Franchising strategies of Mc Donald’s 2010

Theme Paper
On

Franchising strategies of Mc Donald’s

Submitted to
Dean,
Dr. Subhash sharma,
On
10 May 2010

Indian Business Academy

Submitted By:-
Vamsi Krishna Deshaboina FPB0911/130
Amit Dandapath FPB 0911/009
 Franchising strategies of Mc Donald’s

ACKNOWLEDGEMENT

I express my gratitude and thanks to all the people who have helped me in
writing my theme paper. The project report entitled “Franchising strategies of Mc
Donald’s”

I would first like to thank our CEO, Mr. Manish Jain and Dean, Dr. Subhash
Sharma for being so encouraging and helpful throughout my report work

I would also like to thank my mentor Prof. Farah naqvi for his continuous
guidance and support throughout the work.

Last but not least I would like to thank all the faculties of institute and friends for
their kind co-operation throughout the project.

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Declaration

I, Vamsi Krishna Deshaboina, the undersigned, student of Indian Business

Academy, Bangalore, declare that this project report titled “Franchising Strategies
of Mc Donald’s” submitted in partial fulfillment of the requirement for the Theme
paper project during the Post Graduate Program in Management, an esteemed Post
Graduate Diploma awarded by Indian Business Academy, Bangalore.

This is my original work and has not been previously submitted as a part of
any another degree or diploma of any another Business school or University.

The findings and conclusions of this report are based on my personal study
and experience, during the tenure of my Theme Paper Project.

Vamsi Krishna Deshaboina

Indian Business Academy,
Bangalore - 560062

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Certificate

This is to certify that Mr. Vamsi Krishna Deshaboina is a bonafide student of Indian
Business Academy, Bangalore and is presently doing his Post Graduate Programme
in Management.

Under my guidance he has submitted his paper titled “Franchising strategies of

Mc Donald’s” in partial fulfillment of the requirement during the Post Graduate
Programme in Management.

This paper has not been previously submitted as part of another degree or diploma of
another Business School or University.

Prof. Farah Naqvi (Mentor),

Indian Business Academy,

Bangalore.

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Certificate

This is to certify that Mr. Vamsi Krishna Deshaboina is a bonafide student of Indian
Business Academy, Bangalore and is presently pursuing his Post Graduate
Programme in Management.

Under my guidance he has submitted his paper titled “Franchising strategies of Mc

Donald’s” in partial fulfillment of the requirement during the Post Graduate
programme in management.

This paper has not been previously submitted as part of another degree or diploma of
another Business School or University.

Dr. Subhash Sharma (Dean)

Indian Business Academy,
Bangalore.

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 Franchising strategies of Mc Donald’s

EXECUTIVE SUMMARY
For many years the company McDonald's was able to maintain its competitive edge
over the industry because of the low cost by which it was able to promote and
provide its products to the public but it could not explore the entire country. This
paper projects the detailed analysis of the market covered by Mc Donald’s in India.
The first section of this paper will introduce the back ground and history of mc
Donald’s origin and its path to India, after that the compatibility of Indian market is
discussed
In the next section the franchising strategies adopted by the company in India and
followed the SWOT analysis, CINE MATRIX and population covered by the outlets
in India
The suggestion and findings will give the need to explore the untapped market in
India when it is clear that Mc Donald’s is the market leader in India.

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Index

S. No Contents Page. No
1 About the Company 6
2 Mission & Vision 7
3 Customer Base 7
4 Mc Donald’s in India 8
5 Indian GDP Analysis 9
6 Financial Requirements 10
7 Mc Donald’s Financial Status 11
8 Financial Statement Analysis 13
9 SWOT Analysis 14
10 Cine Matrix 16
11 Questionnaire 18
12 Population distribution 21
13 Findings 23
14 Conclusion 24
15 Bibliography 25

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About the company

McDonald's Corporation is the world's leading food service organization. The
corporation started out as a small drive-through in 1948 by two brothers, Dick and
Mac McDonald. Raymond Albert Kroc, a salesman, saw a great opportunity in this
market and advised Dick and Mac to expand their operation and open new
restaurants. In 1961 Kroc bought out the McDonald brothers.
By 1967 McDonalds expanded its operations to countries
outside the U.S.A. This unyielding expansion led the Corporation to open 23,000
McDonald's restaurants in 110 countries in 1994, producing $3.4 bn in annual
revenues. In addition, McDonald's opens a new restaurant every three hours. Also,
McDonald's has twice the market share of its closest U.S. competitor, Burger King,
representing 7% of total U.S. eating-out sales. Similarly, McDonald's serves about
1% of the world's population on any given day through its 23,000 restaurants
internationally

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McDonald’s MISSION AND VISION

We serve people with good quality food, fast and at low cost. McDonald's vision is
to dominate the global food-service industry. Global dominance means setting the
performance standard for customer satisfaction and increases market share and
profitability through successfully implementing our convenience, value and
execution strategies

Objective:
a. To explore the opportunities of franchisee in rural markets
b. To conduct a research on the strategies of franchise to find the market share

Customer Base
Customers are those who pay money to acquire an organization's goods or services.
For many years McDonald's mostly targeted the young people, however this has
changed in this decade. McDonald's concentrates on the family, targeting a diverse
market which includes consumers ranging from children to elderly people, using
products such as the happy Meal for children and Egg McMuffin for the elderly.
McDonald's also realized the changing world we live in and the need for healthier
food, since there is an ever changing demographic group, who demand fast, top
quality food that is low in calories. McDonald's responded to this opportunity and
introduced a new and innovative product. This new product was a regular hamburger
that tasted like the real thing but was made of plant material like Soya beans. This
same product also targets another demographic group, vegetarians. McDonald's
mostly uses psychographic segmentation targeting the working and middle classes.
These are the people who mostly visit a fast food restaurant, since these are the
people that lead a fast moving life and thus require a fast meal. In brief McDonald's
customers are of all classes, but largely working and middle classes, and people of
all ages.
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Mc Donald’s in India
McDonald’s is world’s leading food service retailer with more than 31000
restaurants in 119 countries serving more than 50 million customers each day. In
India Mc Donald’s is a joint venture company managed by two Indians, each of them
heads two different zones one for West and south by Amit Jatia other for North &
East by Vikram Bakshi.
Celebrating a food service of over 12 years in India Mc Donald’s now has a network
of over 160 stores in India.

Business Model
McDonald's Corporation earns revenue as an investor in properties, a
franchiser of restaurants, and an operator of restaurants. Approximately 15%
of McDonald's restaurants are owned and operated by McDonald's
Corporation directly. The remaining is operated by others through a variety of
franchise agreements and joint ventures. The McDonald's Corporation's
business model is slightly different from that of most other fast-food chains. In
addition to ordinary franchise fees and marketing fees, which are calculated as
a percentage of sales, McDonald's may also collect rent, which may also be
calculated on the basis of sales. As a condition of many franchise agreements,
which vary by contract, age, country, and location.

Market potential: India is the second largest franchisee market having a growth rate
of 25% to 30%.

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The economy of India is the eleventh largest economy in the world by nominal GDP
and the fourth largest by purchasing power. A revival of economic reforms and
better economic policy in 2000s accelerated India's economic growth rate, and
Indian population contributes to 34% of world’s population.

Indian GDP analysis:

YEAR GDP
2004 8.30%
2005 6.20%
2006 8.40%
2007 9.20%
2008 9.00%
2009 7.40%
2010 6.50%

After the effect of recession the market is stabilizing and the GDP is standing at
6.5%

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Financial Requirements and Start-Up Costs to Open a McDonald's

An initial down payment is required when you purchase a new restaurant (40% of
the total cost) or an existing restaurant (25% of the total cost). The down payment
must come from non-borrowed personal resources, which include cash on hand,
securities, bonds, and debentures; vested profit sharing (net of taxes), and business
or real estate equity, exclusive of your personal residence.

Since the total cost varies from restaurant to restaurant, the minimum amount for a
down payment will vary. Generally, you need a minimum of $300,000 of non-
borrowed personal resources to be considered to open a McDonald's franchise.
Individuals with additional funds may be better prepared for additional or multi-
restaurant opportunities which McDonald’s encourages.

Other Requirements to Open a McDonald's

1. Significant business experience - Individuals who have demonstrated

successful ownership or management of multiple business units or have
managed multiple departments
2. Rapid growth - Individuals who possess the capability to grow rapidly with
McDonald's
3. Business plan - The ability to develop and execute a business plan
4. Manage finances well - Ability to manage finances including a thorough
understanding of business financial statements
5. Good management skills - Commitment to personally manage the day-to-day
operations of the restaurant business
6. Training - Willingness to complete a comprehensive world class training
program and become proficient in all aspects of operating a McDonald's
restaurant business
7. Exceptional customer experience - The capability to effectively manage an
organization that recruits, trains, and motivates restaurant employees who
deliver an exceptional customer experience
8. Good credit history - An acceptable credit history

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Ongoing Fees to McDonald's

During the term of the franchise, you pay McDonald’s the following fees:
1. Service fee- A monthly fee based upon the restaurant’s sales performance
(currently a service fee of 4.0% of monthly sales)
2. Rent - A monthly base rent or percentage rent that is a percentage of monthly
sales. McDonald's usually owns the property and also acts as the landlord
Site Specifications
The McDonald's real estate team decides where to build, and then once the property
is complete, selects a candidate from their current pool, the company will consider
offers of property from potential franchisees. Requirements are that available space
must be approximately 50,000 square feet with additional room to build on
approximately 4,000 square feet. McDonald's prefers the location to have a "corner
wrap" (at the intersection of two roads) with permission for signage. The location
must support height requirements of just under 24 feet

Financial Outlay
To purchase a McDonald's franchise, you must put down either 40 percent of the
total cost if franchising a new McDonald's or 25 percent if taking over the franchise
of an existing one. The rest of the purchase price must be paid within seven years.
The franchiser must have a minimum of $500,000 in savings, property and resources
to begin the franchising process. After the restaurant is paid off, the franchiser will
continue to pay the McDonald's corporation rent and a service fee based on the
restaurant's performance (approximately 4 percent of each month's sales).

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Mc Donald’s Current Financial Status:

McDonald's one-year sales growth: 10.50%.
Difference from the average for the Restaurants group: 2.40 pct. pts.
McDonald's one-year income growth: 11.30%.
Difference from the average for the Restaurants group: 1.50 pct. pts.

Sales & Income Growth (past

Company Industry
12 months)
Sales Growth 10.50% 8.10%
Income Growth 11.30% 9.80%
Difference from the company's 5-year average net profit margin: 4.7 pct. pts.
Difference from the average for the Restaurants group: 6.1 pct. pts.
Net profit margins (%)
Company 20.0%
Company 5-Yr Avg. 15.3%
Industry 14.0%
The debt/equity ratio shows how much a firm has borrowed as a percentage of
its stock equity. The lower, the better.
McDonald's debt/equity ratio: 0.74.
Difference from the average for the Restaurants group: -62.44%.
Company Industry
Debt/equity ratio 0.74 1.97

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Analysis of Financial Statements

Company 2009 2008 2007 2006
Mc 22,744,7
Donald's 00 23,522,400 22,786,600 21,586,400
Yum
brands 10,836,000 11,279,000 10,416,000 9,561,000
Star bucks 9,774,600 10,383,000 9,411,497 7,786,942
Burger
king 2,537,400 2,455,000 2,234,000 2,048,000

Revenues of Mc Donald’s

This clearly shows that Mc Donald’s is the leading restaurant when compared to
other big brands.
Due to the recession there is a slight effect on its revenues but still it is doing well
with the revenues almost double of the other brands in market.

SWOT analysis
Strengths

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• McDonalds has built up huge brand equity. It is the No. 1 fast-food company
by sales, with more than 31,000 restaurants serving burgers and fries in almost
120 countries. Sales, 2007 (11,4009 million), 5.6% sales growth
• Good innovation and product development. It continually innovates to retain
customers in the business
• The McDonalds brand offers consumers choice, reasonable value and great
service
• Large amounts of investment have gone into supporting its franchise network,
75% of stores are franchises
• Loyal staff and strong management team
Weaknesses
• Core product line out of line with the trend towards healthier lifestyles for
adults and children. Product line heavily focused towards hot food and burgers
• Seasonal
• Quality issues are arising across the franchise network
Opportunities
• Joint ventures with retailers (e.g. supermarkets)
• Consolidation of retailers likely, so better locations for franchisees
• Respond to social changes - by innovation within healthier lifestyle foods. Its
move into hot baguettes and healthier snacks (fruit) has supported its new
positioning
• Use of CRM, database marketing to more accurately market to its consumer
target groups. It could identify likely customers (based on modeling and
profiles of shoppers) and prevent brand switching
• Strengthen its value proposition and offering, to encourage customers who
visit coffee shops into McDonalds

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• The new “formats”, Mc Cafe, having Wi-Fi internet links should help in
attracting segments. Also installing children’s play-parks and its focus on
educating consumers about health, fitness
• Continued focus on corporate social responsibility, reducing the impact on the
environment and community linkages
• International expansion into emerging markets of China and India

Threats
• Social changes - Government, consumer groups encouraging balanced meals
• Focus by consumers on nutrition and healthier lifestyles
• Competitive pressures on the high street as new entrants offering value and
greater product ranges and healthier lifestyles products. E.g. subway, KFC,
Dominos etc

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CINE MATRIX:
Internal External

1. understanding the local 1. As a result of globalization

customs and traditions of the mutual understanding
communities between countries and
2. Restaurants around the world franchises
have innovative programs for
recycling, resource
conservation, and waste
reduction

Controllable

1. The franchises branches may not 1. Increasing competitors

have the same values for the coming up with different
organization strategies

Non- Controllable

These are the different factors internal and external which are controllable and non-
controllable.

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Questionnaire:
Do you know Mc Donald's?

yes

no
How do you come to know about Mc Donald’s?

Friends

Hoardings

Television

Internet

other
Have you ever had food in Mc Donald’s?

Yes

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No
What is the thing most impressed you in Mc Donald's

Quality

Varieties

Taste

Hygiene

Other

Mc Donald's

Which restaurant you prefer to eat

Give the order of preferences according to price

low average good very good

Mc Donald’s

KFC

Burger King

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low average good very good

Give the order of preferences according to Quality

low average good very good

Mc Donald’s

KFC

Burger King

yes

Would you like to have Mc Donald's at your place?

What is your age?

15- 20

20- 25

25- 30

More than 30

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Customer Perception Map

High Quality

Mc Donald’s

KFC
Low Price High Price

Burger King

Low Quality

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Population wise distribution of Franchisee restaurants:

Mc Donald’s has been establishing its stores in few cities and it has to be expanded
across the country. Many cities have to be explored and it is obvious that there is
huge amount of untapped population in India. The following analysis will show
In Andhra Pradesh it is having stores only in Hyderabad and Hyderabad is having 7
stores in different places. In Andhra Pradesh the 4 major cities are Hyderabad,
Vijayawada, Vishakhapatnam and Warangal. This shows that Mc Donald’s is not
utilizing all the cities to its advantage. It should come up with lot of franchising
opportunities across the country.

Name of Populatio
Name of city population city n
Mumbai 13,830,884 Ambala 1685945
Delhi 12,565,901 Nasik 1620000
Jaipur 6690351 Allahabad 1215348
Bangalore 5840155 Amritsar 1194740
Surat 5374429 Jodhpur 1006652
Kolkata 5138208 Chandigarh 900635
Kanpur 4864674 Jalandhar 709255
lucknow 4750447 Gwalior 690342
Chennai 4616639 Gurgoan 600000
Ludhiana 4595053 Kolhapur 493167
Ahmadabad 4525013 dehradun 447808
Hyderabad 4068611 Shimla 392542
Manesar 3700000 Patiala 302870
vadodara 3641566 Noida 293908
Indore 3525780 Panipat 261665
Pune 3337481 Meerut 221817
Varanasi 3147927 karnal 210476
Faridabad 2193276 Vapi 121395
Agra 1686976 Gazraula 39826

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Findings
This shows that Mc Donald’s had covered only 110,501,762 and it has to expand its
franchises to cover the rest of the India which has a total expected population of
1,180,588,000
Mc Donald’s in India is in the process of analyzing its growth strategy in terms of its
new outlets in the market, as part of its expansion plans it should aim at multiple
outlets and different locations.
Mc Donald’s is enjoying good market share in India with so much of ease and it is
targeting the working class and middle class people who walks in the outlets

Suggestions

1. Mc Donald’s should come up with more outlets across the country

2. In India now there is an increasing need of bringing up more drive- in
outlets and outlets with Wi- fi facility.
3. To encourage more franchises the outlet the down payment should be
reduced by 15 %

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Conclusion:
No particular competitive strategy is guaranteed to achieve success at all times. Risk
attitudes can change and vary by industry volatility and environmental uncertainty
and several internal conditions also might be involved. Thus the "four P's" of
marketing (product, price, place and promotion) provide a good starting point for
consideration of the requirements of strategy implementation in the marketing
function. The mix of these marketing elements should be appropriate and the plans
for each of the elements should also be appropriate
The company has decided to launch 170 outlets in India by 2014 is appreciable and it
should consider other cities which are not having outlet till date. There is a lot of
opportunity and scope for Mc Donald’s to expand its market to an enormous level.

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Bibliography:

http://www.mcdonaldsindia.com/

http://en.wikipedia.org

http://www.ehow.com/list_5942995_mcdonald_s-franchise-location-
requirements.html

http://abodesindia.wordpress.com/2009/05/28/mcdonalds-india-to-
launch-170-outlets-by-2014/

http://mcdonaldsindia.net/about/faq.htm#Franchising

http://finance.yahoo.com/q/ks?s=MCD

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