Carnegie Consulting Strategic Solutions for Business Improving Customer Satisfaction and Preserving the McDonald’s Brand Prepared for: ! Table of Contents Executive Summary ......................................................................3 Company History...........................................................................3 Internal Rivalry...............................................................................3 Substitutes and Complements ......................................................5 Entry ..............................................................................................6 Buyer and Supplier Power ............................................................7 Strengths, Weaknesses, Opportunities and Threats ....................9 Financial Outlook.........................................................................13 Strategic Analysis: Improving Store Performance ......................14 Conclusion...................................................................................17 ______________________________________________________________________________ Carnegie Consulting 425 N. College Ave. s Claremont, CA 91711 -2- Executive Summary Competition for fast food customers is fierce. For the purposes of this report, we discuss the fast food industry, focusing on the Southern California region. The Southern California region was selected specifically for two reasons: First, Southern California often acts as a bellwether for food trends nationwide. Second, inter-brand competition is especially intense in Southern California because of the variety and high concentration of restaurants. Because of this structure, internal rivalry among fast food establishments has a tremendous effect on restaurant profitability. Similarly, substitute goods are plentiful and growing in popularity, and therefore represent a threat to current and future earnings. Entry does exist; however it is usually limited to the local level, decreasing its power. Both buyer power and supplier power are low in the fast food industry. Our analysis of the fast food industry can be summarized in the following chart: Summary of Five-Forces Analysis of the Fast Food Market Force Threat to Profits Internal Rivalry High Entry Low to Medium Substitutes and Complements Medium Supplier Power Low Buyer Power Low Improving QSC and offering competitive prices are necessary steps for McDonald’s customer retention and brand reputation. Carnegie Consulting therefore recommends that McDonald’s pare down its menu size in an effort to improve quality, lower labor costs, and reduce wait time. Further, we encourage McDonald’s to consider devolving some menu decision power to local restaurants in an effort to create efficiency gains and maximize profits using local area knowledge. McDonald’s corporate management has taken some important and meaningful steps towards improving QSC at McDonald’s restaurants, but we believe corporate management has not properly evaluated the long-term effect of underperforming restaurants. We therefore urge that stronger action be taken to monitor franchises and enforce McDonald’s QSC standards. Company History Richard and Maurice McDonald opened the first McDonald’s restaurant in 1948 in Southern California. Ray Kroc, the founder of the McDonald’s Corporation opened his first McDonald’s in Des Plaines, Illinois in 1955. In the 1950s franchising consisted mostly of assigning geographic territories in exchange for fees. Kroc believed that the idea of geographic monopolies with multiple outlets operated by a single owner undermined the control McDonald’s could exert over franchisers. Rather, he assigned only one franchise at a time, thus ensuring consistency in each store’s output. By 1956 there were 12 McDonald’s Restaurants, and by 1960 there were 228. ______________________________________________________________________________ Carnegie Consulting 425 N. College Ave. s Claremont, CA 91711 -3- Ronald McDonald was created in 1963. A testament to McDonald’s amazing marketing power, Ronald McDonald is now the second most recognizable character in the world (after Santa Clausi). Other famous creations include the Big Mac in 1968, the popular Egg McMuffin in 1973, and the Happy Meal in 1979. In 1965 McDonald’s stock went public and it was added to the S&P 500 in 1985. Since its initial offering the stock has split 12 times (most recently in 1999). 100 shares in 1965 would have cost $2250, but by now would have grown to 75,000 shares worth $2.8 million. McDonald’s reigns supreme as the largest food-service retailer in the worldii. 1970 marked the first international expansion of McDonald’s (into Costa Rica). Since then 3500 restaurants have been added in Japan and 164 in Africa. Restaurants were opened in Russia and China in 1990. By 2000, McDonald’s was present in 118 countriesiii. Currently, 80% of McDonald’s restaurants are franchises, with licenses costing around $45,000 per outletiv. In 2000, income from franchising fees totaled to $63.7 million. Beginning in 1956 McDonald’s also began to purchase real estate, which it leases to franchisees. Today McDonald’s owns the land at approximately 40% of its restaurants. This has had the duel effect of increasing both McDonald’s wealth and its control over its franchisees. Despite its previous rapid growth and innovative product development, today some analysts view the future of McDonald’s with an increasingly skeptical eye. Lately the company has been affected by many adverse developments. A mad cow disease outbreak in Japan dramatically slowed sales in all of Asia. Though the company believes it will recover, significant resources must be expended to reassure customers of McDonald’s beef safety. Also abroad, implacable political and ideological resistance to McDonald’s presence remains strong in many countries, and the resulting bad publicity is a real threat to brand image both domestically and abroad. Domestically, low customer satisfaction ratings have been the focus of management’s efforts, and it is still unknown whether management’s plans will be sufficient to reverse the loss of customers. Labor issues have been plaguing many McDonald’s (and other fast food establishments) as well. A booming economy has made low-cost labor scarce, and this puts upward wage pressure on McDonald franchises. Trends away from unhealthy food are also adversely affecting McDonald’s, although it is unclear whether this represents a permanent shift away from fast food. Further, because many demand characteristics vary by geographic region, McDonald’s has had difficulty directing local marketing campaigns effectively. Overall, McDonald’s has had a storied history, and has overcome numerous problems equally as vexing as those it encounters today. But today’s problems are real, and they are serious. Carnegie Consulting believes that through the implementation of the plan we present in this report, McDonald’s will be able to recover its market share and delight its customers well into the future. Internal Rivalry McDonald’s competes in the fast food market. The product in this market is food; either a meal or a snack, individual or family-size. McDonald’s Standard Industrial Classification ______________________________________________________________________________ Carnegie Consulting 425 N. College Ave. s Claremont, CA 91711 -3- (SIC) number is 5812-10. Competitors are other restaurants selling quick, made-to-order food, including but not limited to burgers, fries, pizza, fried chicken, sandwiches and tacos. National rival food chains can be grouped in the following categories: a) Burgers: McDonald’s, Burger King, Wendy’s, Jack in the Box, Carl’s Jr. / Hardee’s b) Pizza: Round Table, Domino’s, Little Caesar, Papa John’s, Pizza Hut c) Chicken: Kentucky Fried Chicken, Popeye’s Fried Chicken d) Mexican Food: Taco Bell e) Healthier Alternatives: Quiznos, Subway, f) Regional brands: Baja Fresh, In-N-Out, Del Taco g) Local establishments: Any non-national rival restaurant. This report which is prepared for corporate McDonald’s will focus on the first five of these categories. Store or regional managers should deal with competition from local establishments. McDonald’s has 34.7 percent market share in the U.S. hamburger/sandwich chain market, and 43.0 percent in the U.S. fast food hamburger chain market.v Under the first market definition, close rivals are Burger King with 15.8 percent, Taco Bell with 9.6 percent, Wendy’s International with 9.5 percent, and Subway with 5.9 percent.vi We calculate the HH-Index as 1,722 for the hamburger/sandwich chain market.vii This is the “numbers-equivalent” of approximately six firms of equal size. Participants in this market engage in intense product and price competition. Marketing efforts emphasize product and price simultaneously (e.g., “$1.99 flame-broiled Whopper”). Historically, competition has been so fierce that each fast food restaurant is forced to offer at least one hamburger selling for less than $1. Not surprisingly, there has been no history of cooperative pricing. Raising prices tends just to encourage greater marketing efforts emphasizing low prices at other chains. Prices at corporate chains cannot be adjusted quickly or unobservably – but prices can be adjusted faster in chains with franchise-models. It is difficult for firms to retain brand loyalty because customer switching costs are low. It is not difficult for an unhappy customer to frequent a different restaurant chain. Customer loyalty is weakest in the burger group of the