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Part I: Case Summary
The restaurant chain aims to save itself by going back to
basics. But the company needs more than a tastier burger to solve its problems Company Perspective: McDonald's is the world's leading food service organization Since its incorporation in 1955, McDonald's Corporation has not only become the world's largest quick-service restaurant organization, but has literally changed Americans' eating habits--and increasingly the habits of non-Americans as well. On an average day, more than 46 million people eat at one of the company's more than 31,000 restaurants, which are located in 119 countries on six continents. About 9,000 of the restaurants are company owned and operated; the remainders are run either by franchisees or through joint ventures with local businesspeople. They are a leader in the area of social responsibility. And they actively share their knowledge and expertise in food safety and are committed to protecting the environment for future generations.
The case summery (Symptoms)
From year 2000 to March 2003 McDonalds has experienced a lot of bad experiences which had affected the company’s profitability, growth, the brand image, the satisfaction of consumers and their loyalty as follows: By 1998, McDonald's posted its first-ever decline in annual earnings and then-CEO Michael R. Quinlan was out, replaced by Greenberg, a16 –year.
The company reported its 2003 first quarter loss in its 47 years history. McDonalds stock slide 60 % in three years. Slashed sales growth when Jan 2003 sales at outlets open at least a year skidded 2.4% after
sliding 2.1% in 2002.
Shrinking in the company growth where the new outlets in the US in 2003 was 40% fewer
than in 2002 and in Europe 30% fewer in 2002 and closing 176 in Japan.
Customers surveys show that service and quality now lag far behind those of rivals which
led to Losing big market share and customer satisfaction and loyalty.
Facing a rapidly fragmenting market and great competition from America’s recent
immigrants who present the quick, testy and healthy meals.
A lot of franchisees left the company due to bad performance and the company buys back
franchises if they cannot be sold as well as bear the pretax charges.
Franchises cannot survive with low profit margins and a lot have left the company to other
competitors (faster-growing rivals) which affect the brand image.
McDonalds came in third average service time with 163 seconds after Wendy and sandwich
shop chick-fil-A. McDonald's executives’ plans have been applied to determine the root cause of these symptoms like M. Greenberg who failed in his task and ousted due to his aggressive trends, in addition to James R. Cantalupo who gave himself 18 month to restore the American giant back to track focusing on:
1. Improve the basics (the foundation)
2. rekindle the flame with franchisees 3. whip up something new
4. expansion strategy
Part II: Diagnosis: where are we and why?
According to the summary previously mentioned; we can say that Macdonald's is facing problems with: • • •
Declining profits Stagnant growth rate New trends in the market of fast food Market share was also declining Its continuous expansion resulted in a fall of the franchisees’ revenues and profits. Its continuous expansion had an adverse effect on service and quality It stopped grading its franchisees by mystery shoppers on parameters such as cleanliness, speed and service.
• • •
Changing consumers' preferences (“The world’s has changed. Our customers have changed. We have to change too.” -JAMES R. CANTALUPO, CHAIRMAN AND CEO, Mc Donald’s, 2003).
A high percent of underperforming franchisees McDonald’s had to face legal suits over claims that its high calorie food was responsible for health problems.
In the late 1990s, it faced stiff competition from fast food chains like Wendy’s, Burger King, Pizza Hut, KFC and Subway.
According to a research conducted by Business Week, consumers rated both Wendy’s and Burger King Better, as far as the quality of food was concerned.
Key Results Areas:
Issue One: McDonald's relationship with franchisees
McDonald's Franchisees faced big problems that were relevant to either its basic operation standards or to the franchisees relationship with McDonald's corporation that resulted in:
Large number of franchisee sold the restaurants back to McDonald's which is considered
very costly for McDonalds and negatively affected the profitability of the company.
Achieving stagnant profits that is considered a disincentive for francicess
N.B. Reggie Webb who operates 11 McDonald's restaurants in Los Angeles, says his sales have dipped by an average of 50.000$ at each of his outlets over the past 15 years " from my prospective, I am working harder than ever and making less than I ever had on an average- store basis" says WebbOn an average-store basis.” In 2003, despite the franchise owner Steinig's four restaurants average annual sales of $million 1.56, but he says that their sales haven't budged since 1999 but cost keep rising.
The popular item cost Steinig $ 1.07 to make so he sell it for the $ 2.25 unless a customer
asks for the $ 1 promotion price. No wonder the profit margin are more than half of what they were when he started out. McDonald's took a pretax charge of 292$ million last quarter in 2002 to close 719 restaurants 200 in 2002 and rest in 2003. Performance Drivers concerning the relationship between McDonalds and franchisees:
1. Underperforming Franchisees:
Up until a few years ago, franchisees clamored to jump on abroad. But in 2002 in an exodus that was unheard of in Mickey D's heyday, 126 franchisees left the system, with 68, representing 169 restaurants, forced out for poor performance. The others left seeking greener pastures. The company buys back franchises if they cannot be sold, so forcing out a franchisee is they cannot be sold, so forcing out franchisee is not cheap.
As last resort, McDonald's is getting rid of the weakest franchises. Continuous growth can no longer bail out under performers, so Cantalupo is enforcing a "tough love" program that the Greenberg reinstated in 2002 after the company gave it up in
1990. Owners that flunk the rating and inspection system will get a chance to clean up their act. But if they don't improve, they'll be booted.
2. Problems in the performance of franchisees •
Internal problem in McDonald's Franchisees which is the lack of cleanliness of the restaurants and the quality of the product which have negative effect on the customer satisfaction.
The decline in McDonald's once-vaunted service and duality can be traced to its expansion of the 1990s, when headquarters stopped grading franchises for cleanliness, speed, and services which negatively affected their persistence to assure the application of the standard levels of cleanliness, quality and speed.
Training declined as restaurants fought for workers in a tight labor market that led to falloff in kitchen and counter skills. Franchisee were asked to produce with high quality products in cheaper prices due to the price constraints and regular discounts from McDonald's as well as shouldering renovation costs
Trouble is, it's tough to sell franchisees on a new quality gauge at the same time the company is asking them to do everything from offering cheap burger to shouldering renovation costs. Franchising works best when a market is expanding and owners can be rewarded for meeting incentives.
Franchising is not as attractive as it used to be before; this is because franchising works best when the market is expanding which is clearly not the case for McDonald's for the recent years. For example, owner Steinig's who owns four restaurants says that sales haven’t budged since 1999 meanwhile costs are rising in addition profit margins are no more than half of what they were when they started out
3. The Quit of some franchisees as a result of the new trends in consumer tastes
Already franchisees who see the chain as stuck in a rut are jumping ship to fastergrowing rivals. Paul Saber, a McDonald's franchisee for 17 years, sold his 14 restaurants back to the company in 2000 when he realized that eating habits were shifting from McDonald's burger to fresher better tasty food." The McDonald's- type fast food isn't relevant to today's consumer" says Saber.
4. Upgrading equipment's strategy •
New kitchen upgrades should be more carefully studied to prove that it will enhance the service efficiency process. This is to avoid future company mandated “made for you” kitchen upgrades which was intended to speed up orders ,and accommodate new menu items ,however it turned out to slowdown the service.
Ex: "made for you" kitchen upgrades made Raggie Webb, who operates 11 McDonald's restaurants in Los Angeles fear to be obliged to pay again if McDonald's includes his units in the next 200 restaurants it selects for refurbishing, as franchisees pay 70% of its $150,000 cost.
Different managerial approaches implemented by different executives on the McDonalds franchisee's performance problems:
1. Cantalupo strategy to enhance the performance of franchisees (Cantalupo was the man behind McDonald’s successful international expansion)
To get rid of the weakest franchises; Cantalupo enforced a "tough love" program that the Greenberg reinstated in 2002 after the company gave it up in 1990. Owners that flunk the rating and inspection system will get a chance to clean up their act. But if they don't improve, they'll be booted. Alternatives: 1. Rewarding Renewing the old strategy of McDonald's, as in the past franchisees that beat the McDonald's national sales average were typically rewarded with the chance to open or buy more stores. Pros: rewarding the best performers has always been a successful tool to motivate and give incentives to continue in the successful act, so it can be a tool to encourage underperforming franchisees to follow the standards of cleanliness, quality and speed. Cons: rewarding the best performers by allowing them or facilitating for them, the openness of new stores will lead to more expansion for McDonalds, which is a strategy that Cantalopo had seen that it was not always effective unless following a strict strategy for quality
2. Decreasing the share of the franchisees in the upgrading costs
Any added cost as a result of the equipments'' upgrading process cut the profit margins of the franchisees which may discourage the franchisees to follow the upgrading process to improve the product quality and speed; that is why McDonald's have to get them to involve into its plan by decreasing the percentage of the total upgrading costs that they have to pay. That is why new
kitchen upgrades should be more carefully studied to prove that it will enhance the service efficiency process , Pros: it will encourage underperforming franchisees to upgrade their equipment in the aim to improve their production process quality and be aligned with McDonald's standards of performance, which will , on the long run, regain the trust of customers in the quality of McDonald's and its efficient production process. Cons: this alternative will add to burdens of McDonald's corporation and decrease their profits.
3. Using the "up or out" technique through applying the mystery shoppers and
unannounced inspections technique Applying the " up or out" technique suggested by Cantalopo which is a tool to monitor the performance of the franchisees, by using the mystery shoppers techniques or the unannounced inspection technique. Using this technique will force underperforming franchisees to go out if the business. Pros: this alternative is considered the easiest way to inspect and monitor the performance of the franchisees and will be the least costly, and will consume the least time. Cons: it may not be the most efficient technique for monitoring because it may depend on the behavior of the employees and the time in which the inspection is done.
4. Decreasing the McDonald's share in the franchisees' revenues:
Pros: it will encourage the franchisees to continue with McDonald's which will lead to the spread of the chain all over the world, and of course it well lead to increasing the sales and the revenue. Cons: it may have bad effect on the profitability of the company in the short run and long run. Recommendations: According to the previously suggested alternatives to enhance the relationship between McDonald's corporation and the franchisees, we would choose the third alternative that was also suggested by Cantalopo "up or out" for the following reasons: • • It will be the least costly Gives direct indicators on the performance of the franchisees in the least time.
Issue Two: Changing Consumers Preferences and Competition
Introduction: New trends in consumer preferences of fast food are considered one of the main reasons of McDonald's downfall since the 1990's, and this is relevant to:
Customers preferred eating at home. Customers became more health conscious and selected fresh food over fatty, fried food and red meat.
Obesity became a major health problem in late 1990s. According to a report by American Medical Association, 30.5% of Americans were obese and 15% of the children aged between six and nine were overweight.
Some of McDonald's type of food should not be consumed more than once a week which could lead to problems such as obesity, diabetes and heart disease.
N.B. "The McDonald’s type of fast food isn't relevant to today’s customer" (said by -A Mc Donald’s Franchisee) Performance Drivers concerning the changing consumer preferences and competition:
1. Adding new items to the menu was not always the effective solution to apply the targeting
The introduction of 40 new menu items, none of which caught on big, and the purchase of handful of non-burger chains, none of which were rolled out widely enough to make much difference.
By the late 1990s, it was clear that the system was losing traction. New menu items like the low fat Mclean Deluxe and Deluxe burger, meant to appeal to adults, bombed. Nonburger, offerings did no better, often because of poor planning.
Even introducing new menu's needs a careful study and planning; this was clear when non-burger offering didn’t better, often because of poor planning. Consulting firm in West Hartford Conn., points out that McDonald's offered a pizza that didn't fit through
the drive-through window and salad shaker that were packed so tightly that dressing couldn't flow through them. McDonald's posted its first-ever decline in annual earnings & then-CEO Micheal R. Quinlan was out, replaced by Greenberg, a 16 years McDonalds veteran.
The newly introduced menu items by Greenberg after acquiring Chipotle Mexican Grill and Boston market Corporation was not successful. As Franchisee Webb said: "we would have been better off trying fewer things and making them work".
2. New trends in the market constituted a strong competition threat on McDonald's •
McDonald's didn't introduce new products to face changes in the market like: the trend towards toward healthier and better tasting food as well as the recent change in consumer behavior where Americans immigrants buy foods like Sushi and quick meals of all sorts.
The chain faced a rapidly fragmenting market, where America's recent immigrants have made once-exotic foods like sushi and burritos everyday options and quick meals of all sorts can be found in supermarkets, convenience stores, even vending machines.
The emergence of the fastest growing restaurants categories which is the "fast-casual" segment- those places with slightly more expensive menus, such as Cosi, a sandwitch shop, or Quizon's, where customers find the food healthier and better tasting. As lederhausen said” we are clearly living through the death of mass market”
Any company today has to be very vigilant about their business model and willing to break it even if it is successful to make sure that they stay on the top of the changing trends
One of the main weaknesses was that there were No new innovations to face new trends of eating tastes ;e.g. healthier food or better tasting menu’s ,in addition the change in the demographics of consumers such as immigrants should have been faced by a marketing plans with new menu’s matching their tastes and cuisines.
3. New habits in the market (looking for healthier, more tasty food) •
Paul Saber, a McDonald's franchisee for 17 years, sold his 14 restaurants back to the company in 2000 when he realized that eating habits were shifting away from McDonald's burgers to fresher, better tasting food.
Getting the recipe right will be tougher now that consumers have tasted better burgers. As while McDonald's says it may start toasting its burns longer to get the flavor right, rivals go beyond; they grill burgers when ordered – no heat lambs to warm up precooked food.
The new executives now faces a tougher job as now consumers have tasted better burgers which other competitors offer; in order to get over customer loyalty to other rivals they are going to use Rejuvenated marketing and advertising ; McDonald's now needs to recapture its magic again. The success of this stage is going to shape whether they just fade away or regain their feet in the market again.
Different managerial approaches implemented by different executives on the McDonalds changing customer preferences problems:
1. Greenberg: •
His tenure was marked by the introduction of 40 new menu items, none of which caught on big, and the purchase of handful of non-burger chains, none of which were rolled out widely enough to make much difference.
He was unable to focus on the new ventures while also improving quality, getting the new kitchens rolled out, and developing new menu items.
He said: “The world’s has changed. Our customers have changed. We have to change too.”
He chose to work with younger McDonald's executives, whom he feels will bring energy and fresh ideas to the table. Bell formerly president of McDonald's Europe Launched a separate coffeehouse concept, McCafe which achieved success in France and apparently targeting the new segments of customers who were not satisfied through regular cookie cutter orange and yellow stores for individualized ones that offer local fare like the ham and cheese Corque McDo.
Encouraging the innovative franchisees; such as Irwin Krugerm who opened in New York a 17,000- square foot showcase unit in Times Square with video monitors showing movie trailers.
Alternatives: 1. Encouraging the innovative new franchisees The introduction of the new "Mccafe" is the best example of this solution, which introduced new successful McDonald's services to a new segment of consumers. Pros: it will expand the McDonald's stores but while introducing a new product that will have an increasing growth rate, and at the same time it will target a new segment of consumers far away from the traditional McDonald's products. Cons: its success will depend on the market where we are opening these new stores, because if this market is saturated with this king of products, it may affect McDonald's success in this new field. 2. Introducing new "customized products" Consumers such as immigrants or in countries of special tastes or tradition may prefer to have products that match with them, and should have been faced by marketing plans such as new menu’s matching their tastes and cuisines. Example: Suchi and burritos, McArabia for Arab Countries. Therefore producing customized products for them will be a key factor for increasing McDonald's success and market share in these markets. Pros: Such Introduction will enhance Profits through niche market; As niching is profitable as market nicher ends up knowing the target customer group so it meets their needs better than other firms that casually sell to this market. The key idea in niching is specialization like specific customers. Cons: sometimes a product succeed in a foreign market because it is different from what the people in this market are used to. So these customized products may not achieve the expected success. 3. Introducing a line of "healthy food" They have to understand the new consumer trends and food patterns and go with the customer satisfaction and keep their loyalty. And since the health issue became more important to consumer in the current market, then McDonald's have to take this new concerns of customers into consideration and begin to plan for a whole new line of healthy food that can compete with other rivals who had already introduced it. Pros: attracting a new segment of consumers who are more health conscious and prefer fresh food over fatty, fried food and red meat. Cons: it may not succeed as much as the older brands who were known for this kind of food such as Cosi, a sandwitch shop, or Quizon's.
4. Marketing campaign to change the consumers' perception about McDonald's
McDonald's biggest challenge is going to be changing consumer perceptions about the quality of the food and service offered in McDonald's food chain restaurants, and that can be implement through launching a campaign focusing on the improved quality, service and cleanliness to address complaints about bad service. Pros: improving the quality, services and cleanness of the company which well attract new customers and encourage the franchises to work with McDonald's chain. Cons: the campaign can be costly.
5. Targeting the price sensitive customers
Target customers seeking the competitive prices through expanding the offers of the "low prices" such as $ 1 menu which targets price sensitive customers. Pros: Introducing new offers to such sector would help McDonalds increase its market share through targeting a new segment of customers. Cons: when McDonald's followed a discounting strategy to cope with the prices war, it had bad effect, it risks cheapening the brand.
Recommendations: According to the previously suggested alternatives to cope with the changing consumer preferences and competition, we would choose the first alternative that was " Encouraging the innovative new franchisees" for the following reasons:
It will change the customers perception about McDonald's traditional products and thought attracting new customers and keeping "McDonald's lovers" loyal to their favorite brand.
Introducing new products as Mccafe will increase McDonald's market share in the market of this new product.
Issue three: The performance of McDonald's restaurants
Introduction: Problems in the internal operations of McDonald's Corporation and franchisees was one of the main reasons behind the downfall of McDonald's during the past years which can be summarized into the following (according to several market studies that was held on McDonald's):
• • •
The deteriorated Relationships with franchisees. Its continuous expansion resulted in a fall of the franchisees’ revenues and profits. For every new restaurant that was opened, a McDonald’s store in the vicinity lost anything from 6% to 20% of its revenues.
Its continuous expansion had an adverse effect on service and quality. It stopped grading its franchisees by mystery shoppers on parameters such as cleanliness, speed and service.
In 1999, it introduced a made-to-order system called ‘Made for You,’ to counter custom made food systems at Wendy’s and Burger King. However, both the systems stretched the time required to serve the customers, instead of improving it.
It met the speed of service standard only 46% of the time. Slow services and rude unprofessional employees were major sources of customer complaints.
Although considered the most innovative company in fast food segment, failed to come out with blockbuster products.
Successful innovations were from yesteryears: Big Mac(1968), drive thru(1975), Breakfast(1977), Happy Meal(1979) and Chicken McNugget(1983).
40 food items such as lasagna, pizza and carrot sticks failed. Adult food items like McLean and Arch Deluxe burgers failed. Company changed its views so many times that it was not possible to know company’s stance.
In 1997 , franchisees vetoed McDonald’s plans to serve customers in 55 seconds or less, saying that it was not practical.
Franchisees operated secretly due to fear of retribution from the company, It attempted “system wide propaganda” that franchisees loved expansion.
CEO Greenberg shrugged it off saying- “Our relationship with the licensees is absolute best in the business.”
N.B. “ McDonald’s need to move the question from ‘How can we sell more hamburgers?’ to ‘What does our brand allow us to consider selling to our customers?’” -ADRIAN J.SLYWOTSKY, A PARTNER AT CORPORATE DECISIONS INC., A CONSULTING FIRM IN CAMBRIDGE MASS. Performance Drivers concerning the performance of McDonald's restaurants: 1. Pricing problems:
In spite of the $1 menu (low prices) in the five months since its debuts. It has done nothing to improve McDonald's results.
One of the biggest sore points for franchisees is the top-down manner in which Greenberg and other past CEOs attempted to fix pricing and menu problems.
Franchisees beef about McDonald's addiction to discounting, when McDonald's cut pieces in a 1997 price war, sales fell over the next few months. The lesson should be obvious." Pulling hard on the price lever is dangerous. It risks cheapening the brand" says Sam Rovit, a partner at Chicago consultant Bain & Co.
Unplanned discounting not only decreases profits but also harmed the brand by cheapening it, which made franchisees sell their shops to McDonald’s rivals like Panera Bread Co.
2. Efficiency and effectiveness problems
McDonald’s lost its competitive advantage when McDonalds came in third in average service time behind Wendy's and sandwich shop.
According to a 2002 survey by Columbus (Ohio) market researcher Global Growth Group McDonald's came in third in average service time behind Wendy's took an average 127 seconds to place and fill an order, vs. 151 seconds at chick –fill- A and 163 at McDonald's. that may not seem like much , but Greenberg has said that saving six seconds at a drive –through brings a 1% increase in sales
The decline in McDonald's once-vaunted service and duality can be traced to its expansion of the 1990s, when headquarters stopped grading franchises for cleanliness, speed, and services.
3. High Costs of upgrades: •
Many owner- operators still grumble over the$ 18.000 to $100.000 they had to spend in the late 1990s to install company – mandate "Made for You" kitchen upgrades in each restaurant. The new kitchens were supposed to speed up orders and accommodate new menu items, but in the end, they actually slowed service.
Franchisees were afraid to be chosen by McDonald's for the next restaurants to apply the upgrades, which would cost them 70% of this $ 150,000 cost.
Different managerial approaches implemented by different executives on the McDonalds performance problems: 1. Greenberg:
He won points for breaking the chain's runaway U.S. expansion. He also broadened its portfolio acquiring Chipotle Mexican Grill and Boston market Corporation but he was unable to focus on the new ventures while also improving quality, getting the new kitchens rolled out, and developing new menu items.
Greenberg and other past CEOs attempted the top-down manner to fix pricing problems.
Soon after taking over as the CEO of McDonald’s, Cantalupo has taken various steps to reverse the download slide of McDonald’s. His plans- to rebuild the foundation- “more customers in existing stores”.
He cancelled an expensive stock buyback program. He put more emphasis to- cleanliness, service and staff productivity.
He aimed- to bring customers back. Reduced capital spending Get rid of undesirable marketing activities. He introduced the national ad campaign- “dollar value menu”- Big ‘n’ Tasty burger, McChicken sandwich, special sizes of fries, soda, salad and various desserts.
Environmental trends that affected the performance of McDonald's
The strong Dollar and the mad cow disease may have affected the performance of McDonald's and the fast food industry as a whole.
1. Promote & reposition existing the brand:
And implement mechanisms to achieve greater linkage & coordination such as increasing speed of service across workforce programs & services , and new kitchen upgrades should be more carefully studied to prove that it will enhance the service process efficiency, because according to studies just 6 seconds at a drive-through increased the sales by 1% which consequently affects company's profits. Pros: saving the traditional McDonald's classical menu that most of McDonald's customers love, also this Cons: an opportunity cost that could be invested in creating new items to be added to the menu, in addition to reposition the existing menus would divert our demanding customers who were seeking new or innovative products. 2. Decreasing the share of the franchisees in the upgrading costs Pros: it will encourage underperforming franchisees to upgrade their equipment in the aim to improve their production process quality and be aligned with McDonald's standards of performance, which will , on the long run, regain the trust of customers in the quality of McDonald's and its efficient production process. Cons: this alternative will add to burdens of McDonald's corporation and decrease their profits. Recommendations: According to the previously suggested alternatives, we recommend to choose the "Decreasing the share of the franchisees in the upgrading costs" for the following reasons:
Encouraging the franchisees to continue with McDonald's.
By reducing the amount paid in the upgrading process, it can use these funds in enhancing the employee skills through training.
According to the previously suggested recommended alternative to each of the three problems the company of McDonald's is facing; we recommend the following Action Plan:
We should start with "up or out" technique to overcome the problem of the underperforming techniques, and this technique will be the easiest to apply and the least costly to monitor the performance of the franchisees, and can be applied quicker than other techniques.
The second step in our action plan is to apply the alternative of "Decreasing the share of the franchisees in the upgrading costs" because that is considered a direct incentive for the franchisees to follow the upgrading plan put by McDonald's and will have a positive effect on the efficiency of the McDonald's products.
The third step is applying "Encouraging the innovative new franchisees" for the following reasons: because It will change the customers perception about McDonald's traditional products and thought attracting new customers and keeping "McDonald's lovers" loyal to their favorite brand.
1. Watching the new market trends and the changing customers' preferences permanently is
very essential if the company wants to continue growing in the market, or even to continue existing in the market.
2. Expansion of the business is not always the solution for declining market share. 3. Long run planning and product design is very essential to grow the market share of any
4. Applying new innovative ideas is important for segmentation and targeting, and to keep the
customers loyal to their favorite brand.
5. Different customers' needs and preferences may force the company to introduce customized
products to fulfill these different needs. 6. Apply the customer relationship management concepts with current and expected segments.
7. Using the flank attack to keep the competition.
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