McDonald’s Situational Paper

McDonald’s Situational Paper

Introduction 50

Market disruption is characterized by changes in the way that markets operate. Usually, the changes occur on a large scale and may have long-term effects on the business environment. The changes may have positive as well as negative impacts on a business entity. For instance, disruption through factors such as innovation is desirable, and they are suitable for business because they help the enterprises to stay abreast of technological trends. However, market disruptions caused by uncontrollable factors such as pandemics are typically unfavorable for the company because of the large and rapid market declines. The novel Covid-19 is a pandemic that has disrupted business and led to the closure of some entities. This paper provides a critical analysis of the nature of the disruption that the epidemic will have on McDonald’s business format franchise.

Situational Analysis 900

McDonald’s is one of the biggest fast-food chains in the world, with a global market reach of 10%. Every single day, the company serves about seventy million people, which translates to about 1% of the entire population on earth (Keller, n.d). The business is built upon serving the needs of The Franchising model has enabled the corporate to establish outlets throughout the US. Furthermore, the entity has a strong presence in almost every region of the globe. With a market share of about 45% in the US, McDonald’s is the largest fast-food joint in the country representing $8.2 billion of the entity’s gross revenue (Ganti, 2020). As of 2020, the enterprise has about 14,000 outlets in the US (Ganti, 2020). In Texas, the company is present in all the cities and has over eight hundred franchises. Currently, McDonald’s operates in 120 countries employing more than 200,000 persons. The company has relied on the business format franchise system to expand to other territories. Primarily, the entity purchases land upon which a franchise is established. After that, the company agrees with the business owner, whereby the individual independently runs the enterprise while using McDonald’s name and logo. The company benefits through the share it receives from the revenues attained by the franchises (Hoy, Perrigot & Terry, 2017). The business format franchise has been particularly attractive to investors because of the associated independence. The business owners are allowed to hire and fire employees based on market demands (Kaufmann et al., 2015).

The company’s biggest asset is its brand value, which stands at $43 billion, and it is the most massive value for a restaurant chain in the world. The strength of the entity’s name makes it attractive to potential franchisees who intend to engage be part of the business (Khan, 2014). The value of the premises and other assets owned by the enterprise stands at $33 billion. In 2019, McDonald’s registered gross revenues of $20 billion while making $11 billion as profit in the process. The company was projected to make $21.1 billion in revenues, which would represent 0.5% in earnings in 2020. However, in light of the Covid-19 pandemic and the closure of several businesses, the numbers look bleak. The government’s recent directive banning restaurants and partial allowance for delivery and take-out services will directly affect McDonald’s business format franchise. The individuals who prefer consuming the products from the outlets have been pushed away, and they can no longer enjoy such services.

McDonald’s is not new to disruptions, and the company has had to change tactics and strategies in the past as a result of external forces’ effects on the entity (Supply Chain Disruptions; What McDonald’s Supplier Closure Can Teach Us, 2015). The actions taken have been to primarily ensure that the company remains competitive in light of the challenges faced. For instance, the company’s recent change of the Chief Executive Officer was linked to the disruptions that the entity experienced in 2015. One of the enterprises’ leading suppliers in the US closed shop in 2015, and the company’s business model was affected immensely (Supply Chain Disruptions; What McDonald’s Supplier Closure Can Teach Us, 2015). Since all the outlets serve almost the same recipe, a shortage of supplies would likely affect the entire business. Consequently, deficiencies lead to reduced sales, which impacts the company’s revenues. Weaknesses in the supply management of the company caused the market disruptions. A diversification of the suppliers of the crucial commodities would have shielded the company from the impending shocks. It has to be noted that the closure of a mega supplier was enough to affect the entire business format franchise of the whole company. Therefore, the company cannot afford to plan for one force of change while neglecting other possible avenues for disruptions. For instance, in the 2015 case, McDonald’s ought to have maintained proper data on the nature and financial health of its crucial supplier. The records will enable the company to know whether their business associates are likely to go into liquidation.

The market disruptions caused by Covid-19 will primarily be connected to the absence of clients to purchase McDonald’s products. The nature of the spread of the disease makes it unsuitable for individuals to converge and share a meal of their favorite hamburgers or the Big Mac. The people are even getting more scared to come out and grab the take-out options, and they would rather just have the orders delivered. Therefore, the company needs to come up with ways of meeting the customers’ needs while at home. Technological innovation is the most effective way of dealing with market disruptions. The company has already incorporated some technological advancements into its business format franchisee that would ensure the effects of the pandemic do not cripple the entity’s operations. For instance, in 2017, the corporation entered into an exclusive deal with the Uber Eats service delivery application. The arrangement allowed McDonald’s customers to order products directly from their mobile devices from the comfort of their homes, schools, or at work. In 2020, the fast-food giant has agreed with DoorDash, which is also an online food delivery service. The deal will ensure that the customers have a variety of options to choose on who should conveniently make their delivery (Luna, 2020). Such undertakings will ensure that there are no reasons whatsoever for the complete closure of the outlets. Since the duration of the pandemic remains unknown, the enterprise must find ways that would help it to stay in business.

McDonald’s has also moved with speed to save the businesses of the franchisees (Team, 2020). The outlets pay rent to the enterprise as a percentage of sales because the company owns the land. In 2018, the company retained up to 83% of the revenue generated by the franchisees with at least 22% of the entity’s profits coming from the rent charged on the premises occupied by the outlets (Keller, n.d.). Already, about 50 McDonald’s franchisees have closed down operations as a result of the Covid-19 pandemic. As a response to the dangers posed by the Coronavirus pandemic, McDonald’s has established mechanisms through which it seeks to cushion the outlets from possible closure. First, the CEO explains that the company is in active negotiations with the lenders of the franchisees to restructure loan payments to allow the outlets to have flexibility during this unfortunate period (CNBC, 2020). Moreover, the enterprise is offering a service fee to the franchisees, which serves as loyalty payment, and this is aimed at ensuring the outlets maintain liquidity. Fundamentally, the company is offering rent deferrals for the outlets to ensure further that the franchises keep cash and can meet other financial obligations during the subsistence of the Covid-19 pandemic.

Competitive Analysis

The main competitors of McDonald’s performance are fast-food companies such as Burger King, Yum brands, Subways, and Wendy’s (Downie, 2020). a majority of the competitors are multinational with numerous substantial outlets worldwide. For instance, Subway has over 44,000 franchisees around the globe. The business franchise format for the competitors operates in an almost similar plane as that of McDonald’s. A case in example is the independent franchisee ownership model of Burger King. The enterprise has over 17,000 outlets globally, whereby the retail operators independently own about 90% of the units (Downie, 2020). McDonald’s enjoys a market advantage in terms of the revenue generated as compared to the competitors. In 2019, the company generated almost three times the revenue generated by its closest competitor, Starbucks.

However, the company is not immune to vulnerability, and any blunders could have devastating effects on the market positioning and the profits earned at the end of each year. It is worthwhile to note that the current consumer trends point towards a shift from the traditional fast foods to more healthy products such as salads. Subway is a crucial competitor that seems to be taking advantage of the current change through its development of ‘Eat Fresh’ products, which comprise of sandwiches and freshly baked bread (Downie, 2020). In 2019, McDonald’s was forced to cut down on the artificial ingredients on its burgers to ensure that the company meets the consumers’ demands. These measures were taken after the entity reported a 6.4% decline in sales that was associated with the shift in consumption trends.

The competitors have come up with measures that help them navigate through the challenges posed by the pandemic. For instance, Burger King has offered to provide free meals to children for every adult purchase. The offer is only available on orders that are placed through the company’s online platforms, and it is provided twice a week. This move is aimed to encourage clients to continue making purchases from the enterprises even when they are forced to stay at home. On the other hand, Subway is offering free delivery services across its online platforms for a limited period during the subsistence of the pandemic (How Subway is Addressing Coronavirus and Your Safety in Our Restaurants, 2020). The entity is also offering special drive-thru and take out promotions to stimulate the purchase of products. Furthermore, Subway has announced that it will provide operational support for franchisees restaurants as a way of easing the operational costs of the company during this uncertain period. The measures adopted by the companies are geared towards ensuring continuous customer engagement even when clients are no longer physically present at the outlets.

Prescriptive (Managerial) Recommendations

The company should incorporate Artificial Intelligence (AI) technology in its service delivery across the franchisees. The use of AI will aid the online purchases and delivery services rendered by the entity. Fundamentally, AI will help the company to offer individualized services to its clientele because of the technology’s automatic drive-thru menu panels. For instance, Artificial Intelligence could effectively be used to inform the customers recommended products to be consumed during this Covid-19 pandemic. Implementation of such strategies would help McDonald’s to satisfy the current consumer demands of healthy living.

Moreover, AI technology would help to cut the cost of the company during the uncertain period of the pandemic. Since only drive-thru, take out, and delivery services are allowed during this period, some of the franchisees may have to cut down on the employees. This would ensure that they remain sustainable. Artificial Intelligence will help the company to provide the recommended services while remaining competitive. Finally, the company should offer rent deferrals to the entities for at least five months. Such a period will be sufficient to ensure the franchisees maintain liquidity. The flow of currency will facilitate the operationalization of the outlets.

Conclusion

The full extent of the market disruptions caused by the Covid-19 epidemic remains undeterminable ta the moment. However, the ban on restaurants will have devasting effects on the revenue pools generated by fast-food chains such as McDonald’s. The company has to effectively utilize technology to ensure that it maneuvers through the economic impact of the pandemic.

References

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ask us to remain open. Retrieved from https://www.cnbc.com/video/2020/03/20/mcdonalds-ceo-on-coronavirus-impact-optimistic-government-will-ask-us-to-remain-open.html

Downie, R. (2020, March 14). Who are McDonald’s Main Competitors? Retrieved March 26,

2020, from https://www.investopedia.com/articles/markets/102815/who-are-mcdonalds-main-competitors.asp

Ganti, A. (2020, February 5). How McDonald’s Makes Money: Monetizing the Demand for Fast

Food. Retrieved from https://www.investopedia.com/articles/markets/032015/how-mcdonalds-makes-its-money-mcd.asp

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Keller, C. R. (n.d.). How McDonald’s Became the Leader in The Fast Food Industry. Retrieved

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Khan, M. A. (2014). Restaurant franchising: Concepts, regulations and practices. CRC Press.

Luna, N. (2019, July 16). McDonald’s drops Uber Eats sole partnership with new DoorDash deal.

Retrieved March 26, 2020, from https://www.nrn.com/quick-service/mcdonald-s-drops-uber-eats-sole-partnership-new-doordash-deal

Hoy, F., Perrigot, R., & Terry, A. (2017). Research contributions to understanding franchising.

In Handbook of Research on Franchising. Edward Elgar Publishing.

Supply Chain Disruptions; What McDonald’s Supplier Closure Can Teach Us. (2015, February

16). Retrieved from https://www.foodlogistics.com/3pl-4pl/news/12045536/supply-chain-disruptions-what-mcdonalds-supplier-closure-can-teach-us

Team, C. (2020, March 20). Our focus on supporting franchisees, crew and communities in this

time of uncertainty. Retrieved March 26, 2020, from https://news.mcdonalds.com/news-releases/news-release-details/our-focus-supporting-franchisees-crew-and-communities-time