McDonalds - Financial

Analysis

Submitted by:
Waqas Javed
15206
Submitted to:
Sir Syed Ahmad Zaidi

Contents
1

Executive Summary.....................................................................................................3

Vision/Mission/Objectives...........................................................................................4
2.1 Strategic Issues, Problems and Challenges..............................................................4
2.2 Rising Issues-Customer Service..............................................................................4
2.3 Opposing Viewpoints...............................................................................................4
2.4 Health Factor...........................................................................................................4

Competition.................................................................................................................5

Industry Analysis.........................................................................................................6
4.1 Market Size..............................................................................................................6

Competitive Forces......................................................................................................6
5.1 Substitute Products..................................................................................................6
5.2 New Entrants...........................................................................................................7
5.3 Driving Forces.........................................................................................................7
5.4 New Menu Items......................................................................................................8
5.5 Strategic Moves.......................................................................................................8
5.6 Strategic Groups......................................................................................................8
5.7 Fast-Service.............................................................................................................8

SWOT Analysis...........................................................................................................9
Strengths......................................................................................................................9
Weaknesses..................................................................................................................9
Opportunities...............................................................................................................9
Threats9

Financial Analysis......................................................................................................10
7.1 Income Statement..................................................................................................10
7.2 Balance Sheet.........................................................................................................12
7.3 Cash Flow..............................................................................................................13
7.4 Asset Turnover Ratio.............................................................................................15
7.5 Return on Equity....................................................................................................15
7.6 Current Debt Ratio.................................................................................................15

Key Success Factors..................................................................................................16

Alternate Strategies....................................................................................................17
9.1 Strategic Possibilities.............................................................................................17
9.2 Recommended Strategy.........................................................................................18

10 Executing the strategy and control.............................................................................18

Executive Summary

The business began with two brothers. In 1937, Dick and Maurice
McDonalds opened a small drive-in restaurant east of Pasadena,
California. They served hotdogs and shakes. This led to the creation of a
bigger drive-in which operated successfully and by 1948, the brothers had a
made a fortune they never expected. The brothers realized that hamburgers
comprised of 80 percent of their sales and closed their doors to re-evaluate
their business model. The same year, in 1948 the model was about
affordable dining for family who wanted to eat out. The Speedy Service
System was also implemented that included an assembly line of sorts, a
nine-item menu, and an all-male staff. The operations were proven
successful in 1952 ad the first franchise was sold to Neil Fox who opened a
restaurant in Phoenix, Arizona and created the well-known golden arches of
McDonalds. Fox had huge success with the store and the brothers were
reluctant at first to begin a national franchise system, but soon realized that
too many copycats were creeping up and they needed an advantage and a
head start. Ray Croc joined the team as the exclusive franchise agent in the
United States.
Some of the problems and challenges facing the company is the
increase in competition, poor management, bad marketing, and lack of
response to the changes in the needs of franchises and customers. This
resulted in the strategic issues that needed to be implemented to continue
growing success for the company. Going global is critical in the expansion of
McDonalds. Over the past couple of decades, the major chains have also
begun to expand into the global marketplace and have opened franchises up
around the world. McDonalds currently operates in over 120 countries
around the world with over 30,000 stores.
In analyzing this company, the strengths, weaknesses, opportunities,
and threats were inevitably explored to better understand the current
situation. This SWOT analysis shows us that although there are numerous
threats against the fast-food industry, McDonalds occupies a relatively strong
position in the global marketplace. According to the five forces model, the
strongest competitive force is between rival sellers in the industry. This
SWOT analysis shows the many strengths that Mc Donalds employs to keep
itself at the top of the fast-food industry. Although there are various
weaknesses, these can all be turned around following the McDonalds Plan to
Win, which was implemented with the hiring of Jim Cantalupo.
Keeping in mind, the core competencies of this company is what
makes it so successful today. For the past ten years, one of McDonalds key
success factors has been its franchises, taking in approximately 60 percent of
total sales. Another success factor is the Plan to Win strategy. It is a plan
that focuses on five key drivers of success; people, product, place, price, and
promotion. The first factor is McDonalds people or employees. McDonalds is
striving to do a better job of staffing during busy periods as not to overwhelm
and to reward outstanding employees for exception work.

Based on these facts and analysis, we have come up with alternate

strategies and have recommended the one that best fits McDonalds current
situation. The recommended strategy includes diversification and
maintaining customer service through quality training and people
development.

2.1

Vision/Mission/Objectives

Strategic Issues, Problems and Challenges

In recent time McDonalds has underperformed in comparison to previous

years achievement. Its revenue growth has been in the decline and prior to
April 2003 store sales fall for 12 straight months. It is no surprise that as a
consequence McDonalds reported a loss of 343.8 million dollars in first
quarter of 2003. It is believed that this situation is a result of several aspects
that include an increase in competition, poor management, bad marketing
and lack of response to the changes in the needs of franchises and
customers.

2.2

Rising Issues-Customer Service

As years have progress many issues have arisen for McDonalds but the
greatest is probably its poor customer service. A customer service index done
in 2003 found that McDonalds has the lowest the customer service ranking in
the fast food industry and is ranked even lower on customer service than the
IRS. One reason for this is a high employee turnover rate. McDonalds has the
highest employee turnover rate among its competitors. Another contributing
aspect to the poor customer service is slow service at the drive-through
window. McDonalds currently ranks fifth in speed at the drive-through
window and 19th in accuracy. If you compare its speed and accuracy to its
competitors and keep in mind that McDonalds generates 60 percent of its
revenue from its drive-through and assume it is losing one percent of revenue
for every six seconds that its behind, than McDonalds is loosing
approximately 97,000 dollars annually.

2.3

Opposing Viewpoints

While McDonalds feels positive about its newly implemented changes the
critics are rather skeptical. It was stated that long-term they believe that it
will be tough to sustain growth and margin expansion. Specific concerns
include McDonalds ability to maintain it current level of product innovation
and competitors ability to copy those ideas. The critics even went as far to
question if McDonalds recent improvement was more of a reflection of the
market and the dollar rather than its newly implemented strategy. In
response, McDonalds officials stated that they will need to deliver on their
stated goal of sustaining increases in sales and operating income. Following

with the most significant question of weather or not the new changes will
sufficiently provide McDonalds with core competencies necessary to build a
sustainable competitive advantage in the global fast-food industry.

2.4

Health Factor

All fast-food hamburger chains, McDonalds included, are forced to respond to

the shift in customer preferences from high-calorie burger and fries to
healthier items such a deli sandwiches and baked potatoes. All the chains are
expected to be struggling for several years to come to meet new consumer
health expectations without compromising the original menu items.

Competition

One of the major issues for McDonalds is it competitors. Burger King is the
second largest hamburger fast-food chain in the world and is the number one
competitor for McDonalds. Burger King has 11,400 locations in 58 countries
and derives 55 percent of its revenue from the drive-through window. Burger
King reported 1.72 billion in 2002 in revenue which is a 17 percent increase
compared to a 4 percent increase reported by McDonalds over the same
period. Burger Kings distinct assets include the unique Whopper with its one
of kind charbroiled taste and the company policy of preparing the hamburger
any way that the customer wants it. Burger King has distinguished itself over
the years in many ways including being the first in the fast-food industry to
enclose its patio seating in 1957 thereby offering customer indoor dining
experience. Burger King also differentiated itself when it installed the drivethrough window in its restaurants in 1975. In addition to the Whopper Burger
King also offers a few set items on its break-fast menu that differs it from it
competitors including the Croissanwiches and french toast sticks. The rest of
the menu also offered the unique veggie burger and chicken Caesar salad.
Wendys is the third largest fast-food chain with 9,000 stores in 33 countries
world wide. In 2002 they reported 2.73 billion in revenue which is up 14.2
percent from the previous year. Wendys offers several unique items including
the Frostys and Spicy Chicken Sandwiches as well as healthier items such as
salads, baked potatoes and chili. Wendys has also distinguished itself
through the creation of the special value menu with all items on it under a
one dollar. Wendys also owns several small companies including Tim
Hortons and Baja Fresh Mexican Grill. It plans on increasingly using
acquisitions of smaller brands to further growth. In next decade Wendys
plans to add between 2 and 4 thousand new stores worldwide. One important
weakness of Wendys is the lack of easily recognizable product compared to
McDonalds Big Mac of the Burger King Whopper.
Hardees is the fourth largest fast-food chain in the nation. It holds 2,400
locations in 32 states and 11 countries. In 2002 it reported 1.8 billion in sales.
Hardees greatest strength is in its breakfast menu which brings in 35 percent
of its revenue. Hardees is currently remodeling all of its restaurants inside

and out into Star Hardees and the menu is being expanded to include
several premium offerings such as the Angus beef Thickburger which has
been well received by hamburger eaters and the innovative Six Dollar Burger.
Along with these Hardees offers a one-third, half pound and three quarterpound hamburger. These new items were implemented to demonstrate that it
is quite clear that at Hardees it is thought that customers are willing to pay
more for quality and taste rather than cheap and poorly made burgers.
Jack in the Box, another major competitor in fast-food industry, has of 1,850
restaurants in 17 states. In the fiscal year 2002 Jack in the Box reported
revenue of 2.2 billion dollars, which is up 4.7 percent from the previous year.
While McDonalds and some of the other competitors focus on a family
concept, Jack in the Box gears its menu items toward adult consumers only.
Part of Jack in the Boxs menu includes its innovative items such as teriyaki
chicken bowl and a chicken fajita pita. Along with most of its competitors Jack
in the Box offers a value menu, but the company does not to engage in the
price wars stating its intended reduction of emphasis on dollar menus and
instead has turned its efforts toward improving the quality of it product as
well as to initiate efforts to attract women and reduce its dependency on
young males which is a crowded market. Like its competitors Jack in the Box
believes that success in the future relies on broadening its product offerings
in order to maintain the same level with the other fast-food chains and
grocery stores.
Sonic yet another major competitor owns 2,700 locations and reported in
2003, 2.4 billion in revenue which is 6.2 percent increase. They also reported
an increase of net income by 20 percent. Its unique drive-in restaurant
business is the largest in America and it broad menu and atmosphere along
with oldies music attempt to emulate an era long past. Sonic has specialty
soft drinks and frozen shakes and malts. Over the years Sonic has tried to
focus on it items that are fun and novel. Since its founding the company has
experienced non-stopped growth. In 2004 Sonic expects earning per share to
rise 16 to 17 percent due to the addition of franchises. It also expects to open
200 new locations in 2004 and its revenue is expected to grow between 1-3
percent.

4
4.1

Industry Analysis
Market Size

Sales for the U.S. consumer food-service market totaled approximately $408
billion in 2003. The 10 largest chains in America accounted for about 14
percent of these total sales according to U.S. Systemwide Foodservice
Sales. The consumer food-service market is typically broken down into eight
categories according to the type of food and the restaurant operations. The
categories are as follows: sandwich, pizza, chicken, family, grill-buffet, dinner
house, contract, and hotel. McDonalds competes with other businesses from
these other categories as substitute product competitors but primarily
competes in the quick-service sandwich market. Experts projected that the

sandwich segment was expected to grow by two percent annually for the
years ahead.

Competitive Forces

The quick-service sandwich industry faces competitive pressures from a number of

forces. The major competitive threats originate from competing sellers in the
industry as well as firms in other industries that offer substitute
products. McDonalds main competitors within the quick-service sandwich industry
are continually deriving new strategies through offensive and defensive tactics in
order to gain customers and market share. In 1989, Wendys implemented the 99
cent value menu as an offensive strategy to gain customers looking for a quality
product at a value price. In response, McDonalds and Burger King took a defensive
approach and also instituted a value menu in their respective stores so that they
wouldnt lose market share and customers to Wendys. Firms in the quick-service
sandwich industry are constantly jockeying for better market position through
offensive strategies and in response to these strategies, other firms will take a
defensive approach to guard against that offensive move made by the rival firm.

5.1

Substitute Products

In addition to competition from rival sellers in the industry, sandwich firms

also face intense competitive pressure from firms in other industries selling
substitute products. The substitute products for the fast-food industry are
probably some of the most diverse in the world. These substitute products
may include products purchased from the local grocery store, food from sitdown restaurants, or delivery foods such as pizza. The primary issue with
these substitute products is that they are readily available to the customer
and the customer tends to view them as being comparable or better in terms
of the quality of fast-food products. Another issue that faces the fast-food
industry is the availability of products that cater to the health-conscious
lifestyle. The majority of the public tends to view fast-food restaurants as
primarily serving foods that are high in fat content and unhealthy and as a
result they are likely to look elsewhere for a healthy alternative. In response
to the product offerings, buyers also exercise a great deal of bargaining
ability through their purchasing power. While fast-food products may not
always be associated with health and quality, fast-food restaurants to possess
a major advantage over firms selling substitute products through the price of
their products and the quick, convenient service.

5.2

New Entrants

The threat of potential new entrants and the bargaining power of suppliers is
not a significant competitive force in the fast-food industry. Occasionally,
new entrants will come along and compete with firms in the fast-food
industry and offer substitute products. However, in order to compete on a
large scale, it will require a great deal of capital to invest in real estate and
build physical restaurant locations. In addition, the market is already so
saturated that the new competitor might find it difficult to establish a
customer base and become profitable. Suppliers in the fast-food industry do

not have substantial bargaining power due to the fact that firms in the fastfood business tend to purchase their materials from various outlets. One
company might purchase their meat supplies from a couple different meat
manufacturers, then purchase their dairy needs from a number of different
dairy companies, and also purchase their bakery products from a variety of
sources. Since the fast-food firms divide their purchases among a diverse
array of suppliers, the suppliers tend to have little or no bargaining power or
leverage since there are multiple suppliers for the same products.

5.3

Driving Forces

There are a number of driving forces which have molded the current state of
the fast-food industry. In the beginning, fast-food companies typically focused
on being the low-cost provider and sought to expand into as many markets as
possible. As these national brands have grown, the markets they are
competing in have become overly saturated with restaurant options. As a
result, the fast-food industry has begun to focus on the needs of the
customer. The buyer has a great deal of leveraging power due to the fact
that if they are dissatisfied with one brand they can easily switch or purchase
from an alternate brand with little or no monetary repercussions. The fastfood firms have implemented strategies to improve the quality of customer
service and the cleanliness of the restaurant locations in order to please their
customers in hopes that they will become a repeat customer.

5.4

New Menu Items

Fast-food restaurants have, for the most part, always been related to an
unhealthy lifestyle. As a result, customers who are health-conscious have
tended to take their business elsewhere to restaurants that offer nutritious
alternatives. In response to the health-conscious lifestyle that people have
adopted, the majority of the national chains have created new menu items to
cater to this demographic. Customers are the main driving force behind the
daily operations of fast-food firms. They are the reason that companies have
attempted to upgrade the quality of their customer service and their needs
have lead to the creation of new products to satisfy their demands.

5.5

Strategic Moves

A number of competitors in the fast-food industry have expanded beyond

their traditional offering of generating revenues from their fast-food
restaurants. Major chains such as McDonalds have acquired smaller chains
Boston Market, Chipotle Mexican Grill, and Donatos Pizza. Wendys has also
grown by acquiring smaller companies such as Tim Hortons and Baja Fresh
Mexican Grill. These acquisitions were executed in hopes of generating
revenue from multiple sources and also to help support the companys
growth over the long term. Over the past couple of decades, the major
chains have also begun to expand into the global marketplace and have
opened franchises up around the world. McDonalds currently operates in
over 120 countries around the world with over 30,000 stores. Burger King
has 11,400 stores in 58 countries and Wendys operates 9,000 restaurants in
33 countries worldwide. These fast-food firms have seen countries outside
the U.S. as markets that have an enormous growth potential. In order to
cater to the different cultures, companies such as McDonalds and Burger
King have offered menu items with a distinctively local flavor.

5.6

Strategic Groups

The fast-food industry is primarily composed of national chain brands. As a

result, there are just a couple of strategic groups associated with the fastfood market. The major national chain brands such as McDonalds, Burger
King, Wendys, Hardees, and Jack in the Box compete in markets throughout
the United States and around the world. Their strategies are focused on
providing a product that is based on low-price convenience. Their strategic
group is associated with many geographic locations and low price and
quality. In competition with these large multinational firms are local fast-food
restaurants. Local fast-food restaurants focus on providing their customers
with a quick, cheap alternative to the national brands. These businesses
offer a low price and low quality product in few localities.

5.7

Fast-Service

Over the past couple of years there has been a growing trend in the
restaurant industry to provide customers with a higher quality product in a
short amount of time. These restaurants are typically referred to as fast
casual or quality quickservice. They aim to provide freshly prepared,

made-to-order meals. Their operations combine the speed and convenience

of traditional fast food with the food quality and appealing dcor of casualdining restaurants. There are a number of national chains that fall into this
strategic group of providing a high quality product in many geographic
locations and there are also some businesses that function in a couple
locations and provide a similar high quality product.

SWOT Analysis

This SWOT analysis shows us that although there are numerous threats
against the fast-food industry, McDonalds occupies a relatively strong
position in the global marketplace. According to the five forces model, the
strongest competitive force is between rival sellers in the industry. This
SWOT analysis shows the many strengths that McDonalds employs to keep
itself at the top of the fast-food industry. Although there are various
weaknesses, these can all be turned around following the McDonalds Plan to
Win, which was implemented with the hiring of Jim Cantalupo. Obviously all
fast-food chains are going to have to combat the new consumer health
expectations, but we feel that under Cantaloupes leadership, McDonalds has
a strong enough consumer base to grow in the upcoming years. The financial
analysis shows certain flaws in McDonalds finances, but these are largely
due to the expansionary policy in place in the company.

Strengths
Owns one of the worlds best known
brand names
Real estate operations bring in large
revenues and allow McDonalds to open
more stores
Countless new innovations- breakfast,
playpens, etc.
Specialized training for managersHamburger University
Reinstitute the restaurant review
operation (QSC)
Large market share
Strongest international presence among
fast-food chains
Strong leader in Jim Cantalupo
McDonalds does not need to act as
finance corporation to franchises
McDonalds Plan to Win- focuses on
people, products, place, price and
promotion

Opportunities
Diversification and acquisition of other
quick-service restaurants
Low-cost menu to attract different
customers
Initial public offerings in other countries
could raise revenues
Retail merchandise potentially used to
raise revenues

Weaknesses
Customer service ranking is the lowest
among fast-food chains
Many stores beginning to look dated
Quality becoming inconsistent
Order accuracy is low compared to other
chains

Threats
Increased competition among rival
sellers, including price wars, product
innovation, and growth
Health conscious consumers demanding
better quality, healthier menu items
All fast-food chains expected to struggle
to meet new consumer health
expectations
Overall weaker economy

Financial Analysis

McDonalds has gone through a large turnaround period in the

previous two years. This becomes very apparent when looking at McDonalds
net income between the years 1998 and 2003. Net income rose steadily
between 1998 and 2000, then there was a drop-off in 2001 of over a$300
million. Then in 2002, net income plummeted over $700 million. This was
due mainly to slower growth in total revenues, and large increases in
operating costs and expenditures. McDonalds showed a marked
improvement in 2003, amassing $1.328 billion in net income, up over $400
million from the previous year. Although this was a large gain, McDonalds is
still not over its financial and operating troubles, and needs strong
performance in the upcoming years to stay at the top in the fast food
industry.
McDonalds bottom-line in the first quarter of 2003 was $324.7
million. The dollar profit improved substantially over the next two quarters,
netting $470.9 in the second quarter and $547.4 in the third quarter. As of
the end of the 2003 fiscal year, McDonalds has enjoyed 11 months of
sustained sales gains, which bode well for the future. One mention of note is
that McDonalds did take a big bath in 2002 and the first quarter on 2003,
amassing a 135 million dollar loss as a result of accounting changes done to
the books.

7.1

Income Statement

In Millions of USD (except for per share

items)
Revenue
Other Revenue, Total

2010

2009

27,567.0
0

27,006.0
0

24,074.6
0

22,744.7
0

27,567.0
0
16,750.7
0
10,816.3
0
2,439.00

Cost of Revenue, Total

Gross Profit
-

27,006.0
0
16,319.4
0
10,686.6
0
2,393.70

-100

24,074.6
0
14,437.3
0

22,744.7
0
13,952.9
0

9,637.30

8,791.80

2,333.30

2,234.20

-58.8

18,962.4
0
8,604.60

Total Operating Expense

Operating Income
Interest Income(Expense), Net NonOperating
Gain (Loss) on Sale of Assets

2011

Total Revenue

Selling/General/Admin. Expenses, Total

Research & Development
Depreciation/Amortization
Interest Expense(Income) - Net Operating
Unusual Expense (Income)
Other Operating Expenses, Total

2012

-4.8

18,476.3
0
8,529.70

-115.6
-

16,601.5
0
7,473.10

15,903.7
0
6,841.00

Other, Net
Income Before Tax
Income After Tax
Minority Interest
Equity In Affiliates
Net Income Before Extra. Items
Accounting Change
Discontinued Operations
Extraordinary Item
Net Income
Preferred Dividends
Income Available to Common Excl. Extra
Items
Income Available to Common Incl. Extra
Items
Basic Weighted Average Shares
Basic EPS Excluding Extraordinary Items
Basic EPS Including Extraordinary Items
Dilution Adjustment
Diluted Weighted Average Shares
Diluted EPS Excluding Extraordinary Items
Diluted EPS Including Extraordinary Items
Dividends per Share - Common Stock
Primary Issue
Gross Dividends - Common Stock
Net Income after Stock Based Comp.
Expense
Basic EPS after Stock Based Comp.
Expense
Diluted EPS after Stock Based Comp.
Expense
Depreciation, Supplemental
Total Special Items
Normalized Income Before Taxes
Effect of Special Items on Income Taxes
Income Taxes Ex. Impact of Special Items
Normalized Income After Taxes
Normalized Income Avail to Common
Basic Normalized EPS
Diluted Normalized EPS

-28
8,079.00
5,464.80
-

-54.5
8,012.20
5,503.10
-

5,464.80
-

5,503.10

5,464.80

-44.2
7,000.30
4,946.30
4,946.30
-

5,503.10
-

-26.6
6,487.00
4,551.00

4,551.00
-

4,946.30
-

4,551.00
-

5,464.80

5,503.10

4,946.30

4,551.00

5,464.80

5,503.10

4,946.30

4,551.00

1,020.20
5.36

1,044.90
5.27

2.87

1,080.30
4.58

2.53

1,107.40
4.11
-

2.26

2.05

5.29

5.23

4.58

4.04

7.2

Balance Sheet
As of
2012-1231
2,336.10
-

As of
2011-1231
2,335.70
-

As of
2010-1231
2,387.00
-

As of
2009-1231
1,796.00
-

Cash and Short Term Investments

2,336.10

2,335.70

2,387.00

1,796.00

Accounts Receivable - Trade, Net

1,375.30

1,334.70

1,179.10

1,060.40

In Millions of USD (except for per share

items)
Cash & Equivalents
Short Term Investments

Receivables - Other
Total Receivables, Net
Total Inventory
Prepaid Expenses

Other Current Assets, Total

142.5

Total Current Assets

Accumulated Depreciation, Total

Accounts Payable
Accrued Expenses
Notes Payable/Short Term Debt
Current Port. of LT Debt/Capital Leases
Other Current liabilities, Total
Total Current Liabilities

Total Debt
Deferred Income Tax
Minority Interest
Other Liabilities, Total

1,212.70
1,639.20
30,224.9
0
636
2,132.20
0
18.1
202.4
2,988.70
10,560.3
0
-

11,497.0
0
11,505.3
0
1,332.40
-

1,612.60

3,416.30
33,440.5
0
11,909.0
0
2,425.20

1,335.30
1,624.70
31,975.2
0
943.9
1,861.20
0
8.3
111.3
2,924.70
11,497.0
0

12,133.8
0
12,500.4
0
1,344.10
-

1,526.20

1,060.40
106.2
453.7

4,368.50
34,482.4
0
12,421.8
0
2,586.10

1,427.00
1,672.20
32,989.9
0
961.3
1,919.10
0
366.6
262.2
3,509.20
12,133.8
0

13,632.5
0
13,632.5
0
1,531.10

Total Long Term Debt

309
3,403.10
13,632.5
0

1,179.10
109.9
692.5

4,403.00
35,737.6
0
12,903.1
0
2,653.20

Long Term Debt

Capital Lease Obligations

1,380.50
1,602.70
35,386.5
0
1,141.90
1,952.20
0

Total Assets

1,334.70
116.8
615.8

4,922.10
38,491.1
0
13,813.9
0
2,804.00

Property/Plant/Equipment, Total - Gross

Goodwill, Net
Intangibles, Net
Long Term Investments
Other Long Term Assets, Total

1,375.30
121.7
946.5

10,560.3
0
10,578.4
0
1,278.90
-

1,586.90

1,363.10

20,092.9
0

Total Liabilities
Redeemable Preferred Stock, Total
Preferred Stock - Non Redeemable, Net
Common Stock, Total
Additional Paid-In Capital

Treasury Stock - Common

Other Equity, Total
Total Equity
Total Liabilities & Shareholders' Equity

7.3

16.6
5,778.90
39,278.0
0
30,576.3
0
796.4
15,293.6
0
35,386.5
0

Retained Earnings (Accumulated Deficit)

Shares Outs - Common Stock Primary Issue

Total Common Shares Outstanding

18,599.7
0

16.6
5,487.30
36,707.5
0
28,270.9
0
582
14,390.2
0
32,989.9
0

1,002.70

17,341.0
0
16.6
5,196.40
33,811.7
0
25,143.4
0
877.5
14,634.2
0
31,975.2
0
-

1,021.40

16,191.0
0

16.6
4,853.90
31,270.8
0
22,854.8
0
882
14,033.9
0
30,224.9
0
-

1,053.60

1,076.70

31/12/201
0
4,946.30
1,276.20
-75.7
323.8
-129
6,341.60
-2,135.50
79.5
-2,056.00
127.4
-2,408.10
-2,235.40
787.4
-3,728.70
34.1
591
457.9
1,708.50

31/12/200
9
4,551.00
1,216.20
203
-390.2
171
5,751.00
-1,952.10
296.8
-1,655.30
60.5
-2,235.50
-2,465.30
219.3
-4,421.00
57.9
-267.4
468.7
1,683.50

Cash Flow

In Millions of USD (except for per share

items)
Net Income/Starting Line
Depreciation/Depletion
Amortization
Deferred Taxes
Non-Cash Items
Changes in Working Capital
Cash from Operating Activities
Capital Expenditures
Other Investing Cash Flow Items, Total
Cash from Investing Activities
Financing Cash Flow Items
Total Cash Dividends Paid
Issuance (Retirement) of Stock, Net
Issuance (Retirement) of Debt, Net
Cash from Financing Activities
Foreign Exchange Effects
Net Change in Cash
Cash Interest Paid, Supplemental
Cash Taxes Paid, Supplemental

31/12/201
2
5,464.80
1,488.50
134.5
1.4
-123.1
6,966.10
-3,049.20
-118.1
-3,167.30
128.7
-2,896.60
-2,286.50
1,204.60
-3,849.80
51.4
0.4
-

31/12/201
1
5,503.10
1,415.00
188.4
3.6
40
7,150.10
-2,729.80
158.9
-2,570.90
101.9
-2,609.70
-3,029.10
1,003.90
-4,533.00
-97.5
-51.3
489.3
2,056.70

Current Debt
Ratio

Total
Current
Assets
Total
Current
Liabilities

2012
4,922.10

2011
4,403.00

2010
4,368.50

2009
3,416.30

3,403.10

3,509.20

2,924.70

2,988.70

1.446357
733

1.254701
926

1.493657
469

1.14307
224

Net Working
Capital

Net Income
Profit Margin

Earning per
Share

Sales

Net Income
Shares
Outstanding

Sales
Asset Turn
Over Ratio

Total Assets

Total Liabilities
Debt to
Equity Ratio

Return on
Assets

Total Stockholder's
Equity

Net Income
Average Total
Assets

2012
1,519.
00

2011
893.80

2010
1,443.
80

2009
427.60

2012
5,464.
80
27567

2011
5,503.
10
27006

20%

20%

2010
4,946.
30
24074.
6
21%

2009
4,551.
00
22744.
7
20%

2012
5464.8
1002.7

2011
5503.1
1021.4

2010
4946.3
1053.6

2009
4551
1076.7

5.45

5.39

4.69

4.23

2012
27567

2011
27006

35386.
5
0.78

32989.
9
0.82

2010
24074.
6
31975.
2
0.75

2009
22744.
7
30224.
9
0.75

2012
20092.
9
15,293
.60
131%

2011
18599.
7
14,390
.20
129%

2010
17341

2009
16191

14,634
.20
118%

14,033
.90
115%

2012
5464.8
35386.
5
0.15

2011
5503.1
32989.
9
0.17

2010
4946.3
31975.
2
0.15

2009
4551
30224.
9
0.15

7.4

Asset Turnover Ratio

The asset turnover ratio shows that McDonalds is doing a poor job producing
sales from its assets. This would be a cause for concern, but generally McDonalds
has always had a lower asset turnover ratio, even when they were operating at the
pinnacle of the industry. The return on assets, or return on investment shows again
that McDonalds net income is low when compared to its level of assets. As stated
earlier, this is due in large part to the expansionary policy in place at McDonalds and
in turn, the growing number of assets. One interesting point is the large amount of
cash that McDonalds has begun to keep. Between 1998 and 2001, the cash on hand
was around $415 million, yet in the third quarter of 2003, the company had $647.4
million on hand. This is one reason why the asset turnover ratio is slightly smaller in
2003 than other years.

7.5

Return on Equity

The return on equity at McDonalds is again, low. This represents the

profitability of funds invested by the stockholders in the business. Again, much of
the reason for McDonalds low return on equity is due to the expansionary plans in
the future and the fact that they are continually looking for ways to expand into
foreign markets. As stated, nearly 100 percent of profits from company owned stores
are re-invested into new enterprises.
The debt to equity ratio shows that McDonalds has a large amount of
liabilities and debt, when compared to shareholders equity. In 2008, debt was 1.16
higher than equity. This is not generally a good sign, especially if McDonalds plans
to pay dividends and give back to shareholders in the near future.

7.6

Current Debt Ratio

The current debt ratio at McDonalds shows that current liabilities are higher
than current assets. This is again, a bad sign, as the company is not able to cover all
of its immediate debts and loans. If creditors were to call in all debts, the company
would find it very difficult to pay. As such, McDonalds has little liquidity.
The general impression we receive from McDonalds financial situation is that the
company is slowly climbing out of a low period and making a turnaround. This can be
seen in the financial ratios between 2008 and 2009. All show a marked
improvement, and attest to the changes taking place at McDonalds. The DuPont
analysis shows major weaknesses arising from McDonalds level of debt and
relatively low net income. In order to stay a stable company, we feel McDonalds will
have to lower its debt levels, and strive to keep costs to a minimum. We do realize
that McDonalds is continually expanding, and using all manner of capital to increase
its market share, yet if McDonalds were to fall into another hole, as it did in 2001 and
2002, it would make it that much harder to make it out unscathed.

Key Success Factors

McDonalds short term financial objectives include cutting its capital expenditures by
40 percent, which will save approximately 1.2 billion dollars. McDonalds will use the
extra money pay off debt and return some cash the shareholders by repurchasing
shares and paying out more dividends. Its long term financial objectives include
annual sales growth of 3-5 percent with one to three percent of this growth coming
from existing stores and two percent coming from new stores. They also include an
increase in operation income capital investments.
For the past ten years one McDonalds key success factors has been its franchises,
taking in approximately 60 percent of total sales. McDonalds own restaurants bring
in less than 30 percent of its sales but at the same time that money comprises a
fairly significant portion of total income because the company keeps and applies 100
percent of those profits rather than just a portion of the franchises profits.
McDonalds receives funds from its franchises in two ways. There is monthly service
fee that varies but most recently in 2002 was 4 percent of total monthly sales.
Another manner in which McDonalds receives funds from its franchises is in rent
money. McDonalds owns all property in which a McDonalds outlet was built
regardless if the location is a franchise or company owned. It is estimated that
McDonalds generates more money from its rent than from its franchise fees.
McDonalds also markets excess land, property and buildings on the web.
Between rent and profits from land sales, McDonalds real estate represents a
significant portion of its overall company value along with ventures in earning income
will allow McDonalds to continue to be successful and profitable in the future.
McDonalds also has several restaurant affiliates that in the past years have been
doing quite well for themselves. The list includes Boston Market, Chipotle Mexican
Grill and Donatos Pizza.
McDonalds is currently testing new ways of raising revenue such as offering retail
merchandise for sale in some stores.
One of McDonalds key success factors has been its implantation of its Plan to Win.
The plan focuses on five key drivers of success; people, product, place, price, and
promotion. The first factor is McDonalds people or employees. McDonalds is striving
to do a better job of staffing during busy periods as not to overwhelm and to reward
outstanding employees for exception work. It is also putting more emphasis on its
hospitality training to ensure a friendlier and customer focused support staff.
The second factor is the customer experience. In response to a changing taste
preference and growing interest in healthy foods, McDonalds introduced the
McChicken and McGriddles as well as offering white meat for the chicken McNuggets.
In addition McDonalds added several premium salads.
The third factor was restaurant appears, putting much focus on cleanliness and
modern environment. As a part of this McDonalds has installed wireless technology
and added coffeehouses in some of restaurants. These few carried premium coffee,
muffins, and pastries at low price to enhance adult appeal. In addition to this

McDonalds has gone as far to renovate, rebuild and even relocate some of its
buildings in order to create a fresh and friendly family atmosphere.
The fourth factor was on price, putting much focus on productivity and value.
McDonalds has concentrated much effort on products that appeal to price sensitive
customers, thus it implantation of the dollar menu.
The final factor was promotion and a continuing focus on building trust and brand
loyalty. In its recent campaigns McDonalds has advertised using the slogan Im
lovin it which it there attempt to make McDonalds an easy choice for families. They
have also started using popular or main stream music to attract an ever growing
youth population.
McDonalds has chosen to enhance it focus on its core business and sell certain
aspects such as Donatos Pizzeria. Along with this McDonalds has entered into a
letter of intent to exit its domestic ventures activities with Fazolis and discontinue
development of non- McDonalds brands outside the U.S.

9.1

Alternate Strategies

Strategic Possibilities

1.
Stay-on-the-offensive strategy The main goal of the stay-on-the-offensive
strategy is to be a proactive market leader. The principle of this strategy is to
continually stay one step ahead of your competitors and force them to play catch
up. McDonalds is already the industry leader in the fast-food industry with a market
share of 33 percent compared with the number two chain in the industry, Burger King
at 13 percent market share. They can stay out front by implementing technological
improvements in their restaurants to enhance the production methods or to improve
the ordering process of the customer. In addition, they can also introduce new or
better product offerings to satisfy the needs of their customers. The best approach
that McDonalds can take through this strategy is to improve their customer
service. McDonalds customer service ranking was the lowest in the fast-food
industry and was even lower than the Internal Revenue Service. To improve upon this
substandard attribute, McDonalds should revamp their training process for newly
hired employees and introduce new educational modules for currently employed
personnel.
2.
Fortify-and-defend strategy The purpose of this strategy is to make it harder
for challengers to gain ground and for new firms to enter. A fortify-and-defend
strategy works well with firms that have already achieved industry dominance. Since
McDonalds is already the industry leader in the fast-food market, they can opt for a
number of tactics using this strategy to maintain their industry position. They can
continue their expansion tactics by continuing to open more stores around the
world. This expansion would help defend against and help to discourage smaller
companies from increasing their market share. In addition, they can also elect to
invest capital in R&D to aid in developing new technologies for their
operations. These new technologies will help them remain cost-competitive and
technologically progressive.
3.
Global strategy. McDonalds already holds a strong position in the global
economy. Our recommendation is that they decrease expansion in the almost

saturated domestic markets, and continue their expansion in foreign countries, such
as Asia, and the Pacific. Companies generally expand into foreign markets in an
attempt to gain new customers and capitalize on core competencies. McDonalds
core competency is that they are able to produce and sell quick and cheap food to a
large number of customers. With this concept, they have been able to expand into
other countries, and they currently are the largest global fast-food chain in the
world. Since they already hold this lucrative position, they should continue expansion
in an effort to drive out competition. One strong recommendation would be for
McDonalds to expand into emerging markets. Since they focus on low-priced food, it
is likely that many could afford their products, and therefore, McDonalds could
expand into a stronger company.
4.
Diversification. One strategy that McDonalds as well as many of the other fastfood chains have embraced is that of diversification. We feel that McDonalds should
continue this trend. With the large health-craze hitting the United States, many
restaurants have to change to healthier, higher quality menu items. The fast-food
industry is no exception. Healthier burgers, low-fat salads are all popping up on
menus across the country. We feel McDonalds should continue its diversification and
incorporate more healthy foods, including low-carb burgers and fries. If McDonalds
is able to stay ahead of the competition in this aspect, they will have a strong
competitive advantage over such companies as Wendys and Burger King.

9.2

Recommended Strategy

Stay-on-the-offensive strategy The main goal of the stay-on-the-offensive strategy

is to be a proactive market leader. The principle of this strategy is to continually stay
one step ahead of your competitors and force them to play catch up. McDonalds is
already the industry leader in the fast-food industry with a market share of 33
percent compared with the number two chain in the industry, Burger King at 13
percent market share. They can stay out front by implementing technological
improvements in their restaurants to enhance the production methods or to improve
the ordering process of the customer. In addition, they can also introduce new or
better product offerings to satisfy the needs of their customers. The best approach
that McDonalds can take through this strategy is to improve their customer
service. McDonalds customer service ranking was the lowest in the fast-food
industry and was even lower than the Internal Revenue Service. To improve upon this
substandard attribute, McDonalds should revamp their training process for newly
hired employees and introduce new educational modules for currently employed
personnel.

10 Executing the strategy and control

McDonalds has needless to say already made a presence in the market and
had made itself a household name. It is already the largest hamburger chain in the
world. Therefore, it needs to continue onward with its successes while being a head
every time with new product innovation, marketing schemes, technology
development, customer service, employee training. By improving the standards and
raising the bar a little higher for employee expectations will result in success stories
from stores worldwide. The Plan to Win strategy is important in the offensive
strategy because it is about being innovative and challenging to the competitors. It
proves that McDonalds is not just about profit only, they have made great leaps to
show appreciation for their employees. Happy employees will result in better

performance and give the reputation a whole new look on top of its current one. One
of McDonalds key success factors has been its implantation of its Plan to Win. The
plan focuses on five key drivers of success; people, product, place, price, and
promotion. The first factor is McDonalds people or employees. McDonalds is striving
to do a better job of staffing during busy periods as not to overwhelm and to reward
outstanding employees for exception work. It is also putting more emphasis on its
hospitality training to ensure a friendlier and customer focused support staff.
Conclusion
McDonalds has seen many changes, good and bad during its creation and
duration of the business. As long as the core competencies are recognized and never
forgotten, then this business will continue to thrive. With every issue and challenge
the corporation faces, it has the opportunity to improve itself and prove itself to the
public, shareholders, and stakeholders. With every battle conquered, another one
rises and with a secure mission and vision in mind, the corporation should never stray
too far from the roots and success of the company. The recommended strategy will
strengthen this plan because it is doing what McDonalds does best and more
so. Despite the downturn the company has seen, the general impression we receive
from McDonalds financial situation is that the company is slowly climbing out of a
low period and making a turnaround. We must never forget the key success factors
of the business which really makes the business for what it is today, including
franchises that offer quick, efficient service in a clean friendly environment.