McDonald's Corporation

McDonald's Corporation - Financial and Strategic Analysis Review

Reference Code: GDCPG31248FSA

Company Snapshot Company Overview

Key Information McDonald’s Corporation (McDonald’s) is one of the leading

quick service restaurant operators in the US. The company
McDonald's Corporation, Key Information specializes in offering hamburgers, cheeseburger, chicken
Web Address www.mcdonalds.com sandwiches, French fries, salads, milk shakes, desserts
Financial year-end December and ice cream sundaes, Big Mac, Quarter Pounder,
Number of Employees 400,000 Chicken McNuggets and Egg McMuffin. In addition, it
serves premium salads, chicken, yogurt, bottled water, and
NYSE MCD
fruits. It operates more than 31,967 restaurants that serve
Source : GlobalData
58 million people in more than 118 countries every day.
Out of these, 25,465 are operated by franchisees, while
Key Ratios 6,502 are operated by the company.
McDonald's Corporation, Key Ratios
SWOT Analysis
P/E 17.12

EV/EBITDA 13.02.00 McDonald's Corporation, SWOT Analysis

Strengths Weaknesses
Return on Equity (%) 32.43

Debt/Equity 75.38 Market Leading Brand Declining Market Share in the

Sector
Operating profit margin (%) 30.08
Wide International Presence
Dividend Yield 0.03 Pending Lawsuits
Strong Focus on Quality
Note: Above ratios are based on share price as of 21-Apr-2010

Source : GlobalData
Opportunities Threats
Share Data
Rising Sales in the US Currency and Interest Rate
McDonald's Corporation, Share Data Restaurant Industry Risk
Price (USD) as on 21-Apr-2010 70.36
Product Innovation and Menu Rising Manpower Costs
EPS (USD) 4.11 Diversification
Book value per share (USD) 13.03.00 Government Regulations
Huge Potential in the
Shares Outstanding (in million) 1,107.40 Emerging Markets

Source : GlobalData
Source : GlobalData

Performance Chart
McDonald's Corporation, Performance Chart (2005 - Financial Performance
2009)
The company reported revenues of (U.S. Dollars) USD
22,744.70 million during the fiscal year ended December
2009, a decrease of 3.31% from 2008. The operating
profit of the company was USD 6,841.00 million during
the fiscal year 2009, an increase of 6.18% over 2008.
The net profit of the company was USD 4,551.00 million
during the fiscal year 2009, an increase of 5.51% over
2008.

Source : GlobalData

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McDonald's Corporation

McDonald's Corporation - SWOT Analysis

SWOT Analysis - Overview

McDonald's Corporation (McDonald's) is one of the largest food service companies across the globe. It is engaged in the
franchising and operations of McDonald’s restaurants. The company's globally recognized brand and strong focus on
quality differentiates the company from its competitors. The growing US restaurant industry coupled with product innovation
and menu diversification could ensure a strong future for the company. However, the company's operations could be
hampered by the pending lawsuits, increasing competition and government regulations.

McDonald's Corporation - Strengths

Strength - Market Leading Brand
McDonald’s enjoys a strong market position in the food service industry, which helps it attract and serve a diverse customer
base. McDonald’s is one of the world’s most valuable and renowned brands and has a leading position in the branded
quick service restaurant business across all the countries where it operates. The most famous products of the company
include hamburgers and cheeseburgers, Big Mac, Quarter Pounder with Cheese, Filet-O-Fish, several chicken sandwiches,
Chicken McNuggets, Chicken Selects, french fries, premium salads, shakes, McFlurry desserts, sundaes, soft serve cones,
pies, cookies, soft drinks, coffee and other beverages. In 2008, McDonalds was ranked as the most admired food service
company by Fortune magazine. The company's strong brand equity coupled with efficient marketing and promotional
activities helps the company to attract and retain a loyal customer base. It also supports the company’s new product
launches as well as market expansion strategies.

Strength - Wide International Presence

Wide geographical operations helps the company generate diversified sources of revenues as well as reduces the risks of
overdependence on a particular market. McDonald’s operates across 118 countries worldwide. The company operates
31,967 restaurants, of these 18,402 are operated by conventional franchisees, 2,926 are operated by developmental
licensees, 4,137 are operated by foreign affiliated markets, and 6,502 are operated by the company. It operates in four
reportable segments namely, the US; Europe; the Asia Pacific region, the Middle East and Africa (APMEA); and Other
countries. The Other countries segment includes Canada and Latin America. During the year 2008, the US, Europe and
APMEA segments accounted for 34.3%, 42.2% and 17.9% of total revenues. In the Europe segment, France, Germany
and the UK, collectively, accounted for 55% of Europe’s revenues. The countries Australia, China and Japan collectively
accounted for over 50% of APMEA’s revenues. This broad international presence provides the company a diversified
source of revenue. This also helps the company in mitigating the various risks associated with the overdependence on a
particular region.

Strength - Strong Focus on Quality

A strong focus on high quality product offerings helps the company generate brand loyalty. The company and its
franchisees purchase food, packaging, equipment and other goods from numerous independent suppliers. For this,
McDonald’s has established and strictly enforced high quality standards and accordingly approves these independent
suppliers. The company has quality assurance labs around the world to monitor the quality of these products. The quality
assurance process not only involves ongoing product reviews, but also on-site inspections of suppliers’ facilities.
Furthermore, a quality assurance board, composed of the company’s technical, safety and supply chain specialists,
provides strategic global leadership for all aspects of food quality and safety. In addition, the company works closely with
the suppliers to encourage innovation, assure best practices and drive continuous improvement. Independently owned and
operated distribution centers, also approved by the company, distribute products and supplies to most McDonald’s
restaurants. The company is also engaged in the research and development activities located in the US, Europe, and Asia.
The company’s strategy to provide high quality products to consumers increases the brand image and gives it a competitive
advantage.

Strength - Expanding Operating Margin

The company's operating margin was 27.39% for the fiscal year 2008. This was above the S&P 500 companies average* of
14.7%. A higher than sector average* operating margin may indicate efficient cost management or a strong pricing strategy
by the company. The operating margin has increased 1037 basis points (bps) over 2007 which may indicate management's
high focus on improving profitability.

Strength - Efficient Use of Resources

The company's return on equity (ROE) was 32.2% for the fiscal year 2008. This was above the S&P 500 companies
average* of 12.9%. A higher than sector average* ROE may indicate that the company is efficiently using the shareholders'
money and that it is generating high returns for its shareholders compared to other companies in the sector.

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McDonald's Corporation - Weaknesses

Weakness - Declining Market Share in the Sector
The company's compounded annual growth rate (CAGR) for revenue was 6.05% during 2004-2008. This was below the
S&P 500 companies average* of 11.1%. A lower than sector average* revenue CAGR may indicate that the company has
underperformed the average sector growth and lost market share over the last four years. The company's
underperformance could be attributed to a weak competitive position or lack of innovative products and services.

Weakness - Pending Lawsuits

Various lawsuits have been filed against the company, which could have an adverse impact on its brand image. In
February 2003, and again in January and December 2005, amended complaints were filed against the company on behalf
of individuals in New York under the age of 18, who became obese from eating McDonald’s products. They alleged
McDonald’s engaged in deceptive advertising, failure to disclose certain additives and ingredients, as well as failure to
provide nutritional information about its products. Various complaints have also been filed against the company alleging its
misrepresentation of french fries and hash browns as free of wheat, gluten and/or milk, despite containing derivatives of
these ingredients. Complaints have also been filed against McDonald’s for violation of state consumer fraud acts, deceptive
trade practices acts, unjust enrichment, unfair competition act, negligent misrepresentation and concealment, and false
advertising. Any unfavorable outcome of such lawsuits could have a material impact on the company’s business. Apart
from adding up expenditure due to payment of compensatory and punitive damages, such lawsuits also tarnish the brand
image of the company.

McDonald's Corporation - Opportunities

Opportunity - Rising Sales in the US Restaurant Industry
The company can gain from the booming restaurant industry. According to National Restaurant Industry (NRA) report, the
sales of US restaurant are expected to reach USD 566 billion in 2009, an increase of 2.5% over 2008. The industry is
expected to remain an economic powerhouse, representing 4% of the US gross domestic product and employing 9% of the
US workforce. As the consumers spend approximately 48% of their food budget in restaurants, this industry is considered
to be a major part of American lifestyle. In addition, the sales at full service restaurants are projected to reach USD 182.9
billion in 2009, an increase of 1% over 2008. On the other hand, the sales of Quick Service restaurants are projected to
reach USD 163.8 billion in 2009, an increase of 4% over 2008. These sales are driven by expanded menu choices, meeting
the demand of increasingly sophisticated and value-conscious consumers, with continued emphasis on value and
convenience. As the company is the leading restaurant operator in the US, it can capitalize on this rising restaurant
industry.

Opportunity - Product Innovation and Menu Diversification

The company’s strong focus on new product development creates huge opportunity for the company. During the fiscal year
2008, the company launched many new products such as the egg, tomato and pepper McPuff in its Chinese menu. The
company also introduced branded locally-relevant new products such as the premium chicken line in Australia and New
Zealand. In the US, it introduced Southern Style Chicken products, Iced Coffee and Sweet Tea in 2008. Furthermore, in
2009, McDonald’s is concentrating on menu variety and beverage choice, everyday affordability and convenience in the US
market. A broad and customized menu offering could help the company attract and serve a broad customer base and in
turn increase its profitability.

Opportunity - Huge Potential in the Emerging Markets

The fast paced growth in the emerging economies offer a huge growth potential for the company by leveraging its strong
brand and product portfolio. According to IMF, the GDP growth rate of advanced economies came down from 2.7% in 2007
to 1% in 2008. Furthermore, it is estimated that almost all these economies will post negative growth in 2009. Despite the
global economic slowdown, the emerging and developing economies recorded a GDP growth rate of 6.3% in 2008. The
same was 8.3% in the previous year and is estimated to be 3.3% in 2009. China’s GDP grew at 9% while India grew at
7.3% in 2008. The growing economy in these countries has generated new employment opportunities for the residents and
has provided a boost to their earnings. This rise in disposable income of the people has changed their buying behavior.
McDonald’s is aggressively developing more restaurants in China, where it recently opened its 1,000th restaurant. In
Russia and India too, the company has been expanding its stores in most of the cities. With the competition at its peak and
markets getting saturated, the company can look out for new growth avenues in these regions and expand its presence.

McDonald's Corporation - Threats

Threat - Currency and Interest Rate Risk
Since McDonald’s operates in a geographically diversified environment, it is prone to currency risks and interest rate risks.
The company operates in 118 countries spread across the regions of North America, Latin America, Europe, the Asia

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Pacific region, the Middle East and Africa. Thus, the company is exposed to currency risks associated with the purchases,
sales and borrowings from different markets. Over 60% of the company’s revenues are generated outside the US. Also
about 45% of the company’s debt is denominated by foreign currencies. Thus any foreign currency fluctuations, particularly
Euro, British Pound, Australian Dollar and Canadian Dollar, could have a major impact on the company’s financial
performance. Similarly, any change in the interest rate might also affect the group’s operating expenses and result in
diminished earnings.

Threat - Rising Manpower Costs

The labor costs have been on a rise globally, especially in the US and could have a major impact on the company’s
operational efficiency. The federal minimum wages have increased from USD 5.15 per hour in 1997 to USD 5.85 per hour
in July 2007. It is further expected to increase to USD 7.25 per hour by July 2009. Similar wage hikes have been witnessed
in both developed as well as developing countries across the world. Given the competitive environment and rigid liquidity
scenario, it becomes difficult for the company to attract and retain competent employees at reasonable pay. With the
company’s employee base of about 400,000 people, it is bound to come under pressure due to the pay hikes. If it fails to
comply with future price hikes, it may face labor strikes that might result in huge losses, as well as tarnishing its brand
image.

Threat - Government Regulations

The company, being a producer and marketer of food products, is subjected to various regulations by federal governmental
agencies, including the Food and Drug Administration, the Department of Agriculture, the Federal Trade Commission, the
Environmental Protection Agency and the Department of Commerce, as well as various state agencies, with respect to
production processes, product quality, packaging, labeling, storage and distribution. In addition, advertising of its
businesses is subject to regulation by the Federal Trade Commission. The company is also subjected to certain health and
safety regulations, including those issued under the Occupational Safety and Health Act. The company should comply with
all such stringent governmental regulations, failure of which may expose the company to new liabilities or may hamper its
existing operations, which could result in a decline in its profitability.

Threat - Intense Competition

The competition in the food service industry is fierce. These companies primarily compete on the basis of their price,
service, menu variety, product quality and convenience. Thus to survive and succeed in a stiff competitive environment, it
becomes very important for the company to distinguish its product and service offerings through a clear and unique value
proposition. The company’s competition in the broadest perspective includes restaurants, quick-service eating
establishments, pizza parlors, coffee shops, street vendors, convenience food stores, delicatessens and supermarkets. Key
branded competitors of the company include Starbucks Corporation, Wendy’s, Yum! Brands, Inc. and Burger King
Corporation. In the US, there are approximately 575,000 restaurants that generated about USD 370 billion in annual sales
in 2008. McDonald’s restaurant business accounts for 2.4% of those restaurants and 8.1% of the sales. If the company is
not able to maintain the product quality and consumer loyalty, this intense competition could reduce the sales volume of the
company, thereby hampering its market position. Rising competition may also force the company to reduce its prices, which
in turn may adversely affect its margins.

NOTE:
* Sector average represents top companies within the specified sector
The above strategic analysis is based on in-house research and reflects the publishers opinion only

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