Food Industry: McDonald’s Company

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Introduction

McDonald’s has impacted the food industry within the global capacity. The company can be credited with the development of the revolutionary idea of fast-food. Today, the firm is one of the largest fast-food chains across the world. Currently, it has over 30,000 restaurants serving around 46 million customers in over 110 countries daily. In 2019, the firm reported revenue of $21.1 billion, illustrating how well it is doing in the market. McDonald’s continues to implement changes to increase its market share in a highly competitive market. For example, in 2018, it cut out non-natural ingredients from its seven classic burgers. The case of McDonald’s can be analyzed in different approaches, such as the kind of market the company belongs to, price elasticity of demand for its goods and services, closest competitors, macroeconomic environment, and close substitutes.

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McDonald” Income Statement (2019)

Market McDonald’s Market Segments

McDonald’s franchise operates in an oligopoly market due to many features. Oligopolistic markets are characterized by price rigidity and were that impacts McDonald’s pricing strategies. One reason why the firm operates in oligopolistic markets is that the fast-food sector consists of a small number of larger sellers. Therefore, every seller in impacts other sellers influencing the market. The company is considered an oligopoly since it is one of the few large firms offering similar products and dominating the fast-food industry. McDonald’s, along with its major competitors, are under the economies of scale and operating in a market characterized by many barriers of entry. The business has a long-run average total cost that declines if its operations or its size increases. Therefore, the above factors indicate that McDonald’s operates in an oligopoly market.

Price Elasticity of Demands for Goods that McDonald’s Sells

McDonald offers both fast foods and nonalcoholic beverages; the price elasticity is under one. The analysis of its price elasticity also factors food away from home, further bringing the elasticity closer to one. Overall, the price elasticity for its fast food is between 0.7 and 0.8, indicating that the demand for the firm’s food and beverages is highly sensitive to price changes. The fast-food industry is characterized by constant price fluctuations, mainly due to high competition. If the price of a specific product increases by one percent, the projected decrease in demand will be between 0.7 percent and 0.7 percent. Hence, the price elasticity for food and beverages is highly influenced by constant changes in prices.

The need for the firm’s products is elastic, meaning that price changes affect demand in the short-term. In most cases, the changes in price are the result of the corporation’s decision or uncontrolled regulations, such as tax. Loyal customers cannot reduce their demand rate or shift to alternative products even when the firm changes its price. However, as noted above, its demand is elastic, which poses risks to its market position. The company remains vulnerable to many factors that may influence price changes. For example, there increased concerns about the health of the food products it offers; increased focus on healthy eating habits by many people raises concerns about the firm. Therefore, McDonald’s must consider these factors and develop new solutions to deal with changing the economic and social elements of its customers.

Income Elasticity the Products of the Company Face

McDonald’s offers healthy foods and beverages with demand and supply curves that follow market conventions. For example, a price increase results in high supply, and during this time, demand either increases or decreases. On the other hand, a price increase in products results in demand decline when other factors remain constant. The firm’s customers buy more products when their income increases; for example, the company records more sales during the end months. Demand by customers also decreases during harsh economic conditions and when they lose jobs resulting in having less disposable income. During such times, the income elasticity is elastic. The income elasticity only becomes inelastic for specific foods, such as burgers. An increase in consumer income will only raise demand to a certain level before the customer opts for other pricier foods that consider to healthier. Hence, income elasticity of demand for McDonald’s products varies depending on price, consumers’ disposable income, and specific food that are unhealthy.

Competitors

McDonald’s is always fighting to maintain changes in demand due to the increased number of rivals. The firm’s most significant competitors include:

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Burger King

The Burger King is the most direct rival for McDonald’s with a considerable market share. By the end of 2018, it had over 17,000 locations in over 100 countries. The company recorded an estimated 11 million daily customers from all its restaurants.

Wendy’s

Wendy’s has more than 6,700 locations globally and focuses on similar fast food products as McDonald’s and Burger King: burgers and fries. As of March, this year, the firm had made around $3.7 billion, and its stock was trading at approximately $17 per share. Wendy’s also offers direct competition to McDonald’s, considering the two sell similar products.

Yum Brands

Yum Brands has multiple large quick-service restaurant chains, such as Taco Bell, Pizza Hut, and Kentucky Fried Chicken. The firm has over 49,000 restaurants in over 140 countries.

Starbucks

Starbucks ranks as the largest coffeehouse chain globally. It has an estimated 30,000 stores in 76 different countries. In the United States alone, it has over 14,000 stores. The firm offers foods, such as sandwiches as well as coffee and other beverages.

Close Substitutes/Complements

There multiple products that can act as close substitutes or complements for McDonald’s products based on their elasticity of demand. Consumers often go for substitutes when they do not want to buy any of McDonald’s for different reasons, such as price and preference. McDonald’s and Burger King are close substitutes. For example, if McDonald’s offers meals at a higher rate than Burger King, many consumers will opt for Burger King due to the low price. Most of McDonald’s products have complements; for example, Burger King offers Pepsi at a price that is almost the same as the coke provided by McDonald’s. These two can introduce the case of substitute based on customers’ preferred taste. Since the price of the two soft drinks is almost the same at the two restaurants, some customers will prefer to buy their products at McDonald’s because they prefer the taste of coke over that of Pepsi.

Most of McDonald’s foods and beverages are common among fast-food restaurants; therefore, customers can find substitutes easily at the company’s rivals. For meals, such as burgers, the firm can difference by producing in different tastes and sizes to ensure customers do not find a replacement. Some customers form foods and beverages preferences based on the location of the restaurant due to convenience and brand association. Those who prefer to buy products based on tastes and preferences can easily find replacements at McDonald’s rivals irrespective of location. Therefore, McDonald’s has both substitutes and complements; however, a large portion of its consumers rely on alternatives rather than complements.

Growing Demand for Products

Over the last few years, McDonald has faced many rivals due to the entry of new companies into the fast-food sector. As a result, the overall demand for both foods and beverages has declined. Negative performances due to economic crises have also facilitated the drop in demand. Many customers only have limited disposable income to spend on fast foods. Nonetheless, McDonald’s is still recording marginal growth in demand due to expansion into new markets in different parts of the word (Puleka et al., 2018). Furthermore, population growth, coupled with investments in emerging economies, such as Brazil and India, has prompted some increase in demand. On the other hand, demand in developed countries continues to decline due to consumer preferences as many people are becoming aware of the health concerns posed by junk food. Health concerns have created negative publicity for the company forcing some consumers to move to its rivals. McDonald’s is considering a change of menu and investing awareness campaigns that inform people about healthy eating habits (Puleka et al., 2018). The firm is now focusing on offering foods that constitute natural ingredients and investing in promotional strategies to new markets as well as retain existing ones.

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McDonald’s should focus on more training and development to meet its goals. For example, it should introduce career development and training initiatives even to senior employees to develop their skills that will allow them to cope with labor shortages. These programs will also establish the most efficient working techniques to maximize productivity and facilitate sustainable competitive advantage. The workforce will also be able to work with new equipment and apply innovations. Organizational training represents the foundation of business success. Continuous training of the McDonald’s workforce can improve productivity and reduce operational costs (Puleka et al., 2018). Currently, the firm offers different training programs, including video-training; nonetheless, additional training increases workers’ competencies and productivity.

McDonald’s Labor Force

The human resource of any organization is critical to meeting goals; therefore, it should offer frequent training to improve its competence. The human resource department of McDonald’s functions as the backbone of the firm by hiring the right candidates, adequate numbers, and the right cost to ensure high productivity. The workforce is skilled with the necessary experience and expertise. HRM of the firm offers the staff frequent training to maintain competence. Employees at the company usually receive the initial training that entails skill training in which they are equipped with basic job knowledge for specific positions that can develop further. The workforce will always require future training to cope with changing business environments characterized by new technologies and changing customer needs. At McDonald’s, ongoing training programs offer a more advanced level of job expertise and knowledge, making the workforce more economical based on productivity. The company should also implement continuous training evaluation programs to ensure the workforce is up-to-date with the latest business demands. McDonald’s requires training and development programs to meet customer needs and organizational goals.

Macroeconomic Environment

McDonald’s operates in an external environment with many risk factors. The firm’s macroeconomic environment demands effective management and decision making to prepare for potential uncertainties. Its PESTEL analysis and management decisions should concentrate on trends that impact the fast-food sector. McDonald’s PESTEL analysis and its potential risks are as follows:

Political Factors

McDonald’s faces many reservations regarding the impacts of government policies and actions in different countries that limit its business operations to reduce profit margins. The most significant external political factors that affect McDonald’s include increasing international trade agreements, changing public health policies, and governmental regulations. Countries such as China and India have rigid laws that make it difficult for McDonald’s to operate profitably. New trade agreements between different countries can influence the brand’s performance either negatively or positively (Pratap, 2018). Political changes, currently taking place among Asian countries, pose many threats to McDonald’s.

Economic Factors

The economic factors are the most essential for corporations operating in the global settings. McDonald’s experiences many economic uncertainties that threaten its brand’s performance. A few years back, the world’s economy experienced a deep recession that affected McDonald’s (Schramade, 2019). Currently, the economy has improved, promoting the firm’s performance (Pratap, 2018). The strength of the dollar also raises uncertainties; for example, a stronger dollar negatively affects McDonald’s profit margins. Therefore, economic forces create many uncertainties that can adversely influence financial performance resulting in a decline in revenue.

McDonald’s Financial Performance 2019

2018 (Dec. 31) 2017 (Dec-31) 2016 (Dec-31)
Total Revenue 21025.2 22820.4 24621.9
Total Operating Costs (12202.6) (13267.7) (16877.4)
Operating income 8822.6 9552.7 7744.5
Interest & Taxes (2898.3) (4360.4) (3058)
Net Income 5924.3 5192.3 4686.5
Shares outstanding-basis 778.2 807 854.4
EPS-basic $7.61 $6.43 $5.49
Shares outstanding-diluted 785.6 815.5 861.2
ESP-diluted $7.54 $6.37 $5.44
DIVIDENDS per common share $4.19 $3.83 $3.61

(Ganti, 2019)

Social Factors

McDonald’s should also consider social factors while analyzing its performance. Influential social factors include social trends and lifestyle changes among customers. Consumers often change tastes and eating habits, and it is difficult for the company to predict when such changes may occur. Over the last few years, customers have grown conscious of healthy eating habits forcing McDonald’s to create new menus that suit their preferences. Millennials are more health and price-conscious, two factors that influence the firm’s operations as it has to meet this group’s product needs. McDonald’s currently offers a complex menu that is made of “fat recipes” that many customers do not prefer. The firm needs to create a “slimmer” list characterized by low calories items to meet the demands of millennial customers (Pratap, 2018). It should also focus on identifying the right market segments in society, especially those made of young adults from middle-class families.

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Technological Factors

In today’s business world, technology is an essential factor. It enables everything from customer services and sales of products. McDonald’s can invest more on innovation to amplify its brand’s power; for example, the firm can implement technological changes in marketing, sales, advertising, and customer services, which will accelerate performance (Pratap, 2018). Constant technological changes pose many uncertainties; therefore, McDonald’s should keep updated with any new trends to ensure customer satisfaction and remain competitive.

Environmental factors

There has been an increased focus on environmental protection and sustainability. McDonald’s has invested much in creating environmentally friendly and sustainable supply chains and use them to grow the customer base. Consumers tend to prefer brands that illustrate a high level of environmental sustainability and CSR programs (Pratap, 2018). McDonald’s is currently framing its policies to establish itself as more environmentally friendly.

Legal Factors

McDonald’s operates in many countries, with each having unique legal requirements for both local and international businesses. The company is required to operate within laws that may hinder its business performance. The poor state of regulations can result in difficulties in the firm, limiting its capacity to increase productivity. Some countries lack well-development employment laws that may increase turnover rates (Pratap, 2018). Therefore, McDonald’s should be conscious of such laws and be prepared for the development of new business laws that may hinder its performance.

McDonald’s Profitability

McDonald’s can grow its profit margins through different approaches. For example, it only serves one percent of the world’s population. Therefore, it can improve its profits by targeting more markets to increase the volume of sales. The corporation should also consider corporate social responsibility initiatives to build customer trust and loyalty. McDonald’s can also grow its profits by placing itself in an excellent market position that will allow it to cover different market segments defined by consumer preferences. Maintaining a highly sustainable competitive edge should the firm’s priority. There are many ways through which McDonald’s can sustain its competitive advantage: extensive advertising, capital investment, maintaining a public relationship, and meeting customer needs by offering healthy foods. The company should conduct extensive researches to understand consumer needs and establish the best approaches to build customer relationships that will build trust and loyalty. McDonald’s can further grow profit margins by implementing strategies that allow management of multiple revenue streams, making it easier to sustain its business operations even during economic recessions. Hence, McDonald’s has many avenues it can invest in to grow its net revenue.

The corporation must invest in innovations and research to facilitate the delivery of differentiated services. Technology would allow the firm to extend the restaurant experience beyond McDonald’s facilitate by integrating them with customers’ social lifestyles. It should increase interaction with customers by keeping in touch through social media platforms. It should use its website to keep customers updated with changing menus and allow them to order for foods and beverages online. Such initiatives will reduce traffic at the restaurant and decrease the workforce cutting operational costs. The corporation should also consider offering customized services, especially to loyal customers. McDonald’s has many areas that it can exploit to increase customer-base resulting in high-profit margins.

Other Relevant Factors

McDonald’s is a multinational corporation that is expanding its products and services in diverse markets. The firm developed a unique concept of “think global, act local” that can be credited for the success of its globalization marketing strategy (Kolmakova, 2017). McDonald’s uses local services, goods, and assets to create unique products for other countries. Each country has a unique culture; therefore, McDonald’s develops a specific menu that matches that country in regards to culture and eating habits. These menus are based on the eating habits of a specific country but contain different aspects of the mother country. This form of differentiation demands massive investment in customer intelligence and research of preferences and market trends. According to Igami and Yang (2016), McDonald’s differs significantly from other fast-food franchises regarding profits and costs structures. It generates more revenue than most of them, highlighting the reason it affords vast investments.

McDonald’s SWOT Analysis

Strengths

McDonald’s has a robust brand identity that differentiates it from other fast-food restaurants globally. This strength has been fundamental to the growth of its customer base in China. McDonald’s delivers new products, such as McCafe that provides drive-thru and sit-in cafeteria services. The firm mixes a uniform product menu at all its stores and offers localized food options to meet the preferences and tastes of local consumers. For example, in Beijing and Shanghai, McDonald’s delivers tasty food options to local customers. The firm still retains its classic sense of place and purpose despite offering localized food choices. McDonald’s is well-recognized for its high-quality customer services. The firm has realized this by providing safe and reliable products as well as creating an attractive eating environment. Its services are fast, whereas workers are professional and friendly. McDonald’s has increased its investment capital on marketing. The corporations consistently provide robust promotion and communication tools to reach broader markets. It uses radio, television, billboards, magazines, and newspapers for advertising. Hence, McDonald’s SWOT analysis outlines vital strengths that help the firm remain competitive.

Weaknesses

Most of McDonald’s products are expensive as compared to local fast-food restaurants. Many people consider these products as costly for them to afford. The company has been weak regarding product innovation as compared to competitors, such as Domino’s Pizza, who have been innovating coupled with expanding their menu repeatedly. Its burgers have remained unchanged for almost ten years. McDonald’s has been slow in the expansion of its business operations in developing cities. The corporation has always struggled in the management of increasing material and operating costs and offers low wages to its employees. McDonald’s can expand its customer base and profit margins by addressing these weaknesses.

Opportunities

McDonald’s can exploit different opportunities to increase the sustainability of its competitive advantage. First, the corporation can focus on offering healthy food based on the increased conscious of healthy eating among most people. It can partner with health companies to facilitate the delivery of healthy foods and beverages to customers. Currently, McDonald’s only serves one percent of the world’s population; therefore, it should consider internationalization. The firm should invest in emerging economies, such as in South America and Africa, to grow its revenue. It should also consider the introduction of variations of most demanded products in developed countries to capture new market segments. The current world population is embracing an eating-out culture, among other consumer trends. McDonald’s can exploit these opportunities by partnering with local counties; as a result, expand to new markets.

Threats

McDonald’s operates in a highly competitive business environment that presents many threats. For example, in most of the countries where it has business operations, the company has to deal with many local rivals. In these countries, its success is often scrutinized based on its business strategies, acting as deterrents to differentiation strategy. Local competitors often copy McDonald’s plans decreasing competitive advantage. The firm is always under the threat of cultural backlash, mainly in foreign markets. McDonald’s operates in many international countries and only employs limited efforts to assimilate into local cultures. As a result, it risks facing resistance by a lack of meeting local cultural expectations of specific people. Lastly, the corporation is often associated with unhealthy habits; it faces the challenge of brand image damage as consumers are becoming more health-conscious. McDonald’s needs to address these concerns to avoid the risk of losing customers to rivals and ensure the sustainability of its competitive edge.

Conclusion

McDonald’s is one of the world’s leading fast-food corporations. Its fast growth and expansion in the global scene have influenced the food industry by revolutionizing the fast-food sector. The company can be categorized as an oligopoly due to price rigidity. Furthermore, it operates in an industry that is made up of a small number of larger sellers, such as Burger King and Wendy’s. McDonald’s sells both fast foods and nonalcoholic beverages with a price elasticity of below one (ranging between 0.7 and 0.8). The price for its products is influenced by demand in the short-term. The demand and supply curves of its foods and beverages follow market conventions meaning that an increase in price results in high supply and low demand for products. McDonald’s operates in a highly competitive market with changing demands due to new market entry. Its most significant rivals include Burger King, Wendy’s, Yum Brands, and Starbucks. The firm can expand its services to emerging economies in South America and Africa to grow demand for its products and services. Overall, McDonald’s is a highly profitable multinational corporation existing in an oligopolistic market.

References

Igami, M., & Yang, N. (2016). Unobserved heterogeneity in dynamic games: Cannibalization and preemptive entry of hamburger chains in Canada. Quantitative Economics, 7(2), 483-521. Web.

Ganti, A. (2019). How McDonald’s makes money: Monetizing the demand for fast food. Investopedia. Web.

Kolmakova, L. (2017). Glocalization marketing strategy of Mc Donald’s case study: Turkey. [Unpublished doctoral dissertation]. KTH Royal Institute of Technology.

Pratap, A. (2018). A PESTEL analysis of McDonald’s. Web.

Puleka, D., Kakade, K. S., Pulekar, N. (2018). Comparative analysis of training and development practices in the fast-food segment – McDonald’s and KFC. International Journal of Advance and Innovative Research, 5(3), 174-191. Web.

Schramade, W. (2019). McDonald’s: A sustainable finance case study. Erasmus University. Web.

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