case 18 mcdonalds

7/28/2019 Case 18 McDonalds

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McDonalds 2007

Forest David: Francis Marion University

A. Case Abstract

McDonalds Corporation (www.mcdonalds.com) is a comprehensive business policy

and strategic management case that includes the companys fiscal year-endDecember 2006 financial statements, competitor information and more. The case

time setting is the year 2007. Sufficient internal and external data are provided to

enable students to evaluate current strategies and recommend a three-yearstrategic plan for the company. Headquartered in Oak Brook in the U.S. state of

Illinois, McDonalds common stock is traded on the New York Stock Exchangeunder the ticker symbol MCD.

McDonalds sells various fast food items and soft drinks including, burgers, chicken,salads, fries, and ice cream. McDonalds is led by CEO Jim Skinner whose basic paywas over US$10 million in 2006. The firms major competitors are Wendys, Burger

King, and Hardees.

B. Vision Statement (proposed)

Our vision is to maintain our stand as the number one fast food restaurant in theworld.

C. Mission Statement (proposed)It is our mission to be the worlds best quick service restaurant (2). Being the best

means providing outstanding quality, service, cleanliness and value, so that we

make every customer (1) in every restaurant smile (5, 6). To achieve our missionwe must be the best employer (9) for our people in each community (8) around

the world (3), deliver excellence to our customers in each of our restaurants and

achieve profitable growth by expanding the brand McDonalds through innovationand technology (4).

1. Customer

2. Products or services3. Markets

4. Technology5. Concern for survival, profitability, growth

6. Philosophy7. Self-concept

8. Concern for public image9. Concern for employees

Copyright 2009 Pearson Education Limited
http://www.mcdonalds.com/http://www.mcdonalds.com/


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D. External Audit

Opportunities

1. Rising population in China

2. Chinese consider drive-thrus a novelty where car ownership is growing

rapidly3. Burger Kings market share among quick service sandwich chains dropped

10.95 percent in 2006

4. Developing a Healthy Lifestyle program to attract health consciousconsumers

5. Hispanic population has recently increased 14 percent in the U.S.6. Krispy Kreme Doughnuts possibility of going bankrupt

7. 6 percent increase in social shopping areas (i.e. malls, plazas)

Threats

1. Increased expansion of traditional rivals2. Yum Brands are the leading quick service chains in China

3. McDonalds Europe sales dropped 1.9 percent4. Burger Kings sales growth is an estimated 18.2 percent compared to

McDonalds 11.2 percent5. Yum Brands variety of food and wide range of prices for selections

6. Wendys Frescata product line increased sales by 3.2 percent7. According to National Restaurant Association (NRA) average menu price

increased by 3.2 percent8. Growing public awareness of fast food being unhealthy

CPM Competitive Profile Matrix

Wendys McDonalds Burger King

Critical SuccessFactors Weight Rating

Weighted Score Rating

Weighted Score Rating

WeightScore

Market Share 0.15 2 0.30 4 0.60 2 0.30

Advertising 0.13 2 0.28 3 0.39 3 0.39

Global Expansion 0.12 1 0.12 4 0.48 2 0.24

Product Variety 0.10 4 0.40 3 0.30 3 0.30

Product Quality 0.08 1 0.08 3 0.24 2 0.16

Company Image 0.07 2 0.14 3 0.21 2 0.14

Price Competition 0.04 3 0.12 3 0.12 3 0.12

Management Experience 0.06 2 0.12 3 0.18 2 0.12

Customer Service 0.07 3 0.21 2 0.14 2 0.14

Philanthropy 0.05 2 0.10 4 0.20 1 0.05

Customer Loyalty 0.08 2 0.16 3 0.24 2 0.16

Financial Position 0.05 3 0.15 3 0.15 2 0.10

Total 1.00 2.16 3.25 2.22



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E. Internal Audit

Strengths

1. Globally recognized brand name2. Largest U.S. restaurant chain in international markets with approximately

17,000 stores in 120 countries3. Consumption of food away from home accounted for 48.5 percent of total

expenditures on food4. Total assets of US$29 billion in 2006

5. McDonalds serves nearly 54 million customers daily6. McDonalds beat Starbucks, Burger King and Dunkin Doughnuts in a coffee

taste test according to the Consumer Report7. In 2006 McDonalds return nearly US$5 billion to shareholders through

shares acquired and dividends paid8. McDonalds sells fast food in Disneys theme parks around the world as well

as Ocean Park in Hong Kong9. In 2006, revenue and operating income reached a record high of US$21.6

billion and US$4.4 billion respectively10. McDonalds increased the companys dividends by 50 percent, raising the

annual US$0.67 per share to US$1.00 per share totaling about US$1.2billion

Weaknesses

1. Lack of menu development2. Publics perception of quality, service, and cleanliness at McDonalds units

suffered over the past years

3. McDonalds ranked last out of 25 fast-food chains in a recent study of drive-thru order accuracy

4. McDonalds 5-year average sales are 8.14 compared to 8.89 for the industry

5. Operations loss in Islands of Jamaica, Barbados, Bermuda6. Long-term debt remains over US$8 billion7. Low personnel productivity

8. Yum Brands return-on-assets of 13.56 compared to McDonalds 9.749. Website not user friendly

Financial Ratio Analysis (December 2007)

Growth Rates % McDonalds Industry SP-500

Sales (Qtr vs year ago qtr) 5.70 7.50 8.30

Net Income (YTD vs YTD) -32.10 -9.10 16.00

Net Income (Qtr vs year ago qtr) 69.40 42.50 6.60

Sales (5-Year Annual Avg.) 8.14 8.89 13.34Net Income (5-Year AnnualAvg.)

18.67 13.16 20.14

Dividends (5-Year Annual Avg.) 44.27 26.63 10.00

Price Ratios McDonalds Industry SP-500

Current P/E Ratio 28.6 24.8 21.9

P/E Ratio 5-Year High NA 30.4 25.9

P/E Ratio 5-Year Low NA 13.0 7.4

Price/Sales Ratio 2.89 2.10 2.38



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Price/Book Value NA 3.02 3.39

Price/Cash Flow Ratio NA 5.40 10.60

Profit Margins McDonalds Industry SP-500

Gross Margin 34.7 31.0 33.8

Pre-Tax Margin 15.7 12.1 17.5

Net Profit Margin 10.3 8.1 12.4

5Yr Gross Margin (5-Year Avg.) 32.4 30.5 33.55Yr PreTax Margin (5-Year Avg.) 17.1 12.3 16.8

5Yr Net Profit Margin (5-YearAvg.)

11.7 8.5 11.7

Financial Condition McDonalds Industry SP-500

Debt/Equity Ratio NA 0.69 1.19

Current Ratio NA 0.4 0.9

Quick Ratio NA 0.4 0.7

Interest Coverage 7.6 13.9 43.3

Leverage Ratio NA 1.7 4.0

Book Value/Share NA 3.58 16.25

Adapted from www.moneycentral.msn.com

Date Avg. P/E Price/Sales Price/Book Net Profit Margin(%)

12/07 26.50 3.13 NA 10.2

12/06 16.10 2.66 3.45 13.7

12/05 15.70 2.17 2.81 13.0

12/04 15.60 2.20 2.87 12.2

12/03 17.10 1.85 2.62 8.8

Date Book Value/Share

Debt/Equity ROE(%)

ROA(%)

InterestCoverage

12/07 NA 0.00 NA NA 9.5

12/06 $12.84 0.55 18.5 9.9 11.012/05 $11.99 0.67 17.1 8.6 11.1

12/04 $11.18 0.65 16.0 8.2 9.7

12/03 $9.50 0.81 12.6 5.8 7.2

Adapted from www.moneycentral.msn.com

Net Worth Analysis (December 2006 in millions)

1. Stockholders Equity + Goodwill = 15,458 + 2,200 $17,658

2. Net income x 5 = $3,544 x 5= $ 17,720

3. Share price = $57/EPS 2.00 =$28.5 x Net Income $3,544= $101,004

4. Number of Shares Outstanding x Share Price = 1,180 x $57 = $ 67,260Method Average $50,910

http://www.moneycentral.msn.com/http://www.cnbc.com/http://www.moneycentral.msn.com/http://www.cnbc.com/


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Internal Factor Evaluation (IFE) Matrix

Key Internal Factors Weight Rating WeightedScore

Strengths1. Globally recognized brand name 0.08 4 0.32

2. Largest U.S. restaurant chain ininternational markets with approx.

17,000 stores in 120 countries 0.15 4 0.60

3. Consumption of food away from home

accounted for 48.5 percent of totalexpenditures on food 0.06 4 0.24

4. Total assets of US$29 billion in 2006 0.10 4 0.40

5. McDonalds serves nearly 54 millioncustomers daily 0.02 4 0.08

6. McDonalds beat Starbucks, Burger King

and Dunkin Doughnuts in a coffee tastetest according to the Consumer Report 0.04 4 0.16

7. In 2006 McDonalds return nearly US$5

billion to shareholders through sharesacquired and dividends paid 0.05 4 0.20

8. McDonalds sells fast food in Disneys

theme parks around the world as wellas Ocean Park in Hong Kong 0.02 4 0.08

9. In 2006, revenue and operating income

reached a record high of US$21.6 billionand US$4.4 billion respectively 0.12 4 0.48

10.McDonalds increased the companys

dividends by 50 percent, raising theannual US$0.67 per share to US$1.00

per share totaling about US$1.2 billion 0.04 4 0.16

Weaknesses

1. Lack of menu development 0.03 2 0.06

2. Publics perception of quality, service,and cleanliness at McDonalds units

suffered over the past years 0.08 2 0.16

3. McDonalds ranked last out of 25 fast-food chains in a recent study of drive-

thru order accuracy 0.08 2 0.16

4. McDonalds 5-year average sales are8.14 compared to 8.89 for the industry 0.02 2 0.04

5. Operations loss in Islands of Jamaica,

Barbados, Bermuda 0.01 1 0.01

6. Long-term debt remains over $8 billion 0.02 2 0.04

7. Low personnel productivity 0.01 1 0.01

8. Yum Brands return-on-assets of 13.56compared to McDonalds 9.74 0.05 2 0.10

9. Website not user friendly 0.02 1 0.02

TOTAL 1.00 3.32



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F. SWOT Strategies

Strengths Weaknesses

1. Globally recognizedbrand name

2. Largest U.S. restaurantchain in international

markets withapproximately 17,000

stores in 120 countries3. Consumption of food

away from homeaccounted for 48.5

percent of totalexpenditures on food

4. Total assets of US$29

billion in 20065. McDonalds serves

nearly 54 millioncustomers daily

6. McDonalds beat

Starbucks, Burger Kingand Dunkin Doughnuts

in a coffee taste testaccording to the

Consumer Report7. In 2006 McDonalds

return nearly US$5billion to shareholders

through sharesacquired and dividends

paid8. McDonalds sells fast

food in Disneys themeparks around the world

as well as Ocean Parkin Hong Kong

9. In 2006, revenue andoperating income

reached a record highof US$21.6 billion and

US$4.4 billion

respectively

10. McDonaldsincreased thecompanys dividends

by 50 percent, raising

the annual US$0.67per share to US$1.00

per share totalingabout US$1.2 billion

1. Lack of menudevelopment

2. Publics perception ofquality, service, and

cleanliness atMcDonalds units

suffered over the pastyears

3. McDonalds ranked lastout of 25 fast-food

chains in a recentstudy of drive- thru

order accuracy

4. McDonalds 5-yearaverage sales are 8.14

compared to 8.89 forthe industry

5. Operations loss in

Islands of Jamaica,Barbados, Bermuda

6. Long-term debtremains over US$8

billion7. Low personnel

productivity8. Yum Brands return-on-

assets of 13.56compared to

McDonalds 9.749. Website not user

friendly



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Opportunities S-O Strategies W-O Strategies

1. Rising population in

China2. Chinese consider drive-

thrus a novelty wherecar ownership is

growing rapidly3. Burger Kings market

share among quick

service sandwich

chains dropped 10.95percent in 2006

4. Developing a HealthyLifestyle program to

attract healthconscious consumers

5. Hispanic population hasrecently increased 14

percent in the U.S.6. Krispy Kreme

Doughnuts possibilityof going bankrupt

7. 6 percent increase insocial shopping areas

(i.e. malls, plazas)

1. Expand into Chinese

market (Increaseadvertising and

restaurant locations)Market Development

(S1, S2, O1)2. Acquire Krispy Kreme

Corporation

Horizontal Integration

(S6, O6)

1. Menu Development

(Healthy Lifestyle &Hispanic foods lines)

Product Development(W1, O4)

Threats S-T Strategies W-T Strategies

1. Increased expansion oftraditional rivals

2. Yum Brands are theleading quick service

chains in China

3. McDonalds Europesales dropped 1.9percent

4. Burger Kings salesgrowth is an estimated

18.2 percent comparedto McDonalds 11.2

percent5. Yum Brands variety of

food and wide range ofprices for selections

6. Wendys Frescataproduct line increased

sales by 3.2 percent7. According to National

Restaurant Association(NRA) average menu

price increased by 3.2percent

8. Growing public

awareness of fast foodbeing unhealthy

1. Increase the number ofrestaurants located in

theme parks Disney &Ocean Park) Foreword

Integration (S8, T1)

2. Increase advertising ofcoffee line in keymarkets (China, North

America) MarketPenetration (S6, T3,

T4,)

1. Develop the menu tokeep up with

competition (Asian &Latin American items)

Product Development

(W1,T1)2. Redesign the website

to make it more user

friendly and tocompete better with

competition, ProductDevelopment (W9, T1)

3. Increase salespromotions and

advertisingexpenditures in key

markets, MarketPenetration (W1, W3,

T1,T3, T4)



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G. SPACE Matrix

6

5

4

3

2

1

-6 -5 -4 -3 -2 -1 1 2 3 4 5 6

-1

-2

-3

-4

-5

-6

Competitive

IS

ES

CA

FSConservative Aggressive

Defensive

Return on Assets (ROA) 4 Rate of Inflation

Leverage 3 Technological Changes

Net Income 6 Price Elasticity of Demand

Income/Employee 6 Competitive Pressure

Inventory Turnover 5 Barriers to Entry into Market

4.8 Environmental Stability (ES) AverageFinancial Strength (FS) Average

Environmental Stability (ES)Financial Strength (FS)

Market Share -1 Growth Potential

Product Quality -3 Financial Stability

Customer Loyalty -2 Ease of Entry into MarketTechnological know-how -2 Resource Utilization

Control over Suppliers and Distributors -1 Profit Potential

-1.8Competitive Advantage (CA) Average Industry Strength (IS) Average

Competitive Advantage (CA) Industry Strength (IS)

x-axis: -1.8 + 5.0 = 3.2y-axis: 4.8 + -2.8 = 2.0



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H. Grand Strategy Matrix

Rapid Market Growth

Quadrant II Quadrant I

Strong

Competitive

Position

Slow Market Growth

Weak

Competitive

Position

Quadrant III Quadrant IV



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I. The Internal-External (IE) Matrix

The IFE Total Weighted Score

Strong Average Weak

3.0 to 4.0 2.0 to 2.99 1.0 to 1.99

High I II III

3.0 to 3.99

Medium IV V VI

The EFE

TotalWeightedScore

2.0 to 2.99

McDonalds

Low VII VIII IX

1.0 to 1.99

Grow and Build

Division % Revenue

Europe 36

US 35

Asia Pacific/Middle East 14

Latin America 7

Canada 5Corporate & Other 3



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J. QSPM

Key Internal FactorsOpen 200

New Storesin China

Acquire

Krispy Kreme

Strengths Weight AS TAS AS TAS

1. Globally recognized brand name0.08

4 0.32 2 0.16

2. Largest U.S. restaurant chain in

international markets withapproximately 17,000 stores in 120

countries 0.15

4 0.60 2 0.30

3. Consumption of food away fromhome accounted for 48.5 percent of

total expenditures on food 0.06

1 0.06 3 0.18

4. Total assets of US$29 billion in 20060.10

3 0.30 4 0.40

5. McDonalds serves nearly 54 million

customers daily 0.02 --- --- --- ---6. McDonalds beat Starbucks, Burger

King and Dunkin Doughnuts in acoffee taste test according to the

Consumer Report 0.04

2 0.08 4 0.16

7. In 2006 McDonalds return nearly

US$5 billion to shareholders throughshares acquired and dividends paid 0.05 --- --- --- ---

8. McDonalds sells fast food in Disneys

theme parks around the world aswell as Ocean Park in Hong Kong 0.02 --- --- --- ---

9. In 2006, revenue and operating

income reached a record high ofUS$21.6 billion and US$4.4 billion

respectively 0.12

4 0.48 3 0.36

10.McDonalds increased the companysdividends by 50 percent, raising the

annual US$0.67 per share to $1.00per share totaling about US$1.2 bn 0.04

--- --- --- ---

Weaknesses

1. Lack of menu development 0.03 1 0.03 4 0.12

2. Publics perception of quality,

service, and cleanliness atMcDonalds units suffered over the

past years 0.08

--- --- --- ---

3. McDonalds ranked last out of 25

fast-food chains in a recent study of

drive-thru order accuracy 0.08

--- --- --- ---

4. McDonalds 5-year average sales are8.14 compared to 8.89 for the

industry 0.02

--- --- --- ---

5. Operations loss in Islands ofJamaica, Barbados, Bermuda 0.01 --- --- --- ---



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6. Long-term debt remains over US$8

billion 0.02

--- --- --- ---

7. Low personnel productivity 0.01 --- --- --- ---

8. Yum Brands return-on-assets of13.56 compared to McDonalds 9.74 0.05 --- --- --- ---

9. Website not user friendly 0.02 --- --- --- ---

SUBTOTAL 1.00 1.84 1.68

Key External FactorsOpen 200

New Stores

in China

Acquire

Krispy

Kreme

Opportunities Weight AS TAS AS TAS

1. Rise in population in China 0.05 4 0.20 1 0.05

2. Chinese consider drive-thrus anovelty where car ownership is

growing rapidly 0.05

4 0.20 1 0.05

3. Burger Kings market share amongquick service sandwich chains

dropped 10.95 percent in 2006 0.08

--- --- --- ---

4. Developing a Healthy Lifestyleprogram to attract health conscious

consumers 0.15

--- --- --- ---

5. Hispanic population has recentlyincreased 14 percent in the U.S. 0.05 --- --- --- ---

6. Krispy Kreme Doughnuts possibility

of going bankrupt 0.02 1 0.02 4 0.08

7. 6 percent increase in social shoppingareas (i.e. malls, plazas) 0.05 --- --- --- ---

Threats

1. Increased expansion of traditional

rivals 0.15

4 0.60 2 0.30

2. Yum Brands are the leading quick

service chains in China 0.05 4 0.20 1 0.05

3. McDonalds Europe sales dropped 1.9

percent 0.02

--- --- --- ---

4. Burger Kings sales growth is an

estimated 18.2 percent compared to

McDonalds 11.2 percent 0.05

3 0.15 2 0.10

5. Yum Brands variety of food and wide

range of prices for selections 0.04 --- --- --- ---

6. Wendys Frescata product line

increased sales by 3.2 percent 0.04 --- --- --- ---

7. According to National RestaurantAssociation (NRA) average menu

price increased by 3.2 percent 0.05

--- --- --- ---

8. Growing public awareness of fast

food being extremely unhealthy 0.15 --- --- --- ---

SUBTOTAL 1.00 1.37 0.63

SUM TOTAL ATTRACTIVENESSSCORE

3.21 2.31



14/15

K. Recommendations

The QSPM strategies assessed whether opening 200 new stores in China was morefeasible than acquiring Krispy Kreme. The QSPM distinctly recommended the

former option as the most advantageous, but, considering the low cost of Krispy

Kreme, it is recommended McDonalds undertake both strategies. Each store in

China is expected to cost US$10 million with the expectation franchisees will befound.

Krispy Kreme Net Worth

1. Stockholders Equity + Goodwill = 79 + 28 $ 107

2. Net income x 5 = $-42 x 5= $ NA

3. Share price = $2.73/EPS -0.94 = NAx Net Income $-42= $ NA

4. Number of Shares Outstanding x Share Price = 65 x $2.73 = $ 177

Method Average $142

L. EPS/EBIT Analysis

US$ Amount Needed: 2,142MStock Price: US$57

Tax Rate: 35%Interest Rate: 7%

# Shares Outstanding: 1,180M


Common Stock Financing Debt Financing

Recession Normal Boom Recession Normal Boom

BIT$2,000,000,000

$4,500,000,000

$7,000,000,000

$2,000,000,000

$2,500,000,000 $3,500,00

nterest 0 0 0 149,940,000 149,940,000 149,940,0BT 2,000,000,000 4,500,000,000 7,000,000,000 1,850,060,000 4,350,060,000 6,850,060

axes 700,000,000 1,575,000,000 2,450,000,000 647,521,000 1,522,521,000 2,397,521

AT 1,300,000,000 2,925,000,000 4,550,000,000 1,202,539,000 2,827,539,000 4,452,539

hares 1,217,578,947 1,217,578,947 1,217,578,947 1,180,000,000 1,180,000,000 1,180,000

PS 1.07 2.40 3.74 1.02 2.40 3.77

70 Percent Stock - 30 Percent Debt 70 Percent Debt - 30 Percent Stock

Recession Normal Boom Recession Normal Boom

BIT

$2,000,000,00

0

$4,500,000,00

0

$7,000,000,00

0

$2,000,000,00

0

$4,500,000,00

0 $7,000,00

nterest 44,982,000 44,982,000 44,982,000 104,958,000 104,958,000 104,958,0

BT 1,955,018,000 4,455,018,000 6,955,018,000 1,895,042,000 4,395,042,000 6,895,042

axes 684,256,300 1,559,256,300 2,434,256,300 663,264,700 1,538,264,700 2,413,264

AT 1,270,761,700 2,895,761,700 4,520,761,700 1,231,777,300 2,856,777,300 4,481,777

hares 1,206,305,263 1,206,305,263 1,206,305,263 1,191,273,684 1,191,273,684 1,191,273

PS 1.05 2.40 3.75 1.03 2.40 3.76


15/15

M. Epilogue

On February 8, 2008, McDonalds said sales were up 5.7 percent globally inrestaurants that had been open at least 13 months. That broke down to a 1.9percent increase in same-store sales in the U.S. in January from a flat December,

compared with sales in Europe that were up 8.2 percent. The company also sawincreased traffic in its Asia/Pacific, Middle East and Africa stores, with sales up 7.8

percent. The international numbers exceeded comparable sales growth for thecorresponding period in 2007 when European sales were only up by 5.8 percent

and Asia/Pacific, Middle East and Africa units were up 4.3 percent.

On February 7, 2008, McDonald's Japan, the nation's biggest fast-food chain,

posted a fivefold increase in annual net profit and predicted further growth as itopens new stores and refreshes its menu. McDonald's Holdings Co Ltd (Japan),

nearly half owned by McDonald's Corporation, forecast net profit would rise 28percent in 2008 as it plans to open 130 new stores and put strength into offering

low-cost menu items and promoting coffee. Net profit soared to 7.8 billion yen in2007, up from 1.55 billion the year before. The result was roughly in line with an

average estimate of 7.7 billion yen from analysts.

Among the reasons for McDonalds surge in Japan was the popularity of "Mega

Macs" four meat patties layered between three slices of bun with cheese andlettuce. That and new breakfast menus, along with expanding the number of 24-

hour stores, helped the company ride out its disclosure in November that it mayhave sold salads and other items past their expiration dates at as many as four

Tokyo outlets after employees switched product labels, although December salestook a temporary hit. For 2008, the company forecast net profit to rise to 10

billion yen. Analysts on average are predicting a profit of 9.7 billion yen. It wantsto open a total of 300 new stores by the end of 2010.

In Japan, McDonald's plans to put particular strength into promoting its coffee,which currently sells for 100 yen (US$0.94) a cup a fraction of the cost of a

Starbucks latte echoing the policy of the U.S. McDonald's, which is making apush into the coffee market by opening coffee bars in thousands of stores.


case 18 mcdonalds

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