mcdonalds_case.pdf

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Authors Marco Benvenuti ([email protected]), Anjali Dusija ([email protected]), Vladislav Georgiev

([email protected]), Nirav Shah ([email protected]) and William Wu ([email protected]), are

graduate students in the Masters in Management of Hospitality program at the Cornell School of Hotel

Administration, class of 2005.

This case study is written for the purposes of classroom discussion. It is not to be duplicated or cited in

any form without the authors express permission. For permission to reproduce or cite this case, contact

the author directly.

The Center for Hospitality ResearchAT CORNELL UNIVERSITY

Case date: December 10, 2003

McDonalds Corporation A Case Study

Over the past several years McDonalds has lost momentumand lost what it

takes to make customers feel special. We have struggled to grow our business in

the face of the weak and uncertain economic condition around the world. The

result has been disappointing financial performances. This is not acceptable.

CEO James Cantalupo, Letter to shareholders. March 21, 2003

A global fast food giant, McDonalds operates over 30,000 restaurants in 119

countries, serving 46 million customers per day.1 The Golden Arches of McDonalds are

now more recognized around the world than the Christian cross.

Since its inception in 1955, McDonalds has grown by leaps and bounds. Using

franchising as its main growth vehicle, McDonalds has become a truly global fast food

giant. As a publicly traded company, McDonalds flourished, delivering true value to

1 Market Insight McDonalds company page Long business description, online at

http://ezproxy.library.cornell.edu:2331/cgi-mi-

auth/mihome.cgi?tree=mcd&submitit=Go%21&go=Go%21&tab=company (viewed 11/26/03).


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McDonalds Corporation A Case Study, 2

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its shareholders and a reliable, consistent, and warm meal to its clients. McDonalds

has also provided the first job for a lot of young Americans. In fact, the word McJob

has found its way into the Merriam-Websters Collegiate Dictionary.2

It wasnt until 2000 that McDonalds started stagnating in its growth and showed

signs of no longer being able to effectively manage its franchises. On Wednesday

December 18, 2002, James Cramer, analyst for Thestreet.com, issued the following

statement after McDonalds had just announced a profit warning for the eighth

consecutive quarter:

There can be no fixing of McDonalds because there is no McDonalds. The

company itself cant control its franchises. The franchises used to be the source of

so much growth and so much profit, but now the franchises cant be reined in and

they cant be fixed. McDonalds has become a rogue operation, where

headquarters find its control limited to advertising and issuing proclamationsabout how good the food is. No wonder it issued its eighth profit warning in nine

quarters on Tuesday.3

Thinking more objectively, another analyst for Motley Fool (www.fool.com)

commented:

As I discussed in my last column, like many long-standing, high-growth

companies, McDonalds began to saturate its core markets, yet failed to recognize

this and slow its growth. Consequently, new restaurants performed poorly and

cannibalized established ones, margins and returns on capital fell, and the stockfollowed. McDonalds compounded this mistake by engaging in an insane price

war with Burger King and failing to take care of the basics that made the company

great: tasty food, clean restaurants, quick service, and consistency across the

chain. In addition, it pursued new restaurant concepts that proved to be little

more than expensive distractions.4

In its hunger for growth, McDonalds had started to ignore its key stakeholders.

Profit margins were being squeezed, and franchising was becoming cannibalistic. In a

franchising environment, McDonalds main competitor is McDonalds itself. Its

2 Merriam-Webster's Collegiate Dictionary; "McJob," defined as "a low-paying job that requires little skill andprovides little opportunity for advancement"; online at http://www.merriam-webstercollegiate.com/cgi-bin/collegiate?va=mcjob&x=29&y=11 (viewed 5/23/04).3 Yahoo finance website McDonalds Failure is its Franchises online athttp://biz.yahoo.com/tsp/021218/10059227_1.html (viewed 11/25/03).4 The Motley fool Website CEO of the year- McDonalds Cantulupo. Online athttp://www.fool.com/news/commentary/2003/commentary031017wt.htm?source=eptyholnk303100&logvisit=y&npu=y (viewed 11/25/03).


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franchising activities were impinging on their existing stores and this made

franchisees very upset. McDonalds also began to ignore their own standards of

cleanliness, quality, and consistency. During an interview with Whitney Tilson from

fool.com, a franchisee of McDonalds reported, The only competition I worry about is

McDonalds. I have one store that competes with Burger King, Wendys, and Popeyes

on adjacent corners and I outsell all of them put together. But I get hurt if McDonalds

opens another restaurant nearby it can cost me $500,000 in annual sales.5

In December of 2001, Jim Cantalupo, a long standing retired veteran of

McDonalds, was called out of retirement and asked to take charge of the ailing

company.6

When McDonalds chose to hire the insider Cantalupo, it was viewed as proof

that the companys bureaucratic, inbred culture would continue. A Reuters article

published at the time summarized the conventional wisdom:

Jim Cantalupo is taking the reins of the worlds largest restaurant company as its

markets mature, competition balloons and consumers become more selective in what they

eat.... Investors have come to see McDonalds as a slow-moving monolith facing market

saturation, increased competition, changing tastes in the U.S. fast-food market -- its

largest with some 13,000 restaurants -- and a host of problems overseas where troubled

economies hamper growth...The clock is ticking for Cantalupo, who steps into the hot seat

in the wake of seven earnings declines in the past eight quarters .7

However, within two years, McDonalds seems to have proved its critics wrong.After a tremendous change in management and corporate philosophy, the company is

ready to take its position as a leader in the fast food industry. It is poised for growth

and a return to profitability. It is armed with new management that is committed to

returning McDonalds to excellence. Same-store sales have increased, and consumers

seem to be enjoying the companys new health-conscious menu items.

James Cramer of Thestreet.com, the same analyst who had earlier been so critical,

was happy to eat crow. He was now quoted saying:

5 Ibid.6 Cantalupo was still McDonald's Chief Operating Officer at this case writing. Cantalupo died of a sudden heartattack on April 19, 2004. See Youn, Soo. "McD's Chief Dies at 60," Daily News, April 20, 2004, online athttp://www.nydailynews.com/business/story/185383p-160650c.html (viewed 5/23/04).7 The Motley fool Website CEO of the year- McDonalds Cantulupo. Online athttp://www.fool.com/news/commentary/2003/commentary031017wt.htm?source=eptyholnk303100&logvisit=y&npu=y (viewed 11/25/03).


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It happened again. I had another great experience at McDonalds. I am not

kidding. Either the company is following me and watching me and fixing things

up right before I go in, my having been a big critic of the company, or the changes

are for real. People say thank you. There is no longer a horrendous wait at the

drive-through window. The bathrooms are clean again. And, get this, the foods

better, particularly the California Cobb -- broiled, please.8

History of the CompanyFounded by brothers Dick and Mac McDonald, McDonalds started as a drive-in

restaurant. Attracted by the concept of a small menu and fast service, the McDonald

brothers replaced a traditional 25-item barbeque menu with a nine-item cheeseburger,

fries, and milkshake menu. They introduced the smaller menu with an assembly-line

kitchen and a self-service infrastructure. Leveraging the smaller menu and fasterservice, they focused on selling large quantities at a cheaper price point: They priced the

traditional 30-cent hamburger at just 15 cents. As the company tells its history:

When the new McDonalds re-opened in December of 1948, business took a

while to build. But it soon became apparent that they had captured the spirit of

post-war America. By the mid-1950s, their little hamburger factory enjoyed

annual revenues of $350,000 almost double the volume of their previous drive-

in business at the same location. It was not unusual for 150 customers to crowd

around the tiny hamburger stand during peak periods.9

From here, McDonalds grew to become a part of the American dream. The

proactive and futuristic design that replaced the traditional drive-in restaurant

represented a risk that the McDonalds brothers took. Reaping the benefits of the

economies of scale from a limited menu allowed the brothers to offer good food at a

value that was unheard of at the time. This attracted buyers and investors from all over

the country.

Neil Fox became the first McDonalds franchisee. Neils restaurant in Phoenix,

Arizona, was a red-and-white building with a slanting roof and the Golden Arches onthe side.This restaurant became the prototype for the chain that the McDonald brothers

had envisioned. This prototype became the first wave of McDonalds stores to spread

8 Yahoo finance website McDonalds Deserves a Break These Days, online athttp://biz.yahoo.com/tsp/031007/10117831_1.html (viewed 11/25/03)9 McDonalds History company website. Online at http://www.McDonalds.ca/pdfs/history_final.pdf (viewed on11/28/03)


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throughout the United States. The brothers successful beyond their dreams in San

Bernardino were barely tapping the franchising potential of the business concept they

had pioneered.10

The first franchising model was very simple. It consisted of the rights to use the

McDonalds name and a description of the speedy service system. The franchisee

would also acquire the services of Art Bender, the man who helped the McDonald

brothers behind the counter of the first restaurant in San Bernardino. McDonalds was

on a sure growth path. But everything changed in 1954, when the chugging train hit

warp speed: A milkshake machine salesman named Ray Kroc saw the McDonalds

operation first-hand and the fast food industry was born.11

Ray Kroc

Ray Kroc, a milkshake machine salesman, came to California because a businesscalled McDonalds was selling more milkshakes than any other vendor out there. It

was the sale of Multimixers which first drew him to the McDonald brothers hamburger

stand in San Bernardino, California. After all, if he could discover the secret of how they

sold 20,000 shakes each month, how many more milkshake machines could he sell? But

when Kroc showed up at McDonalds one morning in 1954 and saw the rapidly moving

line of customers buying bags of burgers and fries, he had but one thought: This will go

anyplace. Anyplace!

Despite Krocs enthusiasm, the McDonald brothers were not interested ingrowing beyond their current size. However, in the end, Kroc managed to convince the

McDonald brothers to allow him to franchise and grow the company. On March 2, 1955,

Kroc registered the company under the name of McDonalds System, Inc.

On April 15, 1955. Krocs prototype McDonalds restaurant began business in

Des Plaines, Illinois. This store was opened with the help of Art Bender, who had

served the first McDonald brothers hamburger and now the first Ray Kroc

McDonalds hamburger.

One of the most important features of what was to become Krocs legacy was hisdecision to abstain from modifying the menu or lowering quality or service. He did not

try to modify the assembly line production system. Instead, Kroc focused on the

qualities he needed to add to the concept in order to make it sustainable, even with

10 Ibid.11 Ibid.


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rapid growth. He added additional standards of cleanliness. Indeed, Quality, Service,

Cleanliness, and Value QSC & V continues as McDonalds operating principle

today.12

Krocs main contribution was to use his experience in sales in the area of

franchising. Franchising went on to become the main growth vehicle for the company.

By strategically positioning the business to be scalable, Kroc abstained from selling

franchisees the equipment, supplies and food, yet another legendary trademark. Kroc

did, however, decide to purchase or lease much of the land that the restaurants were

located on.

Krocs agreement with the McDonald brothers was to limit the franchise fee to

$950 per restaurant and to charge a service fee of only 1.9 percent of restaurant sales

with 0.5 percent of that going back to the McDonald brothers. By the end of 1956,

McDonalds 14 restaurants reported sales of $1.2 million, and they had served some 50million hamburgers. Within four years, 228 restaurants reported $37.6 million in sales;

the company had sold its 400 millionth hamburger mid-way through 1960.13

In 1961, Ray Kroc proceeded to buy out the McDonald brothers for a fee of 2.7

million dollars. Unlike the McDonalds, Kroc had never limited how large the company

could grow. To ensure that all franchisees had the adequate training and management

skills, Kroc founded Hamburger University in the basement of a restaurant in Illinois.

The long-term vision that was Hamburger University was an investment that would

pay rich dividends to the company and it continues to do so, even in its current stateas a global industry giant. A worldwide institution, Hamburger University utilizes

sophisticated training techniques and high-level management courses.14

Growth In the United States

McDonalds growth in the United States soon became a series of milestones in

sales, number of restaurants, number of hamburgers served, and in establishing

standards of quality, service, cleanliness and value (QSC&V) previously

unknown in the growing fast food restaurant industry. By 1963, they were

selling one million hamburgers a day.--McDonalds corporate website15

12 Ibid.13 Ibid.14 Ibid.

15 Ibid.


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Growing at an explosive rate, McDonalds soon tapped the next logical step in

the path of a fast-growing company: going public. McDonalds went on to become one

of the most widely held common stocks in the history of America. Consistency in

service and quality led itself to consistency in earnings and growth. McDonalds became

the only company to deliver growing revenues and income for one hundred

consecutive quarters.

The infusion of cash from the public offering also allowed McDonalds to

continue its innovative stance in the industry. McDonalds was the first to introduce a

drive-through restaurant yet another concept that revolutionized and redefined the

quick service food industry.

It wasnt until 1967 almost two decades after the McDonald brothers opened

their first-ever restaurant that the price of a McDonalds hamburger rose from 15 to 18cents.

By 1970, McDonalds reported $587 million in sales from almost 1,600 restaurants

in all fifty of the U.S. states. Continuing to make strides in product innovation,

McDonalds served its first breakfast in Waikiki, Hawaii. The following year, the first

McDonalds Playland opened in Chula Vista, California. McDonalds broke the billion

dollar sales mark in 1972. In 1975, the first drive-through operation was established in

Sierra Vista, Arizona an innovation that today accounts for about half of all

McDonalds restaurant sales in the U.S. and Canada. Ray Krocs dreams for McDonaldsgrowth throughout the United States had been more than satisfied. Next, McDonalds

set its sights on the rest of the world.16

International Expansion

International success came as a surprise to McDonalds. It wasnt so much that

the brand was able to expand beyond the United States that surprised McDonalds. It

was the degree of success they enjoyed in the international locations around the world.

The Quality, Service, Value and Cleanliness model appealed to customers globally.

Japan, Germany, and former Iron Curtain countries became a huge source of expansionand revenues for the company.

16 Ibid.


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The company started with expanding beyond the U.S. borders into Canada;

McDonalds opened its first Canadian restaurant in 1967. McDonalds has more than

1,300 restaurants in Canada today.

When McDonalds started expanding internationally, the company tried to

compromise the traditional menu for local tastes. This move led to initial failures in the

Caribbean and the Netherlands. McDonalds soon realized that what worked in the

United States could also work overseas. Continuing with the globalization of the

traditional menu was key. A strong local partner, fully trained and totally involved in

the business...the traditional McDonalds menu...and our detailed operating procedures

for QSC&V were the formula for success.17

McDonalds has since opened thousands of restaurants around the world. Japan,

Germany, Australia, France, England, Canada comprise McDonalds big six. Together,

these countries provide about 80 percent of international operating income. McDonaldsinternational operations play an increasingly important role in the companys results. In

1995 along, 7,030 restaurants in 89 countries produced sales of $14 billion.18

Some of McDonalds international openings have been so dramatic that they

made headline news around the world. Just one example: On January 31, 1990, more

than 30,000 people lined up on a cold winters day in Moscow to visit the new, 23,680-

square foot McDonalds the most people ever served by a single restaurant to that

date.19

While sticking to their traditional menu, McDonalds has made necessary and

intelligent choices to cater their menu to local audiences by respecting religious and

cultural beliefs, laws, and regulations. Out of respect for local cultures, McDonalds

restaurants in Arab countries maintain Halal menus, which signify compliance with

Islamic laws for food preparation, especially beef. Restaurants in Saudi Arabia do not

display statues or posters of Ronald McDonald, since Islam prohibits the display of

idols. McDonalds in Jerusalem do not use dairy products and is closed on Saturdays,

the Jewish Sabbath. McDonalds has even made an entry in India, where eating beef is

against Hindu law; the traditional beef patty has been replaced with a mutton patty.

17 Ibid.18 Ibid.19 Ibid.


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The growth of McDonalds to date both domestically and internationally has

proven the validity of the first thought in Ray Krocs mind when he initially saw

McDonalds in operation: This will go anyplace.20

Strategic DirectionFollowing almost two years of dismal performance, the Board of Directors

brought in Jim Cantalupo to take charge of the company. This change in leadership also

signified a change in strategic direction for McDonalds. Summarizing the results of

McDonalds financial performance for 2002, Cantalupo said the following:

Over the past several years, McDonalds has lost momentumand lost what it

takes to make customers feel special. We have struggled to grow our business in

the face of the weak and uncertain economic conditions around the world. The

result has been disappointing financial performance. This is not acceptable.21

Franchising which was McDonalds main revenue for growth had begun to

slowly kill McDonalds. Having become a global giant, McDonalds began to

benchmark itself by the number of stores that would open each year. As long as there

were new stores opening in new corners of the world, McDonalds saw no problems.

But as existing markets started becoming saturated and the economy started slipping,

McDonalds inherent problem was exposed. Revenues that came from same store-sales

were decreasing. Continuing to push the envelope on franchising, McDonalds started

opening new stores that were cannibalizing existing ones.

In its ruthless and relentless pursuit of growth, McDonalds had created

disgruntled franchisees. Franchisees had become more and more disgruntled, in part due to

the perception that the company had stopped listening to them.22

In addition to opening new stores near existing ones, McDonalds started

squeezing profits by engaging in a price war with Burger King. Making items available

for a dollar or less, McDonalds disgruntled its franchisees even more.

In addition to its franchisees, McDonalds also stopped focusing on its customers.

In its reckless pursuit of growth, the company had abandoned its rigorous full field

20 Ibid.

21 McDonalds Corporation, 2002 McDonalds Corporation Summary Annual Report, Page 1.22 The Motley Fool Website, "CEO of the year- McDonalds Cantulupo"; online athttp://www.fool.com/news/commentary/2003/commentary031017wt.htm?source=eptyholnk303100&logvisit=y&npu=y (viewed on 11.25.03)


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evaluation standards of franchisees, so cleanliness, quality, and consistency were

slipping.23 McDonalds stopped caring about its customer and their experience.

Focusing on new stores, McDonalds did not focus on inspecting existing stores for

cleanliness, quality, and consistency, and renovation of existing stores was minimal.

And instead of focusing on customer departures to other fast food restaurants,

McDonalds engaged in a price war with Burger King.

After taking over the reign of the company, Cantalupo announced changes in the

strategic direction of the business. The customer became the companys first priority.

Cantalupo said, You see, McDonalds has a new bossits not me. Its the customer.24

Promising the return of McDonalds to its position of leadership in the quick

service industry, Mr. Cantalupo introduced a new revitalization program. The program

was indicative of a major shift in McDonalds strategy.

The new revitalization strategy (to be discussed later in this report) has indeed

been able to turn things around. Same-store sales have been increasing, and new

marketing platforms and food menus are being offered to the customer.

During prior years, McDonalds had looked to add more restaurants and

increase the number of franchisees. Now McDonalds was focusing on increasing sales

at existing stores. Announcing the strategy, Jim Cantalupo stated the following mission

in his letter to the shareholders:

Dear Investor:

In 2003, McDonalds embarked on a new strategic course, reflecting a

fundamental change in our approach to growing the business. Previously, we

emphasized adding new restaurants. Today, our emphasis is on building sales at

existing restaurants.

Consistent with this strategic shift, we reduced our capital spending and intend

to spend less than in the past. This will enable us to return a sizeable amount of

cash to shareholders through dividends and share repurchases.

Weve aligned our global System around a common mission with a common set of

customer-focused, goal-oriented actions. We call it McDonalds Plan to Win. Its

23 Ibid.24 Ibid.


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based on the five drivers of exceptional customer experiencespeople, products,

place, price and promotion.

By consistently delivering on all five drivers, we will achieve our key objectives.

We will attract new customers, encourage existing customers to visit us more

often, build brand loyalty and, ultimately, create enduring profitable growth for

the Company, the system and our shareholders.

Our near-term goals are to fortify the foundation of our business through

operations excellence and leadership marketing and to lay the pipeline for long-

term innovation. Attaining these goals will enable McDonalds to deliver

consistent, reliable top-line and bottom-line growth and improve returns on

invested capital.

More specifically, for 2005 and beyond, McDonalds is targeting annual systemwide sales growth of 3 percent to 5 percent. Of this, approximately 1 to 3

percentage points will come from increased sales at existing restaurants, and up

to 2 percentage points will come from new restaurants. We also are targeting

annual growth in operating income of 6 percent to 7 percent and annual returns

on incremental invested capital in the high teens.

This is the new McDonaldsthe McDonalds for the 21st century. We have a

new strategic plan and a new disciplined approach to running the business. We

have set realistic goals for reliable, predictable financial performance.

I am energized by our progress and have every confidence that we will achieve our

targets and build value for shareholders.

Very truly yours,

Jim Cantalupo

Chairman and Chief Executive Officer, Shareholder

McDonalds Corporation

October 29, 200325

Announcing this new vision of the company, Cantalupo said, We will make

McDonalds the brand people grow up withand never outgrow. We intend to remain

constantly relevant in a constantly changing world.26

25 McDonalds Corporation, 2002 McDonalds Corporation Summary Annual Report.26 Ibid.


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Strategy

With 31,000 units, McDonalds main business is franchising of fast food

restaurants. In addition to earning revenues from franchising, McDonalds also operates

its own restaurants; 30% of restaurants are company owned, with the rest operated by

franchisees.27

In addition to its core business, McDonalds also owns a majority share in three

quick-service and fast casual brands: Chipotle, Boston Market, and Donatos.

Boston Market offers homestyle cooking; the menu features items such as

rotisserie chicken, ham, meatloaf, turkey, and macaroni. Boston Market is a quick-casual

cafeteria-style restaurant that also provides catering services. There are 658 restaurants

operating in 28 states. Boston Market is a wholly owned subsidiary of McDonalds.28

Chipotle, the Mexican brand in McDonalds portfolio, comprises 220 Mexicanfast casual eateries in 10 states. Customers can build their own burritos and tacos; the

emphasis is on fresh ingredients. They also serve chips, salsa, beer, and margaritas.

McDonalds owns 90% of the company.29

Donatos is another wholly owned subsidiary of McDonalds, primarily located in

Ohio and surrounding areas. Donatos offers varieties of pizzas, dessert pizzas, and

submarine sandwiches.30

In addition to its core businesses and brands, McDonalds is also fattening its

brand through the introduction of McKids and McWi-Fi. These new ventures also allowMcDonalds to diversify its core brand.

McKids is a retail line offering toys, videos, clothing and books for kids.

According to Hoovers Online, McKids moves the fast-food giant beyond its core

operations, allowing it to diversify and revive its brand image, including the decades-

old Ronald McDonald, who will be featured in the new videos.31

27 Hoovers online McDonalds Corporation; online athttp://www.hoovers.com/free/co/factsheet.xhtml?COID=10974 .28 Hoovers online Boston Market Corporation, online at http://www.hoovers.com/boston-market-corporation/--ID__16244--/free-co-factsheet.xhtml.29 Hoovers online. Chipotle company site, online at http://www.hoovers.com/chipotle/--ID__106335--/free-co-factsheet.xhtml.30Hoovers Online. Donatos company site; online at http://www.hoovers.com/donatos-pizzeria/--ID__105157--/free-co-factsheet.xhtml31 Forbes.com- McDonalds fattens its brand; online athttp://www.forbes.com/2003/11/13/cx_al_1113mcd2.html?partner=yahoo&referrer.


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McDonalds has also created a strategic alliance with Wal-Mart, the world largest

retailer, to ensure that the McKids product gets the correct audience. In addition to

creating a source of revenue, McKids is an integral part of the revitalization plan. In

addition to adding diversified earnings, McKids also creates a new bond between its

main target audience kids and the company. It helps us establish McDonalds as

more than a trademark; we call it a trust mark, said Larry Light, McDonalds chief

global marketing officer, of the licensing campaigns intent.32

McWi-Fi is wireless internet service available to McDonalds customers. The

service is currently being tested in select locations. Strategically aligning themselves

with T-Mobile, McDonalds will offer an hour of free internet service to customers who

purchase a value meal. Furthermore, additional time can be also purchased in one-hour

increments at a cost of $3.00. McDonalds has also aligned itself to strategically market

this service with Intels Centrino mobile technology chip.

Similar to McKids, McWi-Fi is also a move to re-vamp the brand image in its

appeal to the newer, technology savvy generation.

The Core Brand

Once he came to terms with the reality of the problem that McDonalds faced

with its core operations, Jim Cantalupo initiated a revitalization plan for the company.

It started by lowering the companys growth targets to more modest numbers and

reducing capital expenditures. They went back to the drawing board to focus on

delivering consistency. We need to improve our restaurant operations: our service

must be consistently fast and accurate, the ambience in our restaurants must be

consistently contemporary and welcoming, our food must consistently taste good and

the customer experience we provide must be consistently relevant and fun.33

The companys critics hailed its change in focus:

McDonalds is definitely doing something right. The fast-food burger joint has

undertaken a whole host of initiatives in the last several months to turn its business around andget same-store sales headed in the right direction. The magic is working. McDonalds announced

that U.S. same-store sales for the flagship brand jumped 10% in the month of September and

9.5% for the third quarter. Thats impressive, and better than the strong 4.9% hike in the second

32 Yahoo Finance, McDonaldsSeeks To Make McKids A Multifaceted Brand , online athttp://biz.yahoo.com/djus/031113/1550001747_1.html (viewed on 12/07/03)33 Ibid.


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quarter. McDonalds is keeping both investors and customers happy. It recently raised its

dividend 70%, bringing its yield up to 1.7%. And who can argue with a stock that s gone from

$12 to $24 since March?34

In announcing McDonalds newfound direction, Jim Cantalupo was, in essence,

announcing a return to the basics. Hungry for growth, McDonalds had ignored its key

stakeholders, the customers and the franchisees and finally its shareholders. The

revitalization plan aimed to refocus the companys energies on its main stakeholders.

Mr. Cantalupo set up the following specific goals aimed at making the

revitalization plan a reality:

Improving training to recreate McDonalds winning culture of hospitality.

Building brand loyalty by marketing the product to adults, kids and moms

Focus on providing a clean, welcoming, and contemporary atmosphere tocustomers.

Working with franchisees and suppliers to improve productivity and

identifying cost savings.

Continuing to make meal occasions strategy innovations such as drive-

thru and breakfast. Through its meal occasions strategy, McDonalds has

attempted to increase the number of meal occasions for which customers

would visit McDonalds. In certain countries, McDonalds has introduced

pastries and tea to its product line in an attempt to lure customers to

McDonalds for teatime.

Creating an organizational structure to execute the outlined changes.

In addition to focusing on the core operation, CEO Cantalupo is considering the

sale of some of McDonalds other brands, like Chipotle. While McDonalds invested in

these ventures to respond to the growing segment of fast casual restaurants, they still

need to be developed into large-scale franchises. Given the intensive capital investment

required to grow these partner brands, McDonalds has decided to continue focusing its

energies on its core brand, as Yahoo! Finance recently reported:

In announcing that it will take charge in the current quarter for several items,among them its money-losing partner brands, the fast-food giant seemingly

signaled it has decided to shed at least some of those sidelight ventures as it

concentrates on revitalizing its core hamburger business. The intention of their

34 Yahoo Finance, "McDonalds is Loving Its Turn Around," online athttp://biz.yahoo.com/fool/031008/1065643860_1.html (viewed on 11/25/03)


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acquisitions was to find new growth vehicles and to offer its best franchisees

expansion opportunities. But neither ambition has played out as hoped, and,

collectively, the brands have remained a drain on earnings.

We cannot allow anything, including the partner brands, to distract our owner-

operators, suppliers and company people from maximizing the full potential of

brand McDonalds, Cantalupo said in a memo to employees earlier this week.

While he said the brands may have the potential to add to our growth, they

must first demonstrate their ability to grow and be franchised without requiring

significant capital or other resources.35

Ensuring that McDonalds achieves its new mission, CEO Jim Cantalupo also

announced shifts in management roles. Vice Chairman Jim Skinner has been put in

charge of the troubled McDonalds brand in Japan. One of the largest joint ventures,Japan represents an important part of McDonalds international operations. The

Japanese venture has also suffered due to the economic downturn.

Focusing on service time and efficiency as well as operations in Australia, New

Zealand, and Canada is Claire Babrowski. Babrowski was the former president of

Middle East and Asia Pacific operations. Finally, chief of business development Mats

Lederhausan is in charge of overseeing the Partner Brands such as Chipotle, Donatos

and Boston Market.

Strategic Marketing Campaign

To introduce its new revitalized self to its customers, McDonalds announced its

Im lovin it advertising campaign. The campaigns goal was to connect customers

with the brand once again. It was an invitation to come try the renewed golden arches.

Im lovin it is a key part of McDonalds business strategy to connect with

customers in highly relevant and culturally significant ways around the world. The

theme and attitude of this full-scale campaign is being integrated into every aspect of

the business, from crew training and the overall restaurant experience to national

sponsorships, promotions, and all new local street marketing.36

35 Yahoo Finance, McDonalds Charge Signals End To Partner Brands, online athttp://biz.yahoo.com/djus/031107/1342000840_1.html (viewed on 12/07/03).36 Yahoo Finance, McDonalds(R) USA Launches Im lovin it(TM) Brand Campaign, online athttp://biz.yahoo.com/prnews/030923/cgtu066_1.html (viewed on 12/07/03).


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The Im lovin it campaign has also employed such teen icons such as pop

singer Justin Timberlake and professional skateboarder Tony Hawk in order to connect

with the companys new key demographic.

Meal Innovations

Committed to revitalizing its image relative to obesity, McDonalds has

committed itself to growing same-store sales through new, innovative meal options

such as healthier salads and all-white-meat chicken. CBS News reported that The shift

is part of the nations largest hamburger chains efforts to push healthier choices. A

four-piece serving is now lighter by 40 calories at 170 calories, with 10 grams of fat, 3

grams fewer than the traditional McNuggets.37

McDonalds has also formed a strategic alliance with fitness expert Bob Greene topropagate the McDonalds Healthy Lifestyles initiative. The Healthy Lifestyles initiative

will offer customers advice on balanced nutrition as well the option to purchase Bob

Green Health products. To support this program, Bob Greene will bring his expertise

about health and fitness to the development of compelling, educational materials

available at McDonalds restaurants such as tray liners and booklets, as well as conduct

other high-profile activities, both internally and externally, including speaking

engagements and appearances.38

Internal Stakeholders

Board of Directors

The Board of Directors is composed of 16 members. Some of the members have

risen up the ranks at McDonalds, while others come from varied backgrounds. For

example, chairman and CEO Jim Cantalupo has served as a director since 1987

(including an eight-month leave of absence), while Terry Savage is a financial journalist.

This strategy is very effective for two main reasons: high company morale and the

ability to draw from a diversified talent pool. In fact, while Cantalupo is the

37 CBS Mrketwatch.com, McDonalds to Use All White Chicken, online athttp://www.marketwatch.com/news/yhoo/story.asp?source=blq/yhoo&siteid=yhoo&dist=yhoo&guid=%7BAF38DE6C%2DB153%2D4BF2%2D898B%2D87074C8D21CB%7D (viewed on 12/07/03).38 Yahoo!, McDonalds(R) Partners with Americas Best-Selling Health and Fitness Expert, Bob Greene, on HealthyLifestyles Campaign, online at http://biz.yahoo.com/prnews/030917/cgw008_1.html (viewed on 12/07/03).


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McDonalds man who embodies the tradition and the culture of the company, Savage is

an external expert that helps the company deal with the media and publications.

The following are short biographies of the CEO and the companys most

influential executives:

Jim Cantalupo - Chairman and Chief Executive Officer

Jim Cantalupo has served as chairman and chief executive officer of McDonalds

Corporation since January 1, 2003. A 28-year veteran of the company, Cantalupo was

formerly president and vice-chairman of the McDonalds Corporation. Prior to that, he

was vice chairman of the corporation and chairman and chief executive officer of

McDonalds International.

Cantalupo was first appointed to the McDonalds board of directors in 1987. Hejoined the company as controller in 1974, after eight years with Arthur Young &

Company. He was promoted to vice president in 1975 and senior vice president in

1981. Since then, Cantalupo served as district manager in the Chicago region. In 1985,

he was appointed a zone manager with the responsibility of all McDonalds operating

regions in the northeastern U.S. He was appointed president of McDonalds

International in 1987, and president and chief executive officer in 1991.

Cantalupo also serves on the board of directors of Sears, Roebuck, and Company;

Illinois Tool Works, Inc.; World Business Chicago; and the Chicago Council on Foreign

Relations. In addition, Cantalupo serves on the board of trustees of Ronald McDonald

House Charities.39

Jim Skinner Vice Chairman

Jim Skinner is vice chairman of McDonalds Corporation. His responsibilities as

vice chairman were recently extended to include management oversight of McDonalds

Japan Limited, McDonalds second-largest market with almost 4,000 restaurants.

Skinner has held numerous leadership positions in his tenure with thecorporation. Before his most recent promotion, he served as president and chief

operating officer of the McDonalds Restaurant Group, with operating accountability for

the companys more than 30,000 McDonalds restaurants in 118 countries. Prior to that,

Skinner served as president and chief operating officer of McDonalds

39 McDonalds.com, James Cantalupo Biography, online athttp://www.McDonalds.com/corporate/info/exec_bios/cantalupo/ (viewed 11/23/03).


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Europe/Asia/Pacific and Middle East, with management responsibilities for the nearly

12,500 restaurants operating in those geographic sectors.

Ralph Alvarez Chief Operations Officer, USABefore his recent promotion, Ralph Alvarez was the President, Central Division,

for McDonalds USA, where he was responsible for nearly 4,300 restaurants in central

United States. Previously, he served as president of McDonalds Mexico. Prior to that,

Alvarez served as regional director for Chipotle Mexican Grill, one of McDonalds

partner brands. Prior his role at Chipotle, Alvarez worked as regional vice president for

McDonalds Sacramento region. Alvarez joined McDonalds in 1994 after a lengthy

career in the quick service restaurant industry working for Burger King Corporation

and Wendys International, Inc.40

Claire Babrowski President, Asia/Pacific, the Middle East and Africa

Claire Babrowski is responsible for the companys more than 7,500 restaurants in

Asia, the Pacific, the Middle East, and Africa. Most recently, she served as executive

vice president, Worldwide Restaurant Systems, where she was responsible for

operations development, site development, equipment systems, supply chain

management, menu management, research and development, and training functions.

She also served as McDonalds relationship partner to Chipotle Mexican Grill, Donatos

Pizza, and Pret A Manger, and was the chairman of the board for Chipotle. Prior to this,

she served as executive vice president, U.S. Restaurant Systems, for McDonaldsCorporation. In this role, she was responsible for operations, restaurant development,

purchasing, menu management, and training functions.41

Eduardo Sanchez President, Latin American and Canadian Group

As president of the Latin American and Canadian Group, Edouardo Sanchez is

responsible for supervising the companys operations, planning, development, and

expansion in those geographic regions. Prior to this post, he served as senior vice

president and international relationship partner. Sanchez began his career withMcDonalds in 1974 as a crewmember in Miami, Florida, and was promoted to

restaurant manager in 1977. In 1982, Sanchez became an area supervisor responsible for

40 McDonalds.com Corporate info, Ralph Alvarez Biography online athttp://164.109.33.187/corp/about/bios/ralph_alvarez.html (viewed 05/23/04).41McDonalds.com Corporate info, Ralph Alvarez Biography, online athttp://164.109.33.187/corp/about/bios/ralph_alvarez.html (viewed 05/23/04).


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the operations and local store marketing for five restaurants.

Switching to McDonalds International, Sanchez held numerous positions

including director of operations, managing director, and president of McDonalds

Systems, Spain. In addition, he assumed responsibilities for McDonalds Portugal in

1991. Sanchez returned to Florida in 1992 as regional vice president of the Tampa Bay

region, where he held responsibility for 300 McDonalds restaurants. In 1995, he was

named international relationship partner for Latin America.

In 1986, Sanchez received the McDonalds Presidents Award, the highest honor

given by senior management for an employees performance. He serves as chairman of

the Hispanic Steering Committee, working as a resource to McDonalds management

and Hispanic employees. Sanchez has served on the McDonalds board of directors as

an advisory director.42

Russ Smyth - President, McDonalds Europe

Russ Smyth is responsible for the companys 6,000 restaurants in 51 countries.

Most recently, he was president, McDonalds Partner Brands, the portfolio of restaurant

concepts that McDonalds has acquired or invested in, which includes Boston Market,

Donatos Pizzeria, Chipotle, Pret A Manger and Fazolis. Smyth has extensive

worldwide McDonalds management experience in Asia, Latin America, and Europe.

Previously, he served as senior vice president, International Relationship Partner for

Southeast and Central Asia, a position that gave him responsibility for managing all

McDonalds operations in Southeast and Central Asia, including the Philippines,

Singapore, Malaysia, Thailand, Indonesia, India, Pakistan, and Sri Lanka. Prior to this,

Smyth was Vice President of the Latin America Group, responsible for managing

McDonalds business in Puerto Rico, Central America, the Caribbean, Venezuela,

Colombia, Ecuador, Peru, Chile and Uruguay.

He began his career at McDonalds in 1984 in the financial arena. He was

appointed European Controller in 1992, based in London, where he was responsible for

overseeing the accounting and finance functions. In 1994, he returned to the U.S. upon

his appointment to International Controller, and was promoted to vice president in1996.

42 McDonalds.com Corporate info Claire Babrowski Biography, online athttp://www.McDonalds.com/corporate/info/exec_bios/babrowski/ (viewed 11/23/03).


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In 1988, Smyth received the McDonalds Presidents Award, which is given to the

companys top performing employees each year. He currently serves as a member of the

Federal Institute of Certificate Public Accountants and the Illinois CPA Society. He

served in an advisory capacity to McDonalds Board of Directors from 2000 to 2001.43

Marvin Whaley - President, North Asia Division

Marvin Whaley is responsible for nearly 1,300 restaurants in northern Asia. Most

recently, he served as senior vice president and international relationship partner for

Peoples Republic of China, Hong Kong, Macau, Korea and Taiwan.

Whaley is a 28-year McDonalds veteran. He started with the company as a

manager trainee in Baltimore, Maryland in 1973. He was promoted to Director of

Operations in the Washington, D.C. region in 1980. From 1983 to 1993, he was a

McDonalds regional vice president based in Atlanta, Georgia, and from January 1994 toJanuary 1998 he was president, McDonalds China Development Company.

Whaley has served on numerous civic and charity boards, including Ronald

McDonald House, Ronald McDonald Childrens Charities, the Atlanta Tip Off Club and

local college advisory boards. He also served as an advisory director to McDonalds

Board of Directors from 1996 to 1997.44

Franchisees

The McDonalds corporation serves as the support and guide for the backbone on

the company: the licensees. The licensees more commonly known as franchisees are

the individuals or groups who own and operate a McDonalds branded establishment.

The McDonalds vision and strategy on franchising is as follows:

A Partnering Relationship

Our franchising system is built on the premise that the Corporation can be

successful only if our franchisees are successful first. We believe in a partnering

relationship with our owner/ operators, suppliers and employees. Success forMcDonalds Corporation flows from the success of its business partners.45

43 McDonalds.com Corporate info Russ Smith Biography, online athttp://www.McDonalds.com/corporate/info/exec_bios/smyth/index.html (viewed 11/23/03)44 McDonal.com Corporate info Marvin Whaley Biography, online athttp://www.McDonalds.com/corporate/info/exec_bios/smyth/index.html (viewed 11/23/03)45 McDonalds.com, Corporate Franchise, online at http://www.McDonalds.com/corporate/franchise/index.html (viewed 11/23/03)


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What We Are Looking For

Our selection of prospective candidates is based on an assessment of overall

business experience and personal qualifications. We look for individuals with good

common business sense , a demonstrated ability to effectively lead and develop

people, and a history of previous success in business and life endeavors. Arestaurant background is not necessary. We franchise only to individuals, not to

corporations, partnerships, or passive investors.46

Employees

Employees are the heart and the blood of the company. McDonalds truly

believes in the term human capital, as demonstrated by the efforts it puts into

selecting, training, and developing its employees.

TrainingMcDonalds training mission is to develop quality people for the McDonalds

system.47 The training vision is a continuous and ongoing process following this

principle: When you are green, you are growing; and when you are ripe, you start to

rot.48 There are several levels of training, from line employees to executives.

McDonalds uses a combination of self-study modules, intensive class training and

constant coaching49 both for restaurant managers and for the line staff called crew.

Interactive learning is the most popular method within the company. Conventions and

fieldtrips around the world help employees to experience different approaches to

training and development.

The two institutions that oversee training are the Hamburger University in

Oakbrook, Illinois, and the Accredited Management Program at the Universities of

Beijing, Taiwan, and Hong Kong. Founded in 1961, the facility in Oakbrook is a state-

of-the-art institution. The Hamburger University covers an area of 130,000 square feet

and has 30 resident faculties. In the university, there are translators and devices to cater

to the needs of employees coming from different parts of the world. Every piece of

communication can be translated into 22 languages.50

Here is an example of the employee expectations as outlined for a domestic U.S.restaurant:

46 Ibid.47 McDonalds.com.hk, Recruitment, online at http://www.McDonalds.com.hk/english/recrutiment/grow.htm (viewed 11/23/03)48 Ibid.49 Ibid.50 Ibid.


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We are a quick service restaurant business committed to 100% satisfaction.

McDonalds Independent Franchisees and Company-Owned restaurants serve

over 22 Million customers every day around the world. Each and every one of

these customers deserves great service from the moment they approach the counter

or drive-thru window until they leave the restaurant. We depend on the

employees in the restaurant, whether employed by an independent franchisee or

by McDonalds Corporation, to provide a fast friendly and courteous experience

to all guests so they will visit us again and again. Thats why McDonalds

Independent Franchisees and McDonalds Corporation look for individuals who

like to have fun while delivering fast, accurate and friendly service. If you are

interested in becoming a part of a McDonalds Team, here are some of the duties

that could be required of you.

On Time, Neat and CleanOur crewmembers are expected to report to work on time, neat and clean.

Wash Your Hands

The most important thing crewmembers do to help make sure our customers

receive safe food is to wash their hands often.

Skills and Training

Training will provide you with the skills youll need to perform your job.

Standards

Crewmembers follow standard operational procedures so customers always

receive exceptional quality & service.

Teamwork

Our crewmembers rely on teamwork and high energy to get the job done.

Clean

Spotless... Tidy... Sparkling. Our customers expect every McDonalds will be

clean.

Welcomed Guest

Our crewmembers make each customer feel like a welcomed guest.


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Service

We depend on our crewmembers to deliver fast, accurate and friendly

service with a smile.51

McDonalds also believes in corporate diversity achieved through education.

McDonalds offers courses and seminars in relation to the changing workforce and

diversity education development. The vision of the McDonalds corporate diversity is:

McDonalds is committed to Diversity education...Diversity education is the

cornerstone for bringing diversity to life in the organization. We have developed a

framework to provide diversity education throughout the organization through

formal presentations, workshops and seminars. Diversity education is an ongoing

process, creating awareness and building skills for managing an inclusive, diverse

workforce. Presentations, customized and informal training materials are

provided for integration into team and department processes.52

McDonalds is also very active in attracting, energizing, rewarding, and retaining

talent using a very competitive employees benefit package. The following example

shows the benefits for U.S. employees:

Your Health and Protection - our health and insurance benefits

- Medical

- Vision supplement plan

- Dental- Flexible spending accounts

- Short and long term disability

- Employee and dependent life insurance

- Accidental death & dismemberment (AD&D)

- Travel and business travel accident insurance

Your Pay and Rewards - our compensation, reward and recognition programs

- Base pay

- Incentive pay

- Company car program- Recognition programs

51 McDonalds.com, Careers, online at http://www.McDonalds.com/countries/usa/careers/expect/index.html (viewed 11/23/03).52 McDonalds.com, Corporate Diversity, online athttp://www.McDonalds.com/corporate/diversity/education/index.html (viewed 11/23/03).


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Investing in Your Future - our savings, investment and financial management

programs

- Profit Sharing and Savings Plan (includes our 401(k) plan)

- Stock Option Plan

- McDirect Shares

- Mc$ave

- Credit union

- Financial planning services

Helping Balance Your Work and Life - our work/life benefits

- Vacation

- Holidays

- Sabbatical program

- Short Fridays

- Leave of absence- Alternative Work Approach

- Adoption assistance

- Child care discount

- Educational assistance

- Matching gifts program

- Employee Assistance Program (EAP)

- Auto and home insurance program

- BeyondWork Internet discount program

- Disney discounts 53

McDonalds also has a very structured path by which to promote its employees.

The management development program is for employees who are at least 21 years old,

either with a degree or previous management experience. They get a 360-degree

training in operations as well as in business, communication and leadership skills.

The junior business management program is open to people with specific

degrees. This program last two years and it is more restaurant-based, involving

management skills and practical experience.

Employees are held to very high standards in the company. Human capital is

carefully selected, skillfully trained, and intelligently promoted. The company strives to

retain its talent, offering competitive benefits to all its management-level employees.

53 McDonalds.com, Careers, online at http://www.McDonalds.com/corporate/careers/benefits/index.html (viewed11/23/03).


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Although McDonalds strives to place a high value on its employees, the general

perception of the McDonalds line worker is not inline with the companys vision. The

term McJob meaning a low-paying, dead-end job was recently added to the

Merriam-Webster Collegiate Dictionary, as previously mentioned.

McDonalds has issued a firm rebuttal to the addition of the word McJob to the

dictionary. CEO Cantalupo responded to the move by saying, Restaurant employees

are proud of their jobs and recognize that restaurants are indeed gateways to

opportunitiesSalaries for food service managers are growing at a rate twice as fast as

the median salary for all managerial positions in the United States.54

Key Functional Resource Area: Marketing

McDonalds used franchising in order to achieve local and international success.Local people are able to translate McDonalds policy in terms of product and service,

broken down by the perspective of the specific local culture.55

This policy of franchising helped McDonalds to globalize quickly. Additionally,

McDonalds was totally committed to international marketing, or perceiving the world

as a single market. This prompted the customization of McDonalds marketing policy

for each region. The company used internationalization and globalization to create a

competitive advantage. The leading and apparently successful motto of McDonalds

was think global, act local.

McDonalds uses seven Ps in their marketing mix: product, place, price,

promotion, people, process, and physical standards.

Product

McDonalds successfully followed its policy of think global, act local and

adapted its product accordingly, whether the product was in Singapore, Spain, or South

Africa. The religious laws and customs in each country are different, and McDonalds

altered its product offering to suit. For example, in India, where a majority of thepopulation does not eat beef, McDonalds McNuggets are made vegetarian. Similarly,

McDonalds products in Muslim-dominated countries do not include pork. In Germany,

54 McDonalds.com, McDonalds corporate press release,11/10/2003, online athttp://www.mcdonalds.com/corporate/press/corporate/2003/11102003_a/ (viewed 11/13/2003).55

Vignali, Claudio. McDonalds: Think Global, Act Local -- The Marketing Mix,British Food Journal,Vol. 103 No. 2, 2001, p. 97.


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McDonalds serves its burgers with beer. In Italy, the burger comes with espresso and

cold pasta.

Place

While McDonalds realizes that local markets are saturating, the company is

aware of the potential for growth in international markets and plans to benefit from its

experiences in the U.S. As some of McDonalds competitors are just beginning to

expand rapidly on the global front, the area of international expertise developed by

McDonalds is a source of competitive advantage for the company.

Price

Price is also adapted to the specific local market, despite the cost savings that

come from standardization. McDonalds selects the right price for the right market byselecting the price objective, determining demand, estimating costs, and identifying the

competitors price. The companys overall pricing objective is to increase market share

and use price leadership. They look at the demand for the product and at local

competitors prices56 in the country and set prices accordingly. Whats interesting to

note is that McDonalds does not merely consider the prices of competitors in the fast

food sector but also other local sources of food. For instance, in Hong Kong, the price of

a McDonalds value meal is less than half the price of a simple noodles meal. Exhibit

1, below, illustrates McDonalds adaptive policy.

Exhibit 1Comparative Big Mac prices from around the world57

CountryPrice of Big

Mac Cost in UK

Australia $2.65 0.87

South Africa R7.80 0.92

USA $1.89 1.13

Korea 2,600won 1.13

India Rs80 1.19

New Zealand $3.65 1.2

Turkey 500,000TL 1.25Japan 280yen 1.27

Spain 375psts 1.44

Brazil 2.95reals 1.52

Ireland IERP1.85 1.52

Switzerland SF4.02 1.58

56 Ibid., pp. 99-101.57 Ibid., pp. 102-103.


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Germany DM4.90 1.58

Italy L4,800 1.59

Austria Sch34 1.61

Belgium BF105 1.66

Denmark DKK19.95 1.8

UK 1.81 1.81

Promotion

This marketing phase of McDonalds marketing mix comprises advertising,

direct marketing, sales promotion, public relations, and personal selling. McDonalds

promotion policy is adaptive.58

McDonalds has recently launched several new campaigns in an attempt to reach

out to various customer segments. The biggest of these include the companys Im

lovin it campaign featuring music artist Justin Timberlake.

McDonalds USA announced the launch of its Im lovin it brand campaign in

the U.S. beginning September 29, 2003. . . .Through the Im lovin it campaign,

McDonalds plans to establish a cultural connect with its customers around the world.

The company has integrated the essence of this campaign into every aspect of the

business from training and the overall restaurant experience to national sponsorships,

promotions and the companys latest endeavor local street marketing."59

Our 13,500 U.S. restaurants are uniting behind this new brand message and

energy, said Mike Roberts, president, McDonalds USA. We are focused on bringing

the Im lovin it theme to life not only in our advertising but also for every customer

who visits our restaurants. This world-class marketing strategy is the latest element of

our overall plan to continue revitalizing McDonalds for our customers through

compelling food choices, great service and restaurant operations, motivating value and

exciting new restaurant decors.

McDonalds also formed partnerships with the Walt Disney Company, Limited

Too, and Blockbuster. McDonalds Happy Meal bags included discount coupons for

products purchased at Limited Too and Blockbuster stores. This partnership, targeted atMcDonalds teenage segment, was intended to open doors to fashion, video games, and

movie rentals.

58Ibid., p. 104.59 Biz.yahoo.com, McDonalds(R) USA Launches Im lovin it(TM) Brand Campaign, online athttp://biz.yahoo.com/prnews/030923/cgtu066_1.html, (viewed 12/2/03).


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In addition, McDonalds also launched Relax, McDonalds very own magazine

aimed at providing helpful tips and quick solutions to busy moms. The first of its kind,

Relax was distributed free throughout the month of November, with the purchase of a

Happy Meal.

Were . . . excited to be able to engage the entire family with even more fun and

added value with partnerships with Blockbuster and Limited Too, as well as our first-

ever mini magazine for parents on the go. Relax will give stressed out, time starved

parents entertaining, informative and engaging articles for all areas of their lives -- from

parenting to health to beauty.60

Among the companys innovative promotion efforts is a new retail line called

McKids. This new label will be on toys, videos, books and clothing starting in the

spring of 2004 in eight countries in Asia and North and South America, and expected to

expand to more countries thereafter.61

McDonalds Corp. plans to put

McKids,

a

word it owns, on a slew of products - from toys to apparel to interactive DVDs as part

of a broad, new marketing initiative to make the fast-food giants presence even more

ubiquitous.62

People

The company has more than million employees a number that is expected to

double in coming years.

Before entering a country for the first time, the human resource department

answers a list of questions that include:

What are the labor laws?

Would McDonalds be able to establish part-time and flexible work

schedules?

Is there a maximum number of hours an employee can work?

60 Biz.yahoo.com., McDonalds(R) November Happy Meal(R) Features Characters From Walt Disney Pictures BrotherBear, , online at http://biz.yahoo.com/prnews/031030/cgthfns1_1.html, (viewed,12/02/2003).61Forbes.com, McDonalds Fattens The Brand, online at

http://www.forbes.com/2003/11/13/cx_al_1113mcd2.html?partner=yahoo&referrerModified=00C326779DB4C30175 ,

(viewed 12/02/ 2003).62 Biz.yahoo.com McDonalds Seeks To Make McKids A Multifaceted Brand, online at

http://biz.yahoo.com/djus/031113/1550001747_1.html ( viewed 12/02/2003).


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McDonalds then adapts to each individual situation by understanding and

combining both corporate and local cultures. The process has been described as

``glocal.63

Process

The process used to manufacture McDonalds products is the same the world

over. For instance, one out of two fries must measure 75mm, and meat for Big Macs

contains 20 percent fat and weighs 45 g. Additionally, each restaurant has the same

kitchen layout. However, layouts are also adapted to facilitate certain local production

techniques, required for the manufacture of localized products.

Suppliers from each country have to meet the specific requirements. If the

suppliers product does not meet the standards, the company finds its own supply

source.64

Physical Standards

McDonalds maintains global standards of cleanliness and service. Customers

know that the will find a family environment, no matter which McDonalds restaurant

they enter, worldwide. This can be referred as one further example of McDonalds

standardization and can be added to the successful worlds image of the company.65

McDonalds tries to talk to rather than at its customers. The service is

provided with a smile. Customers have also come to anticipate this kind of service

worldwide.66

Financial ConcernsIn 2002, McDonalds continued to grow through expansion, hoping to increase

its sales figures. However, an increase in sales did not translate into profitability, as the

operating income continued to decline. (See exhibits 2 and 3.)

63 Vignali, Claudio. McDonalds: Think Global, Act Local -- The Marketing Mix,British Food Journal,

Vol. 103 No. 2, 2001, p. 107.64 Ibid., p. 10865 Ibid., p. 10966 Ibid., p. 110


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Exhibit 2McDonalds Corporation, 11-Year Total Revenues and Operating Income

McDonald's Corporation, 11-Year Total Revenues and Operating Income

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Year

InMillions

Total Revenues

Operating Income

Data Source: McDonalds Corporation 2002 Financial Report, p. 1.

Exhibit 3Systemwide Sales67

2002 2001 2000Increase/(decrease) Increase/(decrease)

DOLLARS INMILLIONS

Asreportedamount

Asreported

Constantcurrency (1)

Asreportedamount

Asreported

Constantcurrency (1)

Asreportedamount

U.S. $20,306 1% na $20,051 2% na $19,573

Europe 10,476 11 5% 9,412 1 5% 9,293

APMEA 6,776 (3) (3) 7,010 (6) 3 7,477

Latin America 1,444 (17) 4 1,733 (3) 6 1,790

Canada 1,456 1 2 1,447 - 5 1,443

Partner Brands 1,068 9 9 977 61 62 605Total $41,526 2% 2% $40,630 1% 4% $40,181

(1) Excludes the effect of foreign currency translation on reported sales.na = Not applicable.

67 McDonalds 2002 Financial Report, Managements Discussion and Analysis of Financial Condition and Results ofOperations, online athttp://www.mcdonalds.com/corporate/investor/financialinfo/investorpub/financial/page2/index.html (viewed11/1/2003).


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In 2002 and 2001, sales increased in U.S. operations due to expansion. The

overall slowdown in the restaurant industry and increased competition had a strong

impact on the results in 2002.68

France and Russia were the primary contributors to Europes constant sales

growth in 2002 and 2001. The U.K. also contributed to the increase, although

comparable sales were negative in both years. Negative comparable sales in Germany

impacted Europes results for both years, and the economy continued to be sluggish. In

2001, Europes results were negatively impacted by low consumer confidence due to the

worries on European beef supply in several markets.69

Sales results in APMEA declined in 2002 in constant currencies primarily due to

negative comparable sales in Japan, which were in part due to continuing weak

economic conditions, partly offset by a strong performance in Australia and expansion

in China.70 Chinas strong sales increase was partly offset by weak results in Japan,Taiwan, and Turkey, plus weak consumer spending in Australia. Beginning in late 2001

and continuing into 2002, sales were also dampened by consumer confidence issues

regarding food safety throughout Japan.71

Despite the fact that many markets continued to be impacted by weak economic

conditions, sales increased in Latin America in both 2002 and 2001. The increase in 2002

was primarily due to the positive sales in Brazil and expansion in Mexico. The increase

in 2001, however, was primarily due to the positive sales in Mexico and Venezuela.72

The positive sales and expansion of Chipotle contributed much of the sales

increase in Partner Brands in 2002. Due to the acquisition of Boston Market in second

quarter 2000, the sales increased in 2001. In addition, expansion of Chipotle along

with strong comparable sales at Chipotle and Boston Market helped drive the increase

in 2001.73

68 Ibid.69 Ibid.70 Ibid.71 Ibid.72 Ibid..73 Ibid..


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Exhibit 4Comparable Sales McDonald's Restaurants74

Increase/(decrease)

2002 2001 2000

U.S. (1.5)% 0.1% 1.0%

Europe 1.0 (1.4) .04

APMEA (8.5) (4.8) (0.1)

Latin America 1.0 (3.9) (3.6)

Canada (2.5) 1.3 4.7

Brand McDonald's (2.1)% (1.3)% 0.6%

Operating Income

Consolidated operating income decreased $584 million (22%) in 2002, and $633

million (19%) in 2001. However, operating income for both years included higher

selling, general, and administrative expenses as well as lower other operating income.

Combined operating margin dollars were higher in 2002 than in 2001 and lower in 2001

than in 2000.75

The table below (Exhibit 5) presents reported operating income amounts and

growth rates. The growth rates shown are adjusted for foreign currency conversion.

74 Ibid..75 Ibid.., p. 6.


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Exhibit 5Operating Income Amounts and Growth Rates76

2002Increase/(decrease)

2001increase/(decrease)

2000

DOLLARS INMILLIONS

As

reportedamount Asreported

Adjusted

constantcurrency

As

reportedamount Asreported

Adjusted

constantcurrency

As

reportedamount

U.S. $1,673 3% (2)% $1,622 (10)% - $1,795

Europe 1,022 (4) - 1,063 (10) (3)% 1,180

APMEA 64 (80) (23) 325 (28) (10) 451

Latin America (133) nm nm 11 (89) (46) 103

Canada 125 1 2 124 (2) 10 126

Partner Brands (66) - 22 (66) (61) - (41)

Corporate (572) (50) (8) (382) (35) (22) (284)

Total $2,113 (22)% (6)% $2,697 (19)% (5)% $3,330The chart graph below (Exhibit 6) shows the dramatic decline in sales after year 2000.

Despite the fact that several strategic programs were launched in the hope to turn the

company around, the sales in 2002 dropped to just $2.1 billion almost $1.3 billion less

than year 2000.

76 Ibid.


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Exhibit 6McDonalds Corporation, 11-Year Operating Income

McDonald's Corporation, 11-Year Operating Income

0

500

1,000

1,500

2,000

2,500

3,000

3,500

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Year

InMillions

2003 The Turnaround

On October 22, 2003, McDonalds Corporation announced positive results for thequarter and nine months ended September 30, 2003.

Chairman and Chief Executive Officer Jim Cantalupo said, Earnings per share

increased 13% to a record high of 43 cents. This performance indicates that our

revitalization plan is beginning to yield results. Our focused and disciplined approach

is producing strong sales and profitability improvements in our U.S. business and

improved trends in some international markets; still, there are many opportunities to

improve our business as we move forward.77

Cantalupo reported the following highlights:

Diluted earnings per share for the quarter were $0.43, a 13% increase (8% in

constant currencies).

77 McDonalds corporate financial releases 10/22/2003; online athttp://www.mcdonalds.com/corporate/investor/financialinfo/investorpub/financial/page4/index.html (viewed11/5/2003).


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Net income increased 12% (8% in constant currencies) to $547 million for the

quarter.

Operating income increased 16% (10% in constant currencies) to $964 million

for the quarter; U.S. operating income increased 19% to $571 million.

Systemwide sales and revenues were up 11% (7% in constant currencies) for

the quarter.

Comparable unit sales for Brand McDonalds restaurants increased 3.9%

worldwide and 9.5% in the U.S. for the quarter.

The company repurchased $139 million of its common stock during the

quarter.

In the U.S., our emphasis on improving the taste of our food, the introduction of

Premium Salads and McGriddles, continued demand for the Dollar Menus

outstanding value, and other initiatives are generating almost one million new

customer visits each day. While we are pleased with our customers response tothese innovations, our efforts remain aligned around delivering improved service

and a superior overall restaurant experience.

Europe delivered its highest quarterly sales increase this year. While weve had

solid performance in many European markets, improving results in our largest

markets is critical to achieving our long-term sales and profit targets. To

strengthen the business in these markets, we are working to increase relevance

and customer visit frequency by enhancing our value positioning and adding

more menu choices. I am confident that our European customers will notice the

changes and respond favorably.

Around the world, we recently launched our first-ever global marketing initiative,

Im lovin it. This initiative is designed to reaffirm McDonalds marketing

leadership and help keep McDonalds contemporary and relevant in the minds of

our customers.

Financially, we have put in place a more disciplined capital allocation approach

intended to maximize returns over the long term. Our free cash flow - cash from

operations less capital expenditures - is significant and growing. We are payingdown debt, buying back stock and paying a significantly higher dividend. These

actions are aligned with our commitment to return cash to shareholders without

compromising our financial strength or flexibility.

While we are encouraged by our current business momentum, we know that

significant opportunities remain - particularly in the area of service. Every day,


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we have nearly 47 million occasions to demonstrate operational excellence and

satisfy our customers. Our revitalization plan is designed to build on our

strengths, address our challenges and deliver consistent, positive results.78

Exhibit 7McDonalds Corporation, Condensed Consolidated State of Income79

Dollars & shares in millions, except per common share data

----------------------------------------------------------------------

Nine months ended Inc /(Dec)

September 30, 2003 2002 $ %

----------------------------------------------------------------------

Revenues

Sales by Company-operated

restaurants $ 9,397.0 $ 8,566.8 830.2 10

Revenues from franchised

& affiliated restaurants 3,188.1 2,939.7 248.4 8

TOTAL REVENUES 12,585.1 11,506.5 1,078.6 9

Operating costs & expenses

Company-operated restaurant

expenses 8,094.0 7,348.3 745.7 10

Franchised restaurants

--occupancy costs 690.3 622.9 67.4 11

Selling, general &

administrative expenses 1,319.1 1,226.0 93.1 8

Other operating (income)

expense, net 17.0 (7.0) 24.0 n/m

Total operating costs & expenses 10,120.4 9,190.2 930.2 10

OPERATING INCOME 2,464.7 2,316.3 148.4 6

Interest expense 297.3 279.5 17.8 6

Nonoperating expense, net 88.5 53.1 35.4 n/m

Income before provision for

income taxes 2,078.9 1,983.7 95.2 5

Provision for income taxes 696.4 647.8 48.6 8

Income before cumulative

effect of accounting changes 1,382.5 1,335.9 46.6 3

Cumulative effect of

accounting changes, net of tax (36.8) (98.6) n/m n/m

NET INCOME $ 1,345.7 $ 1,237.3 108.4 9

PER COMMON SHARE-DILUTED:

Income before cumulative

effect of accounting changes $ 1.08 $ 1.04 0.04 4

Cumulative effect of

accounting changes $ (0.03) $ (0.08) n/m n/m

Net income $ 1.05 $ 0.96 0.09 9

n/m = Not meaningful

78 Ibid..79 U.S. Securities Exchange Commission,EDGAR Company Research, online at http://www.sec.gov/cgi-bin/browse-edgar?company=mcdonalds&CIK=&filenum=&State=&SIC=&owner=include&action=getcompany (viewed11/10/2003)


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Exhibit 8Consolidated statement of income80IN MILLIONS, EXCEPT PER SHARE DATA Years ended December 31, 2002 2001 2000

REVENUES

Sales by Company-operated restaurants $11,499.6 $11,040.7 $10,467.0

Revenues from franchised and affiliated restaurants 3,906.1 3,829.3 3,776.0

Total revenues 15,405.7 14,870.0 14,243.0

OPERATING COSTS AND EXPENSES

Company-operated restaurant expenses

Food & paper 3,917.4 3,802.1 3,557.1

Payroll & employee benefits 3,078.2 2,901.2 2,690.2

Occupancy & other operating expenses 2,911.0 2,750.4 2,502.8

Franchised restaurantsoccupancy expenses 840.1 800.2 772.3

Selling, general & administrative expenses 1,712.8 1,661.7 1,587.3

Other operating (income) expense, net 833.3 257.40 (196.4)

Total operating costs and expenses 13,292.8 12,173.0 10,913.3

Operating income 2,112.9 2,697.0 3,329.7

Interest expensenet of capitalized interest of $14.3, $15.2 and $16.3 374.10 452.4 429.9

McDonalds Japan IPO gain (137.1)

Nonoperating expense, net 76.7 52.0 17.5

Income before provision for income taxes andcumulative effect of accounting change

1,662.1 2,329.7 2,882.3

Provision for income taxes 670.0 693.1 905.0

Income before cumulative effect of accounting change 992.1 1,636.6 1,977.3

Cumulative effect of accounting change, net of tax benefit of $17.6 (98.6)

Net income $ 893.5 $ 1,636.6 $ 1,977.3

Per common sharebasic:

Income before cumulative effect of accounting change $ .78 $ 1.27 $ 1.49

Cumulative effect of accounting change (.08)

Net income $ .70 $ 1.27 $ 1.49

Per common sharediluted:

Income before cumulative effect of accounting change $ .77 $ 1.25 $ 1.46

Cumulative effect of accounting change (.07)

Net income $ .70 $ 1.25 $ 1.46

Dividends per common share $ .24 $ .23 $ .22

Weighted-average sharesbasic 1,273.1 1,289.7 1.323.2

Weighted-average sharesdiluted 1,281.5 1.309.3 1.356.5

80 McDonalds Corporation,McDonalds 2002 Financial Report, p. 16


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Exhibit 9Balance Sheet81

McDonald's Consolidated Balance Sheet

IN MILLIONS, EXCEPT PER SHARE DATADecember 31,

2002 2001 2000ASSETS

Current assets

Cash and equivalents $ 330.4 $ 418.1 $ 421.7

Accounts and notes receivable 855.3 881.9 796.5

Inventories, at cost, not in excess of market 111.7 105.5 99.3

Prepaid expenses and other current assets 418.0 413.8 344.9

Total current assets 1,715.4 1,819.3 1,662.4

Other assets

Investments in and advances to affiliates 1,037.7 990.2 824.2

Goodwill, net 1,559.8 1,320.4 1,278.2

Miscellaneous 1,074.2 1,115.1 871.1

Total other assets 3,671.7 3,425.7 2,873.5

Property and equipment

Property and equipment, at cost 26,218.6 24,106.0 23,569.0

Accumulated depreciation and amortization (7,635.2) (6,816.5) (6,521.4)

Net property and equipment 18,583.4 17,289.5 17,047.6

Total assets $ 23,970.5 $ 22,534.5 $ 21,683.5

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities

Notes payable $ 0.3 $ 184.9 $ 275.5

Accounts payable 635.8 689.5 684.9

Income taxes 16.3 20.4 92.2Other taxes 191.8 180.4 195.5

Accrued interest 199.4 170.6 149.9

Accrued restructuring and restaurant closing costs 328.5 144.2 n/a

Accrued payroll and other liabilities 774.7 680.7 608.4

Current maturities of long-term debt 275.5 177.6 354.5

Total current liabilities 2,422.3 2,248.3 2,360.9

Long-term debt 9,703.6 8,555.5 7,843.9

Other long-term liabilities and minority interests 560.0 629.3 489.5

Deferred income taxes 1,003.7 1,112.2 1,084.9

Common equity put options and forward contracts 500.8 699.9

Shareholders' equity

Preferred stock, no par value; authorized165.0 million shares; issuednoneCommon stock, $.01 par value; authorized3.5 billion shares; issued1,660.6million shares 16.6 16.6 16.6

Additional paid-in capital 1,747.3 1,591.2 1,441.8

81 U.S. Securities Exchange Commission,EDGAR Company Research, online at http://www.sec.gov/cgi-bin/browse-edgar?company=mcdonalds&CIK=&filenum=&State=&SIC=&owner=include&action=getcompany (viewed11/10/2003).


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Unearned ESOP compensation (98.4) (106.7) (115.0)

Retained earnings 19,204.4 18,608.3 17,259.4

Accumulated other comprehensive income (loss) (1,601.3) (1,708.8) (1,287.3)

Common stock in treasury, at cost; 392.4 and 379.9 million shares (8,987.7) (8,912.2) 8,111.1

Total shareholders' equity 10,280.9 9,488.4 9,204.4

Total liabilities and shareholders' equity $ 23,970.5 $ 22,534.5 $ 21,683.5

External Analysis

The Broad Environment

In recent years, McDonalds has faced two major types of threats from the broad

environment: socio-cultural forces and political forces. Social-cultural forces are related

to social responsibility and health, while political forces are related to the issues of

obesity, trans fat labels, and after 9/11 and the Enron scandal to issues related to bad

corporate practices.

The modifying international environment is a constant threat to the public image

of the company. Marketing, future strategies, and public relations initiatives are all

aimed to shift public opinion from the issues described.

On the hand, there is a positive trend towards eating out in America.

Social Responsibility

McDonald

s has faced a number of harsh charges from consumer, government,and other groups in recent years. The Environmental Protection Agency took on

McDonalds in 2003 for the fluorinated telomeres in their packaging material (as well

as that of other fast food chains), which were deemed to be

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