McDonald’s Corporation in the New Millennium
May 30, 2006
Team 3
Futurists
Ashley Caldwell
Harold Goldsberry
Courtney Hamm
Brandon Johnson
Futurist Team
445-01
Summer 1
7
Introduction
“McDonald’s Corporation in the New Millennium,” a case in Marketing Management: Case Analysis by Teams, discusses the challenges and opportunities faced by McDonalds in recent years. The four main areas covered by the case included the fast-food industry in general, McDonald’s as a corporation, major competitors in the hamburger segment, and major competition in the non-hamburger segment. Since the case’s writing, there have been several important developments in each of these areas.
The Fast Food Industry
The trends occurring in the fast-food industry at the time of the case included new store designs, a focus by restaurants on the speed of drive through service, an increase in the number of non-hamburger options, more fast-casual restaurants, and an overall change in the eating habits of Americans. Store designs have continued to change, with restaurants such as Sonic Drive-In putting a new spin on its nostalgic appearance. Recent trends have been the introduction of the value menu that most fast food chains have adopted and expansion into international markets.
Restaurants are now focusing not only on drive through speed, but also on menu board appearance and order accuracy. The magazine Quality and Speed for Restaurant Success promotes a yearly drive-thru contest that ranks on these three categories, and accuracy levels tend to carry more weight than speed and appearance. Nationally, the average for accurate orders is 91.3 percent, up from 81.5 percent in 2001 (Baker).
Americans have gone through a huge shift in their eating habits that has left the fast-food industry struggling to catch up. The variety of food available to fast-food consumers is growing. Pizza and chicken chains grew much faster than burger chains in the past five years, but there are still nearly twice as many burger options as compared to the largest competitor, pizza. Non-hamburger sales, which accounted for 8 percent for fast-food meals five years ago, now account for around 11 percent (Gray). In fact, burger chains constitute half of the $100 million revenues of the American fast-food market. Industry analysts feel that this is due to “a more health-conscious American public” (Gorodesky and McCarron).
Companies have also realized that although Americans are focusing on healthier eating habits, diet foods have been a complete failure in the fast-food market. An example of this is the McLean burger, which failed to take off with McDonald’s customers. Restaurants are now luring in an older, health-conscious, and affluent customer base with deli-style sandwiches (Gray). Running contrary to the desire of Americans to eat in a healthy manner, larger portions seem to be attracting more business for the industry. McDonald’s has filled this niche with its Deluxe series (Arch Deluxe, Crispy Chicken Deluxe, Fish Filet Deluxe, and Grilled Chicken Deluxe).
In addition to the changes in eating habits of customers, the industry has also had to face a change in spending habits. “Value Pricing” is increasing gaining in popularity, with nearly all restaurants offering meal combos, in addition to the growing popularity of “dollar” or “value” menus. Not only is the amount of money that customers spend changing, but also how they spend it. Increasing numbers of fast food restaurants are now accepting credit or debit cards. The percentage of non-cash transactions rose from 3% to 12% in the past five years, and industry analysts expect increasing growth (Gray).
The fast-food industry has seen many changes in the location and appearance of restaurants. One example of this is in-store restaurants in chains such as K-Mart, Wal-Mart, and Target. Shoppers can new chose from options including store-specific restaurants such as Little Caesars, Subway, and McDonald’s. “Multiple-branding” has also gained popularity, where one or more restaurants share a store-front. Pepsico and Yum Brands, Inc. are in the forefront of multibranding, with pairings between restaurants such as Taco Bell, KFC, Pizza Hut, Long John Silvers, and A&W. Multibranded units tend to increase single-store sales by around $400,000, giving franchises greater ability to purchase prime real estate usually only accessible to bank and other high-income companies(Gray).
McDonald’s as a Corporation
McDonald’s has made many changes to its menu, layout, and interior design of its restaurants in recent years. These changes have contributed to a system-wide sales increase of 6% in 2004. Shareholders have profited through a 185 percent increase in dividends per share (“McDonald’s Corporation 2005 Financial Report”).
This increase in earnings is due to the implementation of many new marketing plans by the company. Several of the marketing plans are intended to follow in the footsteps of other fast food chains serving healthier foods. The release of documentary film “Super Size Me” in 2004 strongly influenced McDonald’s commitment to healthy alternatives. The film blamed McDonald’s for increasing obesity in the United States. In order to help combat these accusations, the chain immediately dropped the super size menu and began focusing on its healthy alternatives (“Trivia for Super Size Me”).
New menu offerings at McDonald’s have lead to an increase of nearly 2 million customers a day since 2002. These include Fruit Parfaits, Premium Salads, and new Premium Chicken sandwiches which offer the choice of fried or grilled chicken. These changes have caused McDonald’s to become the country’s largest distributor of apples, a feat that no other fast food restaurant has achieved (Piccalo). The company also made changes to Happy Meals, offering the option of milk rather than soft drinks for children. McDonald’s marketing plan also included embarking on a new advertising campaign focused on a healthy and balanced lifestyle.
McDonald’s stores are currently going through a makeover. In the past year, McDonald’s has begun to incorporate the tastes of a “younger” generation regarding design. It is implementing a clean, sleek design based around a Starbucks-style dining area. This redesign has already been implemented in new restaurants and approximately 20 stores in the Midwest. By the end of 2006, the company expects to have all stores in agreement with the changes and at least half of the stores remodeled (Gogoi).
Major Competitors in the Hamburger Segment
The three major competitors in the hamburger segment listed in the case are Burger King, Hardee’s, and Wendy’s. Competition has increased dramatically in the past three years, beginning with the head-to-head battle between Burger King’s Whopper and McDonald’s Big ‘N’ Tasty, each company’s top burger, in 2003. At one point, both companies had priced their burgers at $1 or less, causing them to lose money on every burger that was sold (Green). Although these sandwiches have returned to their normal prices, the after-effect of the “burger war” is still visible in the restaurants’ competing low prices.
The largest trend in the fast-food hamburger industry since 2003 has been the addition of the $1 value menu. The trend began with Wendy’s, but McDonald’s and Burger King quickly followed suit. Although prices continue to rise for consumer goods, the extreme competitiveness in the fast-food industry forces competitors to keep value menus. Richard Adams, the current president of the Franchise Equity Group, a company which owns around 400 McDonald’s franchises blames both the intense rivalry and the immense popularity of value menus on market over-saturation. He believes that there are simply too many fast food stores competing for the same customers (Green). This over-saturation in the domestic market has the potential to cause another burger war, resulting in a loss of revenue for all companies involved. Adams also believes that something as small as which item is on the value menu could create another burger war. “The easy answer is for McDonald’s to put the Big ‘N’ Tasty back on the dollar menu, then Burger King would return fire”(Green).
Another major trend particularly visible in the hamburger segment is the addition of healthy options including salads and fruit bowls. As a whole, America has become increasingly health-conscious in recent years. This has led to an increasing number of dieters and a desire to eat healthier foods. This trend eventually led to the oxymoronic term “healthy fast food.”
Wendy’s was also the first to add healthy options to their menu, with McDonald’s following close behind (Nguyen). Both restaurants are constantly updating and upgrading their salad offerings in an attempt to provide higher variety and quality. According to Bill Lamar, chief marketing officer for McDonald’s, over 500 million salads have been sold by McDonald’s since 2003 (Horovitz).
Another fast-food war has erupted between McDonald’s and Wendy’s, this time based on the health-food market. This fight recently reached a new level of competitiveness when McDonald’s released its Asian-themed salad. This salad is extremely similar to the Wendy’s Mandarin Chicken Salad, a menu item since 2003 (Horovitz). Wendy’s spokesman Bob Bertini claims, “It's another example of McDonald's attempting to take a page from our playbook” (Horovitz).
Both the introduction of value menus and the desire to obtain the business of health-conscious consumers are fueling the competition. Value menus are damaging all three companies’ financial heath. In addition, the competition between chains to attract the health-conscious consumer has become so intense that Wendy’s took the release of McDonald’s Asian Chicken Salad as more of a personal attack than a business strategy.
Major Competitors in the Non-Hamburger Segment
McDonald’s has three main non-hamburger competitors, which are Pizza Hut, Taco Bell, and KFC. All of these fast food chains are now owned by the Yum! Brand. Yum!’s main marketing strategy is the multibranding of restaurants. Multibranding occurs when two restaurants operate under the same roof, offering the consumer more selection and convenience. Yum! is the worldwide leader in multibranding with more than 2900 multibrand restaurants (“Multibranding: Great Brands”).
In recent years, all of the competitive, non-hamburger franchises have been growing under the Yum! Brand. Within the brand, a variety of sales levels exists. Taco Bell is currently in the lead and Pizza Hut has been last since mid 2005 (“Historic: Same Store Sales”).
The trends seen in the hamburger segment are also present in the non-hamburger competitors. Both Taco Bell and KFC have incorporated a value menu as well as more nutritional selections including salads and wraps.
Taco Bell’s newest marketing strategy is the “Fourth Meal,” which is targeting people who eat an addition evening meal after dinner (Cazares). This appears to be a good strategy because it targets the main consumer as detailed in the case. KFC’s newest introduction is “Famous Bowls,” a combination of mashed potatoes, gravy, sweet corn, cheese, and chicken. This is an attempt at combining existing products into a new product to gain new customers (“Survey Reveals…”). Pizza Hut suffers from decreasing sales, seemingly in contrast to its innovative marketing plans (“Historic: Same Store Sales”).
Recommendations and Conclusion
McDonald’s should begin to focus on quality rather than quantity, particularly in the competition-heavy domestic market. It should improve franchise standards, in addition to requiring higher franchise renewal fees. These standards increases should include, but not be limited to adding a selection of deli sandwiches, continuing with plans to create a more appealing interior, beginning to offer higher quality food, providing better service and cleaning standards, and focusing on creating and rewarding well-trained workers. McDonald’s should create a committee to oversee franchise standards, as well as an evaluation system. If an individual franchise is not meeting the standards set forth by the committee, they should immediately begin a pre-set resolution system.
McDonald’s should also continue expanding into foreign markets, particularly China, to increase profits. Finally, the company should focus more on research and development, allowing them to create new trends rather than copy them from their competitors.
Works Cited
Baker, Brian. “Why Accuracy Matters.” Quality and Speed for Restaurant Success. 24 May 2006. 2006. <http://www.qsrmagazine.com/drive-thru/>.
Cazares, Lizeth. “The Dinner Bell Rings at a Later Hour for Taco Bell’s ‘Fourth Meal.’” The California Aggie. 17 May, 2006.
Gogoi, Pallavi. “Mickey D’s McMakeover.” Business Week Online. 24 May 2006. 2006. <http://money.aol.com/bw/investing/canvas3/_a/mickey-ds-mcmakeover/20060509100909990001>.
Gorodesky, Ron, and McCarron, Ed. “Trends in the Quick-Service Restaurant Industry.” Restaurant Report. 24 May 2006. 2006. <http://www.restaurantreport.com/features/ft_trends.html>.
Green, Frank. “Hungry for a Fight? Fast-Food Chains Push Value Items But Recall Burger War Losses”. The San Diego Union-Tribune, Business, p. C1. Feb. 8, 2006.
Gray, Steven. “Drink In The Top 10 Trends In The Restaurant Industry.” Career Journal. 24 May 2006. 2006. <http://www.careerjournal.com/salaryhiring/industries/hotelrestleisure/20041229-gray.html>.
“Historic: Same Store Sales.” Yum! 24 May 2006. 2006. <http://www.yum.com/investors/sss04.asp>.
Mattson, Melvin R. Marketing Management: Case Analysis by Teams. Boston: McGraw Hill, 2005.
“McDonald’s Corporation 2005 Financial Report.” 24 May 2006. 2006. <http://mcd.mobular.net/mcd/90/13/35/>.
“Multibranding: Great Brands.” Yum! 24 May, 2006. 2006. <http://www.yum.com/about/multibranding.asp>.
Nguyen, Daisy. “Despite Healthier Options, Some Fast-Food Eaters Want Greasy Fare”. The Associated Press State & Local Wire, Business News. Dec. 13, 2005.
Piccalo, Gina. “Fries with That Fruit?” LA Times. 24 May 2006. 18 July 2005. <https://medialit.med.sc.edu/fries_with_that_fruit.htm>.
“Survey Reveals Shrinking Lunch Hour Leaves America’s Office Workers in a Mealtime Crunch.” Interest! Alert. 24 May, 2006. 2006. <http://interestalert.com/story/siteia.shtml?Story=st/sn/05170000aaa05aca.prn&Sys=siteia&Fid=RESTAURA&Type=News&Filter=Restaurants>.
“Trivia for Super Size Me.” 24 May, 2006. 2004. <http://www.imdb.com/title/tt0390521/trivia>.
Horovitz, Bruce. “McDonald's Asian-themed salad going nationwide;
Fast-food giant says newest offering could be chain's top seller”. USA Today, Money, p. B3. Apr. 18, 2006.
Futurist Team
445-01
Summer 1
7
Futurist Team
445-01
Summer 1
7