McDonald’s

Team 1:
Chris Athens
Ben Baker
Chris Bolinger
Josh Carver
Jordan Guenther
Jeff Ward
 History
• 1948 – McDonald brothers open the first McDonald’s and names Speedee as
their company image.
• 1954 – Ray Krock, a multimixer salesman becomes the franchising agent.
• 1955- Ray Kroc opens the Des Plaines restaurant. The 1st day’s revenues -
$366.12
• 1957 – Ray Kroc hands out free hamburgers to Salvation Army guests
• 1958 – Sales grow 151%
• 1961 – Ray Kroc buyout the McDonalds brothers for $2.7 million
• 1963 – Ronald McDonald is introduced
• 1965 - McDonald’s goes public with the company’s first offering on the stock
exchange for $22.50 per share.
– First television commercial is aired
• http://www.youtube.com/watch?v=krXP_TUZqsk
 History
• 1966 – McDonald’s stocks split for the first time.
• 1967 - Big Mac invented
– McDonald’s in Canada and Puerto Rico open
• 1971 - “Makadonaldo” (Japan)
• 1973 - Egg McMuffin invented
• 1974 - Ronald McDonald House opened
• 1979 - Happy Meals introduced
• 1979-present - Continued growth
 Problems
• Customer Service
– McDonald’s is currently ranked last amongst its
top competitors in the FFHR subsector.
• #1 – Burger King
• #2 – Wendy’s
• #3 – McDonald’s

– This may not sound bad at first glance, but

when you look at the fact that these three
competitors hold 73% of the FFHR market, it
puts it into perspective.
 Problems (cont.)
• Health Issues
 SWOT Analysis - Strengths
• Worldwide Brand Recognition
• 41% of all fast-food visits are for hamburgers
– McDonald’s has 44% of US fast-food hamburger
business
• Over 70% of the restaurants are independently owned
• Ranked number one in Fortune magazine’s 2008 list of
“most admired food service companies.” Overseas
market
• Over 31,000 restaurants in over 120 countries.
SWOT Analysis – Strengths (cont)

• Quality measures through supply chain

management
• Encourage new ideas from within
– Big Mac
– Egg McMuffin
• Large available amounts of capital for
future restaurants due to holding a limited
number of corporate owned restaurants.
• Economies of scale
 SWOT Analysis - Weaknesses
• Weak product development
• Poor relationships with
franchisees
• Fluctuations in profit
Revenues & Profitability: McDonald's
(which has been improved Corporation

in 2008 after the

Profit Margin (%)

25000.00 20.00%

US Millions
20000.00 15.00%

franchising of many
Revenues
15000.00
10.00% Net Income
10000.00

corporate owned
Profit Margin
5000.00 5.00%

0.00 0.00%

restaurants) 2004 2005 2006 2007 2008

Year
SWOT Analysis - Opportunities
• International expansion through continued
franchise opportunities
– Only serving 1% of the world’s population
• Growth in the beverage industry (by 2011 -
$71.4 billion in sales with 70.8% being
coffee drinks)
• Introduction of local offerings (i.e. Tech
Burger with special condiments and toppings)
 SWOT Analysis - Threats

• Mature industry
• Strength of competition
• More health-conscious consumers
• Changing demographics
• Fluctuation of foreign exchange rates
• Increasing commodity and fuel prices
 Competition
• Top
– Burger King – 14%
– Wendy’s – 13%
• Other strong competitors
– Sonic – 6%
– Jack in the Box – 4%
– Hardee’s – 3%
– White Castle – 1%
 Marketing Techniques
• Product “Image”
• Customers associate with the brand
• Domestic
• Global
 Marketing Techniques
(cont.)
• Original symbol “Speedee”
• Golden Arches
• Building structure and colors
• Local advertising
 Slogans
• “Your kind of place” (1967)
• “You deserve a break today” (1971)
• “We do it all for you” (1965)
• “Have you had your break today” (1995)
• “I’m lovin it” (2003)
 Marketing Mix
• Five P’s
• Marketing and Communications
• Responsibility
• McSpirit Nights
• Commercials
• Atmosphere
 Global Marketing
• National Marketing Campaign
• Marketing-
– North America
– Hong Kong
– France
– Australia
– Catering to local needs across sea’s
 Management In
McDonald’s
Ray Kroc
• “The quality of a leader is reflected in the
standards they set for themselves”
• “We take the hamburger business more
seriously than anyone else”
• “You're only as good as the people you hire”
• “If there is time to lean there is time to
clean”
 Hamburger University
“McDonald’s Center of Training
Excellence”
• Created by Fred Turner and Ray Kroc in
1961
• All levels of managers in the McDonald’s
family go through training at this facility.
“At McDonald’s, our training mission is to be the best
talent developer of people with the most committed
individuals to Quality, Service, Cleanliness and Value
(QSC&V) in the world. Our strong commitment to the
training and development of our people has resulted in
many “firsts” and honors.”
 Management Continued
• Hamburger University has given emphasis to
consistent restaurant operations procedures,
service, quality and cleanliness.
• Because of it’s success H.U. has become the
global center of excellence for McDonald’s
operations training and leadership
development.
• With this training it creates unity for the CEO
to the local store manager, they all have the
same goals in mind which is…………….
Being the best means providing outstanding
quality, service, cleanliness, and value, so that
we make every customer in every restaurant
smile. And by doing this we are our
customers' favorite place and way to eat."
 Financial Health
• We looked at 4 major aspects of financial
health of McDonald’s and their competitors
– Liquidity
– Leverage
– Rates of Return
– Stock Market Ratios
• We also took Altman’s Z-Score into
account to see how healthy these
companies were during the recession.
 Liquidity
• The ability to meet current obligations
• We took into account the Current Ratio
and the Quick Ratio.

• Current Ratio = Current Assets/Current

Liabilities.

• Quick Ratio = (cash + marketable securities

+ net receivables) / Current Liabilities
Current Ratio in 2008
2

1.39
1.5
1.11
0.89 0.88
1 0.76

0.5

0
MCD WEN BKC JACK SONC
 Quick Ratio for 2008
• *If the current ratio is above 1, and the quick ratio is
below 1, then a manager may need to look at the valuation
of inventory or the inventory turnover.
2

1.5 1.34

0.89 *0.97
1 0.84
0.71

0.5

0
MCD WEN BKC JACK SONC
 Leverage
• The ratios between debt and equity which
provides information about bankruptcy.
• We will look at the Debt-to Asset Ratio
and the Debt-to-Equity Ratio
• Debt-to-Asset = Total Liabilities/Total
Assets
• Debt-to-Equity = Long-term
Debt/Shareholder’s Equity
 Meaning of Ratios
• Debt-to-Asset shows whether assets are financed
through equity, value under 1, or financed through
debt, a value above 1.
– Above 1, might mean trouble if the company is
under pressure.
• Debt-to-Equity shows whether a company can
generate new funds from the capital market.
– A higher ratio means a company is thought to
have smaller new-financing capacity and will
have trouble finding future financing funding.
Debt-to-Asset for 2008
1.5

1.08
1
0.69 0.6
0.53 0.49
0.5

0
MCD WEN BKC JACK SONC
Debt-to-Equity for 2008
2

1.5
1.03 1.13

1 0.76
0.45
0.5

0
MCD WEN BKC JACK
• SONC had a -11.24 ratio largely due a buy back of
treasury stock, because they thought their stock
was undervalued.
 Altman’s Z-Score
• The score analyzes the future success or
failure of a company.
• Z-Score =
– A x 3.3 + B x 0.99 + C x 0.6 + D x 1.2 + E x 1.4
• A= EBIT/Total Assets
• B= Net Sales/Total Assets
• C= Market Value of Equity/Total Liabilities
• D= Working Capital/Total Assets
• E= Retained Earnings/Total Assets
 Evaluation of Score
• Score < 1.8 indicates bankruptcy is high
• Score > 1.8 but < 2.7 bankruptcy is fair
• Score >2.7 but < 3.0 bankruptcy is possible,
but not likely,
• Score > 3.0 indicates bankruptcy is low and
company is in good health.

• McDonalds Score was 3.04 for 2008.

 Return on Assests
• Return on assets (ROA) is an indicator of
how profitable a company is relative to its
total assets.
• ROA gives companies and organizations an
idea as to how efficient their management
is at using their assets to create earnings.
• In order to calculate return on assets, you
must divide a company's annual earnings by
its total assets; ROA is displayed as a
percentage.
 Return on Assets
• ROA tells you what earnings were produced
from invested capital or assets.
• ROA for public companies can vary
substantially and will be highly dependent
on the industry.
• This is why when using ROA as a
comparative measure, it is best to compare
it against a company's previous ROA
numbers or the ROA of a similar company
 Return on Assets
2008 ROA 5 year Average
MacDonald’s 15.2% 10.5%
Sonic 10.6% 10.3%
Burger King 7.10% 3.20%
Jack in the Box 7.60% 7.40%
Wendy’s -10.3% -4.50%
 Return on Assets
• This shows that if MacDonald’s net income was
generated from their total value of assets, the
return would be right around 15 cents per dollar.
It is also a great indicator of how efficient
MacDonald’s is at using their assets to generate
income.
• On the other side however, Wendy’s would show a
lose of 10 cents on the dollar if their net income is
based off their total value of assets. Sonic would
have a gain of 10 cents on the dollar while both
Burger King and Jack in the Box would have 7
cents gain on the dollar.
 Return on Equity
• The amount of net income returned as a
percentage of shareholders equity.
• Return on equity measures a corporation's
profitability by showing how much profit a
company makes with the money shareholders have
invested.
• ROE is expressed as a percentage and calculated
by dividing net income by shareholders' equity.
• ROE is useful for comparing the profitability of a
company to that of other firms in the same
industry.
 Return on Equity
• These numbers tell us how much profit is being
produced from money that investors have provided
to these companies.
• 15-20% is usually considered exceptional. For
every dollar of income 20 cents can be credited to
the investor’s capital.
• This ratio is often considered the most important.
The main goal of any company is to maximize
shareholder wealth.
• This ratio tells you and your investors how much
money you are making off their money.
 Return on Equity
2008 ROE 5 year Average
MacDonald’s 32.2% 20.6%
Sonic 44.1% 36.3%
Burger King 20.9% 13.8%
Jack in the Box 23.0% 19.3%
Wendy’s -55.9% -41.3%
 Return on Equity
• According to the information, Sonic and
MacDonald’s are leading the way by making 44
cents and 32 cents for every investor’s dollar
respectively.
• Jack in the box makes roughly 23 cents per dollar
while Burger King makes 20 cents. All four of
these are considered to be outstanding.
• Wendy’s is not fairing very well. For every dollar
an investor puts into Wendy’s, they are losing
almost 56 cents in return. That is not what a
company wants to see if they are looking for
potential investors.
 Stock Market Ratios
• The three most common ratios used are:

1. Price-Earnings Ratio (P/E Ratio)

2. Earnings per Share (EPS)
3. Dividend-Yield Ratio
Price-Earnings Ratio (P/E)
• The P/E ratio (price to earnings) of a stock is a
measure of the price paid for a specific share,
which is relative to the annual net income or profit
which is earned by the company per share

• P/E ratios are segmented between high and low

– A higher P/E ratio means that investors are
paying more money for each unit of net income
– Therefore, the stock is more expensive if
compared to another stock with a lower P/E
ratio
 McDonald’s P/E Ratio
• McDonald’s has a current P/E ratio of 15.1.
However, the company’s P/E ratio for fiscal
year end 2008 was 28.0.

– either the stock is overvalued or the

company's earnings have increased since
the last earnings figure was published
 Sonic Co. P/E Ratio
• Sonic Corporation has a current P/E ratio
of 12.2. The company’s P/E ratio for fiscal
year 2008 was 22.5

– An end of year P/E ratio between 17-25

will usually indicate a growth stock, with
earnings expected to increase
substantially in the near future
Burger King & Jack in the
Box’s P/E Ratios
• The two company’s current P/E ratios are
17.3 and 13.5 and their end of year ratios
were 22.1 and 21.2 respectively

– Investors are hoping that both of these

stocks will be growth stocks that will
increase substantially in the near future
Wendy’s/Arby’s P/E Ratios
• At the end of fiscal year 2008, this
company’s P/E ratio was 37.3

– A company whose shares have an extremely high P/E

ratio have high expected future growth in overall
earnings, or the stock may be subject to a “speculative
bubble”

– These stocks have the potential to trade in high volumes

at prices that are considerably different than the
intrinsic values
Earnings Per Share (EPS)
• Earnings per share are the earnings which
are returned on the initial investment
amount. This is calculated by:

– EPS = (net income - preferred dividends)

/common shares outstanding
Fast Food Industry’s EPS
Last AVG
Company Date Actual EPS
Estimate

McDonald’s Dec. 2008 3.76 3.63

Sonic Aug. 2008 0.97 0.98

Burger King Jun. 2008 1.38 1.35

Wendy’s/Arby’s Dec. 2008 -0.75 0.13

Jack in the Box Sep. 2008 2.01 2.00

 What Does This Mean?
• McDonald’s has reported an average annual
increase in its EPS since 1998

– This makes McDonald’s more appealing to an

investor because the basis of the EPS ratio is
the earnings which are returned on the initial
investment
McDonald’s EPS Over the
Last Decade
 Dividend-Yield Ratio
• The dividend yield on a company stock is the
company’s annual dividend divided by price per
share

Company Price/Share Annual Dividend Dividend Yield

McDonald’s $54.82 $2.00 3.65%

Sonic NA NA NA

Burger King $22.68 $0.25 1.10%

Wendy’s/Arby’s $5.30 $0.06 1.13%

Jack in the Box NA NA NA

 How Does This Affect
McDonald’s?
• McDonald’s has been consistently increasing its
dividends for the past thirty years
– From 1998, up until 2007, this dividend growth stock has
delivered an annual average total return of 11% to its
shareholders
– Over the past ten years, the annual dividend payments
have increased by an average of almost 25% annually,
which is much higher than the before mentioned growth
in EPS

• This 25% growth in dividends translates into

McDonald’s dividend payment doubling nearly every
three years
 Dupre Elementary
1st grade class
• “If you could eat at McDonald’s or Burger
King for lunch today, which one would you
pick?”

– 94% responded “MCDONALDS” with

thunderous cheers
– 6% responded “Burger King” without
much enthusiasm
“Get the kids…and the
parents will follow.”
 Past Strategies
• Product Development

– Hits: Fries, Happy Meal, Big Mac, Egg

McMuffin, Salads, Apple Slices, Yogurt
Parfaits, & Promotions

– Misses: McPizza, Fajita, Carrot Sticks, McLean,

and the Arch Deluxe
 Past Strategies (cont.)
• Market Development
– Hit: International growth
– Miss: Over-expansion in US
• Alternative locations
• Forward Integration
– Distribution through franchisees with
control over store presentation, menu
items
 New Strategies
Product Development: Focus on core
business
– Quality and taste issues
• Food delivery methods
– Family Value Meal
• Thursday’s $1.59 Happy Meal
 New Strategies (cont.)
• Redevelop Franchisee Relationships
• Market Penetration and Development
– Continue International expansion
• Cost Reductions
– Home office cost reductions
– Franchising corporate owned restaurants
 Recommendations
• Improvements in:
– Customer Service
• Focus on team, not individuals
• Reward the behavior that you want
– Training/Compensation
• Training in customer service, speed and accuracy
• Increase pay to attract more qualified applicants
– Technology
• Improvement of order verification system
– Continued Growth of International Market
Thank you from Team 1