Case for analysis

Strong Headwinds for McDonald's

In November 2012, McDonald's Corp. reported the first decrease in monthly same-store sales in nine years.1 The com- pany had already reported declines in second and third quarter earnings, but the decline in sales was larger than expected with a decrease in the United States and Europe of 2.2 percent and in the Asia/Pacific, Middle East, and Africa division of 2.4 per- cent. This trend had become apparent in summer 2012 when second quarter earnings declined and second quarter same-store sales increased 3.7 percent, down from a 7.3 percent increase in the first quarter of 2012. At that time McDonald's Chief Executive Don Thompson noted that the headwinds facing the company included both macroeconomic factors, such as declin- ing consumer sentiment, and microeconomic factors, such as strategic decisions regarding the company's value menus and how new technology was implemented. The slowly recovering and still uncertain global economy limited consumers' ability to eat at restaurants, particularly among young people who tend to eat fast food. The global economy and rising commodity prices limited McDonald's ability to lower its prices. The company also acknowledged that it placed too much emphasis on its Extra Value Menu that included items priced higher than a dollar and that it needed to reemphasize its Dollar Menu. The company added value menus in Australia and Japan but acknowledged that it had little room to raise prices in the United States and Europe. Europe was of particular concern because it accounted for approximately 40 percent of McDonald's revenue and oper- ating profit. The company operated more than 1,400 restau- rants in Germany and more than 1,200 in France. Business in Europe weakened in spring 2012 and even declined in July of that year. In response, the company offered coupons for buy- one-and-get-one-free Big Macs and Chicken McNuggets, and it implemented the "Eurosaver" menu. Although similar dis- counts had been offered in the past, this effort was broader and was not the usual limited-time promotion. In addition to the global macroeconomic influences, McDonald's faced increased competition from rivals that were revising their own strategies. Burger King Worldwide 1The following discussion is based on Julie Jargon, "McDonald's Is Feeling Fried," Wall Street Journal (Online), November 8, 2012; Julie Jargon and Laura Stevens, "McDonald's, Feeling Heat in Europe, Serves Up Deals," Wall Street Journal (Online), October 10, 2012; Annie Gasparro and Chelsea Stevenson, "McDonald's Sales Faltered in July," Wall Street Journal (Online), August 8, 2012; and Annie Gasparro, "McDonald's Loses Some Momentum," Wall Street Journal (Online), July 23, 2012. Inc. began offering new sandwiches and promoting discounts, while Wendy's Co. also offered coupons, upgraded restaurants, and added fresh menu items. In Germany, Burger King intro- duced its "King des Monats" or "King of the Month" deal with rotating sandwiches, large fries, and a drink. McDonald's man- agers urged U.S. franchisees and managers to move beyond the lackluster October 2012 performance and not give com- petitors a chance to steal market share. Franchisees were urged to ensure that restaurants were open through the holidays and to heavily promote the new cheddar bacon onion sandwiches, specialty coffee drinks, and the complete line of holiday drinks. McDonald's had also implemented a new "dual-point" ordering system where customers placed an order at one area of the counter and picked up food at another end when their order number was displayed on a screen. The headwinds facing McDonald's arose after a long period of strong growth even during the U.S. recession of 2007-2009 and the ensuing period of global economic uncertainty.2 Even in the third and fourth quarters of 2011, the company's growth barely slowed, and its revenue and profits exceeded analysts' expectations. Analysts estimated that McDonald's captured nearly 17 percent of the limited-service restaurant industry in the United States in 2011, nearly as much as the next four res- taurants in that category combined-Subway, Starbucks, Burger King, and Wendy's. The average free-standing McDonald's restaurant in the United States generated $2.6 million in sales in 2011, a 13 percent increase since 2008. The company's annual advertising budget was estimated to exceed $2 billion. The company modernized its restaurants all over the world with Wi-Fi, colorful chairs, and flat-screen TVs. It expanded restau- rant hours and added double-lane drive-throughs. The company also engaged "mom bloggers," who wrote about the company and who helped push for improvements in the nutritional con- tent of Happy Meals. McDonald's reduced the size of the french fries and put apple slices in each meal nationally in March 2012. McDonald's also focused heavily on emerging markets such as China for new-restaurant growth. In late 2011, the company's Asia/Pacific, Middle East, and Africa division reported the strongest same-store sales growth of all its busi- ness units. The company offered more drive-through restau- rants and motorbike delivery of food in countries such as China, Egypt, and South Korea.

1.  Describe the macroeconomic factors that caused headwinds for McDonald's in 2012. Please include sources with your answer.

2.  Give examples of oligopolistic behavior among the rivals in the fast-food industry.

3.  Regarding the discussion of when McDonald's introduced its Dollar Menu strategy in the fall of 2002, why was the company assuming or hoping that the demand for its products was elastic? Did this appear to be the case?

4. Based on the case, how did the McDonald's development of its mini-restaurants improve its overall profitability?

5.  What role did the policies of various governments play in influencing the international expansion strategies of McDonald's?