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McDonald’s FranceThink Global, Act LocalElizabeth DunnAaron HarrisBen JacksonAmy StewartThis work is licensed under a Creative Commons Attribution-ShareAlike 3.0 Unported License.
McDonald’s FranceDoug Goare is the new President of McDonald’s Europe and is looking over some worrying news reports. His newposition, which he assumed in October of 2011, means he is now responsible for the company’s 7,000+ restaurants in40 countries, but his prized possession, and the department which seems most likely to keep him up at night, isMcDonald’s France.Humble BeginningsThe McDonald’s known today started in 1940 as a single barbecue place owned by brothers Richard and Maurice (Dickand Mac) McDonald. From there it morphed into a drive-in hamburger stand, where an entrepreneurial salesman namedRay Kroc found it. Recognizing the potential, Kroc bought the expansion rights in 1954 and by the following year had notonly opened his ﬁrst McDonald’s, but also incorporated the restaurant as the McDonald’s Corporation. Seven years later,Kroc completely bought out the McDonald brothers for the small sum of $2.7 million, hoping to build the number onechain in the country. The concept caught on, and by 1958, 100 million hamburgers had been sold. By 1969, thatnumber was up to ﬁve billion. 1984 saw 50 billion, and the 100 billionth hamburger was sold in 1994, at which point thecorporation quit counting exact ﬁgures in favor of using the familiar term ‘billions and billions’ on signage.In its ﬁrst few years of existence, McDonalds did not grow very quickly. After opening the ﬁrst location in 1955, therewere only 34 restaurants by 1958. But during the next year, groundbreaking took off and 67 new restaurants opened,bringing the total to over 100. In general, however, growth remained slow, taking 33 years to open 10,000 restaurants.(Still, business was good and the company had reached all 50 states by 1970 and realized $1 billion in annual sales by1972.) After that, another round of rapid expansion hit and it took only eight additional years to hit 20,000 locations.Beginning in 1997, the chain would set a pace of opening 2,000 new restaurants per year, averaging one every ﬁvehours.In the midst of domestic growth, Kroc did not forget about international opportunities and in 1967 opened the ﬁrst foreignMcDonald’s in British Columbia, Canada. Using strategies of wholly owned subsidiaries, joint ventures, and franchiseagreements, Kroc continued his march through foreign locales and by 1991, 58 countries hosted at least one of over3,600 international McDonald’s restaurants. Foreigners loved the concept as well as Americans and showed it throughThink Global, Act Local 2
McDonald’s Francetheir purchases, boosting international sales to a 37% share of total systemwide sales. The strongest markets wereJapan, Canada, Germany, Great Britain, Australia, and France.Currently, the McDonald’s name “is the single most advertised brand name in the world, 1” and as the world’s largestquick-service restaurant organization with over 33,000 restaurants in 119 countries on six continents, it serves anaverage of 64 million people daily. Keeping in trend with early results, as of 2008 over 70% of revenue came from theUnited States, Canada, Japan, China, Australia, the United Kingdom, France, and Germany2. The company hascontinued to show growth each year and 2011 returned the highest ﬁgures to date: almost $5 billion in proﬁt on nearly$86 billion in systemwide sales. (See Exhibit 2 for previous six year ﬁgures.)Another key indicator of McDonald’s’ success is its stock performance. The company went public in 1965, offeringshares at $22.50 each. A single investment in 100 shares ($2,250) in 1965, if left untouched, would have grown to74,360 shares worth over $5.7 million as of December 2010. As the closing bell on the stock exchange rang on March1, 2012, shares were trading at $99.25 each.To help fuel continued growth and diversify its portfolio, McDonald’s purchased several outside businesses. It began withAroma Café (an upscale coffee and sandwich shop based in the UK) and Donato’s Pizza (a pizza chain based in the US)in 1999 and followed with the bankrupt Boston Market (a home-style meal chain based in the US) in 2000. In 2001, itbought a 33% interest in Pret A Manger (an upscale ready-to-eat sandwich chain based in the UK). Also in 2001, it soldAroma Café, only one year after purchasing it.Despite its phenomenal success, there have been a few bumps along the road. The 90’s was a period of aggressivegrowth, with the majority happening internationally. The number of locations grew to over 11,000 by 1998, while thenumber of host countries jumped to 114 by the same year. In the United States, the number of locations increased from9,000 in 1991 to 12,500 in 1997, and that posed a problem with existing franchisees who had to deal withcannibalization from the new stores. To ease some of the growing pains, McDonalds cut back on domestic expansionand only opened about 400 new restaurants in 1997. Furthermore, to help close up communication gaps betweenfranchisees and management, the organization was restructured down to just ﬁve geographic divisions.1 http://www.fundinguniverse.com/company-histories/McDonalds-Corporation-company-History.html2 http://www.mcdonalds.com/us/en/home.htmlThink Global, Act Local 3
McDonald’s FranceAnother casualty in the slowdown of the 90’s was stafﬁng. In 1998, for the ﬁrst time, McDonald’s cut jobs at theheadquarters level, laying off 525 employees (about a 23% reduction). Because of this, the company took a $160 millioncharge which then caused a decrease in net income - $1.64 billion in 1997 to $1.55 billion in 1998 - for the ﬁrst timesince going public.LocationsMore than 80% of the 33,000 McDonald’s restaurants are franchises. Franchisees enjoy the backing of the McDonald’sCorporation, but pay regular fees such as a percentage of monthly sales and take on the majority of costs themselves,including start-up (approximately $545,000) and equipment/pre-opening (approximately $1.5 million).As McDonald’s has grown, it has developed stand-alone buildings (with or without drive-thrus), store fronts in ofﬁce-typebuildings, space inside shopping malls and large stores such as Walmart, and attached to gas stations. Physicalstructures vary as location, space, and culture dictate.The McDonald’s Corporation does not supply food to franchisees, but it does help set up suppliers through pre-approved listings. Any potential supplier is thoroughly investigated and must adhere to very strict quality standards andsafety regulations. According to the McDonald’s website, its requirements, ‘which meet or exceed USDA standards, areamong the strictest in the restaurant industry.’Domestic MarketingMcDonald’s uses multiple mediums to advertise, including radio, television, newspapers, billboards, and sponsorships.Since its inception several campaigns have launched, beginning with 1960’s successful slogan, ‘Look for the GoldenArches’. Other notable slogans include ‘You Deserve A Break Today’, ‘Did Somebody Say McDonalds?’, ‘Food, Folks,and Fun’, and ‘We Love To See You Smile’. And in 2003 came the still used ‘I’m Lovin’ It’ campaign, which was the ﬁrstglobal campaign ever, running in over 100 countries. This was the ﬁrst success in a while, as it helped increase same-store sales by 2.4% over the entire year.Also as part of its advertising, McDonald’s has long been associated with many movies and television shows, oftenputting specially related collectible toys in Happy Meals. It also uses a variety of games to entice customers, such asOlympic giveaways, Monopoly, and miscellaneous scratch-offs and sweepstakes promotions. One in particular was1997’s very popular Teenie Beanie Baby promotion, in which approximately 80 million toys were snatched up almostovernight.Think Global, Act Local 4
McDonald’s FranceMcDonald’s has been supporting various charities and events since 1968, when it sent hamburgers to US Olympicathletes competing in France. Since then, it has been a regular Olympic supporter, becoming an Ofﬁcial Sponsor in1976.In addition, McDonald’s is big in the sports world, sponsoring FIFA, NHL, NBA, NASCAR, and IndyCar events. Otheralliances include Walt Disney and the Defense Department (‘America Supports You’ military campaign), as well ascountless local sports, educational, and charity-based partnerships.McDonald’s also operates the Ronald McDonald House Charities, giving temporary housing at little to no cost to familiesof seriously ill children in hospitals. The ﬁrst Ronald McDonald House was opened in Philadelphia in 1974, and by 1986,there were 100 locations. As of 2012, there are over 300 worldwide locations.Environmental EffortsIn response increasing consumer demand for better conservation efforts, McDonald’s has taken several steps to improveits processes and output. One such step involves the amount of packaging on each food item. In the 1970’s, anaverage meal used approximately 46 grams, but that amount has now been reduced to 25 grams, a 46% reduction.Other areas of improvement include coffee beans and milk. McDonald’s now only uses those beans certiﬁed by theRainforest Alliance; and uses organic milk for milkshakes and hot beverages.McDonald’s has also implemented a recycling program for its used cooking oil, in many cases turning it into biodiesel fuelfor its delivery trucks.In a ﬁrst for the quick-service restaurant industry, McDonald’s opened the world’s ﬁrst hydroﬂurocarbon (HFC)-freerestaurant in 2003 in Denmark. The result is that the restaurant does not use Freon in its refrigerants, thereby helping cutdown on harmful climate changing emissions.As further proof of its commitment, McDonald’s’ efforts at efﬁcient packaging and recycling have been recognized by theEnvironmental Protection Agency (EPA). Also, the Campus Ofﬁce Building received the LEED-EB Platinum award in2009, in recognition for its ‘green’ initiatives.Think Global, Act Local 5
McDonald’s FranceExpansion AbroadMcDonald’s international expansion started with the 1967 opening of its ﬁrst Canadian restaurant in Richmond, BritishColombia3. The progress into other foreign markets moved slowly at ﬁrst. McDonald’s also opened in Puerto Rico in1967, but did not open in another country until 1970. During the 1970s McDonald’s opened restaurants in 25 morecountries, the most important being Japan, United Kingdom, Germany, France, Australia, Brazil, Sweden, theNetherlands, Hong Kong, Austria, New Zealand, Switzerland, Singapore, Ireland and Belgium. The 1980s saw expansioninto 16 more countries including South Korea, Taiwan, Spain, Italy, Mexico, Philippines, Argentina, Malaysia, Venezuela,Thailand, and several other smaller European countries. In the 1990s McDonald’s incredibly entered into 60 morecountries, the largest of which are China, Poland, Portugal, Indonesia, Israel, Russia, South Africa, Saudi Arabia, Chile,Czech Republic, Greece, Ukraine, Romania, India, and Egypt. 4Major MarketsThe top markets for McDonald’s by number of stores are the United States, Japan, Canada, United Kingdom, Germanyand France. First launched in 1971 and with 3891 locations by 1999, Japan is McDonald’s largest market outside of theUnited States 5. Much of the success of McDonald’s in this country is attributable Den Fujita, a former long-time presidentof McDonald’s Japan. His entrepreneurial spirit and open-mindedness greatly interest McDonald’s corporate team. Mr.Fujita pushed for the ﬁrst McDonald’s to be in one of the busiest parts of Tokyo, a break from McDonald’s tradition ofseeking suburban locations. Mr. Fujita understood the cultural dynamics and traditionalism of Japanese suburbs in the70s and 80s. Much to the surprise of McDonald’s headquarters, the opening of the ﬁrst Japanese location set a newworld record for McDonald’s single-store sales its opening day6.McDonald’s strength in Japan increased from that point on. The model of locally owned franchises mixed with corporateleadership which included Japanese entrepreneurs allowed McDonald’s to continue to offer its classic Americanhamburgers and fries, but with menu items customized for local tastes. Some specialty items from Japanese menusinclude shrimp burgers, different types of seafood wraps, and the Teriyaki McBurger. The Japanese have even expanded3 http://www.mcdonalds.ca/ca/en/our_story/our_history.html4 http://www.ftc.gov/be/seminardocs/04beyondentry.pdf5 ibid6 http://money.cnn.com/magazines/fortune/fortune_archive/1986/09/15/68039/index.htmThink Global, Act Local 6
McDonald’s Franceon the concept of gigantic American-style burgers with the MegaMac – essentially a Big Mac with four meat pattiesinstead of two. 7Canada is the third largest market for McDonald’s, second in international markets. McDonald’s Canada also had animportant driving ﬁgure from very early on. George A. Cohon started as a franchisee and ultimately helped to develop andunite McDonald’s restaurants all over Canada. In 1971 he was named President and CEO of McDonald’s RestaurantsCanada. By 1977 McDonald’s was coast-to-coast in Canada and became the country’s largest foodservice organizationin 1981. By the late 1980’s and early 1990s, under the direction of Mr. Cohon, McDonald’s Canada gained enough cloutto be able to take the initiative to open its own restaurants in another country – Russia. Contributions from Canadiansubsidiaries remained important throughout the 1990s, even to the point that the McFlurry, a Canadian invention, wasadded to McDonald’s menus across the globe. 8As with McDonald’s Japan, the inclusion of local executives and franchise agreements allowed for internationallystandard menu items as well as other items with local ﬂare. A couple of extreme examples are the McLobster Roll andPoutine, consisting of “French fries topped with cheese curds and gravy.”9The United Kingdom is the fourth largest market, but the ﬁrst location in that country (3000th globally) opened with littlefanfare in 1974. The company started a television and cinema marketing campaign in the following years and continuedto add locations across the country until McDonald’s corporate assumed total control of the subsidiary in 1983. Over theyears McDonalds has mitigated legal, ethical and environmental problems including concerns about human health. Earlytransparency with nutrition reporting and supply sources as well as the more recent incorporation of healthier menuoptions have helped to drive further expansion. 10The unique menu items of interest seem to revolve around the aforementioned health concerns. The McDonald’s UnitedKingdom website has whole sections for Deli and Salads. Customers have the option of a sandwich or a wrap eachserved with a patty consisting of chickpeas, coriander and cumin. There are four different chicken salads from which to7 http://www.tofugu.com/2008/11/02/the-japanese-mcdonalds-menu-im-actually-lovin-it/8 http://www.mcdonalds.ca/9 http://foodnetworkhumor.com/2009/07/mcdonalds-menu-items-from-around-the-world-40-pics/10 www.mcspotlight.orgThink Global, Act Local 7
McDonald’s Francechoose. Of the six total sides offered, three are healthy options: garden salad (not counted above), carrot sticks, and afruit bag. 11McDonald’s employs the ‘Think Global, Act Local’ mantra and it appears to be working. Though the company iscontinuously expanding, when entering new markets it adapts to suit local food preferences and customs. For example,the location in Jerusalem is kosher, restaurants in Arab countries use "Halal" menus that adhere to Islamic laws for foodpreparation, locations in India use lamb instead of beef, Japanese restaurants offer shrimp, German sites sell beer, andItaly offers cakes and tarts.In FranceOpening in 1979, Strasbourg, France seemed to be a clear choice for McDonald’s move into the country. Being so closeto Germany, residents in Strasbourg were already familiar with the McDonald’s brand. But the brand quickly realized thatit needed to adopt in order to last.Burger King entered the French market in 1981. During this time, fast food was not a huge industry in France. In fact, theFrench just about opposed the food due to their preference towards quality cuisine. Burger King’s strategy of“transplanting the American restaurant” failed and by 1997, BK had closed its 39 French stores. But this failure can bemore attributed to Burger King’s lack of regard towards the French culture. Other fast food chains that accommodatedthe French thrived. From 1983 to 1996, the fast-food industry in France grew by nearly 1,500 restaurants. Overall, themarket value increased 5 times while McDonald’s expanded to 542 restaurants. Its strongest competitor, Quick, grew to258 restaurants.Perhaps the most important success factor for McDonald’s in France was its ability to cater to the French consumer. In1995, McDonald’s began using French cheeses such as chevre and bleu, rather than cheddar. They also added whole-grain French mustard sauce to the menu. Three separate campaigns have added huge success to the brand.“Uniquely French”Serving high end coffee and pastries at a separate counter, McCafe has brought the French coffee shop feel toMcDonald’s. The French baking conglomerate, The Holder Group, supplies all the pastries – products with an 80% proﬁtmargin. “I set up taste tests for my friends between McDonald’s macaroons and those of Lauduree, and almost no one11 www.mcdonalds.co.ukThink Global, Act Local 8
McDonald’s Francecan tell the difference,” states Alexis Lemoine of McDonald’s France. 12 The addition of McCafe not only adds to theembourgeoisement of the brand’s image, it also increased revenue by 5%. The addition of coffee and dessert has alsoresulted in the average consumer spending nearly $15 per visit (4x what the US consumer spends).McDonald’s introduced the McBaguette in August 2011. Considering that the French consume 9x more sandwiches thanhamburgers (70% of these sandwiches are served on baguettes), adding this bread option was a necessary step. OneMcDonald’s spokesman commented that “today, we are a part of French daily life. Our priority is to integrate locally whileoffering out traditional products…The French are passionate about bread and crazy about baguettes. We’re graduallyresponding to a natural demand.”13 The non-franchised fast-food industry was controlled by the thousands of Frenchbakeries around the country. Adding the baguette to the menu allowed McDonald’s to move into this market as well.The McSalad restaurant may be the furthest play from traditional McDonald’s. Targeting wealthier business workers,McSalad is an all-salad restaurant. Allowing customers to place orders online, McSalad can maximize the short lunchbreak. You won’t ﬁnd any burgers, fries, or shakes in a McSalad restaurant – only the very healthy stuff.McDonald’s France has also made huge strides in the green movement. Partnering with Greenpeace, McDonald’s aimspromote a strong environmentally friendly image. Aiming to reducing gas emissions by over 50%, recycling seventhousand tons of frying oil for bio-diesel fuel, and exchanging the red background in its logo for green, McDonald’sFrance has taken great efforts to improve its reputation.The restaurant chain recently spent $5 million on renovations to create an ambiance within its stores. Hard, plasticfurniture has been replaced with sleek, modern, and comfortable furniture. In 2005, free wiﬁ was added in eachrestaurant (US McDonald’s did this in 2010). The subdued signage is also very different than that of the US. The goldenarches are not as prominent and many people don’t realize they are passing a McDonald’s until they are right in front of it.Restaurants are all locally-owned franchises. The chain currently has a growth rate of about 30 restaurants per year. Theaverage employee age has increased to 26, while turnover rate remains at about 80%. To combat this issue, McDonald’sFrance has instituted a series of reward programs and readily gives its employees diplomas and certiﬁcates for theirachievements. In addition, employees from each store are brought in for marketing and product launch decisions.12 http://knowledge.wharton.upenn.edu/article.cfm?articleid=290613 ibidThink Global, Act Local 9
McDonald’s FranceIssues going forwardMcDonald’s still faced challenges, however. The French have a long tradition of world-class food, and look on American-style fast food with disdain. For many French, “MacDo is the symbol of malbouffe, or bad food and bad eating — a majorslur.” One French citizen from Burgundy even went so far as to say he’d “never take his two young sons to eat chezRonald.14” Adding to these image issues was Morgan Spurlock’s documentary Supersize Me which claimed McDonald’swas the “epitome of malbouffe.”McDonald’s has also come under criticism by anti-globalization protestors, particularly a group led by a man named JoséBové. Bové, a farmer and prominent member of the French food movement, bulldozed a McDonald’s franchise while itwas under construction in Milau in 1999. Despite being convicted and serving a sentence, he continued to protestMcDonald’s as a symbol of anti-unionism and unchecked globalization. He claimed that McDonald’s “trample[ed] localculture – such as French cuisine15”As McDonald’s continues its unprecedented growth in France, Doug Goare faces a major image issue. Although theMcDonalds in Paris 15th Arrondissement brims with customers, Goare must carefully consider his next move.14 http://www.npr.org/blogs/thesalt/2012/01/24/145698222/why-mcdonalds-in-france-doesnt-feel-like-fast-food15 http://www.commondreams.org/headlines01/0813-01.htmThink Global, Act Local 10
McDonald’s FranceExhibit 1 - Segment and Geographic Information In millions 2011 2010 2009 U.S. $ 8,528.2 $ 8,111.6 $ 7,943.8 Europe 10,886.4 9,569.2 9,273.8 APMEA 6,019.5 5,065.5 4,337.0 Other Countries & Corporate 1,571.9 1,328.3 1,190.1 Total revenues $ 27,006.0 $ 24,074.6 $ 22,744.7 U.S. $ 3,666.2 $ 3,446.5 $ 3,231.7 Europe 3,226.7 2,796.8 2,588.1 APMEA 1,525.8 1,199.9 (1) 989.5 Other Countries & Corporate 111.0 29.9 (2) 31.7 Total operating income $ 8,529.7 $ 7,473.1 $ 6,841.0 U.S. $ 10,865.5 $ 10,467.7 $ 10,429.3 Europe 12,015.1 11,360.7 11,494.4 APMEA 5,824.2 5,374.0 4,409.0 Other Countries & Corporate 4,285.1 4,772.8 3,892.2 Total assets $ 32,989.9 $ 31,975.2 $ 30,224.9 U.S. $ 786.5 $ 530.5 $ 659.4 Europe 1,130.1 978.5 859.3 APMEA 614.1 493.1 354.6 Other Countries & Corporate 199.1 133.4 78.8 Total capital expenditures $ 2,729.8 $ 2,135.5 $ 1,952.1 U.S. $ 446.0 $ 433.0 $ 423.8 Europe 570.3 500.5 483.2 APMEA 267.5 232.4 202.9 Other Countries & Corporate 131.2 110.3 106.3 Total depreciation and amortization $ 1,415.0 $ 1,276.2 $ 1,216.2 Source: McDonald’s 10-‐K Filing, Feb 24, 2012Think Global, Act Local 11
McDonald’s FranceExhibit 2 - 6 Year Summary Dollars in millions, except per share data 2011 2010 2009 2008 2007 2006 Company-operated sales 18,29 16,23 15,45 $ 3 3 9 16,561 16,611 15,402 Franchised revenues $ 8,713 7,842 7,286 6,961 6,176 5,493 Total revenues 27,00 24,07 22,74 $ 6 5 5 23,522 22,787 20,895 Operating income $ 8,530 7,473 6,841 6,443 3,879 4,433 Income from continuing operations $ 5,503 4,946 4,551 4,313 2,335 2,866 Net income $ 5,503 4,946 4,551 4,313 2,395 3,544 Cash provided by operations $ 7,150 6,342 5,751 5,917 4,876 4,341 Cash used for investing activities $ 2,571 2,056 1,655 1,625 1,150 1,274 Capital expenditures $ 2,730 2,135 1,952 2,136 1,947 1,742 Cash used for financing activities $ 4,533 3,729 4,421 4,115 3,996 5,460 Treasury stock repurchased (9) $ 3,373 2,648 2,854 3,981 3,949 3,719 Common stock cash dividends $ 2,610 2,408 2,235 1,823 1,766 1,217 Financial position at year end: Total assets 32,99 31,97 30,22 $ 0 5 5 28,462 29,392 28,974 Total debt 12,50 11,50 10,57 $ 0 5 8 10,218 9,301 8,408 Total shareholders’ equity 14,39 14,63 14,03 $ 0 4 4 13,383 15,280 15,458 Shares outstanding in millions 1,021 1,054 1,077 1,115 1,165 1,204 Per common share: Income from continuing operations- diluted $ 5.27 4.58 4.11 3.76 1.93 2.29 Earnings-diluted $ 5.27 4.58 4.11 3.76 1.98 2.83 Dividends declared $ 2.53 2.26 2.05 1.63 1.50 1.00 Market price at year end 100.3 $ 3 76.76 62.44 62.19 58.91 44.33 Company-operated restaurants 6,435 6,399 6,262 6,502 6,906 8,166 Franchised restaurants 27,07 26,33 26,21 5 8 6 25,465 24,471 22,880 Total Systemwide restaurants 33,51 32,73 32,47 0 7 8 31,967 31,377 31,046 Franchised sales (10) 67,64 61,14 56,92 $ 8 7 8 54,132 46,943 41,380 Source: McDonald’s 10-‐K Filing, Feb 24, 2012Think Global, Act Local 12
McDonald’s FranceExhibit 3 - SWOTStrengths Weaknesses • Financial position - diversiﬁed • Growth is too rapid; cannibalization • Internal training program • Not environmentally friendly • Foreign market • Food is not healthy enough • Brand recognition • Food is low quality • Charitable work / sponsorships • Weak customer service perception • Different store formats • Local food customization/adaptation • Convenience • Strict quality control standards for suppliersOpportunities Threats • Greater international expansion • Environmental / protest groups • Home delivery • Economy / currency exchange rates • Presence inside existing businesses • Saturated industry (i.e. as in Walmart) • Obesity epidemic; consumers going • Improve supply chain healthy • Offer additional healthy menu items • Competition catching up • Make a louder noise against obesity • Price / product wars problem • Make larger advances in being so- cially and environmentally responsibleThink Global, Act Local 13