Mcdonalds Venture into the Hotel Industry

1. MC DONALD’S
ADVENTURE IN THE
HOTEL INDUSTRY
Team Ries:
ChinthamAshish(008)
IpsitaPradhan(019)
ArokiaRexton(028)
PranjalYadav(037)
Ragavendra R.(038)
Vaishnavi C.(056)
Gaurav K Singh (096)

2. Introduction:
In 1954, a milk shake seller Raymond Kroc in Southern California had got a franchisee license from the
McDonald’s brothers of San Bernandino to sell hamburgers, cheese burgers, French fries, soda and milk
shake in their name across various parts of the USA. The success of the restaurants is one for the history
books, as in the following years McDonald’s popped up everywhere in the country and became an
American icon.
Expansion outside the US:
• 1967 – Canada, Japan, Holland, Australia, and Great Britain.
• 1970s – Germany, Hong Kong, Sweden, the Far East, and Latin America.
• 1976 – Switzerland, 7200 employees.
• 1989 – Russia, Poland, Hungary and the Czech Republic.
• 2005 – 30000 Restaurants across 122 countries.
This success enabled McDonald’s to go for IPO on the NYSE. Since, 1990 one can buy and sell
McDonald’s stock in Zurich, Basel, and Geneva. And in between, there was a drop in the stock from $48
to $32 per share; this triggered the top level management to rethink about their strategies. They
concluded that every opening of a new McDonald’s restaurant intruded upon the revenues of other
restaurants already in operation.
Diversification:
To overcome this, they have decided to pursue on “Diversification” strategy. They have
operated competency centers in each country of their existence to evaluate possible options of
diversification. One such center in Switzerland had come up with the idea of Hotel Business, a person
from hotel background being the genius behind it. Finally, they had decided to come up with two hotels
in Swiss.
The Zurich market, where McDonald’s opened their hotel, had already been well serviced by leading
hotel chains of the world such as Movenpick, Hilton, the Accor Group etc., McDonald’s had their brand
of service “fast and friendly” in place, tried to prove their excellence in this hotel business.
Uniqueness of the Golden Arch:
McDonald’s had their uniqueness with features. To name a few, luggage handling being provided by a
custom made trolley, every operation being handled automatically by credit cards reducing the human-
human interface eventually reducing the time, and patented curved walls in the hotel rooms and a
damn new futuristic shower in the bathroom. These all features made the customers feel delighted.

3. Customer Experience:
Customer reactions after visiting and staying in the Golden Arch hotel, was not very pleasant. Many
visitors who came to the Mc. Donald’s restaurant did not notice the signage of the hotel. So, not many
customers were aware that the hotel was situated in that locality. Quite often, there were no front desk
employees to receive the customers and they were unfriendly. The beds in the room which were
electronically operated looked more like a hospital bed. The customers found discomfort in walking on
hard flooring as there was no carpet on the room floors. People complained about the bar ambience as
they felt it was very unwelcoming and quite similar to a small city airport lounge. Scenery outside the
bar was that of trees and grasses which made the customers feel like they were having a picnic rather
than having a drink at a bar. The hotel aimed at reinforcing the brand at every turn. In fact, the
headboards above the beds at the hotel had the huge arches which symbolized Mc. Donald’s Golden
Arches. The rooms had wireless keyboards for the customers to access internet, which was too
advanced for 2001.
On the whole, Four-star image did not correspond with the hotel. The hotel was situated in an isolated
area, making the customers forcefully have Mc. Donald’s food throughout their stay. To add on, the
name ‘Golden Arch’ did not sound too pleasant in German.
Point of Parity (POP) and Point of Difference (POD):
Using the brand resonance pyramid, it can be said that in order to create brand resonance with
customers,
-Brands need to deliver both functional performance and meanings and imagery that customers need
-Customers react to these by forming evaluative judgments and emotional responses to the brand.
The functional performance and imagery is related to the point of parity and point of difference
established by the brand.
Golden Arch hotel tried to differentiate themselves from others in design and use of technology.
In Design,
-They had a design of curved wall in rooms which they even got patented.
-There were movable beds in the rooms and a futuristic shower.
In Technology,
-They had a keyboard in each room to operate T.V and internet
-Automation for check in and check out
-Custom made trolley so that customers could carry their own luggage.

4. Although all these attributes are different and highly deliverable, there is a question regarding their
deliverability. In the comments made by the customers, we observe that either they did not notice these
attributes, did not like it or did not consider it important.
So, Golden arches failed to match the customer expectations for a four star in a few areas and while
creating points of difference, it did not take into account, customer opinion/need.
Porter 5 forces Analysis
• Threat from substitute
Tourist and delegates on business visit had no option other than to stay in hotels as within the
hotel sector the customers had wide variety of options
• Intensity of rivalry within industry
Mc. Donald’s Golden arch not only was in competition with the hotels with similar portfolio (i.e
four star hotels) along with that they wanted to grab the market share of the world’s fastest
growing hotels (of the elite group).
To its disadvantage, Mc. Donald’s Golden arch was relatively far from the airport and services
were inferior to the other four star hotels.
• Bargaining Power of Customers
Tourist were the major customers who preferred to stay at close vicinity to the airport as most
of them are in transit state and have to catch flights.
Airlines employee were the other major customers for any hotel in the area. They looked for
long term relationship with the hotels and required rooms to be booked in bulk. Golden arch
failed to establish a healthy relationship as there were very few instance of employee-customer
direct interface interaction thus Golden arch was losing battle in terms of hospitality.
• Bargaining Power of Suppliers
Travel agents were the middle men who use to direct customers to the hotels, however
customer booking his accommodation failed to perceive and visualize Mc. Donald’s as a hotel
service provider in four star hotel category thus added to confusion and raised question mark
about it services.
Almost all hotels in Zurich were facing the scarcity of Human resource and Golden arch group of
hotels too were the victim of it.
• Threat of New Entrants

5. Hotel industry saw a huge scope and opportunity to grow in Zurich which was supported by the
fact that the no. of hotels were escalating at very rapid rate.
Rate at which hotel industry was growing was 40%. Which was a threat to all other hotels
including golden arch as room occupancy would be a question.
A Life Cycle Analysis of the Swiss Hotel Industry
Based on official data from the Federal Swiss Office of Statistics we compiled a time series of yearly data
for the number of hotel and spa establishments in Switzerland. From this we were able to establish a
series of the net entries defined as:
Net entry = (Number of firms entering the industry) – (Number of firms leaving industry)
Another time series was established with the number of over-night stays. The total number of nights
spent in a Swiss hotel per year can be considered the yearly output of that industry. In addition to this
one could examine capacity, given by the number of available rooms or beds. It could be that excess
capacity is non-monotonic over the life cycle. However, since we are mainly interested here in output,
not capacity, we will not examine the latter.
The graph shows the number of hotels in operation in
Switzerland and the demand i.e. number of overnight
stays.
From the above graph we can say that the introductory phase of the life cycle took place in the years
prior to 1880. During this period, the first major hotels were built, and the winter season was invented.
The period 1880 – 1930 saw impressive growth. Following this initial growth, it appears that demand
growth started slowing down a first time around 1910, already before the First World
War. Prices might have got hit then. Though there were fluctuations in the curve due to the World War
I, it did not affect the long term growth in the number of firms, or in output. In fact, ignoring these short

6. term fluctuations, we can say that the growth phase, of the Swiss hotel industry, lasted all the way to
the early 1930s.
In 1930, for the first time, a significant number of firms exited the industry. In fact, between 1933 and
1953, net exit exceeded 15% of hotels. The number of hotels grew steadily again for almost 20 years,
before leveling off. Output, in terms of overnight stays, also reached its peak around 1972. Since then,
the industry has experienced thirty years of stagnation. Quite logically, the number of firms would
diminish from here, going from a peak of 8145 firms in 1974 to 5777 firms in 2001, a 30% drop.
Over the thirty years since the industry peaked, a clear concentration has taken place, leaving fewer
competitors fighting over a stagnant market. We would therefore argue that the industry is now
experiencing the decline phase of the
industry life cycle.
From the production life cycle graph of the
Swiss Hotel Industry we can clearly see that
the growth has stagnated since 1972.
McDonalds’ Golden Arch Hotel was
established in 2000, during the decline
period of the hotel industry where a few players are fighting with the stagnated market. Hammer’s
vision of growth in the industry should have been reconsidered and an in-depth analysis should have
been done before the approval for the Golden Arch Hotel by McDonalds.
Internal Problems:
In case of Golden Arch hotel, since it was a four star, its customers had some general expectations of
comfort and service. Looking at the comments that the customers gave,
-They did not find the level of comfort they expected. For example one customer complained about the
carpeting in the room which was not comfortable.
- In the bar, there was lack of proper ambience.
- There were no recreational activities.
-For food and beverages, there was a Mc Donald restaurant, but customers expected fine dining for a
four star.
-In a hotel business, service is very important for a four star, but it was not taken care of in the way the
customer expected. There was one instance where there was no one at the reception desk for a
customer, and even if she came late, she was rude to the customer.
1880 1930
1880
2001
1972

7. -Cleanliness was given paramount importance. While cleanliness is important, it is something expected
as a POP and not an attribute that can differentiate them.
BCG Matrix Analysis
The BCG matrix is a chart that had been created
by Boston Consulting Group to help
corporations with analyzing their business units
or product lines. This helps the company
allocate resources and is used as an analytical
tool in brand marketing, product management,
strategic management, and portfolio analysis.
McDonald’s restaurant business had almost reached the saturation point as it is mentioned in the case
that every newly opened restaurant in Swiss cannibalizes the profits of the existing McDonalds
restaurants. The market growth rate was below 10 percent per annum and so it is classified as a low
market growth. The relative market share ratio is assumed to be high as McDonalds was the market
leader (information about the competitors was not given). Therefore McDonald’s restaurants should
have been in the Cash cow position in the BCG matrix. They typically generated cash in excess of the
amount of cash needed to maintain the business.
As mentioned earlier ,the industry growth rate in Swiss was declining and the industry itself was in the
declining phase. The competition was also fierce and gaining market share was very difficult. Golden
Arches Hotel remained in the low market share and low industry growth rate cell situation which brings
it to the Dog cell of the BCG matrix. Since it was not of any strategic importance to McDonald and it was
likely to affect the parent brand name, it was sold out at the right time.
Ansoff’s Matrix:
Diversifica-
tion
Better liquidate
it; it might hurt
the parent brand

8. The corporation has already exploited all four cells of Ansoff’s matrix:
• Market Penetration–
McDonald’s saturated its home market (the USA) a number of years ago
• Market Development–
The company has managed to duplicate its fast-food success worldwide
• Product Development –
From burgers ‘n fries to breakfast, from salads to ice cream, the corporation has innovated in
almost every edible direction
• Diversification–
McDonald’s control land holdings and own processing facilities, logistics operations,
franchising/financing operations, training facilities, and now hotels.
Lack of Clarity in STP
Segmentation
From a price perspective McDonald’s could match the segments of Mid-price, Economy and Budget.
The segment chosen has a high impact on the price because Hammers himself told about this.
Targeting
McDonald can make use of the advantage that it is recognized as a family restaurant and attract that
kind of consumers to the hotels.
Positioning and Naming
The graph below shows Mc Donald’s is known for good Quality at cheap price. But it is overriding its
core competency by catering into hospitality industry.
To avoid the Parent Brand Dilution it named differently for the hotel chain as ‘The Golden Arch’.
But the name symbolizes Mc. Donald’s. Further it sounds different in German as human posterior.

9. Profit Model:
According to the profit model of the Golden Arches hotel, the total investment in the venture is
32,000,000 SFr. The investment was brought in by 20% equity and the rest 80% was a 3 year mortgage
loan at 3%. Around 28.8 million was invested in the hotel and the rest was invested in the McDonalds
restaurant built adjacent to the hotel. The restaurant was doing fine and was able to break even easily.
The analysis focuses more on the financials of the hotel. As it was a 3 year loan, Golden Arches had to
pay an annuity of 8,145,339.57 SFr. The profit and loss statement accounts the interest repayment. The
principal amount which lies as a long term liability in the balance sheet had to be paid in the next three
years. In order to pay it back Golden Arches had to earn a PBT (tax rate was not mentioned in the case
and so PAT cannot be calculated) of SFr 7,454,139 in the 1st
year and SFr 7,677,763 in the 2nd
year and
SFr 7,908,096 in the 3rd
year. Given the liability, Golden Arches can break even only if it operates at its
maximum capacity of 7841 rooms a year and at 100% occupancy rate( actual occupancy- 71% ) and the
average cost per room should be around SFr 170.5 which is higher than the rates applied to individual
guests who pay the highest rent of SFr 161. The model was unrealistic unless cash flowed in from the
parent company to bail out Golden Arches. McDonalds realized that in that kind of competitive
environment it was not possible to break even and so they sold it off in a year and a half since it started
operating.
Key Recommendations:
Target Market:
Travel vacationers and lodging guests.Age 0-50 with children. Prefers to travel by car and enjoys various
kind of entertainment
Segments:
The Mid-price and Economy segments. Focusing much on families, building on the parent brand
attracting consumers from both segments.
Hotel Features:
In-room appliances, Internet, Newspapers, breakfast/lunch restaurant with recognizable McDonald’s

10. products.
Location: Currently located near highways, in vicinity of theme parks, golf courses, and shopping
malls.
Be Unique:
-McDonald's can incorporate their Play Place and other game room activities like coin operated arcades.
-Not only does provide entertainment, but it also provides revenue from guests that if they were in
other hotels would not spend more than the room fee.
-Include a unique dining experience that includes much of what they provide already while adding multi-
cuisine food in the menu.
-Mc D’s Golden Arch shall give a reason to look forward to for the customers.
Alternatives: (This or That!)
Mc Donald’s image in the customer’s eyes was clear: It was a family restaurant where you get cheap
fast-food, quick service in a clean environment.
So keeping in mind the above fact; Mc D could exercise one of the two options:
Option 1: (2 or 3 star Hotel)
If the Mc Donald’s want to continue to serve the economy, middle-income customers, it should open a
two or three star hotel.
The key points to be addressed include:
Focus on families with children
Low-cost budget
Economy class
• Use what works in food Industry
for McDonald’s and use the
family oriented and value based
business model to create a unique
hotel experience that everyone
could enjoy.

11. Limited amenities
It should only include the services essential for a customer; so the customer would not feel he
has to pay a premium for unwanted facilities.
Option 2: (4 Star Hotel under a different Brand)
Expectations of customers entering into a four-star hotel are different than that of the customers going
to a two or three star hotel.
McDonald’s brand doesn’t square with the image of a four-star hotel; so it should open a hotel with a
different brand name. In this case, Mc Donald’s new four star hotel would be a endorsed brand.
Keeping in line with the four-star image Mc Donald’s would be required to re-design everything
including:
Brand logo
Interior Design
Ambience
Open a Multi-cuisine restaurant
Inclusion of Customer Engaging Activities
Trained Service staff
What happened to Golden Arch Hotel?
By publicizing the venture mainly inside Switzerland and using the name Golden Arch rather than
McDonald’s, the company avoided damage to the corporate brand. Moreover, the real estate
investment did not result in a significant loss: The two hotels are now managed by Rezidor SAS
Hospitality, which runs them under its Park Inn brand. While a P&L statement was never made public,
the estimated operational losses were insignificant to the McDonald’s portfolio. The decision to exit the
hotel business after less than three years represents a further limitation of the company’s risk.
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