McDonald’s Business Model:

Case Study

EP60006: Management of Growth Ventures

February 1, 2022
Yash Anup Vora, Anurag Jain, Sambhaw Kumar, Mohit Rane
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● McDonald’s Business Model

The business and revenue model of
McDonald’s encompasses nearly
37000 outlets which cover more than
120 countries. Today, McDonald’s is
the largest restaurant chain in the
world in terms of revenue.

The McDonald’s restaurant opened

by Maurice and Richard McDonald

McDonald’s essentially earns money by leveraging their quick meals produced by

franchisees who must lease facilities that are typically owned by McDonald’s at hefty
markups. According to the 2019 reports, McDonald’s operated 36,059 of the 38,695
restaurants in the remainder. Thus, about 93% of the overall capacity is franchised,
which still falls short of McDonald’s long-term target of 95%.

Source: https://fourweekmba.com/mcdonalds-business-model/
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- Mc Donald’s focuses on and deals with three types of franchises.

1. Conventional
Franchising
The company obtains a lease
or owns the land and the
building where the restaurant
is situated. The franchisees
pay for decor, equipment,
seating, and signs. This type
of agreement is the best of its
kind, and it accounts for the
highest standards of
operational performance in
the QSR industry.
The franchisees also reinvest
their capital, with time. The
company provides them with
all the support that they need
to be successful. These
range from the
implementation of innovative
ideas to operational help.
Through this, the company
increases its overall value as
its functional restaurants
bring in more revenues.
2. Developmental License 3. Affiliates
Unlike conventional This type of agreement
franchising, the company accounts for equity
does not make any investments. McDonald’s
investment when it comes to receives a percentage of the
developmental license. The sales as a royalty.
licensed franchisee invests in
the entire capital. They also
China and Japan are the
pay for both the operational
largest affiliated markets of
cost as well as the real estate
McDonald’s, with each having
charges.
2,600 and 2,900 affiliated
restaurants, respectively. The
However, the company company has around 5,800
receives a royalty from the affiliated markets!
percentage of sales. The
company also gets a certain
amount for every license
provided to a new franchisee.
McDonald’s uses this
structure in more than 80
countries. Around 6,900
restaurants operate under
this structure.

This model benefits from a substantially more steady and, more critically, predictable
source of revenues (locality and royalty money derived from franchises) whilst
operational costs are far lower, hence facilitating the route to profitability. McDonald’s
can leverage its market position to negotiate deals because it has control over land and
long-term leases. This is the same as the subscription, which is paid monthly by the
subscriber (the franchisee).
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● How did McD’s Promotional strategy

adapt?
McDonald’s uses a lot of promotional techniques as promotional activities help build
brand loyalty and interest. It gives people who may not normally go to McDonald’s a
reason to go there.
Just like any other company, McDonald’s also sponsors various promotion campaigns to
push their brand. Promotions help in creating a sense of community and association
between the company and its customers

With an innovative approach to marketing and consumption patterns through

value-added menu improvements, McDonald’s aims to significantly improve market
share in key markets through continually improving customer satisfaction and attracting
new customers through cost savings, operational efficiencies, and improving brand
awareness.
“McDonald’s – I’m Lovin’ It…. Para Pap Pap Paa”
“I’m Lovin’ It… Para Pap Pap Paa” is a very
well-known jingle that has been used by
McDonald’s for a very long time now.

What is the best McDonald’s brand mascot? A

funny clown character that McDonald’s is able
to successfully market to both children and
adults. The brand mascot strategy was first
implemented by McDonald’s in 1963 and since
then this mascot has become an integral part
of the company’s legacy.

It very recently collaborated with BTS – the very popular South Korean Music band
where it introduced a special McDonald’s meal called the BTS Meal. Likewise, it has
collaborated with artists like Travis Scott, J Balvin as well as Companies like Coca-Cola.
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● What are you learning about Growth

strategy from McD's case?

McDonald's is the real proof of these strategies, as it applied the 4 strategies in

the most effective way:

1. Market penetration: McDonald's always depends on fast food with lower prices.

2. Market development: McDonald's has over 30,000 branches in the world, it opens a
new one almost every month.

3. Product expansion: McDonald's takes the primary in developing the product as it’s
the first one who made a happy meal and a toy with it.

4. Diversification: McDonald's started a new business like McCafe, which is related to

its real work, and MCSTOPES a chain of small hotels, which is not related to its work.

5. Real Estate business: which is the main profit for McDonald's:

According to financial disclosures since 2017, franchises operate roughly 85% of

McDonald’s restaurants. The franchisees operate their restaurants under the franchise
agreement set forth by McDonald’s corporate.

McDonald’s decided to monetize their franchisees slightly differently. Rather than merely
relying on food sales they diversified their revenue stream and became the primary
landlord to many of their restaurants across the globe. McDonald’s has benefited
dramatically from the year-on-year real estate gains in the US and globally.

Essentially, their franchisees are paying them to lease lucrative properties which
McDonald’s corporate owns at the end of the day. While not all McDonald’s restaurants
are corporate-owned (about 15% of 36,000 restaurants), the rest of the locations are
privately owned by franchises. McDonald’s corporate is shielded from swings in the
fast-food market by the lease payments made by franchises.
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● What caused McD to stumble? (late 1990s)

McDonald's has been the subject of concerns about the health impact of its food. Critics
consistently point to the chain as a symbol of American issues with obesity and argue
that its drive toward low-cost, low-quality meals has contributed substantially to this
problem.

McDonald's first debuted its pizza in the '80s. The pizza became a part of a wider effort
from the chain to win over customers around dinnertime in the early '90s. McDonald's
also tested items including "grilled cod served on french bread with sauce, lettuce and
tomato, and 'Chicken Zestado,' a grilled chicken breast served on pita bread with salsa,"
the Associated Press reported in 1991.

Unfortunately, the McPizza — like most of McDonald's other attempts to expand outside
of burger and fries — did not really succeed. By the end of the '90s, nearly every
McDonald's in America had removed the pizza from the menu.

However, a few holdouts remained. Two McDonald's locations — one in Pomeroy,

Ohio, and the other in Spencer, West Virginia — continued to sell pizza until a few years
ago, when corporate McDonald's forced them to remove the menu item.

However, adding pizza seems out of line with McDonald's current strategy. Back in the
'90s, McDonald's struggled to speedily serve up pizza.
The chain has been simplifying its menu, with franchisees and employees pushing for a
permanent retirement for All Day Breakfast. Adding pizza would be the opposite of
simplification.
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● How the company restored its service

objectives?
McDonald’s change its strategy from growing in terms of quantity to grow in term of quality.
They realized that there was nothing wrong with their business model (franchising), but their
growing numbers of restaurants with compromising for quality was pushing them to wrong
direction. They realized that growth must be “deserved” in order to be sustainable. As long as
you are getting better, it is good to get bigger. But if you are buying size, particularly at the cost
of quality, then you are on a slippery and ultimately unsustainable slope.

McDonald’s focused on five Ps that would represent the primary areas of focus for any market:
people, products, place, price, and promotion. The Ps were organized around an operating
mission to “Become our Customers Favourite Place and Way to Eat.

In 2003, McDonald’s launched our new strategy, “Growth from being better.” We aligned the
entire company around this very simple idea. Human and financial resources were now directed
at truly improving, not just increasing, their activities.
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● How do You see the Competitive landscape of

McD?
McDonald’s is the second largest fast-food chain in the world with only Subway being larger
than them. Even though McDonalds is still America’s favourite fast-food chain, it has fallen from
the top spot and is now losing to its competition. This is why McDonald's has been changing
and adapting to what Americans want, such as healthier menu items and more variety.

McDonald's is one of the largest and most well-known fast-food chains in the world.
Privately-owned Burger King is McDonald's closest competitor. Burger King is probably the most
direct competitor for McDonald's, with its staple Whopper challenging the Big Mac in the burger
war. Yum Brands operates Taco Bell, KFC, and Pizza Hut. Subway is the largest restaurant chain
in the world in terms of size, but sales have been sliding since 2012. Subway is one of the
largest restaurant chains in the world in terms of size, with over 37,000 locations in nearly 100
countries, as of Aug 2021. The company’s menu consists primarily of sandwiches and salads.
Chipotle was formed as a spinoff from McDonald’s with a 2006 IPO and offers a range of
Mexican-inspired menu items. Starbucks is the world’s largest coffeehouse chain. As of
December 2020, the company operated more than 32,000 stores in 76 countries, including more
than 18,000 in the United States. The chain markets itself as a high-quality option at a high price
point.

The threat of substitutes (convenience food) was one of the main reasons in slowing down the
fast-food industry and McDonald’s, the giant in fast food, was suffered from this threat painfully.
Consequently, McDonald would end up with tougher competition in a global scale. It is
important to mention that in 1995, McDonald's starting receiving complaints from franchisers
that they were granting too many franchises and stealing business from current stores.
McDonald's was granting so many franchises that they began competing against themselves!
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● Franchisee Vs Own shops- How they are

relevant for McDonald case?

Franchising has enabled McDonald’s to experience significantly faster expansion and

growth, helping it to achieve a truly global brand identity and a well known trademark.
For example McDonalds now operates in more than 119 countries world-wide, serving
millions of consumers daily, the existence of the franchisee outlets globally have helped
McDonalds gain popularity and customer loyalty.

McDonalds is able to gain more income and revenues from the monthly fees (5%
service fee) and rent paid by its franchisees worldwide, this means they can generate
more finance which can later be used to develop and expand the business. Therefore
franchising gives the opportunity to franchisors to raise sufficient capital.

Franchising gives a chance to the franchisor to leverage the brand. By acquiring new
franchise outlets, McDonalds was able to get in touch with a wider target market and
reach more consumers globally, this in the long-run helped it achieve and maintain a
high market share in the fast-food industry and it also enhanced the company’s
corporate image and prestige.