Mc. Donalds Downfall

PRESENTED BY: RAMSHA QADIR JYOTSNA SINGH VIJAYALAXMI ANKIT RATHI

“The Mc Donald’s type fast food isin’t relevant to today’s customer.” -A Mc Donald’s Franchisee

“The world’s has changed. Our customers have changed. We have to change too.” -JAMES R. CANTALUPO, CHAIRMAN AND CEO, Mc Donald’s, 2003

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Two brothers Richard and Maurice McDonald opened the first restaurant in San Bernardino, California in 1937. • Opened a drive-in restaurant- relatively new concept. • Single store- sold hamburgers and fries. • Strong business in milk shakes.

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SUCCESS FACTORS IN MID 1950s Invented a revolutionary new

concept- “self service” • Reduced menu from 25 items to 9. • Prices kept low. • Success factors- speed, service, quality and cleanliness.

MCDONALD’S LOGO

• First franchisee- Neil Fox in Phoenix, Arizona(1952) • Franchisee restaurant located in a gleaming red and white tiled rectangular building. • Most distinctive feature- “ two bright yellow arches” which later evolved as the symbol for McDonald’s.

MCDONALD TO MCDONALD’S CORPORATION • Ray Kroc- multimixers distributorstepped in to change McDonald’s history. • Small investment for $75000 made business ideal for franchising. • In 1955- Kroc established a franchising company. • In 1961- changed the company name to McDonald’s Corporation.

CRUCIAL HAPPENINGS 1960 1963

Indication of competition- Domino’s first telephone order to deliver a pizza Ronald McDonald’s debut as corporate “spokesclown”

1965

McDonald’s stock went public at $22.50 a share

1967

McDonald’s went International

1968

“Big Mac”, the basic burger, made its debut- an immediate hit

1975

First “Drive- Thru” operations in Sierra Vista, Arizona

1979

Introduced “Happy Meals”- gave working moms a break

1991

Introduced low-fat McLean Delux Burger- flopped and withdrawn

DOWNFALL Since 1994

McDonalds ranked at the bottom of fast food industry.

Dec 2002

Stock plummeted 60% over a period of 3 years

2002

Lost $20 billion in market capitalization

Jan 2003

Quarterly loss of $344 million

One of the main reasons was the changing customer preferences. Customers preferred eating at home. Became more health conscious and selected fresh food over fatty, fried food and red meat. According to an industry expert, the ageing population behaved differently than they did 10, 20, 30 years ago.

Continued… Obesity became a major health problem in late 1990s. According to a report by American Medical Association, 30.5% of Americans were obese and 15% of the children aged between six and nine were overweight. McDonald’s had to face legal suits over claims that its high calorie food was responsible for health problems.  Some of these foods should not be consumed more than once a week which

Continued.. Depended heavily on US tourism, but with the September 11,2001, terrorist attacks, McDonald’s’ sales suffered. In the late1990s, it faced stiff competition from fast food chains like Wendy’s, Burger King, Pizza Hut, KFC and Subway. According to a research conducted by Business Week, consumers rated both Wendy’s and Burger King better, as far as the quality of food was concerned.

INTERNAL CRISIS In the late 1990s, McDonald’s faced a slow down in domestic sales. International sales had also fallen due to economic turmoil across Europe and Asia. Market share had also reduced Domestic operating income had also declined. Relationships with franchisees also

Continued… o For every new restaurant that was opened, a McDonald’s store in the vicinity lost anything from 6% to 20% of its revenues. o Its continuous expansion had an adverse effect on service and quality. o It stopped grading its franchisees by mystery shoppers on parameters such as cleanliness, speed and service.

Continued… o In 1999, it introduced a made-to-order system called ‘Made for You,’ to counter custom made food systems at Wendy’s and Burger King. However, both the systems stretched the time required to serve the customers, instead of improving it. o It met the speed of service standard only 46% of the time. o Slow services and rude unprofessional employees were major sources of customer complaints.

FAILURE OF BLOCKBUSTER PRODUCTS • Although considered the most innovative company in fast food segment, failed to come out with blockbuster products. • Successful innovations were from yesteryears: Big Mac(1968), drive thru(1975), Breakfast(1977), Happy Meal(1979) and Chicken McNugget(1983). • 40 food items such as lasagna, pizza and carrot sticks failed. • Adult food items like McLean and Arch Deluxe burgers failed.

Continued… • “ McDonald’s need to move the question from ‘How can we sell more hamburgers?’ to ‘What does our brand allow us to consider selling to our customers?’” -ADRIAN J.SLYWOTSKY, A PARTNER AT CORPORATE DECISIONS INC., A CONSULTING

• Problems in maintaining cordial relationships. • 1996 survey showed that only 28% of franchisees thought that the company’s strategy is on “the right track”. • Company changed its views so many times that it was not possible to know company’s stance. • Unlike 1994 i.e. 84%, only 26% said that company’s handling of important

Continued.. • in 1997 , franchisees vetoed McDonald’s plans to serve customers in 55 seconds or less, saying that it was not practical. • Worse turn in relation, 1996, franchisees joined independent group consortium, run by former McDonald’s employee DICK ADAMS. • It operated secretly due to fear of retribution from the company. • It attempted “system wide propaganda” that franchisees loved

Continued… • CEO Greenberg shrugged it off saying“Our relationship with the licensees is absolute best in the business.” • Company argued that Consortium is a group of just 8 franchisees. Adams, however, maintained that the group had more than 300 members.

In 1980’s and 1990’s, franchisees were so eager for McDonald’s two year training Global operations program, queue up for hours.. In late 1990’s, no such queues. Terminating their contracts. They saw their profits to just 4% from 15% peak. Countries with McDonald's stores

Continued… Former franchisee and a food consultant Richard Adams, 20 franchisees were leaving McDonald’s in early 2000s. Unhappiness over their expenditure on “made for you” kitchen which actually slowed the service.

-REGGIE WEBB, OPERATOR OF 11 McDonald’s RESTAURANTS IN LOS ANGELES.

Continued… According to some analysis, McDonald’s demanded too much from its franchisees-

-BUSINESS WEEK WROTE IN MARCH 2003.

Continued… Largest franchisees operated more than 50 stores. Franchisees who beat McDonald’s national sales average were rewarded with an offer to open and buy more stores…….. Which again were not proving to be sufficient due to decline in sales. -ALAN FELDMAN, CEO OF MIDAS INC., COO FOR McDonald’s OPERATIONS UNTIL JANUARY 2002.

Continued… Privacy policy contributed to its poor performance. Price war due between McDonald’s and Burger King•Former sold full size Big N’Tasty and McChicken for $1 each and $1 value meal with 8 items. While latter introduced $99 value meal with 11 items. •Franchisees prepared Big N’Tasty in $1.07, so, some of them even sold it of

• Cantalupo- man behind McDonald’s successful international expansion.

INITIATIVES BY CANTALUPO Changes initiated to restore McDonald’s to its glorious days: His plans- to rebuild the foundation“more customers in existing stores”. More emphasis to- cleanliness, service and staff productivity. Aim- to bring customers back. Reduced capital spending by a third to $1.2 billion.

• Get rid of undesirable marketing activities. • National ad campaign- “dollar value menu”- Big ‘n’ Tasty burger, McChicken sandwich, special sizes of fries, soda, salad and various desserts.

MARKETING INITIATIVES Focus on core competency of consistent products and reliable service. Offers upscale alternatives including McCafe and Bistro Gourmet. Eliminates “supersize”- offers healthier food options and introduces Go Active! Adult Happy Meal.

ENVIRONMENTAL INITIATIVES Unbleached paper carry bags. Replacing polystyrene foam sandwich clamshells with paper wraps. light weight recycled boxes.

• “ McDonald’s are at a critical juncture and what they do today will shape whether they just fade away or recapture some of the magic and greatness again.”

Question no. 1 Mcdonald’s was once hailed as the role model for fast food industry. In the 1980s and early 1990s, it was one of the most successful companies in the fast food industry. However, in tne late 1990s, it experienced major problems which reflected in poor sales. Do you think McDonald’s faced poor sales in the late 1990s mainly because of changes in external

Question . 2 Some analysists feel that McDonald’s problems in the late 1990s were due to its inability to bring about a change in the internal environment of the organization. What were the problems in the internal environment that resulted in McDonald’s poor performance in the late 1990s?

Question.3 Many analysts feel that franchising is the best way to grow, more so, in international markets. However, the McDonald’s franchisee model which was very successful in the 1980s took a beating in late 1990s. What according to you were the problems with McDonald’s franchisee model? In the light of such problems, do you think it is still the best way to grow?

Question.4 Soon after taking over as the CEO of McDonald’s, Cantalupo has taken various steps to reverse the download slide of McDonald’s. do you think the steps taken by Cantalupo would see McDonald’s emerge as the “ Great American Meal” once again? What according to you, should Cantalupo do to take McDonald’s back to its youthful vigour?