Case Group A - Market Opportunity Analysis
Teaching notes
for marketing management cases
Case Group A
Market Opportunity Analysis
1. McDonald’s in the New Millennium
Teaching Notes
Synopsis
This case discusses McDonald’s Corporation and the situation it faced in 2001. After many years of doubledigit growth in sales and net revenue, the company’s sales grew only 1.12 percent and net revenue dropped 17.2 percent from 2000 to 2001. The company is the market leader in the burger segment of the fast food industry and is closely identified with burgers and fries, foods that are no longer considered healthy.
Most students will be very familiar with McDonald’s and many of its competitors. Discussion of the case is generally quite lively. The discussion could begin by asking the class if anyone has ever worked at McDonald’s and to describe the experience.
Teaching Objectives
1. To help students recognize how the changing environment impacts companies, even market leaders like McDonald’s.
2. To give students the opportunity to develop strategy in a mature market with strong competitors.
3. To help students understand how changing customer tastes are reflected in changes in industries.
4. To demonstrate limitations on a company’s ability to adapt to changes in customer tastes and preferences.
5. To offer students the opportunity to analyze how company strategies impact their tastes and preferences.
Teaching Suggestions
This case can be taught in a variety of ways:
1. Taught in the traditional manner where the questions at the end of the case are assigned for discussion in class;
2. It can be assigned to a team of students for a written report and presentation to the class;
3. Each of the major competitors in the case can be assigned to a student team for presentation of a SWOT analysis and recommendations. This can be done before class so teams can do research on their assigned company. Alternatively, students can be put in teams in class, meet to do the assignment for a half hour, and then present their analysis and recommendations of the assigned competitor to the class. The instructor can then draw conclusions about the state of the industry after the presentations.
Discussion Questions
1. How are customer tastes changing in the fastfood industry? What impact do these changes have on McDonald’s sales and net income?
It is useful to start discussion of this question with information from the case which suggests that many customers, both younger and older adults, are seeking better quality, healthier food and are willing to pay more for it. The case also states that consumers are eating out less often. These trends obviously are not favorable for McDonald’s since it has a reputation for serving inexpensive, tasty food that is not especially healthy. However, it is also useful to examine company sales and net income shown in the case exhibit and below:
2001 / 2000 / 1999 / 1998 / 1997Total Systemwide Sales (in millions) / $40,630 / $40,181 / $38,491 / $35,979 / $33,638
Net Income
(in millions) / $1,637 / $1,977 / $1,948 / $1,550 / $1,642
Clearly, while these trends are against the company, somebody is still eating nearly $40 billion worth of McDonald’s food! It is useful now to discuss whether and how often students eat at McDonald’s and what their attitudes are toward eating there. Likely, many of them will say that they want to eat healthier food but they are busy and the convenience, low prices and tasty food at McDonald’s and other fast food restaurants still keeps them going there. It is also useful to ask what they order when they go. Likely, many will say they order chicken sandwiches or salads because of their concerns about eating healthier foods. Students can also be asked about how much they know about nutrition. Likely, many students know very little about it but assume that McDonald’s food is bad for health. (Some nutritionists feel McDonald’s food is not as unhealthy as many people believe, but it does contain high levels of fat.)
It is also useful to look at the percentage changes in system-wide sales and net income across the years in the exhibit to see what impact consumer trends are having on McDonald’s (students can calculate these from the exhibit, e.g., 2001 sales minus 2000 sales divided by 2000 sales equals percentage change in sales).
Percentage Changes / Sales / Net Income2000 to 2001 / 1.12% / -17.20%
1999 to 2000 / 4.39% / 1.49%
1998 to 1999 / 6.98% / 25.68%
1997 to 1998 / 6.96% / -5.60%
Clearly, while McDonald’s total sales are growing, its percentage growth is slowing down. Also, its net income percentage decreased in two of the last four years, significantly in the last year. Thus, changes in customer tastes, among other things, are adversely affecting McDonald’s sales and bottom line. This is a major issue in the case. What should McDonald’s do to grow and prosper as it did for many years previously? Of course, it is worth discussing whether the company should be expected to grow and profit as it did previously, given the maturity of the industry and changes in the market.
2. How well are these changes in customer tastes and preferences being reflected in competitive strategies in the industry?
While many of the strategies are the same across segments, it is useful to break the industry down into the groups and strategies listed below. Each strategy can be discussed with the class to evaluate whether it is consistent with changes in customer trends and whether it is likely to be effective in generating sales and profits. Students can be asked whether or not they buy the new products offered and whether the strategies affect them.
Hamburger Segment
· increased effort to sell chicken sandwiches, chicken strips, chicken nuggets (e.g., McDonald’s Chicken Select, Burger King Chicken Whopper)
· increased effort to sell salads (e.g., Wendy’s Garden Sensations)
· increased emphasis on promoting the image of healthy food
· development of larger, higherpriced burgers to increase meal size and average check size
· frequent promotional deals including value meals, coupons, discounts, giveaways, contests, games, sweepstakes to create selective demand
· frequent new product offerings, both permanent and limited time
· updating the external and internal appearance of the restaurants to look more attractive
· speeding up delivery at drivethroughs to take advantage of faster growth in this market
Traditional Nonhamburger Segment (Pizza Hut, KFC, Taco Bell)
· advertising and promotional products designed to appeal to families and kids (e.g., KFC’s new “Kids Laptop Pack” meal program)
· offering new products and new tastes to attract burgerweary customers (e.g., Pizza Hut’s very successful P’Zone)
· offering more highpriced, better ingredient items (e.g., Taco Bell’s Grilled Stuffed Burrito, Chicken Quesadilla)
Newer FastCasual Segment
· offering better quality food at higher prices than traditional fast food
· offering better ambience and surroundings in the restaurants
· offering faster service than traditional sit down restaurants
· offering more trendy image than other fastfood restaurants
Other Fast Foods Segment (deli sandwiches at supermarkets, convenience stores, gas stations as well as microwave and oven ready foods)
· offering better quality sandwiches and other foods, in some cases
· offering greater convenience since sandwiches can be purchased while buying other products
· microwave and oven ready foods offer convenience and better quality at reasonable prices for people at home when they do not want to go out for food
Conclusion
Overall, the industry is responding well to customer tastes and preferences. However, the industry is mature and some competitors, such as Hardee’s, appear vulnerable. Fierce competition for market share leads to difficulty in creating competitive advantage as innovations in strategy are quickly matched. Most competitors are doing much the same thing, focusing on new products and promotional deals. However, what else can they do as the market is saturated with fastfood restaurants and advertising alone is not likely to get customers to switch.
3. What are McDonald’s strengths and weaknesses and what conclusions do you draw about its future?
Many of these are referred to in the case. However, some of them are not and require students to think about the company and its position.
Strengths
· the number one company in market share with $40 billion in sales!
· a reputation for consistency of product offering, tasty food, reasonably priced, quickly served (NOTE: Although not mentioned in the case, McDonald’s French fries are consistently rated by customers as the best in the fast-food industry)
· 30,093 restaurants throughout the world (in exhibit) in some of the best possible locations
· a preferred position with many children and families when they seek fast-food
· quality management that adapted to the market with emphasis on chicken sandwiches and salads, updating and improving the appearance of its restaurants
· a positive corporate image from Ronald McDonald House and Charity Christmas Parade
Weaknesses
· the slowdown in sales and profit growth threatens the company’s value to investors
· the company is not well positioned to compete in the healthy food market given its identity with burgers and fries
· the company is not well positioned to compete in the fast growing, fastcasual market given its identity
· as the top fast-food chain, McDonald’s is a frequent target for nutritionist and environmentalist attacks
· it is competing in a fiercely competitive industry
· it is competing in an industry with high employee turnover, often over 100% per year
Conclusion
McDonald’s is at the top of the burger segment of the fast food industry, has had a history of strong management, and does many things very well. It is unlikely that its restaurants will be abandoned by customers, yet there is clear evidence that part of the market is concerned about food quality and nutrition and is turning away from McDonald’s fare. It also seems unlikely that McDonald’s, as an icon of burgers and fries, will be able to change customer perceptions that its food is really healthy.
4. Should McDonald’s develop a separate strategy for the heavy user segment of the fast-food industry?
The case indicates that heavy users of fast-food comprise 20 percent of customers but account for 60 percent of all visits. Some of these visit 20 times per month and spend up to $40 per day in them. Heavy users have been described as single males under 30 years of age, who have working class jobs, love loud music, don’t read much, and hang out with friends.
Heavy users are clearly a key for being a successful chain given that they account for a large percentage of sales and profits. However, creating an overt strategy to attract them has huge risks. For example, nutritionists would likely complain that McDonald’s is trying to get people who already eat too much junk food to eat even more of it. In addition, these people may not like being targeted since they may be sensitive about their eating habits, both in terms of the quantity and quality of food they eat, and don’t want to know how frequently they eat junk food. They are also sensitive to society’s negative view of fast-food.
Burger chains are sensitive to the issue and rather than refer to these customers has heavy users, refer to them as core customers or “most often” customers. Common strategies used are such things as two burgers for two bucks (and multiples thereof), tripledecker burgers, Biggie meals and Supersized meals.
McDonald’s uses these strategies successfully and likely should not promote further specifically to this market with things like frequent patron offers or a free burger for every four purchased. As long as it offers good value to these customers, the company is likely to continue to get its share of this market.
5. What should Jack Greenberg do to grow sales, profits, and market share at McDonald’s?
At this stage, students should have a good understanding of McDonald’s position. It is clearly a giant in the industry and a great company but is in a fiercely competitive, mature market with changing customer tastes.
McDonald’s development of the McCafe’s chain (it also has interest in the Boston Markets chain, but this is not stated in the case) may be a good strategy for taking advantage of a move to more upscale food and beverages and the recent success of coffee houses like Starbucks. However, it should be clear that much of McDonald’s previous sales growth was fueled by the increase in the number of restaurants it opened, both domestically and globally. As shown in the exhibit in the case, it had 22,928 in 1997 and 30,093 in 2001, a 31 percent increase. It is likely reaching market saturation such that this strategy may no longer be effective.
Within the hamburger segment, McDonald’s can continue to offer new products and new promotional deals to attract customers to its restaurants. Students should be asked to list and evaluate at least three new products and three new promotional deals they think would be successful.
There would also seem to be room in the fastfood industry for chains of restaurants that offer other types of food. Students could be asked for their thoughts on fastfood chain concepts such as
· a national chain featuring fast pasta and salads
· a national chain featuring fast Asian food
· a national chain for fast seafood dishes that could compete with Long John Silvers
Epilogue
While McDonald’s did have a slowdown at the time of this case, the company successfully recharged its sales and profit growth. In 2002, 2003, and 2004 its total revenue grew to $15.4, $17.1 billion, and $19.06 billion respectively. Although its net income dropped to $893 million in 2002, it rebounded to $1.47 billion in 2003 and $2.28 billion in 2004. The company rebuilt and refurbished a number of its restaurants and added some healthier and more expensive items to its menu. It enhanced convenience by staying open longer—in some cases 24 hours a day, began accepting debit and credit cards in many countries, and offered customers wireless internet access in more than 6,500 restaurants worldwide. It continued to increase its number of system-wide restaurants from 30,093 at the time of the case to 31,461 in 2004, also accounting for sales and profit growth. Its stock price tripled from the time of the case to 2004, and Advertising Age recognized the company as 2004 Marketer of the Year.
One interesting way to illustrate how successful McDonald’s has been in its history is to examine the growth of its stock value. If an investor bought 100 shares of McDonald’s in 1965 for $2,250, the investment’s value would have grown to $2.4 million by December 31, 2004—impressive growth by any standard!