McDonald’s leads the food service sector globally, with its more than 70 million customers in more than 100 countries. It relies on 35,000 locations and uses a franchise model to sustain growth globally. The parent company owns 20 percent of the restaurants, while the remaining share belongs to independent businesses (McDonald’s, 2014).
What kind of market does the company belong to?
The market of McDonalds’s products is perfectly competitive because there are many rivals, who have equal access to the customers. At the same time, customers have adequate information about the products offered by all companies in the industry, and they are free to pick any of the products they see fit.
Prices of the products depend on a business’s strategic positioning in the market. At the same time, prices are sensitive to any deviations from the market equilibrium position.
For example, if the price of a McDonald’s burger increases substantially to be different from the ordinary price of burgers in a particular country, then consumers will prefer to buy burgers from the competing brands and shun the McDonald’s brand.
McDonald’s belongs to the quick service restaurant industry, specializing in the delivery of easy to grab food menu items.
What is the Price Elasticity of Demand for the goods that the McDonald’s sells?
The price elasticity of foods and nonalcoholic beverages offered by the company is generally under one. Additionally, the inclusion of food away from home in the analysis brings the elasticity towards one.
Typical scores for the price elasticity of fast food restaurant food are 0.7 to 0.8. An interpretation of this elasticity is that the demand for the food or beverage is very sensitive to price changes. If prices increase by one percent, then the expected reduction in demand will be 0.8 percent to 0.7 percent.
Is the demand elastic or inelastic?
The demand for McDonald’s products is elastic. Changes in price, caused by the company’s decision or regulatory influences such as tax and subsidy policies, can lead to fluctuations in demand in the short term. Customers do not have to invest in the brand for long for them to be able to derive value.
Moreover, they do not build significant attachment to foods and beverages offered, such that they cannot cut their purchases or shift to the substitute products. In fact, the presence of many alternatives contributes to the elasticity of the demand for the company.
The elastic nature of demand for the company’s product places it in a risky market position. At the same time, the quality of food served by the company is a source of concern for many stakeholder groups that seek to influence healthy food choices in society.
Therefore, McDonald’s business remains vulnerable to factors that affect prices of its goods and the demand, as a result.
Increased focus on healthy eating habits in society caused by a high prevalence of lifestyle diseases, such as diabetes and obesity, is causing consumers and health bodies in different countries to demand restrictions on the marketing of fast food restaurants and imposing taxes on the business to compensate for their negative influence on society.
However, the application of recommendations is different in various countries (Andreyeva, Long, & Brownell, 2010). McDonald’s is yet to face a radical shift in policy that severely handicaps its business strategy, but the company is aware of the potential danger that such as regulatory move would cause to its profitability.
Overall, McDonad’s products face different effects of technological changes, social factors, the retail environment, government policies, and changing economic factors in the various countries where the company operates.
What kind of income elasticity the product(s) of the company face?
The foods and drinks offered at any McDonald’s restaurant are normal goods whose demand and supply curves follow market conventions. A rise in the price influences an increase in the supply, when demand remains the same or increases.
On the other hand, as the price elasticity of demand showed, a rise in price corresponds to a decrease in demand when other things in the market remain constant. Consumers increase their consumption of products from McDonald’s when their income increases.
At the same time, during harsh economic conditions, when people lose jobs, or experience a slowdown in their businesses and have less disposable income, they only purchase essential quantities or skip some purchases. Therefore, the income elasticity of the products sold by McDonald’s is elastic.
However, for particular foods like burgers that fill the dollar menu, considerable increases in consumer incomes only increase the consumption to a certain level before consumers choose other pricier menu items perceived for their healthiness. In this case, the burger becomes an inferior good and its income elasticity becomes inelastic.
Who are their closest competitors?
The closest competitors include Burger King Worldwide Inc., which offer various fast food menu items at an affordable price for most consumers, Subway restaurants, KFC, and Wendy’s Co.
Both Burger King and Wendy ventured into the breakfast segment of the market as a way of differentiating themselves, and to increase their rivalry with McDonald’s. They also introduced menu items that are locally customizable to give consumers better matches for their tastes (Patton, 2014).
Other than the main global competitors, there are country-specific competitors in every nation where the company has a presence.
Are there any close substitutes or complements?
There are several products whose cross elasticity of demand with respect to the products offered by McDonald’s is positive. Consumers can take on the substitutes when they do not have or do not want to purchase McDonald’s products.
At the same time, the company’s products have compliments. The beverages sold at McDonald’s restaurants have substitutes in the form of other beverage brands sold by other restaurants. The price of a coke at McDonald’s is about the same as the price of a Pepsi at Burger King.
McDonald’s sells numerous brands within particular beverage ranges, such as coffee or tea and soda. This includes its branded foods and drinks, which consumers can quickly find replacements in its rival stores. As for burgers and other foods, there is a slight difference in the ingredients used to make them.
However, the taste of a burger and the size at a McDonald’s restaurant are similar to those available in other restaurants, such as KFC and Subway (Landsburg, 2014).
Thus, customers can form preferences based on the location of the restaurant and brand association. However, they are free to pick a McDonald’s or any of its close competitors if they depend on a pure product basis. The company does not encourage customers to bring foods from external sources into its restaurants.
Therefore, it does not have compliments. The exception is when clients take food from McDonald’s and go to eat together with food or drinks from other outlets. In many cases, the complimentary product will be a drink or food item that McDonald’s does not offer.
However, a significant percentage of consumers do not rely on complementary products. They will either pick a McDonald’s product, such as its hamburger or one of its close rivals.
Is the demand for the product of the company growing?
The demand for McDonald’s foods and beverages has been plateauing for the last few years as rivals catch up with the company, and negative performances of economies affect it. However, the company still registers marginal growth as the overall demand for fast foods around the world increases.
The main reason for the increase is the rise in population and the growth of the middle-income class in many emerging economies. A big influence for change in the demand is consumer preference. Many people are becoming aware of the health effects of eating junk food.
Therefore, they are watching their fat and calorie intake. The negative publicity of McDonald’s foods does not make the matter better.
The brand associates with bad food choices and consumers opt to look for rival restaurants to find healthy food, despite the interventions made by the company to increase healthy food menu items in its restaurants.
As a result, the company has to invest more money in its promotion strategy to ensure that it continues to attract new customers and retain the existing ones (Hirschey, 2008).
Nevertheless, a focus on the dollar menu has been a key driver of growth for McDonald’s. The company seeks to provide consumers with the most affordable food in the market. It offers a dollar menu item that includes the essential daily nutrition elements for individuals.
Thus, consumers who are busy and need a quick meal prefer to pick items from the dollar menu (The Associated Press, 2013). At the same time, those looking for the most affordable meal associate McDonald’s with inexpensiveness and frequent its restaurants.
Therefore, the primary promoter of the increase in demand for the company’s products is the changing lifestyles of consumers, which make them busy. Moreover, the increase in the costs of living compels consumers to look for value for money deals when visiting restaurants.
Growth in demand for McDonald’s faces two challenges. The first one is the reputation of the brand as a poor health choice for consumers. That reputation was further tarnished by reports showing that the company relied on wrong ingredient choices and used expired ingredients in its foods.
Although the company has done several internal tests to correct the problem, the public perception of the brand has already suffered. Regulators also investigated the restaurant for sanitary standard violation across the European and Russian market.
The restaurant business is sensitive to sanitary issues. Consumers expect to dine in premises that meet the minimum threshold of cleanliness. Therefore, any news of sanitary standards’ violation is going to affect the demand for the company’s products adversely.
Despite the grave nature of the adverse effects highlighted above, McDonald’s can overcome them in the long-term, as it continues to implement strategies that enhance its value to consumers.
A more persistent problem in the company is its maturation. In many markets, the industry has matured, and there is no more room for growth. There are enough restaurants competing in the industry, and the only way for companies to expand is by merging or acquiring their rivals.
Otherwise, companies are only able to introduce few restaurants per year, and the marginal return on the new restaurants is less that optimal.
In the United States, in particular, the growth of McDonald’s and the rival businesses has stagnated in terms of the number of new restaurants opened annually. At the same time, sales for each restaurant are either the same or slowing down in their growth.
Can the labor force of the company be trained further to increase productivity and lower cost of production?
It is difficult to train the labor force to raise productivity because the practice is standardized. Employees are already trained in customer service delivery and specialized in various aspects of restaurant operations. They can serve in different departments in the same restaurant or various restaurants.
They are aware of customer demands, as well as operational needs of the business. Additional training is less likely to increase productivity in the low-end level of employees, unless the training involves the use of technologically advanced equipment to ease service delivery.
On the other hand, the management employees in the restaurants and the overall business can benefit from improvements in the management and leadership skills.
The business performance relies on strategic implementation of its growth and sustainability plans. Its main actors in this area are its management employees.
Therefore, any additional training on the use of appropriate business leadership and management tools, as well as awareness of industry variables will help managers improve the operation of their restaurants and their divisions in the company (Hirschey, 2008).
However, training will not guarantee substantial improvements in performance because it relies on the matching of difference people skills and job demands. Standardized training will work for some employees and fail to work for others.
Therefore, in case the company goes ahead with any additional training plans, it must consider various factors that affect training effectiveness.
These include the company tradition, prevailing economic and social influencing factors on employee productivity, the cost of training, and the expected margin of improvement in performance (Hill, Jones, & Schilling, 2014).
As a business, is the company profitable? Will it be able to sustain profitability?
McDonald’s prides itself as more than just a restaurant; the company gives jobs to many people and acts as a community partner. It seeks to sustain its position as a model for other restaurants around the world.
One way of sustaining its market position is by focusing on the quality of its product, delivering services that meet customers’ expectations and maintaining overall cleanliness.
The company also nourishes its values across all its operations across the world. It seeks to define the lifestyle of its customers, in addition to its desire to become a place where customers will prefer to eat and drink.
Therefore, it focuses on a marketing mix strategy that continuously improves aspects of its operations dealing with products, place, price, and promotions (McDonald’s, 2014).
McDonald’s has not been profitable in the last few years. Its primary market, which is the United States, has been experiencing slow growth, thereby affecting its overall profitability negatively.
In 2014, the third-quarter profits dropped by 30 percent in the United States, which was due to the poor performance of the introduced deals and new items.
An increase in the price of the burger, which many consumers preferred as an inexpensive meal also, led to a slump in demand and decreased profitability.
The loss in profitability was attributed to increased competition, but it could also be a pointer to the decreasing popularity of the purely fast food chain in developed markets (Patton, 2014).
How can it make its profit grow?
Consumers are increasingly scrutinizing the market for foods and drinks across the world. They are looking at ethical business conduct and corporate social responsibility programs of different companies to evaluate their brand values.
Given that ‘eating out’ has become an acceptable lifestyle choice for Western cultures, customers prefer to explain their life choices by different issues, such as the restaurants they frequent daily.
McDonald’s has to place itself in an excellent market position to capture the various market segments characterized by consumer preferences, economic conditions, and social factors (Goodman, 2009).
As a public traded company, the company also faces demands from stakeholders and shareholders, which affect its ability to formulate and pursue different strategies. For example, it has to comply with market regulations against business monopolies and submit annual returns to the market regulator.
It must provide its investors with a yearly report that details its performance and elaborates its strategies for the upcoming years. This information informs investors and other stakeholders about the company.
At the same time, it provides the competitors with a basis for understanding the McDonald’s structure and the way of doing business.
Thus, many rivals can quickly formulate business strategies to compete with McDonald’s and take its share of different markets. In view of these points, McDonald’s must rely on differentiation and the pursuit of capabilities that are difficult for its rivals to copy in various markets.
McDonald’s has an internal company value of constant improvement, where it seeks to respond to changes in customer, employee, and system needs effectively (QRSWeb.com, 2010).
The company has to focus on its iconic brands that are responsible for most customer traffic into its restaurants across the world to maintain profitability. It also has to find incremental changes to its menu items that make the main foods and drinks relevant to changes in customer preferences.
Relying on consumer research will be a good strategy for maintaining profitability. The company should build on its various customer intelligence platforms to know more about its customers and use its barbell strategy to manage its multiple revenue streams.
These strategies will allow it to sustain a favorable market, even in times of economic recession when customers watch their spending.
The company must invest in technology platforms that enable it to offer differentiated services. The restaurant experience can extend beyond the actual restaurant premises into people’s social lifestyles. The company should make use of the new media to stay in touch with the customers.
It should also update its customer order display boards and its point-of-sale systems regularly so that it improves the speed of capturing details and the number of details obtained (Macke, 2015).
Eventually, the new information should assist its employees in delivering personalized service to an industry that relies on standardization.
A critical competitive advantage of the company will be its ability to personalize the McDonald’s experience, which makes it unique compared to customer experiences at rival restaurants.
The franchise business model allows McDonald’s to retain control of its global image and promotion strategy, which is an essential part of sustaining its profitability momentum (Ferrell & Hartline, 2011).
Recently, the company introduced new features in its branding strategy. It hopes that the new features will continue to make its brand relevant in the 21st century.
At the same time, the new features such, as newly build and remodeled restaurants around the world, will be avenues for increasing customer focus. For example, the company is allowing new restaurants to have new designs in in-store graphics, furniture, and iconic features of the Ronald McDonald’s comical image.
Other relevant factors
The company’s profitability relies on a perfect execution of its long-term plan, referred to as the Plan to Win. Thus, it has to maintain a capable leadership and senior management team to ensure that all the parameters of the plan succeed.
The main factor affecting growth and sustainability of the business is its ability to remain relevant and continue to enjoy high levels of customer trust. For the company to achieve long-term growth, it has to differentiate the client experience.
Differentiation requires investing in customer intelligence and research on preferences and market trends. It should also include the development of new products. However, the company must also ensure that additional costs introduced into the business do not erode its profit margins.
The strategic plan of the company continues to affect the options for pricing, marketing, and promoting the business in different countries.
An important point for McDonald’s to consider is to ensure that the company adapts to the cultural and social factors affecting its operations in foreign countries. In the past year, the company initiated various remodeling initiatives for its newer restaurants to improve the brand.
Moreover, it has to look into making optimal capacity improvements so that growth in revenue comes from increased business of the existing restaurants, rather than relying on the development of new restaurants. The biggest improvement in McDonald’s business will come from consistent reviews of its market performance.
The company needs to scrutinize every management decision to determine its effect on the overall performance. For example, it can create performance benchmarks that follow non-monetary aspects of employee engagement, and then use them, together with management decision evaluation systems to evaluate the effectiveness of its strategic plan.
The following is a SWOT analysis table of the internal business situation at McDonald’s and external factors that can influence its strategic choices.
References
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Hill, C., Jones, G., & Schilling, M. (2014). Strategic management theory: An integrated approach (11th ed.). Stamford, CT: Cengage Learning.
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Macke, J. (2015). 3 ways McDonald’s New CEO can turn things around. Yahoo Finance. Web.
McDonald’s. (2014). McDonald’s unveils new mission and image for brand ambassador Ronald McDonald. McDonald’s Newsroom. Web.
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The Associated Press. (2013). McDonald’s sales gain kept in check by slack U.S. demand. Daily Finance. Web.