McDonald's: History, Growth, and Challenges

1. McDonald’s Team 1: Chris Athens Ben Baker Chris Bolinger Josh Carver Jordan Guenther Jeff Ward

2. History • 1948 – McDonald brothers open the first McDonald’s and names Speedee as their company image. • 1954 – Ray Krock, a multimixer salesman becomes the franchising agent. • 1955- Ray Kroc opens the Des Plaines restaurant. The 1st day’s revenues - $366.12 • 1957 – Ray Kroc hands out free hamburgers to Salvation Army guests • 1958 – Sales grow 151% • 1961 – Ray Kroc buyout the McDonalds brothers for $2.7 million • 1963 – Ronald McDonald is introduced • 1965 - McDonald’s goes public with the company’s first offering on the stock exchange for $22.50 per share. • First television commercial is aired • http://www.youtube.com/watch?v=krXP_TUZqsk

3. History • 1966 – McDonald’s stocks split for the first time. • 1967 - Big Mac invented • McDonald’s in Canada and Puerto Rico open • 1971 - “Makadonaldo” (Japan) • 1973 - Egg McMuffin invented • 1974 - Ronald McDonald House opened • 1979 - Happy Meals introduced • 1979-present - Continued growth

4. Problems • Customer Service • McDonald’s is currently ranked last amongst its top competitors in the FFHR subsector. • #1 – Burger King • #2 – Wendy’s • #3 – McDonald’s • This may not sound bad at first glance, but when you look at the fact that these three competitors hold 73% of the FFHR market, it puts it into perspective.

5. Problems (cont.) • Health Issues

6. SWOT Analysis - Strengths • Worldwide Brand Recognition • 41% of all fast-food visits are for hamburgers • McDonald’s has 44% of US fast-food hamburger business • Over 70% of the restaurants are independently owned • Ranked number one in Fortune magazine’s 2008 list of “most admired food service companies.” Overseas market • Over 31,000 restaurants in over 120 countries.

7. SWOT Analysis – Strengths (cont) • Quality measures through supply chain management • Encourage new ideas from within • Big Mac • Egg McMuffin • Large available amounts of capital for future restaurants due to holding a limited number of corporate owned restaurants. • Economies of scale

8. SWOT Analysis - Weaknesses • Weak product development • Poor relationships with franchisees • Fluctuations in profit (which has been improved in 2008 after the franchising of many corporate owned restaurants)

9. SWOT Analysis - Opportunities • International expansion through continued franchise opportunities • Only serving 1% of the world’s population • Growth in the beverage industry (by 2011 - $71.4 billion in sales with 70.8% being coffee drinks) • Introduction of local offerings (i.e. Tech Burger with special condiments and toppings)

10. SWOT Analysis - Threats • Mature industry • Strength of competition • More health-conscious consumers • Changing demographics • Fluctuation of foreign exchange rates • Increasing commodity and fuel prices

11. Competition • Top • Burger King – 14% • Wendy’s – 13% • Other strong competitors • Sonic – 6% • Jack in the Box – 4% • Hardee’s – 3% • White Castle – 1%

12. Marketing Techniques • Product “Image” • Customers associate with the brand • Domestic • Global

13. Marketing Techniques (cont.) • Original symbol “Speedee” • Golden Arches • Building structure and colors • Local advertising

14. Slogans • “Your kind of place” (1967) • “You deserve a break today” (1971) • “We do it all for you” (1965) • “Have you had your break today” (1995) • “I’m lovin it” (2003)

15. Marketing Mix • Five P’s • Marketing and Communications • Responsibility • McSpirit Nights • Commercials • Atmosphere

16. Global Marketing • National Marketing Campaign • Marketing- • North America • Hong Kong • France • Australia • Catering to local needs across sea’s

17. Management In McDonald’s Ray Kroc “The quality of a leader is reflected in the standards they set for themselves” “We take the hamburger business more seriously than anyone else” “You're only as good as the people you hire” “If there is time to lean there is time to clean”

18. Hamburger University“McDonald’s Center of Training Excellence” Created by Fred Turner and Ray Kroc in 1961 All levels of managers in the McDonald’s family go through training at this facility. “At McDonald’s, our training mission is to be the best talent developer of people with the most committed individuals to Quality, Service, Cleanliness and Value (QSC&V) in the world. Our strong commitment to the training and development of our people has resulted in many “firsts” and honors.”

19. Management Continued Hamburger University has given emphasis to consistent restaurant operations procedures, service, quality and cleanliness. Because of it’s success H.U. has become the global center of excellence for McDonald’s operations training and leadership development. With this training it creates unity for the CEO to the local store manager, they all have the same goals in mind which is…………….

20. Being the best means providing outstanding quality, service, cleanliness, and value, so that we make every customer in every restaurant smile. And by doing this we are our customers' favorite place and way to eat."

21. Financial Health • We looked at 4 major aspects of financial health of McDonald’s and their competitors • Liquidity • Leverage • Rates of Return • Stock Market Ratios • We also took Altman’s Z-Score into account to see how healthy these companies were during the recession.

22. Liquidity • The ability to meet current obligations • We took into account the Current Ratio and the Quick Ratio. • Current Ratio = Current Assets/Current Liabilities. • Quick Ratio = (cash + marketable securities + net receivables) / Current Liabilities

23. Current Ratio in 2008

24. Quick Ratio for 2008 • *If the current ratio is above 1, and the quick ratio is below 1, then a manager may need to look at the valuation of inventory or the inventory turnover.

25. Leverage • The ratios between debt and equity which provides information about bankruptcy. • We will look at the Debt-to Asset Ratio and the Debt-to-Equity Ratio • Debt-to-Asset = Total Liabilities/Total Assets • Debt-to-Equity = Long-term Debt/Shareholder’s Equity

26. Meaning of Ratios • Debt-to-Asset shows whether assets are financed through equity, value under 1, or financed through debt, a value above 1. • Above 1, might mean trouble if the company is under pressure. • Debt-to-Equity shows whether a company can generate new funds from the capital market. • A higher ratio means a company is thought to have smaller new-financing capacity and will have trouble finding future financing funding.

27. Debt-to-Asset for 2008

28. Debt-to-Equity for 2008 • SONC had a -11.24 ratio largely due a buy back of treasury stock, because they thought their stock was undervalued.

29. Altman’s Z-Score • The score analyzes the future success or failure of a company. • Z-Score = • A x 3.3 + B x 0.99 + C x 0.6 + D x 1.2 + E x 1.4 • A= EBIT/Total Assets • B= Net Sales/Total Assets • C= Market Value of Equity/Total Liabilities • D= Working Capital/Total Assets • E= Retained Earnings/Total Assets

30. Evaluation of Score • Score < 1.8 indicates bankruptcy is high • Score > 1.8 but < 2.7 bankruptcy is fair • Score >2.7 but < 3.0 bankruptcy is possible, but not likely, • Score > 3.0 indicates bankruptcy is low and company is in good health. • McDonalds Score was 3.04 for 2008.

31. Return on Assests • Return on assets (ROA) is an indicator of how profitable a company is relative to its total assets.  • ROA gives companies and organizations an idea as to how efficient their management is at using their assets to create earnings. • In order to calculate return on assets, you must divide a company's annual earnings by its total assets; ROA is displayed as a percentage.

32. Return on Assets • ROA tells you what earnings were produced from invested capital or assets. • ROA for public companies can vary substantially and will be highly dependent on the industry. • This is why when using ROA as a comparative measure, it is best to compare it against a company's previous ROA numbers or the ROA of a similar company

33. Return on Assets 2008 ROA 5 year Average MacDonald’s 15.2% 10.5% Sonic 10.6% 10.3% Burger King 7.10% 3.20% Jack in the Box 7.60%7.40% Wendy’s -10.3% -4.50%

34. Return on Assets • This shows that if MacDonald’s net income was generated from their total value of assets, the return would be right around 15 cents per dollar. It is also a great indicator of how efficient MacDonald’s is at using their assets to generate income. • On the other side however, Wendy’s would show a lose of 10 cents on the dollar if their net income is based off their total value of assets. Sonic would have a gain of 10 cents on the dollar while both Burger King and Jack in the Box would have 7 cents gain on the dollar.

35. Return on Equity • The amount of net income returned as a percentage of shareholders equity. •  Return on equity measures a corporation's profitability by showing how much profit a company makes with the money shareholders have invested. • ROE is expressed as a percentage and calculated by dividing net income by shareholders' equity. • ROE is useful for comparing the profitability of a company to that of other firms in the same industry.

36. Return on Equity • These numbers tell us how much profit is being produced from money that investors have provided to these companies. • 15-20% is usually considered exceptional. For every dollar of income 20 cents can be credited to the investor’s capital. • This ratio is often considered the most important. The main goal of any company is to maximize shareholder wealth. • This ratio tells you and your investors how much money you are making off their money.

37. Return on Equity 2008 ROE 5 year Average MacDonald’s 32.2% 20.6% Sonic 44.1% 36.3% Burger King 20.9% 13.8% Jack in the Box 23.0%19.3% Wendy’s -55.9% -41.3%

38. Return on Equity • According to the information, Sonic and MacDonald’s are leading the way by making 44 cents and 32 cents for every investor’s dollar respectively. • Jack in the box makes roughly 23 cents per dollar while Burger King makes 20 cents. All four of these are considered to be outstanding. • Wendy’s is not fairing very well. For every dollar an investor puts into Wendy’s, they are losing almost 56 cents in return. That is not what a company wants to see if they are looking for potential investors.

39. Stock Market Ratios • The three most common ratios used are: • Price-Earnings Ratio (P/E Ratio) • Earnings per Share (EPS) • Dividend-Yield Ratio

40. Price-Earnings Ratio (P/E) • The P/E ratio (price to earnings) of a stock is a measure of the price paid for a specific share, which is relative to the annual net income or profit which is earned by the company per share • P/E ratios are segmented between high and low • A higher P/E ratio means that investors are paying more money for each unit of net income • Therefore, the stock is more expensive if compared to another stock with a lower P/E ratio

41. McDonald’s P/E Ratio • McDonald’s has a current P/E ratio of 15.1. However, the company’s P/E ratio for fiscal year end 2008 was 28.0. • either the stock is overvalued or the company's earnings have increased since the last earnings figure was published

42. Sonic Co. P/E Ratio • Sonic Corporation has a current P/E ratio of 12.2. The company’s P/E ratio for fiscal year 2008 was 22.5 • An end of year P/E ratio between 17-25 will usually indicate a growth stock, with earnings expected to increase substantially in the near future

43. Burger King & Jack in the Box’s P/E Ratios • The two company’s current P/E ratios are 17.3 and 13.5 and their end of year ratios were 22.1 and 21.2 respectively • Investors are hoping that both of these stocks will be growth stocks that will increase substantially in the near future

44. Wendy’s/Arby’s P/E Ratios • At the end of fiscal year 2008, this company’s P/E ratio was 37.3 • A company whose shares have an extremely high P/E ratio have high expected future growth in overall earnings, or the stock may be subject to a “speculative bubble” • These stocks have the potential to trade in high volumes at prices that are considerably different than the intrinsic values

45. Earnings Per Share (EPS) • Earnings per share are the earnings which are returned on the initial investment amount. This is calculated by: • EPS = (net income - preferred dividends) /common shares outstanding

46. Fast Food Industry’s EPS

47. What Does This Mean? • McDonald’s has reported an average annual increase in its EPS since 1998 • This makes McDonald’s more appealing to an investor because the basis of the EPS ratio is the earnings which are returned on the initial investment

48. McDonald’s EPS Over the Last Decade

49. Dividend-Yield Ratio • The dividend yield on a company stock is the company’s annual dividend divided by price per share

50. How Does This Affect McDonald’s? • McDonald’s has been consistently increasing its dividends for the past thirty years • From 1998, up until 2007, this dividend growth stock has delivered an annual average total return of 11% to its shareholders • Over the past ten years, the annual dividend payments have increased by an average of almost 25% annually, which is much higher than the before mentioned growth in EPS • This 25% growth in dividends translates into McDonald’s dividend payment doubling nearly every three years