Strategic issues in US restaurant business: Comparing McDonald's with KFC and Burger King

Author: Iloka Benneth Chiemelie

Published: 22-September-2014

INTRODUCTION

In the business setting, corporate identity is used to reference the basic, distinctive, and enduring features of a given organization. It is used to refer to characteristics of the organization that remain stable relatively, which are the features in the company that exhibit some level of uniqueness and continuity over the course of time (Albert and Whetten, 1985). Miles and Cameron (1982), made known that corporate identity comprises of the strategic predisposition, domineering values and belief s with reference to the strategic decision making process as well as the distinctive competencies of the company. It was noted by Dutton and Dukerich (1991), that the identity gained by an organization acts as a form of filter in the course of interpreting, analyzing and making strategic decisions. Organization members collectively read meaning into the environment in terms of the system of categories successfully built and those that have been crystalized in the course of time.

In any case, past recipes don’t necessary mean success for companies in the course of major changes. As such, organizational identity can result in slowed or delayed strategic change during the period of significant change (Ghoshal and Bartlett, 1988; Teece, Pisano and Shuen, 1997). Bouchiki and Kimberly (2003) went even further in the explanation by asserting that corporate identity is a trap that should be avoided because of its capability to limit the capacity of an organization to adapt to change. Thus, the question becomes whether identity is unchanging and cannot be altered? Elsbach and Kramer (1996) made the affirmation that resistance to identity can occur as a result of pressure to change in the current image of the organization. Thus, Fox-Wolfgramm, Boal, and Hunt (1998) made the introduction of the concept of identity plasticity, which is used to make reference to the understanding that organization change is highly possible without the need to change the identity of the company. 

Research objectives

In line with the above understanding, this research takes aim at analyzing McDonalds against two of its top competitors in the form of Burger King and KFC with the objectives to:

1.      Analyze strategic issues faced by McDonalds in the course of its bold walk to glory;

2.      Analyze how competitors have been able to take advantage of these strategic issues in order to gain market shares;

3.      Analyze McDonald’s strategic response and the influence of such response on their success with a comprehensive figurative review as compared with competitors; and

4.      Provide necessary recommendations for future strategic development and deploying in order to ensure sustainability in their strategic performance against competing brands.

Justification for research

The choice of the three company is justifiable on the ground that they are close competitors in the US Restaurant industry, which makes comparative analysis possible because their performance is influenced by similar factors in both their macro- and micro-environment.  

McDonalds in the USA Restaurant industry

Figure 1: McDonald’s 2013 major highlights 

 Source as adapted from: McDonalds (2013)

McDonalds is the world’s largest food retailers and the company noted that they are privileged to serve over 70 million customers daily in 119 countries with great tasting, high quality foods and beverages (McDonalds, 2013). Their success as the company noted is as a result of their unique business model which comprises of best franchise, excellence in supply chain management and a network of talented employees (McDonalds, 2013). Another highlight is that McDonalds acknowledged that these business models are the main reason it has continued to grow over the years as it experienced 02% global comparable sales increase in 2013 with overall system wide sales being up to 3%. On the sale year, the company increased its operating income by 3% while diluting earnings per shares by 4% with an approximated $2.8 billion investments on existing restaurants (McDonalds, 2013).

Corporate values and identity.

McDonalds (2013) noted that their overall brands success is based on their corporate values of Quality, Service, Cleanliness and Value – and these values still remain top priority for the company. The company is also building on the competitive advantages it has gained as a result of its inherent business models by focusing on the drivers of business within its own control. Its overall corporate value is shaped around the ideas of “thinking global, while acing local.” Thus, while it maintains global presence in 119 countries, it also offers countries cuisines to the taste of the local markets (McDonalds, 2013) such as vegetarian menus in India and pork menus in China.

The USA restaurant industry at a glance

Figure 2: the US restaurant industry at a glance in 2010

Source as adapted from: IBIS systems (2010)

International Business Information System (IBIS) world presented a comprehensive analysis of the American restaurant industry in 2010, and defined the industry to comprise of companies in the food and beverage industry that are dedicated towards delivering quality and nutritional foods and beverages to customers in accordance with their individual tastes.

The above figure 2 shows that as of 2010, the industry generated an amazing $184 billion which represents a 0.4% increase in annual growth from the periods between 2005-2010 and the annual growth is also projected to surge further up to 2.5% from 2010 to 2015. In the course of their amazing achievement with growth, the industry generated $8.3 billion in profits with $48 billion paid to employees in wages during the course of the year as it further expanded overall restaurant business in the country to 300,645 in figures. This represents an impressive business opportunity for companies that will be able to take full advantage of the industry’s showering growth as increase in volume of market shares will bring about a subsequent and corresponding increase in the profitability of such company.

Figure 3: Market share analysis of the US restaurant industry

Source as adapted from: IBIS (2010)

An impressive discovery from the above figure 3 is that the three companies being studied in this research are in the top 5 of best performing brands in the US restaurant industry with McDonalds toping the chart with 12.7% of the market share followed by KFC at 9.7% and Burger King following behind with 5.1% as the fifth largest restaurant group in the US.

The key external drivers in the industry

1.      Per capital disposable income – this is the volume of income that the brands have set aside for potential investments in the industry such as opening new outlets or increasing purchase. The higher the volume of per capital disposable income available for further investments and expansions, the higher the competitiveness of the brand.

2.      Health consciousness – this is the degree at which brands offer quality and healthy cuisines that meets consumers’ demand for heathy living and eating experience. The higher the level of health consciousness, the higher the demand for such brands.

3.      Consumers’ sentiment index – this is the degree at which consumers attach sentiments to a brand or the products offered by that particular brand. A lower level of negative sentiment and higher level of positive sentiment will bring about increased demand and sales for brands.

4.      Competition from full service restaurants – this is the extent of competition in the industry, in which the lower the competition the higher the sales for brands.

From the above analysis, it is evidently clear that the US restaurant industry is a profitable industry with numerous opportunities for companies in the industry to enhance their overall profitability. Additionally, McDonalds is doing great by making use of their business models to tap into the industry’s rich financial resources and this has fostered their overall performance as the industry leader.

FINANCIAL ANALYSIS

In this section, the focus will be to perform key financial analysis of McDonalds as compared with that of its competitors in order to understand how the company has been fearing in the industry.

Financial performance indicators

Revenue analysis

Chart 1: Growth of revenue: on year-over-year grounds (growth percentage %)

The above analysis is indicative of McDonald’s competitive advantage and increased superiority in the US restaurant industry in terms of market share. From the above analysis, it can be seen that the brand was successful in maintaining positive returns from 2010 to 2013, which witnessed continuous negative performance from Burger King with KFC also going down the slope from 2011-2013. In any case, it is significant to note that while both McDonalds and Burger King struggled in 2010 to gain grounds on market share, KFC had a tremendous increase which is in excess of 500% as compared with the previous year. However, KFC was quick to lose whatever it gained in the preceding years. In essence, it can be stated from the above analysis that in terms of sustainability, McDonalds have been the better of the three restaurant brands.

Chart 2: Revenue generation (in USD Millions)

Table 1: Revenue generation (in USD Millions)

	2007	2008	2009	2010	2011	2012	2013	TTM
McDonalds	22,787	23,522	22,745	24,075	27,006	27,567	28,106	28,201
KFC	213.5028	224.2044	293.2356	228.2322	216.0606	167.0116	189.4634	189.4634
BK	2,234	2,455	2,537	2,502	2,336	1,966	1,146	1,060

 The above analysis shows a comparative analysis of the revenue generated by the three companies from the period of 2007 to 2013. Just like the revenue percent analysis, McDonalds performed better than all the competing brands with a relatively increasing performance except for 2009 in which the company performed lower than the previous year. Both KFC and Burger King also experienced continued growth except for the periods from 2011 to 2013 in which both companies experienced declining level of revenue and this is reflected in the company’s percentage revenue generation.

Working capital analysis

Chart 3: Working capital (in USD millions)

Table 2: Working capital (in USD millions)

	2008-06	2009-06	2010-06	2011-12	2012-12	2013-12
McDonalds	980	428	1444	894	1519	1880
KFC	1,199	2,113	2,009	1,828	2,343	2,336
BK	-52	-112	-39	252	493	728

 Something significant from this analysis is that in the same year (2009) that McDonalds experienced negative returns in terms of percentage increase in revenue generation, the company also invested relatively lower than other years in its calendar as analyzed above. It could be argued that their experienced losses forced the company to more than double its previous working capital and the outcome was positive return. However, the same is not the case for Burger King as the more the company spent in terms of working capitals, the more losses it experienced. Thus, it could be argued that investments in working capital is not a direct measure of expected outcome from market performance. This implies that other factors outside of financial capital investment does have an impact on the performance of any given company. However, McDonalds have been successful in managing its working capital as the more the company invested, the more positive return it got from such investment.

Table 3: returns on capital investment

	2008-06	2009-06	2010-06	2011-12	2012-12	2013-12	TTM
BK	13.53	13.15	11.49	6.29	6.72	8.5	9.12
McDonalds	19.42	20.26	20.75	22.03	20.83	20.12	20.2
KFC	4.74	6.24	11.7	6.61	3.42	-1.19	3.64

In a valid support for the above argument, it can be seen that McDonalds have relatively returned higher values to its working capital investment as opposed to other competing brands within the same brands. KFC’s negative performances between the period of 2010 and 2013 are also highlighted in their returns on capital investment as the company experienced towards slope in the same aspect. However, Burger King have had a relatively stable return on capital investment irrespective of the negative slopes it experienced from 2010-2013. 

Liabilities analysis

Chart 4: Liabilities analyses (USD Millions)

The liability of any given brand is the easiest way to measure the financial health of such brands. From the above analysis, it can be seen that McDonalds has the lowest level of liability irrespective of its tremendous positive performance in the course of the years being reviewed. As such, it can be said that the company is the most profitable investment option for investors seeking a broader and expanded understanding of the investment possibilities and opportunities possessed by the tree companies being reviewed.

Key performance indicators

Besides the financial indicator analyzed above, the success of McDonalds in the US restaurant industry has been greatly influenced by a number of other internally developed factors such as:

Strategic business model built around consumers’ needs – McDonalds have been successful in modeling its business strategy around understanding the needs of customers and innovating their product offerings in line with consumers’ demands. This has relatively increased overall brand loyalty in the country with a resulting increase in performance.

Strategic franchising – this is one of the ways that McDonalds has been able to establish quality franchising network in the USA and this has increase its overall outlet in the country which brings about increased demand as consumers are being targeted cross the country.

Reliable and effective supply chain - McDonalds have also partnered with numerous suppliers in the course of establishing overall competitiveness of the brand by making needed resources available to provide consumers’ needs.

Variety in meu – the brand offers numerous ranges of both foods and beverages in its outlets across the country. This ensure that customers are served irrespective of differences in their relative demands and menu of choice. The outcome is an increased demand and enhanced performance for the company. All these factors combined together has successfully established McDonalds as a quality brand in the US market.

Financial scenario analysis

Table 4: scenario analysis

Scenario Analysis
Key Ratios -> Growth	2011	%change	2012	%change	2013	%change	2014	%change	2015	%change	2016
Revenue %
Year over Year	12.18	0	12.18	2	12.4236	1.3	12.58511	4	13.08851	3	13.48117
Key Ratios -> Cash Flow
Operating Cash Flow Growth % YOY	12.75	-0.1	11.475	0.005	11.53238	0.1	12.68561	0.33	16.87186	50	860.4651
Free Cash Flow Growth % YOY	5.09	0.019	5.18671	0.023	5.306004	0.4	7.428406	-0.1	6.685565	0.35	9.025513
Cap Ex as a % of Sales	10.11	0.033	10.44363	-0.034	10.08855	0.1	11.0974	0.003	11.13069	0.21	13.46814
Free Cash Flow/Sales %	16.37	-0.01	16.2063	-0.004	16.14147	0.2	19.36977	0.6	30.99163	0.004	31.1156
Free Cash Flow/Net Income	0.8	-0.3	0.56	-0.00335	0.558124	0.4	0.781374	0.4	1.093923	0.13	1.236133
Key Ratios -> Financial Health
Total Liabilities	56.38	0.1	62.018	0.0098	62.62578	0.004	62.87628	0.1234	70.63521	-0.0032	70.40918

From the above analysis, it can be seen that even in the worst case scenario, McDonalds still continued to generate revenue and the best scenario will be 2015 when the company will experience 40% increase in revenue due to low entrance of new brands and high level of economies of scale developed through quality supply chain management. However, the scenario analysis shows that the company liabilities will continue to increase and this is a big threat.

DISCUSSIONS

Overall, the above financial analysis has been successful in establishing McDonalds as the most reliable brand in terms of sustainable financial returns. Besides the financial variables, other factors were also found by IBIS world (2010) to influence the performance of restaurant brans in the US and they include:

Non-financial factors that influence performance of brands in US restaurant industry

Household disposal income – IBIS (2010) noted that the US restaurant industry is very sensitive to household disposal income because this is the means used to fund consumers’ dining and restaurants expenditures. The growth of household disposal income is influenced by changes in the labor market growth (which is basically the level of unemployment), as well as tax and interest rate growth, and fluctuation in the price of gas.

Consumer sentiment – another variable found to influence the performance of brands in the industry is consumers’ sentiment, which is presently more concentrated with the subprime residential mortgage crisis. The idea being presented by IBIS (2010) is that the more consumers view the future as being uncertain, they more they will be pushed to save and cub overall expenses and this will lead to relative low demand in restaurant foods.

Convenience and value for money – the location of the restaurant is an important factor when it comes to understanding demand related elements. This is because the more the restaurant is located to convenient places where consumers can easily access it, the higher the demand. Consumers are also conscious of the value they receive for the expenses incurred and the higher the perceived value, the higher the demand.

Health consciousness – IBIS (2010) noted that US consumers are increasingly becoming conscious of the health features and benefits of restaurant foods as well as the impact of such products on their overall health. Thus, brands that take such consideration into effect create a higher competitive edge because consumers’ demand for their products will increase as compared with brands that don’t take that into consideration.

Environmental factors and its influence on performance of McDonalds

Political factors	The US system is one of the most reliable political system in the world with high level of stability as fostered by the country’s advanced democratic unit. This is beneficial to brands in the country and it could be said that stability in business and investment policies have helped McDonalds to ensure stability in the country
Economic Factors	One highlight from the above analysis is 2009 recession, which saw McDonalds experience negative return while other brands did experience positive returns. As such, it could be argued that the McDonalds strategic unit is not built to effectively handle economic recessions. However, the company was successful in responding to the recession as it returned positively for the preceding years. The US economy is also one of the most reliable in the world with advanced financial systems, and this is positively influential on the performance of McDonalds because it offered some needed level of stability in the system.
Socio-economic factors	This is one of the factors highlighted by IBIS (2010) as having the most significant impact on performance of brands in the restaurant industry. This is because the American society craves for restaurant dishes as it offered them needed flexibility and lesser time investment in preparation of home meals and also provides the right scene for meeting people. Thus, this factors does have a positive influence on the overall performance of McDonalds in the country.
Technological factors	US is also one of the most technologically advanced countries in the world and it offers an effective way for management of supply chain, which further posts the overall competitive advantage of McDonalds. This is because needed resources are made available as required and products and services effectively and efficiently delivered to customers.
Legal factors	Just like majority of the discussions made in this research, the USA adopts an advanced form of legal system, which offers high level of protection to both consumers and companies. From the company point of view, this will allow them to legally protect all their assets such as patents and trademarks. From the consumers’ side, the company is being put at high risk as consumers will likely seek legal battle for any slightest mishap in their business process.
Environment factors	USA also adopted mechanized form of faming, and this provides the company with high opportunity of exploring new ways of sourcing needed raw materials for their production.

Source as adapted from: IBIS (2010)

Market competition analysis

Porter’s 5 forces

1.      Supplier’s bargaining power – in the course of its successful business establishment, McDonalds have partnered with numerous suppliers in its industry as well as established its own raw material production units. This has relatively reduced the level of suppliers’ bargaining power for the company (IBIS, 2010) and it is positive for the success of the brand.

2.      Consumers’ bargaining power – prices in the US restaurant industry are relatively similar, which reduced the level of consumers’ bargaining power and offered needed competitive balance for brands like McDonalds.

3.      Threat of new entrants – IBIS (2010) also noted that growth in the industry has reached maturity with new brands rarely entering the industry. Thus, threat of new entrants is reduced significantly and balanced more assured in the competitive sphere of the industry.

4.      Threat of substitutes – there are numerous substitutes offered by competing brands such as KFC and Burger King as discussed in this research, and this is very significant as it does have potential influence on overall performance of McDonalds in the US restaurant industry.

5.      Rivalry – competition is also very fierce with numerous advanced brands such as KFC and Burger King all vowing for the market share. Thus, competition is expected to have negative influence on the brand in the future.

From the above analysis, it is evident the external environment has provided sustainable business opportunities for McDonalds, but the success of the brand is very much threated by the presence of other top restaurant brands such as KFC and Burger King.

RECOMMENDATION

Proposed Strategy: Create Differentiable Corporate Identity

In order to ensure sustainable performance in an industry that is marred with competition from similar brands that offer similar products, it is suggested that McDonalds should adopt Porter’s Generic forces in the form of:

Differentiation - The Company should differentiate its product offerings by making use of secret ingredients and recipes that offer consumers best taste and quality. Such offerings should be hard for competing brands to imitate in order to ensure that it can be used to create sustainable competitive advantage (Gatignon and Xuereb, 1997; Zhou et al., 2005; Slater and Narver, 1994; Day and Wensley, 1983, 1988). For instance, Coca-Cola has been able to perform great in a fiercely competitive market just because it successfully developed its secret recipe that differentiated its products from that of competing brands.

Price leadership - Price is one of the factors highlighted as having significant influence on the performance or brands (Stoelhorst and Van Raaji, 2004) in the US restaurant industry. This is because consumers are very conscious about the value received per incurred expenses.  Thus, it is recommended that the company should take advantage of its expanded networks and establish huge economies of scale that will be difficult for competing brands to achieve and competitively price its products in the process. This will ensure sustainability in demand even when household incomes are relatively low. For instance, since the products are relatively similar in the industry, offering competitive pricing will ensure that consumers always continue to demand for McDonalds.

Niche marketing – Another recommendation is for McDonalds to target its product niches and market their products to thee niche. Such will enhance the level of focus of it marketing strategy and focus in essence will bring about enhanced competitive level and improved performance. Focusing on niche will aloe for tailored products and services (Day, 1994, 1999; Jaworski and Kohli, 1993; Vargo and Lusch, 2004).

Limitations of adopted models

Although these recommendations are expected to be very effective if properly implemented, it is important to understand that they are based on the external environment analysis above. Past researchers have criticized both the Porter’s five forces and Pestle analysis for being primarily focused on external environments while ignoring internal factors such as workplace conditions, competence level of the workforce, organizational politics and other factors that can potential influence the overall performance of the company. Thus, it is said that the above recommendations are also limited in the sense that they ignore internal environment, thus limiting the overall possibility of establishing sustainability through the aid of both internal and external forces.

CONCLUSION

From the above analysis, it can be seen that McDonalds have been successful in ensuring sustainability in its business operation through the development of effective and efficient business model. However, increased competition by related brands that offer similar products is a worry for the company if it is to carry such established level of sustainability into the future. In order to ensure that the recommendations come into full effects, it is suggested that future related studies should focus on understanding internal forces in the company and how such forces can bring about sustainability in McDonalds. This is because the models adopted in this research focused primarily on external forces and almost completely ignored internal forces and their influence on overall performance of the brand.

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