Section 1 Company Background, Industry Overview and Competitor Analysis

1.1 Company Background

McDonald's Corporation is the world's largest chain of hamburger fast food restaurants.
A McDonald's restaurant is operated by either a franchisee, an affiliate or the corporation itself. The
corporation's revenues come from the rent, royalties and fees paid by the franchisees as well as sales in
company-operated restaurants.
McDonald's primarily sells hamburgers, cheeseburgers, chicken products, french fries, breakfast items, soft
drinks, shakes and desserts, serving more than 58 million customers daily.
1.2 Industry Overview
In order to have a clearer outlook of the industry and competitors, Porters Five Forces Model (Please refer to
Figure 1 in the Appendices) is adopted to analyze the fast food industry.
1.2.1 Competitive Rivalry within an Industry
To start with, the competitive rivalry within the fast food industry is high as the products offered by each
company are similar. Competition is ferocious as there are many firms in the industry and the customer
loyalty is low as customers are eager to try new products. McDonald's, however, manages to retain market
share by becoming a cost leader and offering differentiated products together with prominent marketing
efforts.
1.2.2 Threat of New Entrants
In general, the barrier of entry into the fast food industry is low as there are no government interventions on
introduction of a new fast food provider. Thus, it is very likely for companies to enter the industry. Indeed,
countless fast food companies offer burgers and fries around the globe. Yet McDonalds has been the
dominant player with more than 32000 shops worldwide, obtaining much of the market share.
1.2.3 Bargaining Power of Suppliers
The bargaining power of suppliers is poor as raw materials such as beef and bread and other food are readily
available in many countries, and the supply of such materials can be considered as perfectly competitive,
where suppliers have not much power to alter the supply conditions.

1.2.4 Bargaining Power of Customers

The bargaining power of customers, on the other hand, is strong as there are many companies providing
similar products. Customers also tend to try new offerings, increasing the chance of turning away to
competitors. In response, large firms like McDonalds regularly launch marketing campaigns to promote latest
products to attract customers back to make purchases.
1.2.5 Threat of Substitute Products
Since westerners are used to having burgers and sandwiches, there are few substitutes to burger and the
threat is low. The threat of substitutes is higher in Asia-Pacific region as there are caterers providing fast
Chinese or Japanese cuisines, such as Caf de Coral and Yoshinoya. In response, McDonalds has attempted to
capture customers by providing rice burgers, but it was not well-received.
1.3 Competitor Analysis
Out of the many fast food companies, Yum! Brands, Inc., a mother company of KFC, Pizza Hut and 3 other
brands, Burger King and MOS Burger were chosen. Yum! Brands, Inc. offers a wide range of fast food
worldwide while Burger King is comparable to McDonalds in terms of nature of operations. MOS Burger,
originated in Japan, is an emergent company expanding in Asia.
1.3.1 Inventory Management
The low days of sales in inventory for companies except MOS Burger suggested that large fast food
companies like McDonalds have already switched to Just-In-Time (JIT) inventory policy to reduce cost of
storage and maintenance on quality of food to the lowest.
1.3.2 Profitability Analysis
The sales revenue obtained recorded a drop for most companies in 2009 due to the recession brought by the
financial tsunami, but McDonalds has recorded huge sales revenue, more than twice as much as Yum! Brands
Inc. and almost ten times of Burger King, maintaining high gross and operating margin. The return on assets
and equity are also appreciable while the huge return on equity by Yum! Brands, Inc. is actually due to the
equity deficit caused by a huge debt from Pepsi.

1.3.3 Cost Control

McDonald's also devotes itself to cost leadership strategy, maintaining a relatively low manufacturing cost and
an even lower non-manufacturing cost to maximize their operating income. The large manufacturing cost to
non-manufacturing cost ratio can be a suggestion to McDonald's to seek cheaper supplies and extra budgets
to launch new products and marketing campaigns to attract more sales.
1.3.4 Marketing Strategy
What McDonalds is trying to adopt is diversification in Ansoffs matrix, which stands out from other strategies,
since it requires the company to obtain new skills, facilities and techniques, while others can be carried out
with current capabilities.
McDonald's has come to realize that there is little room for market development as they have already
entrenched themselves worldwide. They cannot bring along much innovation to current product as
competitors may have offered such innovated products, such as rice burger by MOS Burger. Thus, McDonald's
focused on marketing campaigns to penetrate deeper into market, promoting a warm image to attract
different age groups of customers. McDonald's has also diversified into the coffee business by launching
McCafe as early as in 1993, seeking alternative source of income. This has yet to be achieved by other
competitors.

Section 2 Marketing Strategy and Pricing Strategy

2.1 Marketing Strategy
McDonalds, a long-time leader in the fast-food industry, puts some emphasis on the marketing strategy of
the company with the marketing expenses of only the company-owned storefronts included1.
Observed from the marketing strategy of McDonalds throughout these years, one or two major campaigns
are held in new product launching or other development. It also focuses on building the image of being green
and having corporate responsibility. Together with the new products introduced in the original product line,
or launching a new series (like Mac Snack Wrap) or whole product line (like McCafe), McDonalds expenses

The number of company owned stores in 2009: 6262 out of 32478.

these marketing costs in the selling, general & administrative expenses2 item. The marketing strategy of
McDonalds also addresses the challenges faced in these recent years concerning the intensive pressure from
external competitors, the rising concern over health from parents as well as the environmentally friendly issue.
This is expected that McDonalds will continue to promote itself as the fast-food provider with qualitative
services and food. It will continue its involvement in environmental actions to address the concern, as well as
in the corporate responsibility by using green as the concept. No great changes are foreseen in the overall
marketing strategies of McDonalds.
For the advertising costs, McDonalds allocates its budget for its advertisements worldwide on TV, billboards,
newspaper etc. Despite the traditional displays, McDonalds also exposes itself to the digital world by focusing
on the online advertising targeting at the younger generation. The advertising cost amounted to $611.5
million in 2005 and increased by 14.4% to $699.8 million in 2006. There was a smaller percentage increase of
2.64% in 2007. Although there records a decrease in advertising costs for McDonalds in recent years, it is still
reasonable for McDonalds to increase the promotion by intensive advertisements as a means to trigger sales
in the times of the economic recovery in order to trigger the need of McDonalds food or to introduce
customers of McDonalds new products. The forecast is made based on the optimistic view on the recovery of
the economy gradually.
It is likely for the advertising cost to increase on a steady rate to a similar level of 2007, before the major
sports events held, which were expected to bring certain fluctuation to the currency and thus the expenses
allocate (McDonalds, 2007, 2008, 2009). Therefore, the advertising expense is expected to have a 3% growth
in 2010 to $670 million3 as the economic recovery is in the primary stage, with quite an uncertain prospect for
all industries. McDonalds is expected to have a positive change in the advertising cost addressing the online
marketing and the consolidation of brand image in face of competitors, but not as much as the increase in
2006. Similarly, it is expected that an increase in the overall marketing expense can be observed in the year
2010, with the level of 4.12% increase to $2326 million, in the situation better off than 2007, but the progress
is not as obvious as that in 2006.
2

For the selling, general & administrative expense account, it only reflects the spending of McDonalds marketing and related costs
on the company owned stores. All comparison and prediction are thus made based on the expenses for its stores owned.
3
The estimated number is only based on the assumption of the trend of increasing expenses in relevant account.

2.2 Pricing Strategy

Flexible strategies are used by McDonalds in accordance with different product promotion as well as the
economic situation. Product line and bundling are introduced in McDonalds worldwide, providing limited
choices with few interchangeable options. Promotional pricing is often used, especially in Hong Kong,
introducing weekly promotion products or meals in a lower price to trigger sales. Penetration pricing is for
new product launching like the coffee of McCafe. Value pricing is special as it appears in times of economic
downturn to meet the demand of cheaper meals. As there are competitors offering more upscale dining
experience charging a higher price, and some traditional rivals competing in the market giving lower price
meals on an eroded margin, it is thus less likely for McDonalds to have a huge change in the pricing strategy
for either increasing the price which shifts customers to competitors, or lower the price which may further
reduce the profit margin that is impossible to support the quality of goods and services delivered.

Section 3 Sales Forecast

3.1 Sales
Revenues of McDonalds consist of company-operated sales and revenues from franchised restaurants
including rent and royalties based on a percent of sales.
According to the consolidated operating income statement of the years 2007, 2008 and 2009, the sales of
company-operated restaurants remained relatively the same from 2007 to 2008 and fell by 7% from 2008 to
2009. The revenues from franchised restaurants rose by 13% from 2007 to 2008 and 5% from 2008 to 2009
( McDonalds Corporation, 2009). It implies that some company-operated sales shifted to franchised sales in
the past two years due to the re-franchise strategy which led to a decrease in consolidated revenues because
the company could only receive a certain percentage of the franchised restaurants sales as income.
In recent years, McDonalds has been putting much effort into re-imaging itself, improving services and
planning to aggressively open about 600 new restaurants in three years in China (McDonalds Corporation,
2009), so it is expected that the sales of both the company-operated restaurants and franchised restaurants
will increase in 2010 due to a more optimistic economic outlook as well as the strategies mentioned above.

3.2 Cost of Goods Sold

On the other hand, the cost of goods sold will also be expected to increase because of inflation with the global
inflation rate of 3.7% in 2010 (Proper role, 2010). However, since McDonalds adopts bulk purchases, the
impact of inflation may not be huge. The increase in sales volume will lead to a rise in total cost of goods sold
and the inflation will add a slight increase to it as well.

Section 4 Inventory Management

In this part, we will look at the two major components of McDonalds inventory, holding costs and inventory
costs.
What used to be the case was McDonald's would pre-cook a batch of hamburgers and let them sit under heat
lamps. So, raw materials like bread, beef, cheese and chicken were to be kept for as long as possible and
eventually discarded while they could no longer be sold. This incurs a fairly holding cost and ordering cost.
With new burger making technology, McDonalds is capable of making burgers faster and thus the time
between placing an order and receiving it is shortened. Also, with the implementation of Just-In-Time system,
the finished products sitting in the inventory are greatly reduced. This ensures the company to properly
manage inventory effectively even in times of inflation without holding too much inventory. This also
facilitates rapid inventory turnover, better and responsive cost controls. In 2010, we can expect that the
inventory level will be more or less similar to the ones of previous years.

Section 5 Capital Expenditure Analysis

5.1 Definition
Capital expenditure is the expenditure incurred for buying new assets or adding value to existing assets. The
assets are expected to be used for more than one period. It is probable that future economic benefits
associated with the assets will flow to the enterprise.
5.2 Assumptions

There are some assumptions made in the analysis. First, there is constant inflation rate. Second, new
restaurants are opened every year, resulting in a certain yearly capital expenditure in acquiring land and
buildings. Third, old and outdated machinery and equipment are replaced by new ones, resulting in a certain
yearly capital expenditure in acquiring equipment.
5.3 Analysis
McDonald has continuously invested in both property and equipment to expand its business. Such an
investment is exactly the capital expenditure. The total capital expenditure (in cash) spent by McDonald has
been generally increasing with an increasing rate of 9%. The trend implies that the total capital expenditure
(in cash) will increase in the future. Its value is anticipated to increase by 9% to around 2,300 million dollars in
2010.
To facilitate the expansion of its business, the capital expenditure is spent on buying land and building and
doing improvements on owned land and leased land. The capital expenditure (in cash) on land and buildings
has kept increasing, with an average increase of 2,000 million dollars each year. The capital expenditure is
expected to be around 32,500 million dollars in 2010.
The capital expenditure (in cash) on equipment has also kept increasing, with an average increase of 200
million dollars each year. The estimated capital expenditure on equipment is 4,800 million dollars. This is the
corporations strategy to utilize new equipment to increase the productivity and efficiency in generating sales,
thereby reducing the average production cost. Also, this is to further improve the quality of food and
beverages so that the competitiveness of McDonald in the industry can be maintained.

Section 6 Cost Control and Analysis

6.1 Cost Component and Trend Analysis
McDonalds Corporation has four major cost components, namely Food and paper, Payroll and employee
benefits, Occupancy and Selling, general and administrative expenses. The total cost has decreased from
$18,908 million to $15,904 million. Food and paper cost, the major variable cost which varies directly with
the production volume, has decreased by 5.64% from 2007 to 2009. The obvious reduction in total cost is also
mainly attributable to 10.58% decline in Payroll and employee benefits which is a mixed cost . For the major

fixed cost Occupancy expense as whole (including franchising occupancy cost), it has been reduced slightly
from 2007 to 2009 by 1.50%. Selling, general and administrative expenses decreases by 5.61% within these
3 years.
6.2 Cost Control
With the pressure of inflation and increasing production cost, McDonalds corporation uses respective tactics
to control its costs. Through ownership of land and building or long-term lease of restaurant sites, despite
facing high inflation in rental costs, McDonalds successfully controls its rental and occupancy expenses which
is a major component of fixed costs (McDonalds Corporation, 2010). For Payroll and employment benefits,
it has been reduced significantly because McDonalds has increased the proportion of franchised restaurant
worldwide. Due to a smaller proportion of corporate-owned restaurants, it reduces the manpower cost
needed. For Food and paper cost which constitutes cost of goods sold, McDonalds maintains rapid
inventory turnover to ensure that there is no idle inventory which ties up cash or causes wastage of food
inventory. Therefore, it can keep the food cost lowered, even under the upward pressure brought by inflation.
6.3 Projected Cost Analysis
With the tactics used by McDonalds as stated above, using the previous annual rates of change as reference,
it is anticipated that all four categories of costs will increase but at a decreasing rate.

Section 7 Summary and Conclusions

As regard to the optimistic economic outlook and the constantly improving service, both company-operated
restaurants and franchised restaurants are believed to bring increased revenue and loyalties to McDonalds.
With the view to enhance its competitiveness, it is predicted to see that there will be reasonable increased
budgets for advertising expenses as well. However, Due to the ongoing inflationary pressure, the commodity
as well as selling, general and administrative expenses are expected to increase for the year 2010, assuming
there will be no significant changes in the cost structure of McDonalds.
Furthermore, along with the possibility of the expansion plan of further addition of restaurants, there will also
be an increasing capital expenditure involved in both opening up new restaurants as well as reinvesting in
existing restaurants. Despite so, it is believed that the extra costs and expenses can well be covered by the
increased revenues.

References
McDonalds Corporation. (2006). 2006 Annual Report. Retrieved April 4, 2011 from McDonalds Web Site:
http://www.aboutMcDonald's.com/mcd/investors.html.
McDonalds Corporation. (2007). 2007 Annual Report. Retrieved April 4, 2011 from McDonalds Web Site:
http://www.aboutMcDonald's.com/mcd/investors.html.
McDonalds Corporation. (2008). 2008 Annual Report. Retrieved April 4, 2011 from McDonalds Web Site:
http://www.aboutMcDonald's.com/mcd/investors.html.
McDonalds Corporation. (2009). 2009 Annual Report. Retrieved March 7, 2011 from McDonalds Web Site:
http://www.aboutMcDonald's.com/mcd/investors.html.
Proper role of the central bank. (2010). Retrieved March 31, 2011 from
http://www.thedailystar.net/newDesign/news-details.php?nid=164755

Appendices
Table 1: Days Sales in Inventory of McDonalds and its competitors in 2009
McDonalds

Yum! Brands,
Inc.

Burger King

MOS Burger

3.04

5.96

33.37

Days Sales in
Inventory
(days)

Table 2: Sales Trend Analysis of McDonalds and its competitors

Sales
Revenue
McDonalds
(million USD)
Yum! Brands,
Inc. (million
USD)
Burger King
(million USD)
MOS Burger
(thousand
JPY)

2009

2008

2007

2006

2005

22745.0

23552.0

22787.0

20895.0

19117.0

10836.0

11304.0

10435.0

9561.0

9349.0

2537.4

2454.7

2233.7

2047.8

1940.3

60641865

62301887

59890823

58216912

59345939

Table 3: Profitability of McDonalds and its competitors in 2009

Profitability

McDonalds

Yum! Brands, Inc.

Burger King

MOS Burger

Gross Margin

44.0%

31.0%

36.8%

45.2%

Operating Margin

30.1%

14.7%

13.4%

2.9%

Return on Assets

15.5%

15.7%

7.4%

1.3%

Return on Equity

33.2%

233.6%

22.0%

1.6%

Table 4: Manufacturing Cost to Non-manufacturing Cost Analysis of McDonalds and its competitors in 2009

Manufacturing
Cost as percentage
of sales
Nonmanufacturing
Cost as percentage

McDonalds

Yum! Brands, Inc.

Burger King

MOS Burger

56.0%

69.0%

63.2%

54.8%

13.9%

16.4%

23.4%

42.3%

of sales
Manufacturing
Cost to Nonmanufacturing
Cost

402.9%

420.7%

Table 5: Definitions of Accounting Ratios (Profitability)

, where

, where

Table 6: Inventory at cost, not in excess of market

Year

Inventory (million USD)

2006

149.0

2007

125.3

2008

111.5

2009

106.2

270.1%

129.5%

Table 7 - Capital Expenditure

2006

2007

2008

2009

$000,000 $000,000 $000,000 $000,000

New restaurants
530

687

897

809

Old restaurants

1,075

1,158

1,152

1,070

Other

137

102

87

73

1,741.9

1,946.6

2,135.7

1,952.1

11.75%

9.71%

8.60%

Property and
equipment
expenditures
Percentage Change

Table 8: Projected Cash Flow Statement

McDonalds Corporation
Projected Cash Flow Statement for the year ended December 31, 2010
Cash flows from operating activities
Cash received from customers

$25704.53

Cash paid to suppliers

(5436.90)

Operating expenses paid

Interest paid

(10569.31)
(482.76)

Net cash from operating activities

$9215.55

Cash flows from investing activities

Cash paid to acquire property and equipment
Cash paid to acquire restaurant business
Net cash used in investing activities

(2127.79)
(151.53)
(2279.32)

Cash flows from financing activities

Dividends paid

(2369.63)

Cash to purchase treasury stock

(2657.53)

Cash paid to retire long-term loans

(711.12)

Net cash used in financing activities

(5738.28)

Net increase in cash and cash equivalents

1197.95

Cash and cash equivalents as at January 1, 2010

1796.00

Cash and cash equivalents as at December 31, 2010

$2993.95

Table 9: Projected Income Statement

Assumptions for the Budgeted Income Statement 2010
All the figures in the Income Statement 2010 are forecasted using the figures of the fiscal year 2009 and 2008. Expenses
and sales are expected to increase largely when compared with the performance and operations in 2009 because of the
economic recovery, though not recovering to the level of 2008.

For the year ended

31st December 2010

For the year ended

31st December 2009

Revenue

million USD

million USD

Sales by Company-operated restaurants

16,282.44

15,458.5

Revenues from franchised restaurants

7,557.98

7,286.2

Total revenues

23840.42

22,744.7

-Food & paper

5,367.51

5,178.0

-Payroll & employee benefits

4,119.86

3,965.6

OPERATING COSTS AND EXPENSES

Company-operated restaurant expenses

-Occupancy & other operating expenses

3,682.26

3,507.6

Franchised restaurants-occupancy
expenses

1,362.62

1,301.7

Selling, general & administrative

expenses

2,326.23

2,234.2

Impairment and other charges (credits),

net

30.05

(61.1)

Other operating (income) expense, net

(177.84)

(222.3)

Total operating costs and expenses

16,656.69

15,903.7

Operating income

7,813.73

6,841.0

Interest expense-net of capitalized

interest of $12.0, $11.7 and $12.3

450.80

473.2

Non-operating (income) expense, net

Gain on sale of investment

(15.95)

(24.3)

Income before provision for income

taxes

6,748.88

6,487.0

Provision for income taxes

1,980.23

1,936.0

Net income

4,768.65

4,551.0

Earnings per common share-basic:

4.59

4.17

Earnings per common share-diluted:

4.52

4.11

Dividends declared per common share

2.26

2.05

Weighted-average shares outstandingbasic

983.00

1,092.2

Weighted-average shares outstandingdiluted

996.67

1,107.4

Table 10: Projected Balance Sheet

Assets

31st December 2010

(Budgeted)

31st December 2009

million USD

million USD

Current assets
Cash and equivalents

2994.0

1796.0

Accounts and notes receivable

1161.5

1060.4

Inventories, at cost, not in excess of

market

102.4

106.2

Prepaid expenses and other current

assets

510.5

453.7

4768.4

3416.3

Investments in and advances to

affiliates

1278.3

1212.7

Goodwill

2555.1

2425.2

Miscellaneous

1801.3

1639.2

Total other assets

5634.7

5277.1

34482.4

33440.5

Accumulated depreciation and

amortization

(13014.2)

(11909.0)

Net property and equipment

21468.2

21531.5

Total assets

31871.3

30224.9

Accounts payable

625.5

636.0

Income taxes

169.3

202.4

Other taxes

293.6

277.4

Accrued interest

221.7

195.8

1788.3

1659.0

Total current assets

Other assets

Property and equipment

Property and equipment, at cost

Liabilities and Shareholders Equity

Current liabilities

Accrued payroll and other liabilities

Current maturities of long-term debt

17.3

18.1

3115.7

2988.7

11401.8

10560.3

Other long-term liabilities

1464.8

1363.1

Deferred income taxes

1354.6

1278.9

Shareholders equity

14534.4

14033.9

Total liabilities and shareholders

equity

31871.3

30224.9

Total current liabilities

Long-term debt

Table 11: Projected Cash Budget

Cash Budget (in millions)

December 31, 2010

Beginning cash balance

$ 1796

Cash collections (W1)

25704.525

Total Cash Available

27500.525

Purchase of inventory (W2)

(5436.9)

Operating expenses (W3)

(10569.312)

Interest expenses (W4)

(482.761)

Purchase of property and equipment (W5)

(2127.789)

Purchase of restaurant business (W6)

(151.528)

Long-term financing repayment (W7)

(711.122)

Treasury stock purchases (W8)

(2657.53)

Common stock dividends (W9)

(2369.63)

Total Cash Payments

(24506.572)

Ending cash balance

2993.953

W1: 1060.4+15458.5x1.05+7286.2x1.1-1060.4x1.07+406x0.98 = 25704.525

W2: 5178x1.05 = 5436.9
W3: (3965.6+3507.6+1301.7+2234.2) x0.96 = 10569.312
W4: 468.7x1.03 = 482.761
W5: 1952.1x1.09 = 2127.789
W6: 145.7x1.04 = 151.528
W7: 664.6x1.07 = 711.122
W8: 2797.4x0.95 = 2657.53
W9: 2235.5x1.06 = 2369.63

Diagrams / Tables

Fig. 1

Fig. 2

Porters Five Forces Model

Ansoffs Matrix

Percentage of Contribution of each member:

AU PO YU

- 16.67% (2010239659)

CHAN SHING HO JOHNNY - 16.67% (2010007173)

CHAN WING YIN

- 16.67% (2010067381)

CHAU HOW YING

- 16.67% (2010011930)

KWAN TSZ FUNG

- 16.67% (2010075429)

LEUNG CHIN CHING

- 16.67% (2010002094)