The International Market Strategy of McDonald's

Executive Summary

McDonald’s is one of the world’s largest chains of fast food restaurants. They operate thirty two thousand restaurants serving more than sixty million customers daily. The key to rapid and successful international expansion of McDonald’s is the franchise model pioneered by them.

McDonald’s recognized early in their life that overseas market required an extremely high degree of local responsiveness and that they needed to manage business spread across different regions effectively and efficiently which would be achieved only through “Transnational Strategy”. The value chain was constructed taking into consideration of local culture, legal-political and economic environments in mind.

Company Overview

McDonald’s is one of the best brands known worldwide and world’s largest chain of hamburger fast food restaurants, serving more than 50 million customers daily. Company started in year 1940 by Dick and Mac McDonald in San Bernardino, California, USA. From extremely modest beginning, they could able to scale their business by selling a high quality product cheaply and quickly. Companies expansion in terms of business happened after Ray Kroc from Chicago joined two brothers in their business. He quickly realized and had a vision to expand the business throughout USA and beyond.

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They have spread across 117 countries and operate around 32000 restaurants worldwide employing 1.5 million people. They serve around 60 million customers per day. The key to such a rapid and successful international expansion is the business model pioneered by McDonald’s. Ray Kroc realized company can achieve rapid expansion by franchise model. Today over 70% of McDonald’s restaurants are running on the basis of franchise model.

Today McDonald’s global sales were around $22 billion, making it largest fast food Service Company and ranked 107 in Fortune 500 companies in year 2009. The company operates other restaurant brands such as Boston Market, Pret A Manger, Donatos Pizza, Chipotle Mexican Grill, and Aroma Cafe.

Company History and Milestones

The McDonald’s concept was introduced in San Bernardino, California by Dick and Mac McDonald of Manchester, New Hampshire. Later on, Ray Kroc, one of the business partners, of Oak Park, Illinois, modified and expanded the business, who subsequently bought the business to incorporate McDonald’s Corporation.

While the company was experiencing rapid growth rate on the US soil, it also went in for international expansion. It all started with the opening of their first restaurant outside the U.S. in Canada on June 1, 1967 in Richmond B.C. Canada today has more than 1,300 restaurants.

After a few setbacks in the Caribbean and the Netherlands, they tried with customization of their international standardised delivery model in the form of a change menu for local tastes – they realized the fact that what had worked for them in the U.S. may not be replicated elsewhere. Till now they relied on a strong local partner, fully trained and totally involved in the business with detailed operating procedures for QSC&V (Quality, Service, Cleanliness and Value) for success.

Japan came as one of the most promising and initial success story in their path of international success, where Den Fujita, owner of an import company, became McDonald’s joint venture partner in 1971. Fujita opened his first restaurant on July 20, 1971 in a tiny 500-square-foot restaurant in a prime location in Tokyo’s Ginza shopping district. On its first day, the restaurant had sales of $3,000. At the end of 1993, McDonald’s was Japan’s most successful restaurant chain, with some 1,400 restaurants enjoying nearly double the annual sales of its nearest competitor.

Similar kind of success stories were also replicated in Germany and Australia in 1971. Germany has more than 1,200 restaurants and Australia has some 700 McDonald’s locations. The company’s footprint in France and England are also along similar line with 980 restaurants in France and more than 1,200 restaurants in the United Kingdom.

These six countries – Canada, Japan, Germany, Australia, France and England – are known as McDonald’s “Big Six” providing about 80 percent of international operating income. McDonald’s international operations are playing an increasingly important role in our company’s result, as in 1995 its 7,030 restaurants across 89 countries produced sales of $14 billion.

Of late, McDonald’s international openings have made headline news in the media around the world. On January 31, 1990, about 30,000 people gathered in Moscow to visit the new, 23,680-square foot McDonald’s. This is by far being the maximum number of people ever served by a single restaurant. The negotiation for this restaurant had begun since the Montreal Olympics, 1976 and is the largest joint venture agreement between the Soviet Union and a food company.

The Russian McDonald’s was soon serving about 40,000 to 50,000 customers each day i.e. 15 million people in its first year of inception, which is supported by a $45 million food processing facility near Moscow, one of the most modern food processing facilities in Europe.

But it was only the beginning. McDonald’s opening in Beijing, China, on April 23, 1992 attracted more than 40,000 Chinese customers to its 28,000-square-foot restaurant, equipped 29 cash register stations to handle the flow. Located in the city’s busiest shopping district, the restaurant has some 800,000 pedestrians passing by daily.

The joint venture partnership between McDonald’s and the General Corporation of Beijing Agriculture, Industry, and Commerce had been working for five years to establish the network of local farmers, manufacturers, and other suppliers to support the restaurant.

The record breaking path continued with two new restaurants in Poland in 1992, one in Warsaw (13,304 transactions) and the other in Katowice each surpassing the Moscow and Beijing records for opening day transactions.

Other successful countries where McDonald’s has proved to be popular include the Czech Republic, East Germany, Hungary, and Slovenia.

October 1993, saw a new ground breaking path when McDonald’s entered the Middle East with a new restaurant in Tel Aviv, Israel. This was followed by entry in Saudi Arabia, Oman, Kuwait, Egypt, Bahrain, United Arab Emirates, and Qatar.

Company’s Global Strategy

Think Global Act Local

McDonald employs a transnational strategy in terms of local responsiveness and global integration.

They recognized that overseas market required an extremely high degree of local responsiveness and since their business has grown too big they also need to manage business spread across different regions effectively and efficiently which would not be achieved through any of the other strategies. The value chain needs to be constructed taking into consideration of local culture, legal-political and economic environments in mind.

Local Management

McDonald’s emphasize on local management for better responsiveness to the external environment. Moreover hiring locals would bring more acceptance of the company in local market by customers and company can gain easy access to bureaucracy associated with local government. This brings up the culture of innovation, accountability, and better customer responsiveness. Having local management also enables franchisee to address employees’ issues more effectively taking into consideration of local culture. Through franchise model McDonald’s are able to reduce the cost of setting up new businesses in different region.

Political Sensitivity

Political risk is that political decisions, events or conditions which may affect country’s business environment in ways that may affect the investments badly or may have to accept lower returns. The political risk factor is quite important for McDonald’s since there can be several countries which might not allow FDI in fast food industry or disallow franchise kind of business model.

Countries like India where 80% population do not eat beef and some religion does not allow eating pork, therefore McDonald’s had to customize their product offerings to the local needs and in a way avoided any political conflicts.

Environmental Friendliness

The strategy of being environmental friendliness is a new emerging concept. Many developed countries enforce certain environmental laws to make companies comply with the norms. E.g. there are specific kinds of directions for the disposal of wastes generated by the business operations. Environmental friendliness in effect brings goodwill to the company and also provides opportunity to build a brand. McDonald’s also engage themselves in CSR activity like sustainable supply chain management, healthy and nutritious food products etc. Recently McDonald’s have come up with products which have low calorie content, nutritious to the health of customers.

System and Process Standardization

As a transnational company it is essential to have a standardized system and process in place for effective and efficient management of the businesses running in different territories. E.g. McDonald’s force standard operating procedures like make to order make to stock and just-in-time processes. Implementation and integration of ERP system across businesses of various countries and with business associates would standardization in their business processes. This would help McDonald’s reduce their cost, reduce manual work, more transparency and efficiency in information sharing, better responsiveness to stakeholders etc.

Pricing Strategy

Companies entering into different countries for business have to evaluate their pricing of products based on income distribution of citizens, local inflation and other factors like currency exchange rate. Because of exchange rate it is possible that you end up paying different prices for same product in different countries. McDonald’s mainly open their shops in major cities targeting middle and upper class citizens as they can afford the prices. After this they start targeting lower middle class citizens.

Growth Strategy

McDonald’s growth strategy is based on three elements

1. Increasing number of restaurants
2. maximizing sales and profits at existing restaurants
3. improving international profitability

Maximising sales and profits at existing restaurants will be accomplished through better operations, reinvestment, product development and refinement, effective marketing and lower development and operating costs. McDonald’s believes that its long term sustainability and growth depends on stakeholders – franchisees, suppliers, and customers. They believe that as long as franchisees and suppliers are profitable, so would the company.

Improved international profitability is realised as economies of scale are achieved in individual markets and as the company benefits from the global infrastructure.

McDonald’s is earning from two sources, one from home country US and another from foreign markets. With the globalization, the share of foreign earnings is growing rapidly. The chart below gives number of stores in host countries to home country.

While McDonald’s faces costs of expansion into new and within markets, it is able to assess the long-term prospects of different markets and it is on this basis that it would decide when to enter a new market. McDonald’s initially opened outlets in higher-income countries like UK, Japan, Canada and then move into lower-income countries like India etc.

Entry Strategy and Business Model

While McDonald’s cannot export its product but it can choose among different modes of operation in foreign market, some of which may involve a higher degree of commitment of resources than others. In particular, it can open a subsidiary that franchises directly, or enter into a joint venture with a local partner, or establish a master franchising arrangement whereby the master franchisee owns and operates all the outlets in his or her territory or finds franchisees to do the same. The level of investment that McDonald’s commits to these markets differs across these different modes but in all cases McDonald’s exerts significant control over the number of outlets and the growth in the number of outlets in each market. Hence McDonald’s internalizes the cost of expansion to a large extent depending on kind of governance within each market and sets the expansion path within as well as across other markets.

McDonald’s Franchise Model

McDonalds primarily operates through franchises across various countries. Franchises give companies such as McDonalds a cheaper way of expanding to other countries while also giving the control over the usage of their brand and operations. The advantages of franchising are as follows

Franchises get up and running faster than other forms of ownership

They are profitable more quickly

Supplies are cheaper for the franchisee by leveraging the company’s supply chain

Initial investment is lower for the company

Control on usage of brand and operations is higher as compared to leasing

Franchisee gets assistance in terms of managerial know-how from the company

McDonald’s earns revenues from its franchisees in two forms:

Service Fees – A monthly fee depending upon the restaurant’s sales (currently a service fee of 4.0% of monthly sales)

Rent – A monthly base rent or percentage rent that is a % of monthly sales. McDonald’s usually owns the property and also acts as the landlord.

Since McDonald’s owns most of the properties on which its franchisees operate, it collects a percentage of monthly sales as rent. Through this method, McDonald’s now is the largest owner of corner properties in the world.

The success of the franchising mode of expansion depends on three factors:

1. Product and service standardization

McDonald’s ensures that it standardizes operations across its franchises to ensure a standard McDonald’s experience anywhere in the world. McDonald’s aim was that a customer in California would have the same experience if he visited an outlet in Paris. McDonald’s achieves this by reducing the amount of skill required in the preparation of its product line. This has been done by breaking the process into a series of repeatable actions to achieve the same result. By giving instructions to workers off the streets, and providing each location with the same frozen meat products, McDonald’s can ensure that each worker follows the same procedure, and has an identical output at any McDonald’s across the continent.

2. High identification through promotion

McDonald’s is one of the largest advertisers amongst its competitors. By having an integrated brand promotion across the world, McDonald’s ensures high identification and a uniform brand image across the geographies and markets in which it operates.

3. Effective cost controls

Through strict control of each franchisees costs and comparison across franchisees, McDonald’s is able to ensure that each franchisee is operating at the right cost structure. It can use knowledge from the outlets that are owned by McDonald’s itself to experiment and find appropriate cost optimization measures.

However, one problem with McDonald’s penetration is that in some markets franchisees find themselves competing against each other. When McDonald’s opens two outlets near each other, franchisees end up cannibalizing each other’s markets which might lead to resentment and unhealthy competition.

Further, McDonald’s franchisees also have begun to feel stifled by the amount of controls that McDonald’s exerts over their operations. However, McDonald’s, in most cases, seems to have the right balance between standardization and adjustment to local needs.

What McDonald’s looks for in its franchisees?

Business Experience – Individuals who have demonstrated successful ownership or management of multiple business units or have managed multiple departments

Rapid Growth – Individuals who possess the capability to grow rapidly with McDonald’s

Business Plan and Customer Experience – The ability to develop and execute a business plan

Financial Management – Skill to manage finances including a thorough understanding of business financial statements

Management Skills – Commitment to personally manage the day-to-day operations of the restaurant business

Training – Willingness to complete a comprehensive world class training program and become proficient in all aspects of operating a McDonald’s restaurant business

Regional Strategy

For a successful business in host countries McDonald’s had to customize its business strategy to the local needs. Regional strategy became important for McDonald’s they started their expansion in Asian countries as their culture is very different from western world. McDonald’s adopted product localization and innovations for new offerings based on local tastes and needs.

In 1963, McDonald’s introduced the “Filet-of-Fish” sandwich in the Cincinnati area for Catholics who did not eat meat on Friday. This was the first new offering added to the standard menu and went national the following year.

The “Big Mac” introduced in 1968 was the brainchild of Jim Delligatti, one of the earliest McDonald’s Systems franchisees.

The “Egg McMuffin” was developed in 1973 by McDonald’s franchisee Herb Peterson.

A Canadian franchisee invented The McFlurry in 1997.

Use of chicken instead of pork and beef in India.

Introduction of Maharaja Mac, McAloo Tikki in India suitable to local tastes and tradition.

In year 2005 McDonald’s adapted Wi-Fi with the changing times and consumer demand with Nintendo in selected locations. They also started home delivery service in Singapore, where customer can place their orders on phone and have it delivered at their doorsteps. In busy places like malls, airports McDonald’s installed quick service kiosks rather than its standard free-standing units.

McDonald’s in China

The company managed to succeed in establishing their business where most Western based Multi-nationals have failed previously. One of the primary reasons for the failure can be attributed to the lack of appreciation of Chinese culture by other MNCs. They tried to replicate their US operations China without any modification to local population and their tastes.

McDonald’s have made major strides in adapting to Chinese culture in terms menu and local taste. Locals manage all restaurants. Asian consumers were allowed to change company culture for their own purpose. Restaurants were more akin to coffee houses where people meet rather fast food joints. Menu was also modified to include the now highly popular “teriyaki burger”.

McDonald’s in Britain

McDonald’s was tarnished by the McLibel, which was the longest running libel trial in English history. Activists sued the company for exploiting children in advertisements, producing misleading advertisements, cruelty to animals and antipathetic to unionization. McDonald’s finally settled for 10 million pounds

Later on, company developed strategy to address following issues in order to address its situation in Britain.

• Tackle impact of recession by offering good value item
• Attract new and different customers
• Improve tarnished image of McDonald’s

The company used photographs of the British farmers who supply McDonald’s, which appeared on the sheets of paper put on customers’ trays. Cooking oil was converted into biodiesel fuel to power the restaurants.

Menus and the introduction of new items, such as the Little Tasters, as well as the introduction of more chicken-based dishes was introduced, in response to customer demand for a greater selection of supposedly healthier white meat options .They also tried making breakfast a more important mealtime “event” for McDonald’s to increase their offerings.

All these initiatives helped McDonald’s to increase sales during recession at a time when the fast-food market was suffering huge losses.

McDonald’s Saudi Arabia

McDonald’s Saudi Arabia is also highly tuned into local customs. It closes 5 times a day for Muslim prayers. It does not offer any pork items in deference to Muslim customs. 50% of products are manufactured locally and in gulf regions.

Competitor’s Entry Strategy

Kentucky Fried Chicken

Kentucky Fried Chicken (KFC) is one of the most admired and known fast food chains in world. Started in year 1930’s by Kernel Sanders in the southern part of US as a small franchise operation. Quality, service, and cleanliness represent the most critical success factors to KFC global success.

KFC’s ownership change many hands, first it went to Hubelin International in 1974 and then acquired by R. J. Reynolds in 1982. R. J. Reynolds was concerned about the declining profitability in home market because of tough competition and hence was willing to fund KFC for overseas expansion. In order to reduce risk of overseas expansion, KFC encouraged franchising in complicated markets but faced challenges in aligning corporate planning with franchisee’s short term profitability.

Company deployed other entry strategies like Joint Venture with large scale poultry producer for Japanese market in early 1970s. JVs helped KFC to manage sourcing, logistics problems and also helped addressing quality of chicken and other supplies. The company also had entered foreign markets by Greenfield entry by establishing a company-owned foreign subsidiary.