McDonald’s Corporation (NYSE: MCD) is an American multinational fast food restaurant chain headquartered in Chicago, Illinois. Richard and Maurice McDonald founded the business in 1940, operated it for a while, and then rechristened it as a hamburger stand. It sold a few items, including beverages, burgers, and fries which allowed them to focus on quality and speed of service.
Later on, in 1955, while working with their “Speedy Service System,” the McDonald brothers brought in Ray Croc. Ray was a milkshake mixing machine salesman who saw the potential of their business and opened the first McDonald’s franchise in Des Plaines, Illinois. After working as its franchise agent for some time, Ray bought the company and developed it into the global giant it is today.
Currently, McDonald’s operates in more than 120 countries, serving about 69 million customers daily across approximately 38,000 locations. Its focus on nutrition, convenience, innovation, and affordability plays a significant role in its brand positioning.
This article explores the dynamics that shaped McDonald’s as a business, its internal and external environment, and its performance over time. By understanding its SWOT analysis, we can understand how the company managed to stay afloat and continue to grow in an increasingly competitive industry.
Bottom Line Up Front
McDonald’s competes in the fast-food industry alongside other major brands such as Burger King, KFC, and Wendy’s. The company’s business model revolves around selling burgers, chicken, breakfast items, soda, and fries through its chain of restaurants. The company’s strong brand image, global scale, and menu innovation are some of the key strengths that have allowed it to stay ahead of its competitors.
It also faces health concern challenges, declining customer confidence, and intense competition. To stay relevant, McDonald’s must focus on its strengths and continue to innovate its menu and customer experience.
McDonald’s Business Model
McDonald’s is a franchisor, meaning that it licenses its brand and operating procedures to local entrepreneurs who want to open their own McDonald’s restaurants. Franchisees operate about 93% of McDonald’s locations, with the other 7% of locations being company-operated.
The company’s revenues come from franchise fees and sales at company-operated restaurants. Essentially, franchisees pay McDonald’s an initial fee and an ongoing percentage of their restaurant’s sales. In return, franchises use McDonald’s brand, recipes, and operating procedures.
Franchises lease properties often owned by McDonald’s at high markups. The expected high-profit margins make franchisees more willing to pay these higher fees. The real estate kind of business model guarantees stable and predictable revenue for McDonald’s. Coupled with low operational costs, it results in very high margins and profitability for the company.
Harry J. Sonneborn, a former McDonald’s CFO, once stated that McDonald’s is not technically in the food industry but rather the real estate industry. The company’s focus on real estate has been a significant contributor to its success. As of 2022, the company owned about 45% of the land and 70% of the buildings for its restaurants worldwide.
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McDonald’s Corporation Financials
In 2021, McDonald’s Corporation posted revenue of $23.233 billion, an increase of 21% from the previous year. Revenues from restaurants operated by the company were $9.787 billion, while revenues from franchised restaurants were $13.085 billion. Other revenues contributed about $351 million.
The company’s net income was $7.545 billion, an increase of 59% from the previous year. Its operating income was $10.346 billion, an increase of 41% from the prior year. McDonald’s earnings per common share diluted were $10.04, a rise of 59% from the previous year.
Despite the Covid-19 pandemic, McDonald’s maintained its profitability and even grew it significantly. The company attributed its performance to its focus on the safety of its employees and customers, its drive-thru and delivery options, and its strong financial position. Currently, the company has a market cap of $180.834 billion, making it one of the largest fast-food chains in the world.
SWOT Analysis of McDonald’s
Below is a detailed SWOT analysis of McDonald’s:
McDonald’s focused on nutrition, convenience, innovation, and affordability to register progressive growth in an increasingly competitive industry. However, other potent aspects characteristic of the company played a role in its success.
Below are McDonald’s strengths and how they help the company succeed:
Strong Brand Image and Recognition
Perhaps the most significant strength of McDonald’s is its brand image and recognition. A 2021 research by Statista places the company’s brand value at $154.92 billion, making it the 7th most valuable brand in the US. It serves approximately 69 million people globally, about 1% of the world’s population.
Moreover, the golden arches of McDonald’s are one of the most recognized symbols in the world. The company’s name is often used colloquially to refer to fast food. Such a level of brand recognition and equity is invaluable to the company and has helped it withstand competition.
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McDonald’s has a diversified menu, with something for everyone. The company’s menu items are not only affordable but also tasty. McDonald’s sells hamburgers, chicken sandwiches, salads, wraps, soft drinks, milkshakes, desserts, breakfast items, and coffee.
The company is constantly innovating its menu to ensure that it meets the needs of its customers. It implements several product strategies, such as introducing new menu items, limited-time offers, and localizing its menu.
For instance, to appeal to its loyal customers, the company offers regular hamburgers, quarter pounders, and Big Macs to ensure they can always find their favorite meal.
Its local adaptation strategy ensures that McDonald’s serves different menu items in different parts of the world to suit the local preferences. For instance, in India, McDonald’s introduced the Maharaja Mac, a beefless Big Mac to suit the local dietary restrictions.
Strong Financial Performance
McDonald’s is undoubtedly a profitable company. Its revenue consists of sales from company-operated restaurants and franchised restaurants. The company’s robust financial performance is attributable to its focus on strategic growth initiatives, effective cost management, and strong global sales.
Its history of generating significant cash flow and profits has seen it maintain a good credit rating, which allows it to fund discretionary spending such as share repurchases and dividends.
In 2021, it had a free cash flow of $7.1 billion with a conversation rate of 94% and a cash and equivalents balance of $4.7 billion. The company could also meet its short funding obligations through continued funding from commercial paper borrowings.
Strong Digital Presence
McDonald’s has invested heavily in technology to boost its digital presence in recent years. Its focus on M-C-Ds, such as mobile apps, customer data collection, and digital ordering, is bearing fruit. About a quarter of McDonald’s 2021 Systemwide sales representing approximately $18 billion, came from digital channels. This figure represents a 60% increase from the previous year.
As the company implements the “Accelerating the Arch” strategy, it will focus on improving the customer experience through technology and convenience. The company is committed to its core menu consisting of 3Ds, Digital, Drive through, and Delivery.
Strong Real Estate Portfolio
McDonald’s is a lessee of most of its restaurant properties, particularly in ground leases. Buying and leasing properties is a clever way of ensuring that the company has control over its restaurant locations. It also collects rent from franchisees.
In 2021, the company had a portfolio of 40,031 total Systemwide restaurants, 2,736 of which were company-operated, and the remaining 37,295 were franchised. The company’s real estate strategy is to grow its portfolio of company-operated and franchised restaurants globally.
While McDonald’s owns the building and land, it leaves property insurance, site maintenance, and tax obligations such as property taxes to the franchisor. The company’s approach to real estate helps it minimize its capital expenditure.
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Effective Supply Chain Management
Ray Croc established a supply chain that ensures mutual positive outcomes for the suppliers, employees, and franchisors. His 3-legged stool approach has seen the company develop a vast and efficient supply chain. Essentially, all parties in the supply chain are dependent on each other for success.
The company has strong relationships with its suppliers. For instance, it has a long-standing relationship with Martin-Brower Company, a leading distributor of paper napkins, packaging, and other restaurant products. Currently, the Martin-Brower Company supplies its products to more than 15,000 McDonald’s restaurants.
Moreover, McDonald’s established an effective vertical integration system that cuts out the middleman. The company processes its beef and pork in-house, grows potatoes, and uses its logistics network to deliver products to its restaurants. Consequently, the company has more control over its food quality, safety, and cost.
Tech Developments and Acquisitions
In recent years, McDonald’s has been investing in technology companies to gain a competitive edge and improve its customer experience. For instance, it acquired Dynamic Yield Ltd, an AI company that personalizes the customer experience through real-time decisions.
The $300 million acquisition in 2019 saw McDonald’s gain access to Dynamic Yield’s technology, which it has since used in its drive-thrus and digital ordering platforms. The move helped the company boost its sales by increasing personalization and convenience.
The company also developed the McDonald’s Global App and the Mobile Order and Pay feature. The app allows customers to order and pay for their food before picking it up from the restaurant. Its digital indoor and outdoor menu boards make the customer experience more seamless.
Despite the company’s many strengths, it also has a few weaknesses, which include:
Dependence on Franchises
While franchising is an effective growth strategy, it also has its shortcomings. For instance, McDonald’s is reliant on its franchisees for the success of its business model. The company cannot control how its franchisees operate their businesses.
If the franchisees don’t uphold its standards, they could hurt McDonald’s reputation. Additionally, if the franchisees don’t pay their royalties or make necessary investments, it could also hurt the company’s bottom line.
McDonald’s has been criticized for its role in the obesity epidemic. The company’s menu is high in calories, fat, and sodium, which has led to concerns about its impact on public health.
In response to the criticism, McDonald’s made some changes to its menu. For instance, it now offers healthier options such as salads and fruit. However, these changes have not been enough to convince the public that McDonald’s is serious about tackling the obesity issue.
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McDonald’s has about 200,000 employees globally. While the company offers some benefits to its employees, such as health insurance and discounts, it has been criticized for its low wages and lack of job security.
In recent years, multiple lawsuits have been filed against McDonald’s by its employees. The company has also been accused of violating labor laws. These issues have led to employee dissatisfaction and negative publicity for the company.
While McDonald’s has an extensive network of franchisees, not all of them are happy with the company. The disgruntled franchisees accused the company of unfair practices, such as growing fees and unreasonable expectations. McDonald’s made some changes to its franchise agreements in response to the complaints. However, the company is still facing backlash from its franchisees.
Supply Chain Interruptions
McDonald’s relies on its suppliers for the majority of its food products. While it has strong relationships with its suppliers, supply chain interruptions are always at risk.
For instance, in June 2021, there was a UK-wide shortage of Chicken Selects after one of McDonald’s suppliers ran into production problems. These interruptions can lead to inconvenience and negative publicity for the company.
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Expansion in Emerging Markets
McDonald’s has significant opportunities for growth in emerging markets. The company is present in 120 countries, but there are still many countries where it does not have a presence.
The company focuses on expansion in Asia, Africa, and Latin America. These markets offer significant growth potential due to their large population sizes and growing economies.
McDonald’s is investing heavily in digital transformation. It is working on mobile ordering and delivery initiatives to make the customer experience more seamless. The company must continue to invest in digital transformation to stay ahead of the competition and meet the changing needs of consumers.
McDonald’s must continue to innovate its menu to attract customers. The company has already made some changes, such as adding healthier options and introducing new items. However, it must do more to appeal to health-conscious and adventurous eaters.
Expand self-Order Kiosks, Drive-Ins, and Pick Ups
The Covid-19 pandemic was a hard knock on the restaurant industry. However, the pandemic also presented an opportunity for McDonald’s to expand its self-order kiosks, drive-ins, and pick-ups. McDonald’s must continue to invest in these initiatives to make the customer experience more convenient and safer.
Some of McDonald’s most significant threats include:
Competition from Other Fast-Food Chains
McDonald’s faces stiff competition from other fast-food chains, such as Burger King, Wendy’s, and KFC. These companies are constantly innovating their menus and customer experience to attract customers. McDonald’s must stay ahead of the competition to maintain its market share.
Changing Consumer Preferences
Consumer preferences are changing, and McDonald’s must change with them. Health-conscious and adventurous eaters are looking for healthier and more exciting options. McDonald’s is already working on menu innovation to address this issue. However, it must do more to meet the changing needs of consumers.
Economic uncertainty can lead to decreased consumer spending, a threat to McDonald’s. For instance, the Covid-19 pandemic led to decreased consumer spending on eating out. Overall, economic uncertainty can lead to decreased sales and profit for McDonald’s.
Food Safety Scares
Food safety is a significant concern for McDonald’s. The company has been the victim of several food safety scares, such as the E. coli outbreak in 1993 and the mad cow disease scare in 2001. These events can lead to negative publicity and decreased sales.
Tighter regulations on the food industry are a threat to McDonald’s. For instance, several countries, including Iceland, Macedonia, and Montenegro, have banned McDonald’s due to its alleged negative impact on health. To stay in business, McDonald’s must comply with these tighter regulations.
McDonald’s SWOT Analysis (FAQs)
Question: What external factors affect McDonald’s?
Answer: External factors affecting McDonald’s include the economic environment, competition from other companies, and changes in consumer preferences. The trend toward a healthier and ever-increasing cultural diversity also affects McDonald’s.
Question: What are McDonald’s strengths?
Answer: McDonald’s strengths include global brand recognition, customer loyalty, economies of scale, diverse product offerings, and financial stability. The company also benefits from its franchising model, which allows it to expand its reach without incurring high costs.
Question: Does McDonald’s have a competitive advantage?
Answer: McDonald’s competitive advantages include quality, convenience, affordability, value-added products, and customer service. The company can effectively utilize its scale to drive down costs and offer competitive pricing. The company’s brand equity and customer loyalty are also significant competitive advantages.
Question: How has McDonald’s affected the economy?
Answer: McDonald’s has had a positive impact on the economy. The company has created jobs, both directly and indirectly, and has contributed to the growth of the fast-food industry. McDonald’s has also been a significant contributor to the globalization of the food industry.
McDonald’s is a global giant in the fast-food industry. The company has strong brand equity and enjoys high levels of customer loyalty. To stay ahead of the competition, McDonald’s must continue to innovate its menu and customer experience. The company must also adapt to changing consumer preferences and the regulatory environment. Despite some challenges, McDonald’s is well-positioned to maintain its position as a leading global fast-food chain.
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