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VIVEK COLLEGE OF COMMERCE CHAPTER-1 INTRODUCTION 1.1 COMPANY PROFILE McDonald's Corporation is the world's largest chain of hamburger fast food restaurants, serving around 68 million customers daily in 119 countries. Headquartered in the United States, the company began in 1940 as a barbecue restaurant operated by Richard and Maurice McDonald; in 1948 they reorganized their business as a hamburger stand using production line principles. Businessman Ray Kroc joined the company as a franchise agent in 1955. He subsequently purchased the chain from the McDonald brothers and oversaw its worldwide growth. A McDonald's restaurant is operated by a franchisee, an affiliate, or the corporation itself. The corporation's revenues come from the rent, royalties and fees paid by the franchises, as well as sales in company- operated restaurants. McDonald's revenues grew 27 percent over the three years ending in 2007 to $22.8 billion, and 9 percent growth in operating income to $3.9 billion. McDonald's primarily sells hamburgers, cheeseburgers, chicken, frenchfries, br eakfastitems, soft drinks, milkshakes and desserts. In response to changing consumer tastes, the company has GLOBAL AND FRANCHISING STRATEGIES OF MCDONALDS PAGE 1

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Page 1: MC DONALDS PROJECT.docx

VIVEK COLLEGE OF COMMERCE

CHAPTER-1

INTRODUCTION

1.1 COMPANY PROFILE

McDonald's Corporation is the world's largest chain of hamburger fast food

restaurants, serving around 68 million customers daily in 119 countries.

Headquartered in the United States, the company began in 1940 as a barbecue

restaurant operated by Richard and Maurice McDonald; in 1948 they reorganized

their business as a hamburger stand using production line principles.

Businessman Ray Kroc joined the company as a franchise agent in 1955. He

subsequently purchased the chain from the McDonald brothers and oversaw its

worldwide growth.

A McDonald's restaurant is operated by a franchisee, an affiliate, or the corporation

itself. The corporation's revenues come from the rent, royalties and fees paid by the

franchises, as well as sales in company-operated restaurants. McDonald's revenues

grew 27 percent over the three years ending in 2007 to $22.8 billion, and 9 percent

growth in operating income to $3.9 billion. McDonald's primarily

sells hamburgers, cheeseburgers, chicken, frenchfries, breakfastitems, soft

drinks, milkshakes and desserts. In response to changing consumer tastes, the

company has expanded its menu to include salads, wraps, smoothies and fruit.

1.2 HISTORY

The business began in 1940, with a restaurant opened by brothers Richard and

Maurice McDonald at 1398 North E Street at West 14th Street in San Bernardino,

California . Their introduction of the "Speedee Service System" in 1948 furthered the

principles of the modern fast-food restaurant that the White hamburger chain had

already put into practice more than two decades earlier. The original mascot of

McDonald's was a man with a chef's hat on top of a hamburger shaped head whose

name was "Speedee". Speedee was eventually replaced with Ronald McDonald by

1967 when the company first filed a U.S. trademark on a clown shaped man having

puffed out costume legs.

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McDonald's first filed for a U.S. trademark on the name "McDonald's" on May 4,

1961, with the description "Drive-In Restaurant Services", which continues to be

renewed through the end of December 2009. In the same year, on September 13,

1961, the company filed a logo trademark on an overlapping, double arched "M"

symbol. The overlapping double arched "M" symbol logo was temporarily disfavored

by September 6, 1962, when a trademark was filed for a single arch, shaped over

many of the early McDonald's restaurants in the early years. Although the "Golden

Arches" appeared in various forms, the present form as a letter "M" did not appear

until November 18, 1968, when the company applied for a U.S. trademark. The

present corporation dates its founding to the opening of affranchised restaurant

by Ray Kroc, in Des Plaines, Illinois, on April 15, 1955, the ninth McDonald's

restaurant overall. Kroc later purchased the McDonald brothers' equity in the

company and led its worldwide expansion, and the company became listed on the

public stock markets in 1965. Kroc was also noted for aggressive business practices,

compelling the McDonald brothers to leave the fast food industry. The McDonald

brothers and Kroc feuded over control of the business, as documented in both Kroc's

autobiography and in the McDonald brothers' autobiography. The San Bernardino

store was demolished in 1976 (or 1971, according to Juan Pollo) and the site was sold

to the Juan Pollo restaurant chain. It now serves as headquarters for the Juan Pollo

chain, as well as a McDonald's and Route 66 museum. With the expansion of

McDonald's into many international markets, the company has become a symbol of

globalization and the spread of the American way of life. Its prominence has also

made it a frequent topic of public debates about obesity, corporate

ethics and consumer responsibility.

1.3 KEY DATES

1948: Richard and Maurice McDonald open the first McDonald's restaurant in San

Bernardino, California.

1954: Ray Kroc gains the rights to set up McDonald's restaurants in most of the

country.

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1955: Kroc opens his first McDonald's restaurant in Des Plaines, Illinois; he

incorporates his company as McDonald's Corporation.

1960: The slogan, "Look for the Golden Arches," is used in an advertising campaign.

1961: Kroc buys out the McDonald brothers for $2.7 million.

1963: Ronald McDonald makes his debut.

1965: McDonald's goes public.

1967: The company opens its first foreign restaurant in British Columbia, Canada.

1968: The Big Mac is added to the menu.

1973: Breakfast items begin to appear on the menu, with the debut of the Egg Mc

Muffin.

1974: The first Ronald McDonald House opens in Philadelphia.

1975: The first McDonald's drive-thru window appears.

1979: The children's Happy Meal makes its debut.

1983: Chicken Mc Nuggets are introduced.

1985: McDonald's becomes one of the 30 companies that make up the Dow Jones

Industrial Average.

1998: The company takes its first stake in another fast-food chain, buying a minority

interest in Colorado-based Chipotle Mexican Grill.

1999: Donatos Pizza Inc. is acquired.

2000: McDonald's buys the bankrupt Boston Market chain.

2002: Restructuring charges of $853 million result in the firm's first quarterly loss

since going public.

2003: McDonald's sells Donatos in order to refocus on its core hamburger business.

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1.4 HEADQUARTERS

The McDonald's headquarters complex, McDonald's Plaza, is located in Oak Brook,

Illinois. It sits on the site of the former headquarters and stabling area of Paul Butler,

the founder of Oak Brook. McDonald's moved into the Oak Brook facility from an

office within the Chicago Loop in 1971.

1.5 PRODUCTS

McDonald's predominantly sells hamburgers, various types

of chicken sandwiches and products, French fries, soft drinks, breakfast items,

and desserts.

In most markets, McDonald's offers salads and vegetarian items, wraps and other

localized fare. On a seasonal basis, McDonald's offers the McRib sandwich. Some

speculate the seasonality of the McRib adds to its appeal. Various countries,

especially in Asia, are currently serving soup. This local deviation from the standard

menu is a characteristic for which the chain is particularly known, and one which is

employed either to abide by regional food taboos (such as the religious prohibition of

beef consumption in India) or to make available foods with which the regional market

is more familiar (such as the sale of McRice in Indonesia). In Germany, McDonald's

sells beer.

1.6 FACTS AND FIGURES

McDonald's restaurants are found in 119 countries and territories around the world

and serve 58 million customers each day. McDonald's operates over 34,000

restaurants worldwide, employing more than 1.7 million people. The company also

operates other restaurant brands, such as Piles Café.

Focusing on its core brand, McDonald's began divesting itself of other chains it had

acquired during the 1990s.

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The company owned a majority stake in Chipotle Mexican Grill until October 2006,

when McDonald's fully divested from Chipotle through a stock exchange. Until

December 2003, it also owned Donatos Pizza. On August 27, 2007, McDonald's

sold Boston Market to Sun Capital Partners.

Notably, McDonald's has increased shareholder dividends for 25 consecutive

years,making it one of the Aristocrats. In October 2012, its monthly sales fell for the

first time in nine years.

1.7 GLOBAL OPERATIONS

McDonald's has become emblematic of globalization, sometimes referred to as the

"McDonaldization" of society. The newspaper uses the "Big Mac Index": the

comparison of a Big Mac's cost in various world currencies can be used to informally

judge these currencies' purchasing power parity. Norway has the most expensive Big

Mac in the world as of July 2011, while the country with the least expensive Big Mac

is India (albeit for a Maharaja Mac—the next cheapest Big Mac is Hong Kong).

Thomas Friedman once said that no country with a McDonald's had gone to war with

another. However, the "Golden Arches Theory of Conflict Prevention" is not strictly

true. Exceptions are the 1989 United States invasion of Panama, NATO's bombing of

Serbia in 1999, the 2006 Lebanon War, and the 2008 South Ossetia war.

Some observers have suggested that the company should be given credit for

increasing the standard of service in markets that it enters. A group of anthropologists

in a study entitled Golden Arches East looked at the impact McDonald's had on East

Asia, and Hong Kong in particular. When it opened in Hong Kong in 1975,

McDonald's was the first restaurant to consistently offer clean restrooms, driving

customers to demand the same of other restaurants and institutions. McDonald's has

taken to partnering up with Sinopec, the second largest oil company in the People's

Republic of China, as it takes advantage of the country's growing use of personal

vehicles by opening numerous drive-thru restaurants. McDonald’s has opened a

McDonald's restaurant and McCafé on the underground premises of the French fine

arts museum, the Louvre. The company stated it will open vegetarian-only restaurants

in India by mid-2013.

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1.8 CRITICISM

As a prominent example of the rapid globalization of the American fast food industry,

McDonald's is often the target of criticism for its menu, its expansion, and its business

practices. The Mc Libel Trial, also known as McDonald's Restaurants v Morris &

Steel, is an example of this criticism. In 1990, activists from a small group known

as London Greenpeace (no connection to the international group Greenpeace)

distributed leaflets entitled What's wrong with McDonald's?, criticizing its

environmental, health, and labor record. The corporation wrote to the group

demanding they desist and apologize, and, when two of the activists refused to back

down, sued them for libel in one of the longest cases in British civil law. A

documentary film of the Mc Libel Trial has been shown in several countries.

Despite the objections of McDonald's, the term "McJob" was added to Merriam-

Webster's Collegiate Dictionary in 2003. The term was defined as "a low-paying job

that requires little skill and provides little opportunity for advancement". In an open

letter to Merriam-Webster, Jim Cantalupo, former CEO of McDonald's, denounced

the definition as a "slap in the face" to all restaurant employees, and stated that "a

more appropriate definition of a 'McJob' might be 'teaches responsibility.'" Merriam-

Webster responded that "we stand by the accuracy and appropriateness of our

definition."

In 1999, French anti-globalization activist José Bové vandalized a half-built

McDonald's to protest against the introduction of fast food in the region.

In 2001, Eric Schlosser's book Fast Food Nation included criticism of the business

practices of McDonald's. Among the critiques were allegations that McDonald's

(along with other companies within the fast food industry) uses its political influence

to increase its profits at the expense of people's health and the social conditions of its

workers. The book also brought into question McDonald's advertisement techniques

in which it targets children. While the book did mention other fast-food chains, it

focused primarily on McDonald's.

McDonald's is the world's largest distributor of toys, which it includes with kids

meals. It has been alleged that the use of popular toys encourages children to eat more

McDonald's food, thereby contributing to many children's health problems, including

a rise in obesity.

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In 2002, vegetarian groups, largely Hindu and Buddhist, successfully sued

McDonald's for misrepresenting its French fries as vegetarian, when they

contained beef broth.

People for the Ethical Treatment of Animals (PETA), continues to pressure

McDonald's to change its animal welfare standards, in particular the method its

suppliers use for slaughtering chickens. Most processors in the United States shackle

the birds upside down, then run them through an electrically charged water tub to

render them unconscious before slitting their throats. PETA argues that using gas to

kill the birds (a method known as "controlled atmosphere killing" or CAK) is less

cruel. Both CAK and "controlled atmosphere stunning" (CAS) are commonly used in

Europe.

Morgan Spurlock's 2004 documentary film Super Size Me said that McDonald's food

was contributing to the epidemic of obesity in society, and that the company was

failing to provide nutritional information about its food for its customers. Six weeks

after the film premiered, McDonald's announced that it was eliminating the super size

option, and was creating the adult happy.

The soya that is fed to McDonald’s chickens is supplied by agricultural

giant Cargill and comes directly from Brazil. Greenpeace alleges that not only is soya

destroying the Amazon rain forest in Brazil, but soya farmers are guilty of

further crimes including slavery and the invasion of indigenous peoples’ lands. The

allegation is that McDonald's, as a client of Cargill's, is complicit in these activities.

1.9 ARGUMENTS IN DEFENSE

In response to public pressure, McDonald's has sought to include more healthy

choices in its menu and has introduced a new slogan to its recruitment posters: "Not

bad for a McJob". (The word McJob, first attested in the mid-1980s and later

popularized by Canadian novelist Douglas Copland in his book Generation X, has

become a buzz word for low-paid, unskilled work with few prospects or benefits and

little security.) McDonald's disputes this definition of McJob. In 2007, the company

launched an advertising campaign with the slogan "Would you like a career with

that?" on Irish television, outlining that its jobs have many prospects.

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In an effort to respond to growing consumer awareness of food provenance, the fast-

food chain changed its supplier of both coffee beans and milk. UK chief executive

Steve Easterbrook said: "British consumers are increasingly interested in the quality,

sourcing and ethics of the food and drink they buy". In a bid to tap into the ethical

consumer market, McDonald's switched to using coffee beans taken from stocks that

are certified by the Rainforest Alliance, a conservation group. Additionally, in

response to pressure, McDonald's UK started using organic milk supplies for its

bottled milk and hot drinks, although it still uses conventional milk in its milkshakes,

and in all of its dairy products in the United States. According to a report published

by Farmers Weekly in 2007, the quantity of milk used by McDonald's could have

accounted for as much as 5% of the UK's organic milk output.

McDonald's announced on May 22, 2008 that, in the U.S. and Canada, it would

switch to using cooking oil that contains no trans fats for its french fries, and canola-

based oil with corn and soy oils, for its baked items, pies and cookies, by year's end.

With regard to acquiring chickens from suppliers who use CAK or CAS methods of

slaughter, McDonald's says that it needs to see more research "to help determine

whether any CAS system in current use is optimal from an animal welfare

perspective."

1.10 ENVIRONMENTAL RECORD

In April 2008, McDonald's announced that 11 of its Sheffield, England restaurants

have been using a biomass trial that had cut its waste and carbon footprint by half in

the area. In this trial, waste from the restaurants were collected by Veolia

Environmental Services and used to produce energy at a power plant. McDonald's

plans to expand this project, although the lack of biomass power plants in the U.S.

will prevent this plan from becoming a national standard anytime soon. In addition, in

Europe, McDonald's has been recycling vegetable grease by converting it to fuel for

its diesel trucks.

Furthermore, McDonald's has been using a corn-based bioplastic to produce

containers for some of its products. Although industries who use this product claim a

carbon savings of 30% to 80%, a Guardian study shows otherwise.

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The results show that this type of plastic does not break down in landfills as

efficiently as other conventional plastics. The extra energy it takes to recycle this

plastic results in a higher output of greenhouse gases. Also, the plastics can

contaminate waste streams, causing other recycled plastics to become unsalable.

The U.S. Environmental Protection Agency has recognized McDonald's continuous

effort to reduce solid waste by designing more efficient packaging and by promoting

the use of recycled-content materials.[60] McDonald's reports that it is committed

towards environmental leadership by effectively managing electric energy, by

conserving natural resources through recycling and reusing materials, and by

addressing water management issues within the restaurant.

In an effort to reduce energy usage by 25% in its restaurants, McDonald's opened a

prototype restaurant in Chicago in 2009 with the intention of using the model in its

other restaurants throughout the world. Building on past efforts, specifically a

restaurant it opened in Sweden in 2000 that was the first to intentionally incorporate

green ideas, McDonald's designed the Chicago site to save energy by incorporating

old and new ideas such as managing storm water, using skylights for more natural

lighting and installing some partitions and tabletops made from recycled goods.

When McDonald’s received criticism for its environmental policies in the 1970s, it

began to make substantial progress towards source reductions efforts. For instance, an

“average meal” in the 1970s—a Big Mac, fries, and a drink—required 46 grams of

packaging; today, it requires only 25 grams, allowing a 46% reduction. In addition,

McDonald’s eliminated the need for intermediate containers for cola by having a

delivery system that pumps syrup directly from the delivery truck into storage

containers, saving two million pounds of packaging annually. Overall, weight

reductions in packaging and products, as well as the increased usage of bulk

packaging ultimately decreased packaging by 24 million pounds annually.

1.11 LEGAL CASES

McDonald's has been involved in a number of lawsuits and other legal cases, most of

which involved trademark disputes. The company has threatened many food

businesses with legal action unless it drops the Mc or Mac from trading names.

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In one noteworthy case, McDonald's sued a Scottish café owner called McDonald,

even though the business in question dated back over a century (Sheriff Court

Glasgow and Strath kelvin, November 21, 1952). On September 8, 2009, McDonald's

Malaysian operations lost a lawsuit to prevent another restaurant calling

itself McCurry. McDonald's lost in an appeal to Malaysia's highest court, the Federal

Court.

It has also filed numerous defamation suits. For example, in the Mc Libel case,

McDonald's sued two activists for distributing pamphlets attacking its environmental,

labor and health records. After the longest trial in UK legal history, the judge found

that some claims in the pamphlet were untrue and therefore libelous. The company,

however, had asserted that all claims in the pamphlet were untrue, essentially obliging

the judge to publicly rule on each one. Embarrassingly for the company, several of the

specific allegations were upheld.

McDonald's has defended itself in several cases involving workers' rights. In 2001 the

company was fined £12,400 by British magistrates for illegally employing and over-

working child labor in one of its London restaurants. This is thought to be one of the

largest fines imposed on a company for breaking laws relating to child working

conditions. In April 2007 in Perth, Western Australia, McDonald's pleaded guilty to

five charges relating to the employment of children under 15 in one of its outlets and

was fined A$8,000.

Possibly the most infamous legal case involving McDonald's was the 1994 decision

in The McDonald's Coffee Case where Stella Liebeck was awarded several million

dollars after she suffered third-degree burns after spilling a scalding cup of

McDonald's coffee on herself.

In a McDonald's American Idol figurine promotion, the figurine that represents "New

Wave Nigel" wears something that closely resembles Devo’s Energy Dome, which

was featured on the band's album cover, Freedom of Choice. In addition to the

figurine's image, it also plays a tune that appears to be an altered version of Devo's

song "Doctor Detroit". Devo copyrighted and trademarked the Energy Dome and is

taking legal action against McDonald's.

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1.12 CHARITY

MCHAPPY DAY

Mc Happy Day is an annual event at McDonald's, where a percentage of the day's

sales go to charity. It is the signature fundraising event for Ronald McDonald House

Charities.In 2007, it was celebrated in 17

countries: Argentina, Australia, Austria, Brazil, Canada, the United

States, Finland, France, Guatemala etc. According to the Australian McHappy Day

web site, McHappy Day raised $20.4 million in 2009. The goal for 2010 is $20.8

million.

MCDONALD'S MONOPOLY DONATION TO ST. JUDE

In 1995, St. Jude Children's Research Hospital received an anonymous letter

postmarked in Dallas, Texas, containing a $1 million winning McDonald's Monopoly

game piece. McDonald's officials came to the hospital, accompanied by a

representative from the accounting firm Arthur Andersen, who examined the card

under a jeweler's eyepiece, handled it with plastic gloves, and verified it as a

winner. Although game rules prohibited the transfer of prizes, McDonald's waived the

rule and has made the annual $50,000 annuity payments, even after learning that the

piece was sent by an individual involved in an embezzlement scheme intended to

defraud McDonald's.

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CHAPTER -2

GLOBAL CHALLENGES AND STRATEGIES

2.1 THREE CHALLENGES TO MCDONALD'S GROWTH

McDonald's has long been the darling of Wall Street, posting increases in same-store

sales for 30 consecutive quarters since early 2003. Even during the depths of the

recession in 2008, same-store sales rose by 6.1%.

Time and time again, the fast-food global chain has found success by being something

to virtually everyone. It tweaked its menu beyond its core offerings of burgers and

fries, grabbing all kinds of new customers, from the health conscious with its latest

oatmeal breakfast to the cost conscious with its dollar menu items. And watch out

Starbucks McCafe's specialty coffee drinks now satisfy those who want more than

just a standard cup of Joe.

Next Monday, when McDonald's announces its earnings for the last three months of

2010, analysts expect the chain's winning streak to continue. Wall Street expects the

chain will end the fourth quarter at about $1.15 per share, up 12% from the same

period a year ago.

Shareholders have reaped the benefits -- McDonald's stock has risen nearly 40% in

the past three years. But how long will the run last? While Wall Street

overwhelmingly maintains a 'buy' position on the stock, some analysts are beginning

to point to factors that could start to work against the world's largest burger chain.

Here are three headwinds to watch for in 2011.

RISING FOOD PRICES: 

Higher food commodity and energy prices have recently pushed up wholesale and

retail food prices. The US Department of Agriculture predicts that prices will continue

to accelerate during the first half of 2011, leading to a 2% to 3% rise in food price

inflation for the year. McDonald's and other big burger chains have largely been

unaffected so far, but that might soon change.

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In a report last week, RBC Capital Markets analyst Larry Miller said McDonald's will

raise prices by 2% to 3% to help offset its higher food costs. McDonald's declined to

comment, citing a quiet period ahead of earnings next week. However, the chain's

CFO Pete Bensen told analysts in October that while prices for beef and other

ingredients were rising, the burger chain could deal with the increase.

But it may be too early to conclude that the Golden Arches will survive the

inflationary pressures unscathed. Rising food prices could be a risk for McDonald's,

says analyst Andy Barish of Jefferies and Company, even though the chain is largely

safeguarded from such volatility because the vast majority of its operating profits,

about two-thirds, come from franchises and royalties. While individual franchises

might have a harder time dealing with rising prices given the sensitive demand of cost

conscious consumers, it could eventually hurt profits of the overall chain if prices rise

to levels where it makes it difficult for franchises to expand.

Barish doesn't see any major disappointments in sales or earnings this year, but rather

a gradual slowing of earnings growth. He expects McDonald's to post 16% earnings

growth in 2010, followed by 10% growth in 2011.

LIMITATION OF BEVERAGES OVER BURGERS:

McDonald's increasingly diverse menu has helped it become the nation's best-

performing restaurant company during the economic slump. The chain realized

quickly that consumers have lots of options when it comes to food and drink and they

want the option to stop at McDonald's for snack time as opposed to just regular meals.

Creative drinks are the product du jour at the chain, with everything from fruit

smoothies and specialty coffee drinks.

But beverages might only take the company so far. The Wall Street Journal recently

cited a company email that disclosed that McDonald's peak lunch-hour business has

been flat for five years. And the few analysts taking a bearish view of McDonald's

2011 outlook say real growth of the company's core business -- the burgers and fries

part -- is overstated.

Howard Penney, restaurant industry analyst with investment research firm Hedgeye

and a Fortune contributor, believes the chain has expanded too broadly into

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beverages, and the plan will eventually catch up with the company -- helping send

U.S. same store sales to negative levels during the second, third and fourth quarters

this year. Much of McDonald's success in beverages has come from specialty coffees

such as lattes, which are sold at relatively higher prices. Penney says year over year

sales growth of the pricier beverages has flattened.

"McDonald's makes a lot of its money on fries and beverages," Penney says. "So

selling beverages is good but it makes operations more complex. It takes more to

make a latte than to pour a Coke. To continue peak service time you have to add

labor."

RETURN ON INVESTMENT:

Some franchises worry that their investments will not pay off, according to an

October McDonald's franchisee survey by Janney Montgomery analyst Mark

Kalinowski, who maintains a buy rating on the stock. A poll of franchisees shows

some concern that corporate demands to redo stores and sell more coffee cost too

much and might not pay off in the end.

One franchisee writes: "Very concerned about reinvestment issues and whether the

Corporation is paying a fair share of McCafe, upgraded technology platforms ..."

According to the Wall Street Journal, the McCafe machines cost $100,000 to install,

with McDonald's covering just $30,000 of that.

The criticism might appear typical for any large corporation with a significant

franchise business, but if the concerns by some franchise owners begin to snowball,

McDonald's could face a problem that no amount of caffeine can fix. 

2.2 MCDONALD’S REPORTS UNEXPECTEDLY SHARP DROP IN SALES

McDonald’s, the world’s largest fast-food chain, reported a decline in an important

global sales figure, the first such drop in almost a decade.

Monthly sales in stores open at least 13 months fell around the world by 1.8 percent in

October, reflecting “the pervasive challenges of today’s global marketplace,”

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according to Don Thompson, who was appointed chief executive of McDonald’s in

July. The last decline was in April 2003.

Same-store sales fell 2.2 percent in the United States and Europe and declined 2.4

percent in the Asia Pacific, Africa and Middle East regions. Jack Russo, a stock

analyst who follows McDonald’s at the financial adviser Edward Jones, said Wall

Street had been expecting a dip in sales figures from McDonald’s, but not such a

sharp one.

In addition to weak markets around the world, Mr. Russo blamed the calendar. “There

was one less Sunday and one less Saturday in the month, and those are big sales

days,” he said. “If you make an adjustment for that, sales would have been slightly

positive but still decelerating.”

The chain is also facing stiffer competition from its longtime rivals Burger King and

Wendy’s, which have new owners. Both chains have been adding to their menus and

remodeling stores.

Burger King is currently featuring a gingerbread cookie shake, while Wendy’s new

Garden Sensations salads are doing well. On Thursday, Wendy’s announced that its

same-store sales in North America were up 2.7 percent in the third quarter, although it

reported a loss of $26.2 million, or 7 cents a share, in contrast to a loss of $3.97

million in the same quarter a year ago.

At the same time, demographic shifts are favoring chains that traditionally have

competed less directly with McDonald’s, like Taco Bell and Chipotle. All of the

hamburger chains have been working to capitalize on lower bacon prices. Burger

King has a White Cheddar Whopper sandwich with bacon, and Wendy’s is offering a

Bacon Portabella Melt sandwich.

McDonald’s has also been aggressively using social media platforms, like Twitter, to

promote its new Cheddar Bacon Onion burger, or C.B.O. It also heavily advertised its

Dollar Menu and its Monopoly promotion, but Mr. Thompson said those efforts to

drive sales had fallen flat in the face of “modest consumer demand.”McDonald’s

stock was down about 2 percent Thursday, while Wendy’s was up about 3 percent.

Burger King was also down slightly.

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2.3 MCDONALD'S SUPPLIERS MAKE PROGRESS ADDRESSING GLOBAL CHALLENGES

McDonald's received more than 400 submissions from 172 different suppliers,

making the 2012 selection process the most difficult yet impactful to-date.  Supply

chain achievements spanned diverse areas including meeting zero waste-to-landfill

targets, taking the plastic out of plastic bottles, teaching orphans how to raise

chickens, helping employees attain further education, and more. Collectively, they

demonstrated the power of sharing responsibility by letting employees lead; sharing

experience by applying global lessons locally; and sharing expertise through

partnerships. 

A panel of executives and external experts, including BSR, Conservation

International, Food Animal Initiative (FAI) and World Wildlife Fund (WWF) selected

the final 2012 Best of Sustainable Supply winners. These projects were selected based

on either measurable results or innovation. 

"One of our core values is taking seriously the responsibilities that come with being a

leader, and using our size, scope and resources to help make the world a better place.

Nowhere is that commitment more evident than in our supply chain," said Jose

Armario, executive vice president, McDonald's Global Supply Chain, Development &

Franchising. "The submissions in this year's report demonstrate that McDonald's

supply chain is world class in its ability to provide safe, sustainable, and assured

supply of food and products our customers love." 

Best of Sustainable Supply Report highlights include:

Integrated Pest Management

Leading competitive North American potato suppliers (ConAgra Lamb Weston,

McCain Foods, J.R. Simplot Company) collaborated to identify and measure the

implementation of best practices to reduce pesticide, fertilizer and water use.

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Animal Welfare Training

Gen OSI Inc. (an OSI Group partner in the Philippines) trained government

animal welfare officers and meat inspectors in the Philippines. Judges selected

this entry as an example of leadership that extends beyond a company's scope of

responsibility to drive systemic change.

Sustainable Wheat Farming to Reduce Carbon Footprint

Fresh Start Bakeries in Europe worked with suppliers to reduce the carbon

footprint resulting from the agricultural practices used to produce its main raw

material: wheat. This example reflects the highest aspirations of McDonald's

Sustainable Land Management Commitment.

Reducing the Use of Fossil Fuels and Supplying Energy to the Community

Grupo Melo, a Central American supplier, built and optimized hydro power

turbines that produce excess power for the surrounding community during the

rainy season.

The majority of any given company's social and environmental impacts are in its

supply chain. McDonald's recognition of its suppliers is an important means to

highlighting innovative solutions that drive sustainability commitments and encourage

leadership within the industry," said Sonal Pandya-Dalal, Conservation International's

Senior Advisor, Corporate Leadership Strategies, Center for Environmental

Leadership in Business.  "McDonald's Best of Sustainable Supply recognizes the

importance, and thereby encourages, the development of sustainable initiatives within

the supply chain," said Roland Bonney, director of Food Animal Initiative. 

McDonald's Armario added, "Leadership throughout our supply chain is increasingly

critical as we work to integrate sustainability actions across all areas of our business

to help make the world a better place for everyone. We sincerely appreciate all of our

suppliers' efforts." 

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2.4 GLOBAL GROWTH AND SUCCESS STRATEGIES

Since the start of the company in 1973, McDonald’s Corporation began spreading

domestically throughout the United States thus establishing its brand recognition. Its

initial strategy began by advertising directly to the middle and upper class citizens, as

can be seen in countries such as India and China. However, with its many bargain

deals on several of its food items, McDonald’s began to cater to several people

belonging to the lower class.

China was McDonald’s first global country in which it researched heavily before

opening up restaurants. In fact, through globalization and internationalization,

McDonald’s was able to develop marketing strategies, while at the same time

customizing them for different regions in accordance to the cultural and national

variations in order to serve specific target markets. The company conducts heavy

research in regions where it desires to open locations based upon a few elements,

including social, cultural, technological, political, and economic situations.

McDonald’s key to success is its business mantra of “think global, act local”. This has

allowed the company to achieve financial success in every region it opens its fast food

restaurants.

Internationally, McDonald’s earns high revenues is India. India is one of the toughest

markets to enter for foreign businesses, due to the governmental hardships imposed

upon by the Indian government. The reason behind such hardships is solely based on

the Indian government seeking to protect its domestic businesses, and employment for

its citizens. Vasant Vihar, a prosperous residential area in New Delhi, was the initial

location that McDonald’s opened up its first store in India in 1996. Since then, almost

60 McDonald’s restaurants have been opened. One of the most successive strategies

that McDonalds uses before opening up its stores is research and development of its

foods. Tastes and preferences vary across the globe, therefore, the company

thoroughly analyzes the preferred tastes, especially to not offend local cultures. For

example, India is a nation where beef is highly unpopular due to religious purposes;

therefore, the company had to come up with burgers that were not made with beef, but

rather with chicken or lamb. Furthermore, the company had to create flavors that were

spicy in order to meet the general taste preferences. In order to further emphasize the

globalization element incorporated by the company, the success strategies include:

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Emphasis on Local Management

Throughout the world, McDonalds prides itself in hiring locals, specifically

management in order to gain acceptance into the country by its citizens. The emphasis

is based on the “think global, act local” theme of the company. For instance, the

company decided to establish two joint ventures with two local entrepreneurs in New

Delhi, who were selected to manage the fast food restaurant. This strategic move

allowed the company to gain easy access to the bureaucracy associated with the

country’s government.

Politically Sensitive Strategy

One of the company’s major concerns was to develop ways to avoid political

confrontation with the Indian government. The other major concern was to be careful

of the religious sensitives in India. Almost 80% of Indians do not eat beef, and over

150 million Indian Muslims do not eat pork, therefore, instead of supplying the

normal Big Mac, which consists of beef, the company developed the Maharaja Mac

that is made of two lamb patties. Other foods were also added to the non-standardized

menu including McAloo Tiki Burger, and other common Indian dishes.

Employment Opportunity

Foreign enterprises are often reluctant to hire locals in their companies, specifically at

the managerial positions, however, McDonald’s research concluded that in order to

survive the brutal Indian government, it would have to hire locals as cashiers, cooks,

managers, etc., as well as provide jobs for the country’s agricultural workforce. In

fact, McDonald’s outsources its products to several Indian companies throughout

India. This provides evidence to the Indian government that McDonald’s is not only

customer friendly, but also employee friendly.

Environmental Friendliness

In order to achieve a positive reputation, as well as follow local and national policies

of a country, McDonald’s tries to establish services that are environmentally friendly.

India is an example where the company provides financial contributions and sponsors

several community related activities in order to promote environmental protection.

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This is primarily seen within schools; thus indicating that the company also supports

local schools.

Corporate Citizenship

In order to better its reputation, this multinational firm gives back to the local citizens

in all countries it operates. For example, the company provides several financial

donations to local organizations. This is one way to encourage consumers to eat at its

restaurants, as it is an incentive that is used to spread the name.

Pricing

As the value of currencies varies worldwide, McDonald’s is often forced to change its

pricing strategy in accordance to its target market. For instance, the value of a Big

Mac varies worldwide (see Chart 1). In Switzerland, the Big Mac is valued $.60 over

the U.S. (price base of the product). However, in China, it is undervalued by $0.60 in

comparison to the price of the Big Mac in the U.S. It seems that the company tries to

maintain a price range on all its products based on the location, income distribution

and it is for this purpose that the company opens up most of its restaurants in major

cities such as New Delhi, Shanghai, Beijing, and so on. Its primary goal is to initially

attract middle and upper class citizens, as they can afford McDonald‟s prices. After

this, they slowly target the lower middle class citizens. In the United States, for

example, the restaurant chain has appealed equally well to all classes ranging from the

poor to the upper class; however, its popularity continues to be among the lower,

middle and upper middle class.

Chart 1: The Big Mac Index

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2.5 CHALLENGES THE MCDONALD’S HAS OVERCOME

The company has grown through several challenges that have come its way, including

adapting to its local environments; this is an ongoing challenge that it will face as it

continues to open up more restaurants worldwide. However, the biggest challenge the

firm faced was in 2001, when the company had hit a low point, specifically with the

new fad of eating healthy. This was primarily seen in its home country, the United

States. This fad continues today, and as a result, McDonald’s became one of the least

visited fast food restaurants. In fact, Subway increased in sales due to its low calorie

subs that were available. After 2001, the company changed its strategy: instead of

opening more stores, the firm decided to change its menu by introducing healthier

meals (see chart 2a). In fact, the company took a big dip in profits from 2000-2002.

However, since its introduction of the new menu, consisting of fruit snacks for

children, and healthier meals for adults, such as the grilled chicken flatbread, the

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company has begun to increase its revenues from the previous slow years. This can be

seen in Chart 2b, as revenues have begun to increase since 2003. Furthermore, in

order to fulfill federal health regulations, as well as meet its healthy requirements to

societies in which it operates, the company in 2004, begun to experiment with

products. It introduced new oven baked sandwiches, which were healthier and tastier

for its consumers. In 2004, as a result of overcoming its challenges, the company

increased its shares by 11% to 12%. McDonald’s in Australia, for example,

introduced the Mc Cafe, its gourmet coffee for its customers. This proved to be a big

hit.

Chart 2a: Sales Growth (Economist.com, 2004)

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Chart 2b: Total Revenue (Economist.com, 2004)

Another way the company begun to increase profits was to introduce its dollar menu.

This became popular very quickly, as it allowed even the lower class citizens to eat at

McDonald‟s, not just in the United States, but in countries such as India and China.

With its new campaign, larger sizes or portions were introduced at a dollar value,

including sodas, fries, salads, and desserts (Eisenberg, 2002). It seems that during the

initial years, when the company first began to spread domestically, there were little

worries on healthy eating, however, as times have changed and competition has

increased, the company has been forced to seek new and innovative ways to not only

increase its shares and revenues, but to also fulfill its obligation to the societies in

which it operates in.

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2.6 MCDONALD’S ADAPTING TO NEW MARKETS

The McDonald Corporation has been able to cater to the needs of their customers in

various markets by adjusting their projects, ads and work processes. As the multi-

billion dollar company continues with its spread into the international waters, it has to

first research, and then develops its products. Its most recent locations have been

India and China. As noted earlier, the company thoroughly conducted in-depth

analysis among several states in India in order to meet the preference requirements.

For instance, in the state of Gujarat, most citizens are vegetarians, therefore, when the

company opened up a location there, it introduced veggie burgers, and other

traditional Indian dishes, such as samosas, dosa, vada, and so on. This was not the

case in New Delhi, where the company introduced several meat burgers, including

Maharaja Mac, kabas, etc. (Dash, 2005). Therefore, in an effort to adapt to the local

environment, the company created foods that were more in line with the taste buds of

the Indians. This can also be seen in countries such as China, Israel, Venezuela,

Mexico, and so on.

Recently, the company opened up a retail store, Mc Kids, a clothing retail store in

China which appeals to children on the basis of toys, casual modern clothing,

interactive books and videos. Other stores were also opened in Europe and the United

States in 2005 (People’s Daily, 2004). Furthermore, China is the country where high

sales are normally generated; and in an effort to keep up these sales, the company has

decided to create a new feel for the Chinese people. The Chinese society usually seeks

to be more westernized and in an effort to enhance their image and serve the demands

of their clients, the company has placed more of an emphasis on beef, which is a

luxury item to some customers. The firm has introduced and heavily advertised beef

burgers, such as the Quarter Pounder. In fact, in order to exhilarate the image of

eating beef, it has been advertised that eating beef increases sex appeal. This is only

one of many such ways that the company is promoting its products through its

adaptation strategy of becoming local (Towns, 2006).

The latest trend in China has been the growth of fast paced restaurants such as

McDonald’s, which is second in line with the highest number of restaurants in China

of over 120, where the majority of these are located in Shanghai.

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This U.S. based company owns more stores worldwide (about 19,700) than it does in

its home country, thus indicating its appeal of internalization. In 2005, the company

opened its first drive- thru restaurant in China, with the hope of opening up at least

100 drive-thru outlets by the next two years. In fact, the company expects to increase

the number of total restaurants to 1,000 by 2008 (Goldkorn, 2005). The company’s

adaptation to the local environments in which it operates stores and restaurants have

allowed it to achieve success, as well as maintain it.

In fact, McDonald’s success has been largely due to its envelopment of globalization,

specifically through its adaptation of the local tastes and preferences. Food,

specifically fast-food seems to be a weakness among the human race, especially,

when it is cheap, convenient and tasty. Yet, this has also led to the company’s

downfall in its home country during the healthy fad and the growing concerns of

obesity among children and adults that the U.S. is going through. However, the

company changed its menu in order to accommodate the much desired healthy

lifestyle, as well as fulfilling its obligations to provide healthier meals for children.

The healthy menu thus carried on over to its global restaurants, where it was tweaked

to meet the tastes of the local people. The research and development conducted by the

team experts of McDonald’s has allowed for a high growth in the company. In the

most recent 2006 report, the company announced that it had grown significantly from

the previous year. In the United States, the multinational firm grew by 4.7% and 4.9%

in Europe. Its largest growth was in the Asian/Pacific region, the Middle East and

Africa with 5.7% (McDonald’s.com, 2006). This growth illustrates McDonald’s

successive strategies of not only adapting to the local environments in which it

operates, but also fulfilling society’s obligations for healthy lifestyle, donating large

funds to various countries and the environment.

2.7 RETAINING LOYAL CUSTOMERS

Experts suggest that if you want loyal customers, then dont stop at customer

satisfaction as it takes much more than simply having a few satisfied customers to

operate a successful business. The McDonald brand has differentiated itself from

competitors not just through customer loyalty, but also through quality, consistency,

and standardization to name but a few variables. Author Todd Beck, his article

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entitled Want loyal customers? Don’t Stop at Satisfaction,1 states that “Basic service

delivery is not enough to differentiate an organization in today’s competitive

marketplace” (Beck, 2005). Beck states that managers need to understand which

service qualities customers‟ value, and then lead employees toward incorporating

these qualities into their daily interactions. The creation of a culture that emphasizes

and delivers these values can propel an organization beyond customer satisfaction to

the type of loyalty that can drive business growth. According to Beck, over the years,

business leaders‟ focus on improving customer service has produced a host of

messages, well-worn phrases or value propositions such as “anything for the

customer” and “the customer is always right.” According to Beck, as customers

become increasingly savvy, products more commoditized and choices more abundant,

companies are finding that simply meeting customer expectations (i.e., creating

customer satisfaction) does not automatically translate into repeat business. Beck

writes that “Indeed, among customers who switch to a competitor, up to eighty

percent report being satisfied before making the move. It is when customers feel loyal

to an organization that they behave in ways that help grow the business.” Companies

that guess at what the customer values often miss. Even those that hire expert

consultants to do much of formal research can find that they missed something major

in their analysis.

Beck states that with all of the “lip service” paid to customer loyalty in today’s

marketplace, one would think that organizations understand the value of a loyal

customer base. Why then do so few provide the kind of customer service that

generates loyalty? “The challenge lies in human nature and in the ability of service

providers to develop the right attitudes and supporting behaviors” (Beck, 2005). In

order to “deliver service performance that inspires customer loyalty, organizations

must first understand what customers really want from a service transaction. Research

has shown that, regardless of industry, product, age, gender or location in the world,

consumers want the following four qualities”

Seamlessness

Service provider must have the ability to manage service factors that are behind the

scenes and invisible to the customer, sparing customers the need to deal with multiple

organizational layers or complicated procedures.

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Trustworthiness

Customers wish to feel they are in capable hands and that commitments will be kept.

They want and expect things to be correct the first time. Should something go amiss,

they expect a quick and thorough recovery.

Attentiveness

“Customers want to be recognized quickly, politely and with respect. Although this

may seem a basic tenet of customer service, attentive service--the quality valued most

highly by some customers--tends to be the point at which many organizations fall

short” (Beck, 2005). We know from experience that if someone tells a story about

being ignored by a representative, listeners often respond with their own “horror

stories,” each worse than the one before.

Resourcefulness

Providers who take a fast, flexible approach to the service interaction appeal to

customers‟ desires for resourceful service. If needed, customers also expect prompt

and creative problem solving in the service recovery.

Once an organization fully understands what customers expect from a service

transaction, then “the next step is to ensure employees both understand and commit to

service improvement goals” (Beck, 2005). Beck agrees to generate employee

acceptance and to ensure that frontline service delivery reflects the qualities

customers value most, organizations should consider the following actions.

Communicate

According to Beck, impart a vision of customer service to your employees that

includes clear and understandable long-term goals. “Once employees know the

direction the organization plans to take, they are more likely to get behind the effort”

Empower

Encourage employees to exercise the flexibility and judgment that customers‟ expect.

Employees need to be able to answer a customer’s questions and to make routine

decisions.

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Guide

The key is to hold supervisors and managers responsible for modeling the skills you

expect to see in frontline service personnel.

Show value

The best result is to make sure that “employees who understand the pay-off are more

likely to support the organization’s service improvement goals.” The most critical

factor is to “Help employees see how creating a positive customer experience benefits

them, their customers and the organization.”

Equip

Provide the resources your staff requires to succeed, including coaching and training.

Evaluate and compensate

Establish specific and objective evaluation factors to both measure and encourage

behaviors that create positive experiences for customers.

Build for the future

Recruit, hire and develop employees whose values and priorities are in harmony with

the organization. Most businesses, and the people who run them, assume they know

what their customers value, when in fact they have never really made finding out a

matter of top priority, this leaves organizations vulnerable. Companies that do not

determine-and then regularly take the blinders off and re-determine- what their

customers‟ value often miss fundamental changes. To determine how customers

experience value requires more than mere objective, quantitative research. It also

requires fresh, unfettered thinking- and listening to maintain loyal customers.

Gathering strategic information on your customer, discovering their unique needs,

creating loyalty and guaranteed service program and looking for patterns among

former customers are all helpful methods of raising customers‟ loyalty rates. And in

the value-added era, when customers are less loyal than ever, retaining customers is

putting money in the bank.

The true customer loyalty approach can be one of the most powerful tools any form of

industry can follow which will help build a lasting customer relationship. According

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to Beck, to foster a loyal customer base, organizational leaders must understand that

simply satisfying customers won't differentiate their company from the rest of the

marketplace. Instead, leaders must commit to delivering the type of customer service

that exceeds expectations and inspires customers to continue doing business with the

organization. The McDonalds Corporation has consistently exceeded the expectations

of their customers by inspiring them to repeatedly count on the quality and taste of

their meals at any McDonald’s round the globe.

2.8 RE-BRANDING: THE MCDONALD’S STRATEGY

Between 1969 and 2005 McDonald’s management strategies were frequently

celebrated on the business pages of The New York Times – a testament no doubt to

the media relations department’s ability to spin the company’s mass-marketing

efficacy into a much repeated American success story in this very important US

newspaper. However, the brand was also often criticized in the news for the labour,

environmental and social externalities of its expanding empire. These critiques

underscored the most voiced concerns and anxieties: namely problems with youth

labour, its encroachment on community values, environmentalism, globalization of

culture, and children’s healthy lifestyles.

Young workforce

With well over one million employees, McDonald’s impact on the workforce has

been significant. By 2000, one out of eight Americans had, at some time in their life,

worked for this company. As labour was one of the largest expenses and most

unpredictable aspects of the McDonald’s system every effort was made to rationalize

the workforce. Apart from implementing technology to replace human labour,

McDonald’s decided to use a youthful Workforce.

Yet youth labour proved a double edge sword. McDonald’s treatment of its young

workers emerged as one of its earliest and most challenging public relations concerns.

Critics argued that youth’s lack of experience and eagerness to please leave them

vulnerable to corporate exploitation.

McDonald’s public relations experts have sought to legitimize its labour practices

with articles about employee incentive programmes. They have also been careful to

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feature happy and helpful servers in their marketing campaigns. The declining teen

population in the 1980s led the company to hire more new immigrant workers,

seniors, and disabled workers, helping to distance the corporation from the

controversy of youth labour.

Community and family values

McDonald’s began its expansion in the late 1960s in medium-sized towns, where its

appeals to cleanliness, value for money, friendly service and family looked in step

with the mainly white middle classes suburban inhabitants. Yet as the chain expanded

into city centres and small towns, it ran up against those for whom McDonald’s

suburban values provoked a negative register. In 1969, when a black community in

Cleveland boycotted McDonald’s restaurants, in protest over the corporation’s denial

of franchise opportunities for black people, McDonald’s value of mass inclusiveness

was challenged.

In 1974, the urban residence of Greenwich Village, New York, loudly protested that a

second McDonald’s chain would threaten local family owned shops, create more

traffic congestion, encourage loitering, and contribute to litter problems. Protesters

from Hell’s Kitchen New York, to Belmont in the Bronx, rallied against the opening

of McDonald’s restaurants. Every location McDonald’s failed to secure was more

than simply a loss of income; it was a blemish on corporate image. Public relations

staff worked tirelessly to turn around community opinion.

Environment issues

During the late 1980s the production of beef to feed the hamburger giant supply chain

lead to the charge that McDonald’s devastates the rainforest. Animal rights activists

were incensed by how McDonald’s promotional weight and availability promoted a

meat-based diet that resulted in the poor treatment and slaughter of masses of animals.

Yet, by and large press coverage reveals that the biggest environmental nightmare for

McDonald’s is its waste and packaging.

For 20 years, McDonald’s collared its burgers in cardboard, wrapped them in paper

and sold them in red cardboard boxes, yet in 1975, the corporation introduced a new

Styrofoam package aptly named the “clamshell”. Apart from being cheap, the

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clamshell kept the burger hot, the tomato and lettuce cold, and did not show grease

stains. Yet, through the 1980s, as landfills dried up and health professionals drew a

link between plastic and a suspected carcinogenic, the clamshell became public

enemy No. 1. In 1987, grass roots organizations launched a Mc Toxics Campaign

encouraging the public to picket, lobby, and boycott McDonald’s to stop their use of

plastic packaging.

In 1989, McDonald’s agreed to set up a $16 million national recycling programme for

its packaging and become a major purchaser of recycled materials. In a bid for

legitimacy, McDonald’s joined with three members of the Environmental Defense

Fund to research and draft recommendations for changing McDonald’s packaging and

waste. A year later McDonald’s outlined a 40-point plan to reduce its waste stream by

80 per cent, by measures such as trimming the size of its napkins and introducing

refillable coffee mugs. The most important point in the plan was the agreement to

eliminate foam packaging from its 8,500 US outlets and return to paper wrappings.

Fat kids and burger panic

In 1985, when the typical American’s diet reached 43 per cent fat, the National

Institutes of Health (NIH) announced that daily fat intake be reduced to 30 per cent to

avoid health complications. The NIH singled out the fast food industry as a major

contributor of fattening foods and asked them to market leaner meats and other foods.

By 1986, the American Medical Association had condemned the hamburger as the

leading source of saturated fat in the American diet. As of July 1990 fries and hash

browns were fired in 100 per cent vegetable oil instead of the beef tallow mixture of

much criticism by food campaigners. Low fat milk, new salads, and more fiber rich

breakfast options were added to the menu.

However, McDonald’s was also vulnerable to the charge that it did not warn

consumers of the dangers to their health that emerged from a burger rich diet.

Following the Center for Science’s 1980s request that fast food restaurants supply

ingredient information, in 1986 US Senator Chafee from Rhode Island proposed

legislation to require ingredient labelling on packaged fast food as a point of law.

McDonald’s countered that the law would increase costs and defeat the purpose,

given consumers received the information after the purchase. Fearing state regulation,

McDonald’s issued a pamphlet to educate individuals about their products, which

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include calories, protein, carbohydrate, fat, cholesterol, sodium, vitamins and

minerals.

In the summer of 1990, McDonald’s agreed to post charts outlining the nutritional

content of the food in its 8,000+ restaurants. In 1993 to improve the legitimacy of its

food information, McDonald’s enlisted the support of the American Dietetic

Association in its efforts to target food information to children. Special pamphlets

were distributed to children in Happy Meals, with accompanying toy food characters

and television commercials. However, McDonald’s also made claims, such as meat

“can make it easier to do things like climb higher and ride your bike farther”.

McLibel

Nowhere were the converging discontents which surrounded McDonaldization more

clearly revealed than in the 1989 McLibel court case. Against the back drop of

aggressive McDonald’s expansion in Britain, a group of British Greenpeace activists

decided to bring the “irrationalities of McDonaldization” to public attention

distributing a leaflet entitled “What’s wrong with McDonald’s?” that argued

McDonald’s quest for profit had extended American imperialism into the third world,

encouraging labour exploitation and antiunionism, devastated the environment and

gulled children into unhealthy diets.

The authors pointed to medical evidence that linked: “a diet high in fat, sugar, animal

products and salt, and low in fibre, vitamins and minerals – which describes an

average McDonald’s meal” to fatal illnesses such as cancer and heart disease. The

leaflet encouraged consumers to boycott McDonald’s, enjoy vegetarian diets utilizing

home-grown vegetables and eat wholesome slow food together.

Fiercely protective of its corporate image, McDonald’s lawyers served writs on the

five campaigners claiming libel. The McLibel case became the longest trial in British

history, lingering in the courts for ten years as £10 million of McDonald’s legal might

battled two environmental advocates who defended themselves (with the help of a

vast number of witness supporters) over their rights to publish criticism of the

corporation. In 1997, the judge ruled in McDonald’s favour on several counts and

fined the plaintiffs £96,000. However, the judge also ruled that it was not libelous to

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claim that McDonald’s suppressed labour markets, made deceptive claims about its

food, posed a health threat to its long-term customers and exploited children's

credulity with its promotions. If anything, the court case only served to illustrate the

activists’ claims that this corporation used its position of global wealth and power to

pummel those who would challenge its public image.

The end of an empire

The cumulative weight of negative publicity, coupled with burger fatigue, and stiff

competition from Subway and Starbucks (both of which offered healthy sandwich

options) was showing up on the bottom line of the McDonald’s Corporation as

globalization, competition from other restaurants, and changing tastes and lifestyles

began impacting the fast food restaurant market. Between 1998 and 2002,

McDonald’s experienced declining rates of growth and its actual share of the fast-

food market fell more than three per cent. Sales were stagnant since 2000 and

plummeted 2.8 per cent in 2002, representing the first ever decline in the

corporation’s history. In Europe too, stiff competition from other fast food chains and

anti McDonald’s sentiments began to affect the bottom line. After 30 years of

phenomenal growth in Britain, McDonald’s, who directly controls two thirds of the

1,235 UK restaurants, reported a £61 million decline in their profits from the previous

year. But most tellingly McDonald’s stock lost about 70 per cent of its value.

Moreover, it was now paying the price for its litigious folly. Way back in 1990,

McDonald’s had announced that it would replace the beef tallow with pure vegetable

oil. But a decade later activists found that because the oil change proved costly and

altered the flavour of the fries, McDonald’s had not followed through on this

commitment.

In 2000, John F. Banzhaf III, a law professor at George Washington University

encouraged his students to work with him to launch court cases on behalf of

vegetarians and religious non meat eaters who claimed they had been falsely mislead

by the company. In 2002 the judge ruled in favour of vegetarian and religious groups

and McDonald’s was fined $10 million in a master settlement agreement that

controlled the terms of pending cases.

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The turn of the millennia brought the World Health Organization’s (WHO) public

declarations of a globesity crisis which fuelled criticism of fast food culture. Given its

market leader status and super-sized marketing budgets, parenting advocates around

the world condemned McDonald’s for its excessive marketing to children.

McDonald’s not only found itself having to defend its right to advertise to children in

the UK, but in the USA, crusading lawyer Hirsh brought forward a law suit on behalf

of the parents of two overweight teenagers who claimed their children were not aware

that McDonald’s food was fattening. In this instance, the Judge dismissed the case.

Hirsh then filed a revised complaint accusing the fast food giant of making misleading

nutritional claims. The complaint not-only included the two original girls, but was

filed on behalf of “hundreds of thousands of New York state residents under the age

of 18” who suffer health problems as a result of eating McDonald’s food.

McDonald’s lawyers contended that it would be impossible to establish whether

eating at McDonald’s was a major cause of these children’s ailments because

genetics, medical conditions and sedentary lifestyles could also be factors. So it is the

parents, not the fast food industry’s fault if kids are eating improperly and are not

active enough. The court agreed with McDonald’s noting that it was reasonable to

assume that most people were aware that McDonald’s food was fattening. However, it

was the release of a documentary, which shows filmmaker Morgan Spurlock

damaging his health by eating nothing but McDonald’s food for a month that became

the straw that broke the camel’s back. Faced with shareholder dismay at its declining

profitability, McDonald’s once again opted for a public relations turn around.

Re-branding

The head office decided it was time to stop the decline in global profits and the

bleeding of customers to healthier options, and charged its communications specialists

to respond to the changing climate of opinion. This McDonald’s did with great fanfare

devoting billions of dollars in a global corporate re-branding intended to blunt

McDonald’s association with unhealthy kids.

Charlie Bell, the CEO of McDonald’s whose “plan to win” approach was a revival of

the five P’s of marketing price, people, product, place and promotion. At an

operational level, McDonald’s stores were to be given new interiors, revamped staff

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uniforms and packaging, and new menu items. In their UK print and outdoor

campaigns, a golden question mark now replaced the Golden Arches explained by the

tagline “McDonald’s. But not as you know it”.

Menu changes alone could not achieve the turn around, however, so McDonald’s also

developed a two-pronged global marketing strategy. They decided to sidestep the

child market by targeting teens rather than children, ironically returning to the burgers

original fans. Their first ad in the global youth campaign featured, global pop star

Justin Timberlake singing its new “I’m Lovin’ it” strapline. This youth campaign

focus unfolded with growing sponsorship of MTV show Advance Warning followed

by ads employing hip yet dynamic teen icons like skater legend Tony Hawks to speak

to its new youthful targets based around four core areas: music, sport, fashion and

entertainment.

Future struggles

The David and Goliath struggles between the public and corporations are likely to

remain endemic to the future politics of the global marketplace. Clearly the defence

and maintenance of a corporate legitimacy must now go well beyond spinning

positive media stories and promoting happy lifestyles: brand mythmaking today is a

multiplex and volatile affair which includes brand advertising, community relations,

social marketing, government lobbying, and even litigation as key elements of

corporate survival.

However, unlike the issues raised by student and environmental advocates, the

lifestyle anxieties encountered in the globesity debates arise from the middle class

worries of stressed out parents who have trouble childrearing. These are not likely to

dissolve in a flurry of lifestyle advertising. So perhaps there remains an accumulated

cost of public trust emerging from a deepening parental scepticism towards the

corporate ethos of McDonald’s.

CHAPTER -3

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FRANCHISING STRATEGIES AND SUCCESS

3.1 THE MCDONALD’S FRANCHISING MODEL

When analyzing a McDonald’s franchise there are a variety of terms and conditions

that come into play with regard to individual store franchise fees. For each

McDonald’s restaurant, there is an operator’s lease with an assortment of fees and

conditions appropriate to that specific restaurant. A portion of the table of contents

from an Operator’s Lease with various articles is shown as. The Operators Lease is a

legal document signed by the franchisee that specifically states the rents and fees for

that specific McDonald’s restaurant. Each individual store will have a separate and

specific operator’s lease. In order to understand the full magnitude of this lease and its

fees, three basic agreements that can originate in the Operator’s Lease become

important and need to be further analyzed and discussed. These three agreements are

the Conventional Franchise, the Business Facilities Lease and the Joint Venture.

Conventional Franchise

The majority of McDonald’s franchises are termed “Conventional Franchises.” This

agreement is based on a 20 year agreement between the franchisee and McDonald’s

Corporation. The Operator’s lease for a Conventional Franchise usually includes an

ongoing service fee of approximately 4 % of the monthly sales/revenues of that

particular store. This 4% is used for advertising and marketing. This may also be

referred to as the advertising fee. This money is used for TV, radio, internet

advertising/promotions, as well as other marketing choices. In addition to this 4%,

there is an ongoing “monthly fee” (percent rent) of 8.5% to 13% of monthly revenues

due to McDonald’s Corporation for use of the building which is owned by

McDonald‘s. This percent rent is also based on McDonald’s Corporation owning the

land and building for that particular restaurant. This rent percent can be reduced in

rare cases where the franchisee owns the building. There may be a few cases where

the franchisee owns both the building and the land, but it appears McDonald’s

Corporation usually owns the land and the majority of buildings where McDonald’s

restaurants are located. Hence, McDonald’s has become one of this country’s largest

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real estate holding companies; owning thousands of prime commercial locations

throughout the United States. An example of estimated monthly fees is found.

There are some initial costs, in addition to the “service fee” and “percent rent fee,”

that are also required to be paid for a conventional McDonald’s franchise. These costs

include a security deposit (one-time payment of $15,000) and the initial franchise fee

of $45,000. These costs are tied to the Operator’s Lease Agreement for each

individual store. These monthly fees and deposits are in addition to the purchase price

of the actual restaurant. The purchase price reflects the fair market value paid for an

existing restaurant. Although there is no set purchase price, a broad rule of thumb

usually sets the purchase price between 50% - 75% of the store’s past annual sales for

an existing and established store. McDonald’s usually requires the franchisee to invest

25% of the negotiated purchase price of a restaurant from personal funds. The

Conventional Franchise is further defined in Table III for purchase of a new restaurant

and for the purchase of an existing restaurant.

Business Facilities Lease (BFL)

A second agreement for purchasing a McDonald’s restaurant is known as the Business

Franchise Lease (BFL). The BFL is a program to help outstanding individuals become

franchisees who may lack the funds to qualify under the Conventional Franchise

Agreement. The BFL is a program for franchisees lacking the $45,000 for the

franchise fee and/or the 25% down of the purchase price of a restaurant. The

individual who is selected by McDonald’s for the BFL will usually pay a higher base

rent rate of 13% or more for 2 - 3 years until the franchisee is able to save-up the

required 25% down of the purchase price of the restaurant. Since the BFL is usually

purchasing a restaurant owned by McDonald’s Corporation, the final sale price will

again be determined by the sales volume of the restaurant. The sales price is usually

between 42% - 52% of the past year’s annual sales. The BFL is a popular agreement

used for existing outstanding McDonald’s employees who wish to become

franchisees. The BFL is further defined in.

Joint venture

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In the late 1990’s, another program was started by McDonald’s to enable franchisees

to purchase a McDonald’s known as the Joint Venture. This program was offered to

existing franchisees as a way to rapidly expand with less up front capital expense.

Joint Venture franchisees are essentially partners with McDonald’s Corporation. For

example, if McDonald’s had corporate stores that they wished to sell, they may offer

them to an existing franchisee as a joint venture. The agreement establishes the

payment of a management fee to the franchisee from McDonald’s of approximately

$5,000 per month for each store involved in the joint venture agreement (as many as

10 locations could be involved). In addition, the franchisee may get a percent of the

bottom line of each store (40% - 60% - depending on the agreement in place with

each joint venture franchisee). Today there is evidence that McDonald’s is mainly

using the joint venture agreement with franchisees in countries outside the U.S.

Additional McDonald’s options

McDonald’s has also located restaurants in various retail stores within the past 10 to

15 years. Locations like Wal-Marts, airports, hospitals and universities that house a

McDonald’s restaurant are usually called satellite locations, and usually are awarded

to existing McDonald’s franchisees in the vicinity of the satellite location. The fees

and expenses for satellite locations differ from the conventional McDonald’s stand-

alone store locations and could serve as the basis for an entirely separate study of this

type of franchising fee structure.

Conclusion

Base rents, percent rents, security fees, service fees, franchise fees and royalty fees

are all terms used to discuss franchising costs. When looking at the fees and expenses

associated with any company’s franchise, a good place to begin an analysis is with a

comparison to McDonald’s Corporation. In this paper we have laid out the 3 basic

agreements McDonald’s Corporation uses when franchising: the Conventional

Franchise, the Business Facilities Lease (BFL) and the Joint Venture with all like

associated fees. These three agreements serve as an excellent cornerstone for

analyzing all companies that offer franchising opportunities. Herein, the authors have

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attempted to elucidate and explain the various terms associated with the numerous

fees.

One must also recognize McDonald’s, as with most franchises, makes money from

the monthly expenses (percent rent) to the franchisee based on the restaurant’s “total

revenues” (and not just profits). Each individual McDonald’s franchise is carefully

researched prior to completion. McDonald’s corporation attempts to reduce its

corporate risk exposure as much as possible. If the franchise holder is successful,

McDonald’s corporation is successful. This concept appears to work very well for

McDonald’s and equally well for the motivated franchisee. Franchising is not for the

“weak-of-heart” or for someone looking for an easy way to become a small business

owner.

In addition to the financial requirements that one must consider when analyzing

various franchise opportunities, there are numerous other basic requirements

McDonald’s mandates of anyone attempting to become a franchisee of McDonalds’s.

These McDonald’s corporate requirements include such restrictions as not allowing

partners (operationally or financially) when purchasing a franchise. There are also

extensive training programs that franchisees must complete in order to become a

McDonald’s franchisee. This training can take up to two years with no compensation

to the trainee franchisee. A more complete analysis of the many and varied

requirements of the McDonald’s franchise model definitely should be pursued as an

avenue for future research.

3.2 REQUIREMENTS TO OPEN A MCDONALD'S

McDonald's has more than 2,400 owner/operators in the United States, and selling

franchises is an important part of McDonald's business strategy. The company is very

selective in granting franchises, and prospective franchisees need to demonstrate a

solid commitment to McDonald's, as well as possess substantial business or restaurant

experience and sufficient liquid assets. Only about 1 percent of applicants are

accepted as McDonald's franchisees.

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Personal Qualifications

McDonald's has minimum personal requirements that must be met by all potential

franchisees. These include business experience at the managerial level and a

demonstrated ability to develop and carry out a business plan. A commitment to

franchising, an understanding of business finance and a willingness to work on site in

the restaurant are also important. Potential restaurant owners must also be willing to

train with McDonald's for up to nine months before opening their restaurant, and must

demonstrate the ability to manage and motivate employees.

Financing

Franchisees must make a down payment when buying a McDonald's restaurant. This

is equal to 40 percent of the total cost of a new restaurant, or 25 percent of the total

cost of an existing restaurant. This money must be paid using non-borrowed liquid

assets, such as cash, securities, bonds or business or real estate equity other than your

own home. Before you can be considered by McDonald's, you will need to

demonstrate that you have at least $500,000 in non-borrowed liquid assets.

McDonald's does not provide financing for its franchisees, so you will also need to

arrange additional financing.

Application

The process for opening a McDonald's begins with your application to McDonald's

Corporation. If you meet the company's initial personal and financial qualifications,

you will be asked to spend three days in a McDonald's restaurant, working and

learning about the business. If the company is satisfied with your performance during

this time, you will be invited to a further interview to discuss training and finance.

Training

Before you can open a McDonald's franchise, you must complete a training course

run by McDonald's Hamburger University. The training program is conducted in part

at the Hamburger University campus in Oak Brook, Illinois, in part online and in part

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in individual McDonald's restaurants. Trainees must complete a range of learning

objectives before they can qualify to own a franchise. Depending on previous

experience, the complete training program can take between nine and 24 months.

Training may be taken on a full-time or part-time basis.

3.3 MCDONALD'S FRANCHISE LOCATION REQUIREMENTS

With more than 33,000 locations across the world, McDonald's golden arches are

among the most recognizable corporate logos in the world. Millions of people visit the

fast food restaurant every day, attracted by convenience, product familiarity,

competitive prices and the relative ease of finding a McDonald's location almost

anywhere you find yourself. McDonald's began its franchise operations in 1955. For

franchise owners, the company has very specific requirements for where a restaurant

can be located.

McDonald's Franchises

McDonald's is known around the world for its burgers, fries and shakes. Its huge

worldwide success and recognition ensure a McDonald's franchise is a strong

candidate to make money. Most franchisees buy existing restaurants from the

corporation or from other McDonald's owner/operators. Only a few purchase and

build on a new site. As of 2011, 87 percent of McDonald's franchisees own more than

one restaurant. All current franchisees are owner/operators; the company does not

permit absentee ownership of its franchises. When considering a site, be aware that

McDonald's usually will give preference to a proven franchisee over a new one when

awarding select, demonstrably successful sites.

Location Requirements

The location of each unit is a major element of its potential success. For that reason,

the company keeps a close watch on where its stores can be located. The ideal site for

a stand-alone restaurant will be 50,000 square feet, although units have been

developed on both smaller and larger sites. A corner location with the option to put up

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signs visible from two major streets is considered optimal, as is a site near a major

intersection with traffic signals. Ample parking space is required and must meet all

applicable local parking codes. Size and space requirements are adapted for mall,

airport and some downtown locations.

Facility Considerations

Your McDonald's location will have to meet stringent inspections to ensure its food

preparation, storage and counter areas are safe, clean and sufficiently large to meet

client demand. The seating area is subject to safety and health inspections, and will be

reviewed in terms of traffic flow and maximum capacity. Each location is required to

have restroom facilities for males and females. Drive-through locations must meet

local traffic and safety requirements, including clear markings for drive-through lanes

and vehicle size restrictions. Additional space is required for restaurants at which the

franchisee wants to have a McDonald's Play Place. Space requirements vary

depending on whether the play area is inside or outdoors.

Financial Requirements

Because of its international name recognition and record of success, purchasing a

McDonald's franchise requires a major financial commitment. The franchise fee alone

is $45,000, with the total investment required ranging between $1 million and $2

million, according to Entrepreneur Magazine. The term of the franchise agreement is

typically 20 years, at which time it can be renewed. McDonald's requires potential

investors to demonstrate a minimum of $500,000 in non-borrowed liquid assets to

even be considered for a franchise. The down payment is typically 25 percent of the

total cost to purchase an existing restaurant and 40 percent for a new restaurant. Other

fees include annual service fees and rental costs.

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3.4 THE INITIAL MCDONALD'S FRANCHISE FEE COVER

The Secret Recipe

Not only does your initial franchise fee buy you access to all of McDonald's recipes,

but it gives you access to the company's successful business plan. Think of your

franchise fee as insurance. Instead of worrying about how much garlic to use, you can

relax knowing that your burgers will be exactly what your customers are looking for.

In addition, McDonald's corporate takes the guesswork out of your location, your

decor and image and your procedures. Instead of paying a team of consultants to help

you plan and design a start-up, your franchise fee pays for a package with proven

results.

Marketing: Opening with Instant Name Recognition

If you were to open a restaurant on your own, without the support of a franchise, more

than half of your initial battle would be reaching customers and creating a name for

yourself. Your burgers might be a thousand times better than those served by

McDonald's, but if no one tastes them you cannot make a profit. Your initial franchise

fee helps you circumvent that challenge by including your restaurant in a chain with

the advantage of instant name recognition. It gives you a legal right to use the

McDonald's logo and branding materials and the benefits of years of successful

advertising that guarantees customers will recognize your business as they drive past.

Consistency: Meeting Customer Expectations Every Time

A McDonald's franchise offers its owner more security than many other new business

ventures because of its long-standing successful track record and the company's

scrupulously strict standards. Customers know that if they drive through a

McDonald's while on vacation across the country, they will receive an identical

burger to the one they would have been served in their local restaurant. This kind of

consistency requires substantial corporate supervision, which is paid for by your

franchise fees and dues. A substantial portion the training provided to franchise

owners is devoted to the recipes and standard business practices that ensure high

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levels of consistency across the chain. Franchise fees pay for the team of people that

not only support and train new owners but also supervise their efforts.

Training: Ensuring Your Ability to Successfully Meet McDonald's

Standards

A study reported in Small Business Trends found that a significant portion of small

businesses fail because their owners lack the experience and knowledge to create

something that can compete with existing businesses. McDonald's enhances the

competitiveness of its franchisees by providing extensive training. Each potential

franchise owner attends an intensive nine-month training program, the cost of which

is partially offset by your initial franchise fee. None of your living or travel expenses

come out of your fees, but some of the actual costs of training do. Your fees also pay

for ongoing corporate support.

3.5 CONDITIONS UNDER WHICH A MCDONALD'S FRANCHISE AGREEMENT CAN BE TERMINATED

"Entrepreneur" magazine rated McDonald's as the third-best franchise to launch, but it

can be expensive, costing as much as $1.9 million in 2011. With 12,465 United States

franchises, and more than 30,000 restaurants worldwide, McDonald's is one of the

most well-known brands in the world. Managing a franchise for the company that

brought the world golden arches, Happy Meals and hamburgers is a significant

undertaking. However, under certain conditions, a McDonald's franchise agreement

can be terminated by the company.

History

Ray Kroc is often credited with founding McDonald's, however his idea was hatched

from the work of two brothers in California, Dick and Mac McDonald, who owned a

popular hamburger stand in California. Convinced that the brothers' business idea

could be expanded and applied elsewhere, Kroc persuaded them to go into business

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with him. The first McDonald's restaurant opened in 1955 and the first franchise was

sold that year.

Franchise Agreement

Most McDonald's restaurants are owned by independent operators who enter into a

franchise agreement with the company. Franchisees must have a business background

and the capital required to open a restaurant. "Entrepreneur" listed McDonald's

restaurant startup costs from $1,068,850 to $1,892,400. Franchise agreements are for

20 years and include a number of standards and legal requirements that franchisees

must follow, including adhering to menu items, employee training, and the use of

company products, such as soft goods. McDonald's has terminated franchise

agreements for a variety of infractions.

Mc Victim's Rights

In 1972, Joan and Fred Fiore opened their first McDonald's restaurant in Long Island

City, N.Y. Eventually, the Fiores had five restaurants in that area. In a letter to the

Federal Trade Commission, Joan Fiore outlined how McDonald's began a defranchise

process that commenced just before the couple's 20-year franchise agreement was to

end. The Fiores claimed that McDonald's devalued one of their restaurants because no

double-drive through was present, costing the couple $75,000 and forcing them to sell

off all five restaurants. Effectively, the franchise agreement was terminated because

the Fiores did not make mandated improvements to one or more stores.

Financial Difficulties

In 1993, a pair of Mississippi McDonald's restaurants were relinquished by its owners

with one restaurant returned to McDonald's and the other restaurant surrendered to the

Internal Revenue Service to cover unpaid taxes. In a 1995 suit, McDonald

Corporation v. Watson, the hamburger chain alleged that the two defendants had

difficulty managing their restaurants and "were unable to honor their financial

obligations to McDonald's in a timely fashion." McDonald's cited several material

breeches to the McDonald's agreement that took place with subsequent notice served

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by the company to the franchisees of its intent to terminate the franchise agreement.

McDonald's sued for damages as well as for "trademark infringement, rents, service

fees, repair costs, and attorneys' fees."

State Regulations

A McDonald's franchise may be affected by where it is located, as some states

regulate the sales of such franchises. The Federal Trade Commission outlines the

steps that must be taken before a franchise can be sold. In some states, disclosure and

registration also is required, with state officials reviewing such transactions before

they can be approved. State intervention can make it more difficult to establish a new

franchise, but it could also protect the franchisee who might be pressured to giving up

his restaurant.

3.6 ADVANTAGES AND DISADVANTAGES OF A MCDONALD'S

FRANCHISE

McDonald's has been a leader in the fast-food market for decades, boasting one of the

U.S.’s most memorable brands, products and mascots. Owning a McDonald's

franchise can be safer than lesser-known franchises, since the McDonald's name and

operational model comes packaged with its own legion of loyal customers and

industry-best practices for restaurant success.

Significance

Owning a franchise is a dream come true for many entrepreneurs. A franchise store

such as McDonald's can help business owners to achieve financial independence by

getting on board with an international powerhouse that can almost guarantee a certain

degree of success.

History

The McDonald's brand began in 1940 when two entrepreneurs in San Bernardino,

California, open the doors of “McDonald's Bar-B-Que.” In 1948, the pair eliminated

the barbeque options, slimming the menu down to focus on hamburgers, soft drinks

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and potato chips. Over time, McDonald's has grown to be one the world's largest

corporations, with outlets in at least 119 countries.

Benefits

Franchise organizations eliminate a great deal of the risk that most small business

owners face, since franchises come with financing options, building and training

assistance, marketing assistance and detailed methodologies that have been proven

successful on the front line for years. Franchisees are required to meet stringent up-

front requirements for capital contributions and management experience, improving

the chances of success even further.

Warning

A wide range of business types operate under the franchising model. Fast-food

franchises, in particular, may not always be the best choice for a franchise agreement.

Fast-food companies such as McDonald's have been targeted in a battle against what

has been termed the obesity epidemic, casting McDonald's outlets -- along with their

owners -- in a highly negative light in the media and their communities. McDonald's

and its peers respond to this negativity by attempting to add healthy options to their

menu, but the stigma is likely to linger.

Process

The process of opening a McDonald's franchise can be challenging, but McDonald's

will assign you a franchise representative who will walk you through the process step

by step. Begin the franchising process by reviewing the information on their website

under “Franchising” at AboutMcDonalds.com and setting up an appointment with a

representative. The representative will walk you through the process of making sure

you meet all of the requirements, selecting a site, building or purchasing a store,

setting up your store and hiring your first employees, as well as helping you to obtain

any necessary licenses and permits for your state and community.

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3.7 MCDONALDS FRANCHISE IN INDIA REDESIGNS AND REPRICES TO WOO MORE CUSTOMERS.

Stung by a consumption slowdown and cut-throat competition from other quick-

service chains, Big Mac is trying hard to give customers more reasons to come to its

stores. So its latest India menu now comprises a differential pricing strategy and better

in-store experience.

While Vikram Bakshi’s Connaught Plaza Restaurants, which has a joint venture with

McDonald’s and has rights for the north and east, cut prices by 6-15 per cent from

August 1 to boost sales, Hardcastle Restaurants, a development licensee of

McDonald’s which runs West and South India operations, has refrained from doing so.

“When customers are feeling the pressure of inflation from all sides, we thought it is a

good time to rationalise prices,” says Bakshi. He claims the chain has seen 10 per cent

increase in sales, though it has taken a hit of 40 basis points in its margins after it cut

prices. “We think 10 per cent growth is far superior than a 40 basis points hit on

margins.”

Bakshi may have a point as early this year, Pizza Hut, run by Yum Restaurants India,

launched the ‘Rs 29 pizza’ and KFC added two snacker burger and new beverage

Krushers Frappe to its Streetwise Menu which starts at just Rs 25.

But Hardcastle’s Amit Jatia has a different take. “We do not need to reduce prices as

we are seeing a strong comparable sales growth in our stores in the south and west.

We believe consistency in offering ‘everyday low value’ has paid off for us,” says.

Doesn’t such differential pricing create confusion in the minds of consumers? Jatia

does not think so. “Anyway, different states have different taxes which make prices

different. The consumers’ perception of value is also different,” he adds.

Even retail consultants such as Devangshu Dutta, chief executive, Third Eyesight, see

logic in the move. “Firstly, in India, McDonald’s has two JVs with separate P&Ls –

so the opinions of the partners in their respective regions would have more weight

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than a simple franchisee’s would. Secondly, local relevance of product mix and

pricing is a key driver of success in all retail products.”

Besides pricing, McDonald’s is also experimenting with different formats to woo

customers. While Jatia’s Hardcastle is looking at bigger restaurants of 4,000 sq ft ,

Bakshi recently launched smaller-sized ‘remote kiosks’ which are within three to four

kms of a “mother store” and located at metro stations, hypermarkets and high streets.

While Hardcastle has around 35 kiosks and 26 drive thru’s, it plans to have 25-30

kiosks and a similar number of drive thru’s in the next two-three years. It plans to

open 35 to 40 restaurants this year.

McDonald’s is also opening new stores and revamping the existing ones under new

designs to make them more appealing. So you have cushioned bar stools, plush LED

lights and POS/EDC terminals from the earlier stainless steel furniture and dim

yellow lightings. “We have learnt that design has to keep up with consumer

demands,” says Jatia.

Being modern and contemporary also led McDonald’s to increasingly accept credit

cards at almost all its new outlets.

Experts, however, say the improvement of McDonald’s stores should have happened

much earlier. QSRs, which focus on coffee, have overtaken McDonald’s. There is no

doubt that McDonald’s needs to look contemporary, soft and modern with cutting

edge,” says Harish Bijoor CEO of Harish Bijoor Consults Inc.

Even for Shripad Nadkarni, founder director, MarketGate Consulting, a brand

consulting firm, McDonald’s stores had begun to look “dull” for some time now.

“One of McDonald’s’ biggest successes is understanding the Indian palate. They draw

on ‘glocal’ products which have been a huge success for them. However, where

McDonald’s was lacking was in-store experience. Their stores needed improvement.

It now seems the in-store experience is moving along the consumer preferences,” says

Nadkarni.

When compared to its peers like Subway and KFC, McDonald’s also has to keep its

target audience in mind while planning the in-store experience. “Subway caters to an

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adult audience, KFC looks to focus mostly on non-vegetarians while McDonald’s is

about family and kids. Subway’s appeal is more towards a mature consumer segment

while McDonald’s is more about family time,” says Nadkarni. Needless to say,

McDonald’s’ new stores offer ample space for kids’ play area, thereby tapping its

consumers’ family time.

The chain will first renovate those that are more than 10 years old. For the rest, it will

adopt a ‘mini-market’ approach. “If we have five stores in the same area, then we’ll

partially renovate all of them so that some consistency is managed in the design,”

Bakshi says.

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3.8 THE SUCCESS OF THE MCDONALD'S FRANCHISE

The success of McDonald's is the business equivalent of the American Dream. While

McDonald's was not the first franchise business, it has possibly become the premier

example of the business model. With roots that trace back to a single drive-in started

by a pair of brothers, Dick and Mac McDonald, in Southern California, McDonald's

has grown to a network of well over 30,000 locations in more than 100 countries.

So how did the chain grow from a single restaurant into the expansive corporation it is

today? It's not a question that can be answered concisely because McDonald's is first-

class in every segment of its operation. With that in mind, this article focuses upon

three of the characteristics which stand out when speaking about the success of

McDonald's: consistency, innovation and resiliency.

Consistency

It doesn't matter if you're visiting a McDonald's in California or Connecticut, America

or Australia – you're going to have a similar experience wherever you are. This

highlights Ray Kroc's vision for McDonald's from the beginning. Kroc was a

salesman from Illinois who ventured to San Bernardino, California in 1954 when he

noticed a larger than normal order for the milkshake multi-mixers he was selling came

in.

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When he arrived in Southern California, he was intrigued with what he witnessed – a

restaurant that was efficiently serving a large number of customers who seemed

pleased with the food they were receiving. Sensing a business opportunity, he made a

proposal to the McDonald brothers to begin franchising their restaurant concept,

which the brothers eventually accepted. Kroc opened his first McDonald's in 1955 in

Des Plaines, Illinois.

“Quality, Service, Cleanliness and Value” was Kroc's motto. His belief in this motto

was so strong he went on to found a training school, Hamburger University, in 1961

whose curriculum is based upon the four concepts, as well as lessons he had learned

from his initial years in operating the franchise. Consistency, of course, is the

lynchpin of any franchise system and Hamburger University has systematically taught

future franchisees how to run a McDonald's restaurant the way Ray Kroc

envisioned.1 Customers know what to expect and can take comfort in that knowledge

when making a decision on where to eat. These efforts towards process repetition and

efficiency not only set the basis for McDonald's success from the standpoint of

customers' expectations, but also help McDonald's stay on top in a culture where

producing at a quick pace is commonly expected.

Innovation

At first, the characteristics of consistency and innovation seem to contradict one

another. But in fact, they work together to allow for McDonald's continued growth.

Staying consistent on the core components of your business doesn't mean the products

you sell, or even the way you deliver them, have to stay the same. It's a delicate

balance. However, if you take the necessary steps, and put the work in ahead of time,

you can tweak your product without causing disruptions, and potentially better serve

your customers. Innovation stemming from responsiveness to customers and

franchisees has played a big role in McDonald's fending off stagnation over the years.

For example, in 1975 a group of potential McDonald's customers had a problem: at

that time, soldiers in a certain locale weren't permitted to get out of their cars while

wearing their fatigues. After learning of this problem, McDonald's came up with a

solution: add a drive-thru. The first McDonald's drive-thru was located near military

base Fort Huachuca in Sierra Vista, Arizona to serve the soldiers with additional

drive-thru locations in Georgia and Oklahoma City soon following.

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In addition, McDonald's product offerings have evolved over the years alongside the

tastes of their customers thanks in part to some observant and innovative franchisees.

A few examples of products that were introduced after being developed by

McDonald's franchisees or owner/operators are:

Filet-O-Fish

Big Mac

Hot Apple Pie

Egg McMuffin

McFlurry

These menu innovations (along with items developed in their test kitchen) have

allowed for McDonald's to hold product offerings for all meal times, and the snack

periods that fall in between, allowing for greater profitability. But McDonald's takes

great care not to effect the consumer experience when a new item is introduced. As

McDonald's CEO James Skinner said in a 2010 interview with CNBC, “[McDonald's

doesn't] put something on the menu until it can be produced at the speed of

McDonald's.”

Resiliency

Though the trajectory for McDonald's has been primarily upward throughout its

existence, the company has had to weather several challenges and controversies. For

decades, McDonald's has had many lawsuits directed at them for various issues, and

has been the subject of a large amount of negative press. What does McDonald's do

combat this negativity? It appears part of their strategy entails acknowledging the

concern, and then dedicating resources in-house to staying on top of the issue as the

following examples illustrate.

Many of the challenges McDonald's has faced over the years are related to health

concerns, particularly related to children. In response to these concerns, McDonald's

formed the Global Advisory Council (GAC) in 2004. The GAC is an international

team of independent experts assembled by McDonald's to provide us with

professional guidance in the areas of nutrition and children's well-being.4 Several

additions to their menu items have come in answer to critics' and consumers' desire

for healthier choices.

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Some examples of these choices include an increased variety of salads, fruit and

maple oatmeal, and the option of being able to order a Happy Meal with apple dippers

and apple juice or 1% low-fat milk as the drink. In addition, McDonald's was one of

the first fast food restaurants to provide nutrition facts on their packaging, beginning

in 2006.

When it comes to sustainable environmental practices, activists have been raising

concerns over McDonald's policies for decades. In the mid-1980s, McDonald's began

facing one of its staunchest challengers in the activist group London Greenpeace (not

affiliated with the international Greenpeace organization). In a leaflet entitled “What's

Wrong with McDonald's?” the group alleged that the food that McDonald's served

was bad for people's health and that actions used to produce their food products and

packaging contributes to the destruction of rainforests, among other things.5 In

response, McDonald's formally established a Global Environmental Commitment in

1990 that outlines the steps they have taken to reduce solid waste, conserve and

protect natural resources, along with encouraging others to be accountable for their

actions.6 One of results of this commitment is that currently 82% of McDonald's

consumer packaging is made from renewable materials.7 But, McDonald's did take a

big PR hit through the actions of members of the London Greenpeace group that is

well documented by the “Mc Libel” case and subsequent accounts of the litigation.

In spite of these and additional controversies, McDonald's ranked in the top 10

overall, and number one in food services, in CNNMoney.com's survey of the World's

Most Admired Companies for 2011.8 How can McDonald's turn these tribulations into

bumps in the road instead of them have a devastating impact on business? Part of the

reason McDonald's can be resilient when they are challenged is an established rapport

within the community. When controversies arise, having goodwill with consumers

can help any company weather the storm. Ways McDonald's cultivates goodwill with

consumers include their involvement in youth sports programs and charity programs

such as Ronald McDonald House charities.

Very few companies will ever come near the magnitude of operation McDonald's has

achieved. However, the lessons the corporation showcases are on display to be

learned by entrepreneurs striving to make their company the best it can be.

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The success of McDonald's can be attributed to many more factors that have been

discussed in this article, but these are three which have contributed heavily to it. Here

are some takeaways from the discussed factors that can be applied to virtually all

businesses:

Developing strong, efficient processes and procedures and remaining consistent on

them allow for businesses to develop consumer confidence in the brand.

Having the foundation of consistent processes allow businesses the flexibility to

innovate and adapt to consumers' concerns, and improve the brand with minimal

disruption.

Problems and downtimes will happen in business. Having an established rapport

with consumers can help businesses be resilient when difficulties arise.

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CHAPTER -4

CONCLUSION

McDonald’s is one of the largest fast food companies in the world. They continue

their path for success by keeping their consumers in mind regarding their product

selection as well as their prices. They encourage their employees to do a good job,

usually promote from within, and offers several scholarships to encourage education.

Though McDonald’s is a centralized, “wait and see” company they find ways to use

technological products that will increase their productivity, service, and sales,

everywhere from using the Nintendo DS to train staff to suing Mew POS touch screen

registers. McDonald’s will certainly be around for plenty more years to come.

McDonald’s has been successful in operating within the food service industry through

efficient strategies and quality standards which enables them to gain competitive

advantage. As evidenced by its international market growth, McDonald’s has already

been efficient in gaining entry even in the most challenging markets like Britain.

Through its strong sense of quality service and customer satisfaction, McDonald’s

was able to offer its products to the Britain market. Products were modified to suit the

British taste and preferences; affordable prices were implemented; effective

promotions and offers were done.

These are some of the strategies involved in the company’s business strategy which

allowed McDonald’s to gain the Britain support. Despite these successes, the

company should take into consideration the growing level of competitiveness in the

food service industry.

In Britain, several foreign fast food chains offering similar products are also being

supported by the Britain consumers. Constant strategic change is then necessary to

ensure that the company would sustain their competitive advantage.

In conclusion, McDonald’s has been successful because of the value the company

gives for its customers. Hence, despite the controversial beginning of McDonald’s in

Britain, the company managed to adapt to its people’s cultural needs. Indeed,

McDonald’s is a learning organization, one that is willing to learn and open to change.

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