‟s population in 2030.[22]

The growing middle class will increase the demand for fast food and beverages, the products that

McDonald‟s is offering.

In 2013, McDonald‟s has opened 275 restaurants in China. The company plans to open further 300

restaurants in China in 2014 alone. While this might appear a significant growth, McDonald‟s

growth doesn‟t match that of Yum! Brands or Subway growth in China.

While China‟s market is still underserved, McDonald‟s has the opportunity to aggressively expand

its chain in the country and expand its market share as well as brand awareness among Chinese

consumers.

Threats

1. Intensifying rivalry. McDonald‟s operate in a highly competitive fast food industry, where it has

to compete with international, national, regional and local rivals, which specialize to serve specific

consumer segments. As the fast food industry‟s growth has slowed down, the competition has

significantly intensified. The traditional McDonald‟s rivals like Burger King and Wendy‟s are

constantly introducing new meals to directly compete with McDonald‟s offerings.[23] Their focus is to

attract breakfast eaters from McDonald‟s by offering very low prices on breakfast items.

Another rival, Starbucks, has also changed their strategy. The coffee chain giant is moving from

selling coffee only to becoming a destination for breakfast and lunch.[23] New rising rivals, Chick-fil-

A and Chipotle, are growing on average by 12.7%[24] and ~20% annually in the U.S. Comparing

that to a nearly 0% growth for fast food industry in the U.S. last year, it seems that these

companies are biting a market share from McDonald‟s and other established restaurant chains.

Competition is growing in other countries as well, were regional restaurant chains, which are

capable of better serving local customers, are spreading fast.

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2. Rising labor wages. One of the key McDonald‟s competitive advantages are low prices. This

means that the fast food chain relies on its low prices to attract customers and to outcompete its

rivals. What happens when the prices rise? McDonald‟s loses its competitive edge and can‟t

properly compete with its competitors. This is what‟s happening to McDonald‟s at the moment.

Most of McDonald‟s employees receive a minimum wage, which currently is $7.25 per hour in the

U.S. The federal minimum wage has increased from $5.15 per hour in 1998 to $5.85 in 2008,

$6.55 in 2009 and to $7.25 in 2010. It will likely rise to $10.10 per hour soon enough.

The rising minimum wage will increase the prices of the McDonald‟s menu and because of the

company‟s low price strategy, it will find very hard to distinguish itself from other fast food chains in

the market.

3. Political sanctions. McDonald‟s is one of the best known U.S.-owned consumer brands in the

world, which represents U.S. culture, values and a way of doing business. The company often

suffers because of what it represents and U.S. government actions against other countries. There

are plenty of examples when McDonald‟s restaurants where attacked in the Middle East, when

local people were protesting against U.S. actions in their countries. Currently, McDonald‟s is

suffering a collateral damage from the economic sanctions imposed by U.S. against Russia.

Russian government has started investigations against 200 out of 440 McDonald‟s restaurants in

the country.[25] 9 restaurants are already closed by the government and many more could be

closed after the investigations.

Politically, U.S. is a very active country and its actions against other countries may further invoke

hostile actions against U.S. based businesses. Knowing that McDonald‟s represents U.S. values

and operates in as many as 119 countries, it becomes one of the key targets for hostile actions.

4. Strong U.S. dollar. The exchange rate affects every multinational company. McDonald‟s is no

exception. It has earned $19.225 billion or 68.5% of its revenues outside the U.S.[1] This means

that the company receives most of its profits in currencies other than the U.S. dollar. Other

currencies have to be converted to U.S. dollar so that the company would be able to calculate its

total revenues and send the profits back to the U.S. This is where a strong dollar, or in other words,

the rising U.S. dollar exchange rate is threatening McDonald‟s. Over the last two years,

McDonald‟s has lost $726 and $29 million, in 2012 and 2013, respectively, due to a rising dollar

exchange rate.[1]

In order to combat this, some companies raise their product prices overseas, but because

McDonald‟s strategy is based on low prices, raising the prices of the products is not an option. It is

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very likely that the U.S. dollar exchange rate will rise again the next year and that the profits will

suffer because of that.

5. New food safety and work regulations. According to McDonald‟s,[1] one of the main threats

affecting its operations, is increasing food safety and work regulations: “In many of our markets,

including the United Stated and Europe, we are subject to increasing regulation, which has

increased our cost of doing business”. McDonald‟s adds “We face and must manage the impact of

new, potential or changing regulations that can affect our business plans, such as those relating to

product packaging, marketing and the nutritional content and safety of our food and other products,

as well as the risks and costs of our labeling.” McDonald‟s also warns that workplace regulations

may affect its business as well.

The regulations add to the business costs and decrease profits. McDonald‟s is and will be the

subject of many regulations in the future.

6. Negative publicity. McDonald‟s brand has been damaged many times by negative publicity

(see the 3rd weakness) and this trend will likely continue in the future. The company may face new

nutritional, health and other food related studies and conclusions that may become very popular

and adversely affect the business.

New litigations, such as, class actions, labor, employment or personal injury claims and litigations

with franchisees can also harm McDonald‟s public image.

7. Declining demand for fast food. According to data from Euromonitor International, sales of

major fast food chains grew only by 1.1% in U.S. in 2013.[26] This is the lowest growth rate since

the beginning of fast food industry and it indicates that the fast food industry is nearly saturated.

Other report from NPD Group shows that the traffic to the restaurants, where an average person

spends less than $10 for their meal (mainly fast food industry), has actually declined by 1%.

Figure 4. Customer traffic growth rate

Spending Traffic

$0 to $9 (1%)

$10 to $19 5%

$20 to $39 6%

$40 or more 11%

Source: NPD Group [16]

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Both reports reveal that McDonald‟s faces the most severe threat of all – the declining demand for

fast, cheap and poor quality food that McDonald‟s is serving.

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Sources:

1. McDonalds (2014). Annual Reports. 2013 Annual Report. Available at: http://www.4-

http://www.aboutmcdonalds.com/content/dam/AboutMcDonalds/Investors/McDs2013AnnualReport.p

df Accessed 20th October 2014

2. Yum! Brands (2014). Annual Reports. 2013 Annual Report. Available at:

http://www.yum.com/annualreport/pdf/2013yumAnnReport.pdf Accessed 20th October 2014

3. Burger King (2014). Annual Reports. 2013 Annual Report. Available at:

http://investor.bk.com/burgerking/web/conteudo_en.asp?idioma=1&conta=44&tipo=43575 Accessed

20th October 2014

4. Bloomberg Businesweek (2014). Wendy's Co/The Financial Statements. Available at:

http://investing.businessweek.com/research/stocks/financials/secfilings.asp?ticker=WEN Accessed

20th October 2014

5. Interbrand (2014). Best Global Brands 2014. Rankings. Available at:

http://bestglobalbrands.com/2014/ranking/ Accessed 20th October 2014

6. Forbes (2014). The World‟s Most Valuable Brands. http://www.forbes.com/powerful-brands/list/

Accessed 20th October 2014

7. Wikipedia (2014). McDonald‟s. Available at: http://en.wikipedia.org/wiki/McDonald's Accessed 20th

October 2014

8. BusinessWire (2014). Kantar Media Reports U.S. Advertising Expenditures Increased 0.9 Percent in

2013, Fueled by Larger Advertisers. Available at:

http://www.businesswire.com/news/home/20140325006324/en/Kantar-Media-Reports-U.S.-

Advertising-Expenditures-Increased#.VEepS_mUe-2 Accessed 20th October 2014

9. BurgerBusiness (2014). 2013 Top 5 Chain Sales. Available at: http://www.burgerbusiness.com/wp-

content/uploads/2013-Top-5-Chain-Sales.jpg Accessed 20th October 2014

10. QSR Magazine (2014). The Drive-Thru Performance Study: Average Service Time. Available at:

http://www.qsrmagazine.com/content/drive-thru-performance-study-average-service-time Accessed

20th October 2014

11. Neville, S. (2013). McDonald's ties nine out of 10 workers to zero-hours contracts. The Guardian.

Available at: http://www.theguardian.com/business/2013/aug/05/mcdonalds-workers-zero-hour-

contracts Accessed 21st October 2014

12. Allegretto, S. et al. (2013). Fast Food, Poverty Wages: The Public Cost of Low-wage jobs in the Fast

Food Industry. Available at: http://laborcenter.berkeley.edu/pdf/2013/fast_food_poverty_wages.pdf

Accessed 21st October 2014

13. Taylor, M. (2013). McDonald's advises own employee to apply for food stamps. Available at:

http://america.aljazeera.com/articles/2013/10/24/mcdonald-s-

employeehelplineadvisesfoodstampsnotwageincrease.html Accessed 21st October 2014 Accessed

21st October 2014

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http://bestglobalbrands.com/previous-years/2013 Accessed 21st October 2014

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