McDonalds

Facts

McDonald's roots go back to the early 1940s when two brothers opened a burger restaurant that relied on standardized preparation to maintain quality--the Speedee Service System.

So impressed was Ray Kroc with the brothers' approach that he became their national franchise agent, relying on the company's proven operating system to maintain quality and consistency.

Over the next few decades, McDonald's used controlled experimentation to maintain the McDonald's experience, all the while expanding the menu to appeal to a broader range of consumers. For example, in June 1976, McDonald's introduced a breakfast menu as a way to more fully utilize the physical plant. In 1980, the company rolled out Chicken McNuggets.

Despite these innovations, McDonald's tremendous growth could only continue for so long. Its average annual return on equity was 25.2% between 1965 and 1991. But the company found its sales per unit slowing between 1990 and 1991. In addition, McDonald's share of the quick service market fell from 18.7% in 1985 to 16.6% in 1991. Plus growth in the quick service market was projected to only keep pace with inflation in the 1990s.

McDonald's faced heightening competition on several fronts. First, its traditional rivals--Burger King, Wendy's, and Taco Bell--were eating into its margins through promotions and value pricing strategies. Taking a leaf from McDonald's own playbook, Sonic and Rally's were using a very limited menu approach to attract time-strapped consumers. Finally, Chili's and Olive Garden were appealing to diners looking for something a little more enticing that the familiar Golden Arches for their families.

In the late 1980s, McDonald's began recognizing the importance of maintaining an ecologically correct posture with the public, which was becoming more concerned about the environment. For example, in 1989, 53% of respondents in one survey revealed that they had not bought a product because they didn't know what effect the packaging would have on the environment. Closer to home, a 1990 study showed that each McDonald's generated 238 pounds of on-premise solid waste per day.

It's no surprise, then, that McDonald's sought a way to reduce its solid waste while providing a more environmentally acceptable face to the public. Beginning in 1989, it partnered with the Environmental Defense Fund, a leading organization devoted to protecting the environment, to seek ways to ease the company's environmental burden on the landscape.

Together, EDF and McDonald's considered its impact on a wide range of stakeholders--customers, suppliers, franchisees, and the environment. The company gave its franchisees much autonomy in finding ways to eliminate environmental blight. The company's hope was that from these divergent approaches, it stood a greater chance of finding solutions with broad applicability than if it had tried to pursue a one-size-fits-all approach from the outset.

Some of the environmentally inspired solutions that came out of the collaboration with EDF were the:

* Introduction of brown paper bags with a considerable percentage of recycled content.

* Solicitation of suppliers to produce corrugated boxes with more recycled content, which had the twin effect of reducing solid waste and building a market for recycled products.

* Abandonment of polystyrene clamshell containers to hold sandwiches in favor of new paper-based wraps that combined tissue, polyethylene, and paper to keep food warm and prevent leakage.

Analysis

McDonald's Sustained Prosperity

The secret of McDonald's success is its willingness to innovate, even while striving to achieve consistency in the operation of its many outlets. For example, its breakfast menu, salads, Chicken McNuggets, and the McLean Deluxe sandwich were all examples of how the company tried to appeal to a wider range of consumers.

The company has also made convenience its watchword, not only through how fast it serves customers, but also in the location of its outlets. Freestanding restaurants are positioned so that you are never more than a few minutes away by foot in the city or by car in the suburbs. Plus McDonald's is tucking restaurants into schools, stores, and more.

Key Threats

The key threats to McDonald's domestically are the lack of growth opportunities. The market is well saturated, and it would difficult to achieve double-digit growth. Other concerns are a newfound emphasis on healthier eating. Most of McDonald's most popular fare probably in some small way contributes to the increasing incidence of cancer, heart disease, and diabetes among the population.

But I feel the key threat to McDonald's continued success is its very ubiquity. Because McDonald's are everywhere, the dining experience is never special. And as Baby Boomers age and become more affluent, it is likely that they will leave behind their fast-food ways, if only to step up to moderately priced restaurants like Olive Garden, Bennigans, and Pizzeria Uno. These chains have the added advantage of serving higher-margin alcoholic drinks. McDonald's, meanwhile, has to continually battle Burger King and Wendy's, which leads to an erosion of margins for everyone. Even alliances with toy manufacturers, while popular with consumers, do little for the bottom line because the cost to run these promotions can be quite expensive.

Responding to Burger King's October 1 Announcement

The October 1 announcement from Burger King that it would begin offering table service is not much of a threat at all. You can try to dress up fast food, but it's still fast food. I couldn't imagine this being a potent draw for consumers. McDonald's best course is to ignore this development as irrelevant. As the market leader, McDonald's does not need to respond to every competitor's initiative. Indeed, doing so would have the effect of making McDonald's look reactive and less like a leader.