McDonalds Corp.

Group #5
Michael Ahern, Asime Mehmeti, Kelsey Middelkoop, Kevin Ngo
September 27th, 2016

Executive Summary (Case 3-3)

Richard Steinig became a junior partner with a McDonalds Corp, franchisee in 1973. At
that time his two stores each generated $80,000 in annual sales. From these annual sales he
pocketed more than 15% of that as profit. In 1973, this seemed to be a positive for Steinig.
However, fast-forward 30 years Steinig owner of four restaurants average annual sales of $1.65
million, says he barely scraped by. Unfortunately, sales havent budged since 1999 and costs
keep rising. McDonalds profit margins are no more than half of what they were in 1973.
Steininger's stated , We have become our worst enemy. For decades, McDonalds gave
millions of Americans their first job while changing the way a nation ate. Today, McDonalds is a
reeling giant that teeters from one mess to another. McDonalds continued to suffer through
the 80s and 90s with the company reported the first quarterly loss in its 47-year history.
Cantalupo, second top executive, wanted McDonalds to rebuild the foundation of McDonalds
franchisees. Cantalupo stated, We have to rebuild the foundation. Its fruitless to add growth if
the foundation is weak. Franchisees, who own 85% of all U.S. McDonalds, faced stagnant

sales. Cantalupo had to convince them to buy into his plan. However, 126 franchisees left the
system, with 68, representing 169 restaurants, forced out for poor performance.
One of the biggest flaws for franchisees is the top-down manner in which Greenberg and
other past CEOs attempted to fix pricing and menu problems. In the 1990s, headquarters
stopped grading declined for cleanliness, speed, and service. Also, training declined as
restaurants fought for workers in a tight labor market. Bell, formerly president of McDonalds
Europe, launched a coffeehouse concept called McCafe, which is now being introduced globally.
The introduction of McCafe will hopefully bring sales up for McDonalds. McDonalds best hope
to succeed is to recapture that love and to become the most innovative franchisees by
strengthening their brand image, diversifying their menu, and they also need understand their
consumer preferences.

Problems
One of the problems that McDonalds is facing is the current customer trend towards
healthier foods. McDonalds has shot itself in the foot when the franchise was selling their food
items for extremely cheap. Due to the shift towards a healthier lifestyle, profits and sales have
been declining for McDonalds with its stock sliding to 60%. Another problem that McDonalds
has is their attempt towards fixing the prices from being too cheap, product innovation and
service and quality. To speed up the service and produce new food items McDonalds tried to
install new equipment in order to accelerate the processes, but it did the reverse by slowing
down the service in general; another issue with installing new equipment would be the time it
takes to learn how to use said equipment and preparing the new food items. Former Chief
Executive Greenberg introduced 40 menu items, and all of the items flopped.
SWOT ANALYSIS
McDonalds has gained some strengths as a brand. They provided millions of americans
with their first jobs; Americans relied on this brand to help get them through and provide for their

families. They rose from a single privately owned store located in a Chicago suburb, to an
American Icon, which is their greatest strength.
Mcdonalds has a weak business model. The introduction of the dollar menu actually
decreased sales, and only cheapened their brand name. Their burgers sell for $1 when it costs
them $1.07 to make. They arent making a profit let alone breaking even. Their weak business
model is due to a lack of strong leadership, which is their second weakness. The chief executive
was let go after introducing 40 new items and acquiring of a handful of non-burger chains; it
was a complete failure causing a stock value decrease of 60%, over a three year period. The
company relied on a retired successor, to save the company. Unfortunately, he too was unable
to bring their company back from an all time low.
One immediate opportunity available for McDonalds is to work on ticket times. Currently
it takes them 163 seconds to complete a drive through order. Research showed that saving six
seconds at a drive-through, brings a 1% increase in sales. A more long term solution or
opportunity available, is to become a fast-casual restaurant. By creating healthier options, and
branding themselves as fast- casual, they can actually increase their prices and start making a
profit.
McDonalds has many threats or competitors. People can buy fast meals from
supermarkets, convenience stores, and even vending machines, causing McDonalds to close
719 stores. Restaurants that adapted to consumers needs, and moved away from a fast- food
model, have now become successful, completely surpassing McDonalds.

Alternatives and The Pros and Cons

When choosing a course of action to increase McDonalds profits, there are a couple of
alternatives to consider before making a final decision. The first alternative that McDonalds can
implement is diversification among their menu. For example, McDonalds can alter their menu
and add different choices for consumers to pick from to differentiate themselves from their other

fast-food competitors, which would be a pro. However, a con to this strategy is it is often
implemented by other competitors, such as Wendys adding their ghost pepper burger or Jack
In The Box adding their new Brewhouse burger. McDonalds has also tried to use this strategy in
the past when they offered hot dogs that failed and pizza that was too large to fit through the
drive-thru window also causing this new product to fail. A simple diversification of the menu at
McDonalds simply would not be enough to give them the edge over their competitors. Even
currently, McDonalds is still trying to implement this strategy and their success is still on the
steep decline. A second alternative for McDonalds to consider is investing in making their
production faster. McDonalds used to be known as the king of fast food, yet they are now
currently slower in drive-thru time compared to Chick-fil-A and Wendys costing them a 1%
difference in sales. The question is, would this 1% make a big enough impact to help the failing
company. The cost of the new equipment to increase efficiency would be another factor that
would have to be considered and the 1% difference in sales may not be worth it to pay for new
equipment to increase production. Another option for McDonalds is to completely change their
brand and reposition themselves into a new market. The introduction of the McCafe, which
spread worldwide, was actually a successful addition to the McDonalds franchise. McDonalds
could in fact drop their american fast-food half of their company and focus on the McCafe brand.
With its potential already proven, this complete transition could be great for the company. They
could focus more on their popular coffee items and have more fresh, fast-casual foods
introduced to complement this change. McCafe would enter a market where they would be the
low-cost provider competing with Starbucks, Dunkin Donuts and Einsteins. Coffee and fastcasual foods to complement it is a big market and there is real opportunity for McCafe in this
area. The only potential problems identified with this alternative is that it may be difficult to
change the McDonalds brand in consumers minds and the cost of remodeling all of the
McDonalds franchises would be no cheap feat.
Decision Criteria

When making a decision about the best alternative for McDonalds, there are a number
of things that need to be considered before making the final decision. The first thing would need
to be profits and cost. Each alternative will require a significant amount of investment and would
need to have the appropriate return in profits in order for the decided change to be successful.
For the menu items, the cost of implementation would be the least costly, but would probably
also have the least effect, if any, on McDonalds profits. The cost of new equipment to increase
production would have high costs and with McDonalds losing 1% of sales do to their current
production rate, the potential profits may not outweigh the costs. Lastly, the greatest costs would
be the complete reposition of McDonalds brand to the McCafe brand. The costs would entail
new marketing campaigns, menu items and complete makeovers of the current franchises.
However, this change could bring in the most profits in result from entering a new market.
McDonalds brand image would also have to be considered with the repositioning
alternative mostly. The goal of reposition McDonalds and re-branding the company as McCafe
would cause a change in the brand image for the company. Ronald McDonald has to go as it is
a relic of the past; a time where cheap and unhealthy burgers and fries are no longer the staple
foods of America. If McDonalds were to keep Ronald McDonald as the mascot, then there has
to be a drastic design change towards Ronald from being a Clown to being an icon related to
the current times. However, by entering a new market the brand image would need to
completely change from old fashioned American fast-food to a new trendy cafe style fast-casual
restaurant.
Finally, consumer preference would also need to be considered with each alternative.
When choosing new menu items, consumer preference is the biggest consideration because
adding new items that consumers will not buy is wasted efforts. As far as increasing efficiency,
the expectation of a customer going to McDonalds is to get food very fast. An increase in how
fast they get the food would only match customer preference. Lastly, if McDonalds tries to
reposition themselves into the cafe market, they would need to make sure that consumers

would prefer this change. This means choosing appropriate menu items to attract consumers
such as coffee and food that meets the markets demands.
Decision
The decision that we came up with is that McDonalds needs to do a complete rework on
their brand image and reposition themselves into a new market. What McDonalds should do is
scrap most of the franchises items, and focus on the McCafe. The business can enter a new
market by their standards, with the main threats being Starbucks and other coffee/bakery shops
like Dunkin Donuts, Einsteins Bagels, Panera Bread or Corner Bakery. The McCafe can
emphasize on selling coffee and healthier items, but at a cheaper price than what Starbucks is
selling their food for. A few examples of a menu change would be having fresh salads made
from scratch, grilled chicken instead of chicken nuggets, and healthy sandwiches instead of fatty
burgers. We do recognize that there are certain costs that need to be accounted for such as
changing the equipment, teaching employees how to make the new food items, shipping
perishable items like fresh fruits and veggies to the store and preserving perishables;
McDonalds is losing money though, and why would a business stay in a dying market when the
business can shift over to a new market with potential profits? Sometimes there needs to be
risks taken in order to survive, and even though McDonalds previous decisions and risks
caused the franchise to go through multiple slumps, McDonalds needs a reality check. The
times have changed, and McDonalds cant remain as a fast food chain or else itll be erased.