1. MC DONALDS ADVENTURE IN THE HOTEL INDUSTRY Team Ries: ChinthamAshish(008) IpsitaPradhan(019) ArokiaRexton(028) PranjalYadav(037) Ragavendra R.(038) Vaishnavi C.(056) Gaurav K Singh (096)

2. Introduction: In 1954, a milk shake seller Raymond Kroc in Southern California had got a franchisee license from the McDonalds brothers of San Bernandino to sell hamburgers, cheese burgers, French fries, soda and milk shake in their name across various parts of the USA. The success of the restaurants is one for the history books, as in the following years McDonalds popped up everywhere in the country and became an American icon. Expansion outside the US: 1967 Canada, Japan, Holland, Australia, and Great Britain. 1970s Germany, Hong Kong, Sweden, the Far East, and Latin America. 1976 Switzerland, 7200 employees. 1989 Russia, Poland, Hungary and the Czech Republic. 2005 30000 Restaurants across 122 countries. This success enabled McDonalds to go for IPO on the NYSE. Since, 1990 one can buy and sell McDonalds stock in Zurich, Basel, and Geneva. And in between, there was a drop in the stock from $48 to $32 per share; this triggered the top level management to rethink about their strategies. They concluded that every opening of a new McDonalds restaurant intruded upon the revenues of other restaurants already in operation. Diversification: To overcome this, they have decided to pursue on Diversification strategy. They have operated competency centers in each country of their existence to evaluate possible options of diversification. One such center in Switzerland had come up with the idea of Hotel Business, a person from hotel background being the genius behind it. Finally, they had decided to come up with two hotels in Swiss. The Zurich market, where McDonalds opened their hotel, had already been well serviced by leading hotel chains of the world such as Movenpick, Hilton, the Accor Group etc., McDonalds had their brand of service fast and friendly in place, tried to prove their excellence in this hotel business. Uniqueness of the Golden Arch: McDonalds had their uniqueness with features. To name a few, luggage handling being provided by a custom made trolley, every operation being handled automatically by credit cards reducing the human- human interface eventually reducing the time, and patented curved walls in the hotel rooms and a damn new futuristic shower in the bathroom. These all features made the customers feel delighted. 3. Customer Experience: Customer reactions after visiting and staying in the Golden Arch hotel, was not very pleasant. Many visitors who came to the Mc. Donalds restaurant did not notice the signage of the hotel. So, not many customers were aware that the hotel was situated in that locality. Quite often, there were no front desk employees to receive the customers and they were unfriendly. The beds in the room which were electronically operated looked more like a hospital bed. The customers found discomfort in walking on hard flooring as there was no carpet on the room floors. People complained about the bar ambience as they felt it was very unwelcoming and quite similar to a small city airport lounge. Scenery outside the bar was that of trees and grasses which made the customers feel like they were having a picnic rather than having a drink at a bar. The hotel aimed at reinforcing the brand at every turn. In fact, the headboards above the beds at the hotel had the huge arches which symbolized Mc. Donalds Golden Arches. The rooms had wireless keyboards for the customers to access internet, which was too advanced for 2001. On the whole, Four-star image did not correspond with the hotel. The hotel was situated in an isolated area, making the customers forcefully have Mc. Donalds food throughout their stay. To add on, the name Golden Arch did not sound too pleasant in German. Point of Parity (POP) and Point of Difference (POD): Using the brand resonance pyramid, it can be said that in order to create brand resonance with customers, -Brands need to deliver both functional performance and meanings and imagery that customers need -Customers react to these by forming evaluative judgments and emotional responses to the brand. The functional performance and imagery is related to the point of parity and point of difference established by the brand. Golden Arch hotel tried to differentiate themselves from others in design and use of technology. In Design, -They had a design of curved wall in rooms which they even got patented. -There were movable beds in the rooms and a futuristic shower. In Technology, -They had a keyboard in each room to operate T.V and internet -Automation for check in and check out -Custom made trolley so that customers could carry their own luggage. 4. Although all these attributes are different and highly deliverable, there is a question regarding their deliverability. In the comments made by the customers, we observe that either they did not notice these attributes, did not like it or did not consider it important. So, Golden arches failed to match the customer expectations for a four star in a few areas and while creating points of difference, it did not take into account, customer opinion/need. Porter 5 forces Analysis Threat from substitute Tourist and delegates on business visit had no option other than to stay in hotels as within the hotel sector the customers had wide variety of options Intensity of rivalry within industry Mc. Donalds Golden arch not only was in competition with the hotels with similar portfolio (i.e four star hotels) along with that they wanted to grab the market share of the worlds fastest growing hotels (of the elite group). To its disadvantage, Mc. Donalds Golden arch was relatively far from the airport and services were inferior to the other four star hotels. Bargaining Power of Customers Tourist were the major customers who preferred to stay at close vicinity to the airport as most of them are in transit state and have to catch flights. Airlines employee were the other major customers for any hotel in the area. They looked for long term relationship with the hotels and required rooms to be booked in bulk. Golden arch failed to establish a healthy relationship as there were very few instance of employee-customer direct interface interaction thus Golden arch was losing battle in terms of hospitality. Bargaining Power of Suppliers Travel agents were the middle men who use to direct customers to the hotels, however customer booking his accommodation failed to perceive and visualize Mc. Donalds as a hotel service provider in four star hotel category thus added to confusion and raised question mark about it services. Almost all hotels in Zurich were facing the scarcity of Human resource and Golden arch group of hotels too were the victim of it. Threat of New Entrants 5. Hotel industry saw a huge scope and opportunity to grow in Zurich which was supported by the fact that the no. of hotels were escalating at very rapid rate. Rate at which hotel industry was growing was 40%. Which was a threat to all other hotels including golden arch as room occupancy would be a question. A Life Cycle Analysis of the Swiss Hotel Industry Based on official data from the Federal Swiss Office of Statistics we compiled a time series of yearly data for the number of hotel and spa establishments in Switzerland. From this we were able to establish a series of the net entries defined as: Net entry = (Number of firms entering the industry) (Number of firms leaving industry) Another time series was established with the number of over-night stays. The total number of nights spent in a Swiss hotel per year can be considered the yearly output of that industry. In addition to this one could examine capacity, given by the number of available rooms or beds. It could be that excess capacity is non-monotonic over the life cycle. However, since we are mainly interested here in output, not capacity, we will not examine the latter. The graph shows the number of hotels in operation in Switzerland and the demand i.e. number of overnight stays. From the above graph we can say that the introductory phase of the life cycle took place in the years prior to 1880. During this period, the first major hotels were built, and the winter season was invented. The period 1880 1930 saw impressive growth. Following this initial growth, it appears that demand growth started slowing down a first time around 1910, already before the First World War. Prices might have got hit then. Though there were fluctuations in the curve due to the World War I, it did not affect the long term growth in the number of firms, or in output. In fact, ignoring these short 6. term fluctuations, we can say that the growth phase, of the Swiss hotel industry, lasted all the way to the early 1930s. In 1930, for the first time, a significant number of firms exited the industry. In fact, between 1933 and 1953, net exit exceeded 15% of hotels. The number of hotels grew steadily again for almost 20 years, before leveling off. Output, in terms of overnight stays, also reached its peak around 1972. Since then, the industry has experienced thirty years of stagnation. Quite logically, the number of firms would diminish from here, going from a peak of 8145 firms in 1974 to 5777 firms in 2001, a 30% drop. Over the thirty years since the industry peaked, a clear concentration has taken place, leaving fewer competitors fighting over a stagnant market. We would therefore argue that the industry is now experiencing the decline phase of the industry life cycle. From the production life cycle graph of the Swiss Hotel Industry we can clearly see that the growth has stagnated since 1972. McDonalds Golden Arch Hotel was established in 2000, during the decline period of the hotel industry where a few players are fighting with the stagnated market. Hammers vision of growth in the industry should have been reconsidered and an in-depth analysis should have been done before the approval for the Golden Arch Hotel by McDonalds. Internal Problems: In case of Golden Arch hotel, since it was a four star, its customers had some general expectations of comfort and service. Looking at the comments that the customers gave, -They did not find the level of comfort they expected. For example one customer complained about the carpeting in the room which was not comfortable. - In the bar, there was lack of proper ambience. - There were no recreational activities. -For food and beverages, there was a Mc Donald restaurant, but customers expected fine dining for a four star. -In a hotel business, service is very important for a four star, but it was not taken care of in the way the customer expected. There was one instance where there was no one at the reception desk for a customer, and even if she came late, she was rude to the customer. 1880 1930 1880 2001 1972 7. -Cleanliness was given paramount importance. While cleanliness is important, it is something expected as a POP and not an attribute that can differentiate them. BCG Matrix Analysis The BCG matrix is a chart that had been created by Boston Consulting Group to help corporations with analyzing their business units or product lines. This helps the company allocate resources and is used as an analytical tool in brand marketing, product management, strategic management, and portfolio analysis. McDonalds restaurant business had almost reached the saturation point as it is mentioned in the case that every newly opened restaurant in Swiss cannibalizes the profits of the existing McDonalds restaurants. The market growth rate was below 10 percent per annum and so it is classified as a low market growth. The relative market share ratio is assumed to be high as McDonalds was the market leader (information about the competitors was not given). Therefore McDonalds restaurants should have been in the Cash cow position in the BCG matrix. They typically generated cash in excess of the amount of cash needed to maintain the business. As mentioned earlier ,the industry growth rate in Swiss was declining and the industry itself was in the declining phase. The competition was also fierce and gaining market share was very difficult. Golden Arches Hotel remained in the low market share and low industry growth rate cell situation which brings it to the Dog cell of the BCG matrix. Since it was not of any strategic importance to McDonald and it was likely to affect the parent brand name, it was sold out at the right time. Ansoffs Matrix: Diversifica- tion Better liquidate it; it might hurt the parent brand 8. The corporation has already exploited all four cells of Ansoffs matrix: Market Penetration McDonalds saturated its home market (the USA) a number of years ago Market Development The company has managed to duplicate its fast-food success worldwide Product Development From burgers n fries to breakfast, from salads to ice cream, the corporation has innovated in almost every edible direction Diversification McDonalds control land holdings and own processing facilities, logistics operations, franchising/financing operations, training facilities, and now hotels. Lack of Clarity in STP Segmentation From a price perspective McDonalds could match the segments of Mid-price, Economy and Budget. The segment chosen has a high impact on the price because Hammers himself told about this. Targeting McDonald can make use of the advantage that it is recognized as a family restaurant and attract that kind of consumers to the hotels. Positioning and Naming The graph below shows Mc Donalds is known for good Quality at cheap price. But it is overriding its core competency by catering into hospitality industry. To avoid the Parent Brand Dilution it named differently for the hotel chain as The Golden Arch. But the name symbolizes Mc. Donalds. Further it sounds different in German as human posterior. 9. Profit Model: According to the profit model of the Golden Arches hotel, the total investment in the venture is 32,000,000 SFr. The investment was brought in by 20% equity and the rest 80% was a 3 year mortgage loan at 3%. Around 28.8 million was invested in the hotel and the rest was invested in the McDonalds restaurant built adjacent to the hotel. The restaurant was doing fine and was able to break even easily. The analysis focuses more on the financials of the hotel. As it was a 3 year loan, Golden Arches had to pay an annuity of 8,145,339.57 SFr. The profit and loss statement accounts the interest repayment. The principal amount which lies as a long term liability in the balance sheet had to be paid in the next three years. In order to pay it back Golden Arches had to earn a PBT (tax rate was not mentioned in the case and so PAT cannot be calculated) of SFr 7,454,139 in the 1st year and SFr 7,677,763 in the 2nd year and SFr 7,908,096 in the 3rd year. Given the liability, Golden Arches can break even only if it operates at its maximum capacity of 7841 rooms a year and at 100% occupancy rate( actual occupancy- 71% ) and the average cost per room should be around SFr 170.5 which is higher than the rates applied to individual guests who pay the highest rent of SFr 161. The model was unrealistic unless cash flowed in from the parent company to bail out Golden Arches. McDonalds realized that in that kind of competitive environment it was not possible to break even and so they sold it off in a year and a half since it started operating. Key Recommendations: Target Market: Travel vacationers and lodging guests.Age 0-50 with children. Prefers to travel by car and enjoys various kind of entertainment Segments: The Mid-price and Economy segments. Focusing much on families, building on the parent brand attracting consumers from both segments. Hotel Features: In-room appliances, Internet, Newspapers, breakfast/lunch restaurant with recognizable McDonalds 10. products. Location: Currently located near highways, in vicinity of theme parks, golf courses, and shopping malls. Be Unique: -McDonald's can incorporate their Play Place and other game room activities like coin operated arcades. -Not only does provide entertainment, but it also provides revenue from guests that if they were in other hotels would not spend more than the room fee. -Include a unique dining experience that includes much of what they provide already while adding multi- cuisine food in the menu. -Mc Ds Golden Arch shall give a reason to look forward to for the customers. Alternatives: (This or That!) Mc Donalds image in the customers eyes was clear: It was a family restaurant where you get cheap fast-food, quick service in a clean environment. So keeping in mind the above fact; Mc D could exercise one of the two options: Option 1: (2 or 3 star Hotel) If the Mc Donalds want to continue to serve the economy, middle-income customers, it should open a two or three star hotel. The key points to be addressed include: Focus on families with children Low-cost budget Economy class Use what works in food Industry for McDonalds and use the family oriented and value based business model to create a unique hotel experience that everyone could enjoy. 11. Limited amenities It should only include the services essential for a customer; so the customer would not feel he has to pay a premium for unwanted facilities. Option 2: (4 Star Hotel under a different Brand) Expectations of customers entering into a four-star hotel are different than that of the customers going to a two or three star hotel. McDonalds brand doesnt square with the image of a four-star hotel; so it should open a hotel with a different brand name. In this case, Mc Donalds new four star hotel would be a endorsed brand. Keeping in line with the four-star image Mc Donalds would be required to re-design everything including: Brand logo Interior Design Ambience Open a Multi-cuisine restaurant Inclusion of Customer Engaging Activities Trained Service staff What happened to Golden Arch Hotel? By publicizing the venture mainly inside Switzerland and using the name Golden Arch rather than McDonalds, the company avoided damage to the corporate brand. Moreover, the real estate investment did not result in a significant loss: The two hotels are now managed by Rezidor SAS Hospitality, which runs them under its Park Inn brand. While a P&L statement was never made public, the estimated operational losses were insignificant to the McDonalds portfolio. The decision to exit the hotel business after less than three years represents a further limitation of the companys risk. _____________________________THANK YOU__________________________________________