McDonald’s Corporation

Honors Contract Capstone

Final Case Project Zach Bickett, Jerry Bobal, Jack DeLong, Brigid McCuen, Carolyn Smith

November 25, 2014

The Biggest Alligator in the Swamp

At the McDonald’s annual shareholder meeting in May 2013, CEO Dan Thompson was

confronted by a group of activists wanting answers.1 Does McDonald’s target children and

African Americans? What is the company doing about its role in the obesity epidemic? How is

the company responding to protests about worker pay? Fronting the controversy was Tanya

Fields, who portrayed her neighborhood in the Bronx as a food swamp plagued with corner

stores and fast food restaurants. Tayna is a mother and executive director of the BLKProjek,

whose goal is to, “address food justice.”2 She told the CEO that among the options within

walking distance from her house, McDonald’s was “the biggest alligator in that swamp.”3

As the largest QSR (quick-service restaurant) in the world, customers, lawmakers,

shareholders, and employees are looking to McDonald’s to set the standard. The company has

faced controversy for decades, but has managed to remain on top and work to maintain their

public image. However, with the emergence of fast-casual restaurants, are minor adjustments and

a strong public relations team enough to deal with the changing industry environment?

Started from the Bottom

From humble beginnings as a small drive-in barbeque restaurant, McDonald’s has built

itself to be the largest fast food service retailer in the world with over 35,000 stores worldwide,

serving nearly 70 million people daily.4 In 1940, Dick and Mac McDonald opened McDonald’s

Bar-B-Q in San Bernardino, California. By 1948, McDonald’s is founded, with a limited menu,

1 McDonald’s CEO Fields Questions on Nutrition, Wages 2 The BLK Project 3 The 10 Most Absurd Lies Told by McDonald’s CEO 4 Our Story

featuring the 15-cent hamburger.5 The brothers began franchising other McDonald’s locations in

1952, starting with Neil Fox, who purchased the first franchise in Phoenix for $1000.6

Enter Ray Kroc

Before he pitched his vision for McDonald’s to the McDonald brothers, Ray Kroc

worked as Red Cross ambulance driver, piano player, paper cup salesman, and finally, a multi-

mixer salesman. It was his last job as a multi-mixer salesman that led to his involvement with

McDonald’s. In 1954, he received a large order from the McDonald’s brothers for 8 multi-

mixers, who used them in making milkshakes. When Kroc went out to California, he was

instantly impressed with the brothers’ quality and efficiency.7 He was so impressed that he

wanted to become involved in helping the brothers with their franchising goals. By 1955, Kroc

had opened his first McDonald’s in Des Plaines, Illinois. Only four years later, the 100th location

opened in Fon Du Lac, Wisconsin.5 By 1961, Kroc had bought the exclusive rights to the

McDonald’s name, along with Dick and Mac McDonald’s stake in the company for $2.7 million

With Kroc at the helm, the company experienced substantial growth. In 1967, McDonald’s

opened its first international location in British Columbia, Canada. By 1968, the 1000th

McDonald’s restaurant opened up where Kroc had begun: Des Plaines, Illinois. One decade later,

the 5000th McDonald’s location opened in Kanagawa, Japan.

According to Kroc’s vision, McDonald’s would become famous for its consistency and

high quality. He wanted a customer to be able to order a McDonald’s hamburger that tasted the

same in Illinois as it did in California. In order to accomplish this, he needed franchisees and

5 McDonald’s History 6 McDonald's first franchise restaurant was built in Phoenix 7 The Ray Kroc Story

suppliers to buy into his plan. He promoted his slogan, “In business for yourself, but not by

yourself.”7

To succeed in creating a consistent product, McDonald’s former senior chairman, Fred

Turner, founded a training program focused on managerial positions and called it Hamburger

University. To date, more than 275,000 have graduated the program8, including more than

80,000 restaurant managers, mid-managers, and owner/operators since 1961.9 Currently there

are seven Hamburger University campuses around the world.10 The University has 19 full-time

professors with restaurant expertise and boasts four curriculums: Crew Development, Restaurant

Managers, Mid-Management, and Executive Development.11

Although Kroc was focused on consistency, he also greatly valued innovation. Many

famous menu items were created by franchisees instead of upper management. The Filet-O-Fish

was invented in 1962 by Lou Groen and was inspired by the needs of the Catholic consumers in

Cincinnati. Ray Kroc wagered with Groen that if his fish sandwich outperformed Kroc’s “hula

burger”, which was an appetizing creation consisting of a cold bun and a slice of pineapple, then

McDonald’s would keep it. Groen claims the Filet-o-Fish’s success saved his franchise.12

The Big Mac, which reached international success, was invented by an early franchisee,

Jim Deligatti, in 1967. Delligatti himself claimed in an interview “I always felt it was going to be

a huge success, but I only thought in terms of the United States.”13

8 Our Alumni 9 Hamburger University 10 Our Facility 11 Our Curriculum 12 No fish story: Sandwich saved his McDonald's 13 Golden Arch Angel

Menu Diversification

McDonald’s Breakfast

Delligatti continued to make differences in the company when he altered the hours of

operation, opening at 7 AM versus the normal 11 AM. He began selling coffee, doughnuts, and

other common breakfast items. Five percent of Delligatti’s business was conducted during these

morning hours, but other owner/operators could not be on board without double-digit sales gains.

The Egg McMuffin was the key to McDonald’s breakfast success. New franchisee, Herb

Peterson, was excited to take advantage of this new breakfast market. He invented an egg

sandwich complimented by a slice of cheese between a warm English muffin. After Kroc

allowed the product to go nationwide, the breakfast business increased in popularity and now

represents 15% of McDonald’s sales 14

Decades after breakfast was introduced, McDonald’s announced the arrival of McCafé

coffees, including cappuccinos, lattes, and mochas. In addition, McDonalds began offering free

Wi-Fi in over 11,000 restaurants in the United States to stage a more coffeehouse-like

atmosphere. Kroc desired to take on the competition of chains such as Dunkin Donuts and

Starbucks.15

Happy Meals

1979, McDonald’s added the Happy Meal to their menu with the help of Dick Brams,

known as the “father of the Happy Meal”. Brams thought of the Happy Meal as a marketing

gimmick to drive up sales by targeting kids. Kid-sized portions and a toy made this idea a hit.

Though the food remained the same (Chicken McNuggets were added nationwide starting in

14 The Birth of the Egg McMuffin 15 Coffee Wars - The Big Three: Starbucks, McDonald’s and Dunkin’ Donuts

1983), the toys changed almost weekly. In 1987, McDonald’s released Disney Happy Meals.

This marked the beginning of many different licensed Happy Meals.16

More Additions and The Dollar Menu

Among other additions, notable menu items that were added include the Quarter Pounder

in 1973, Chicken McNuggets in 1983, and fresh tossed (non-entrée) salads in 1987. Premium

salads were added to the menu in 2003.

In 2002, McDonald’s further attracted the price-sensitive customer and launched the

Dollar Menu. Although it wasn’t the first value menu to be launched in the industry, it was still

wildly successful, accounting for almost 15% of sales in 2013.17 The breakfast dollar menu

features the sausage McMuffin, a hashbrown, and a McCafé coffee. The dollar menu for the rest

of the day includes the McChicken, which is a chicken sandwich with mayonnaise and shredded

ice burg lettuce, Chicken McNuggets, several burger options, as well as ice cream and cookies.18

McDonald’s is constantly working to provide new and interesting options to the customers for an

affordable price.

Ronald McDonald House

Much like other large corporations, McDonald’s makes an effort to improve not only

their relations with the public but also their social impact. However instead of choosing a charity

to donate to, the company created its own. Thus the first Ronald McDonald House opened in

Philadelphia in 1973. The Ronald McDonald House Charities, or RMHC, was officially

established in 1984 in Memory of Ray Kroc. Although McDonald’s is RMHC’s largest

16 The Happy Meal 17 McDonald's Admits Salads Only Make Up 2 To 3 Percent Of Sales 18 Dollar Menu and More

corporate sponsor, it is, in fact, a registered non-profit 501(c) (3). RMHC’s mission is to

“create, find and support programs that directly improve the health and wellbeing of children.”19

RMHC has local chapters in more than 62 countries worldwide. Over $200 million has been

collected through RMHC Donation Boxes and 78% of the world’s best children’s hospitals have

RMHC programs.20

Competition

Burger King: Have It Your Way

Burger King, publicly traded hamburger fast food restaurant (NYSE: BKW), was

founded in 1954 in Miami, FL. The company’s staple product, the Whopper, was introduced in

1957.21 The company then expanded into foreign markets in 1963 with a restaurant opening in

Puerto Rico. Pillsbury acquired Burger King in 1967 and at the time had 274 locations and over

8,000 employees. The 1970’s led to many new and innovative programs that Burger King still

uses today. Some of these include the “Have it your way” campaign, first restaurant in Europe,

and the introduction of the drive-thru service. Burger King allowed customers to customize their

items, eventually forcing McDonald’s to follow suit. The company has also developed several

successful short-term marketing campaigns but as seen in Exhibit 1, their long term growth still

puts them below McDonald’s in terms of market share.

Burger King focused more on restaurant growth and menu expansion during the 1980s.

Breakfast was introduced in middle of the decade and a chicken nugget meal was introduced

shortly after as an alternate to a hamburger meal. 1986 was a huge year for Burger King, with

19 Mission and Vision 20 Our Relationship with McDonald’s 21 Burger King History

over 500 new restaurants opening across the world that year (over 4,700 restaurants total in the

Burger King system). Burger King was operating in 25 different countries at the end of 1986.

In 1988, Grand Metropolitan LLC acquired Pillsbury, including its subsidiary Burger

King. Grand Metropolitan had more of an international focus and Burger King further expanded

into the Middle East, Eastern Europe, Latin America, etc. In 2002, Burger King was sold to the

private equity firms Texas Pacific Group, Bain Capital and Goldman Sachs Capital Partners.19 In

2006, Burger King successfully completed an initial public offering (IPO). In 2010, Burger King

went private again, only to go public again in 2012. In August 2014, Burger King announced its

intentions to purchase Tim Hortons.22 This will help lower Burger King’s tax burden and help

grow the brand’s breakfast offerings. Some speculate the move may also be a response to the

rise in “fast-casual” restaurants such as Chipotle.

Wendy’s

Wendy’s Old-Fashioned Hamburger Restaurant is a publicly traded fast food (NASDAQ:

WEN) restaurant that was founded in Columbus, OH in 1969 by Dave Thomas. Wendy’s

entered the industry with a focus on providing fresh food at reasonable prices. Wendy’s started

out as a hamburger restaurant but quickly expanded into other avenues, including a salad bar in

1979.23 Wendy’s later added chili, chicken, and Frosty dessert products to further add to the

product line. Wendy’s does not have a staple sandwich (like McDonalds and the Big Mac and

Burger King and the Whopper), but instead is known for having square burger patties.

Wendy’s expanded quickly through the United States and the first foreign restaurant was

opened in 1975 in Ontario, Canada. Growth began to slow in the 1980s and Wendy’s countered

22 Burger King-Tim Hortons Cross-Border Merger Much More Than Tax Inversion 23 Wendy's Timeline

this by trying a “Where’s the Beef” commercial campaign. The commercials were successful

and eventually Dave Thomas starred in commercials, which helped to grow the Wendy’s brand

and put a person behind the company. Over 90% of Americans knew who Dave Thomas was in

the 1990s, making him an integral part of their brand.

Starting in the mid-1990s, Wendy’s began to expand, starting with the acquisition of Tim

Hortons in 1995. Wendy’s later went on to acquire Arby’s, only to sell the roast beef fast food

chain three years later. In March 1997, the 5,000th Wendy’s location opened and the company

hit 6,000 restaurants a short time after that. Wendy’s continued to expand overseas, later

focusing on certain Mexican cities.

The company began to revitalize its menu and strategy in the 2000s. The plan included a

focus on core business processes, modification and simplification of the value menu, and a plan

to attract younger customers that were leaning more towards fast-casual restaurants.24 A few

years ago, Wendy’s changed how they made their French fries. Even more recently they have

added new menu items, focusing mainly on healthy or premium type of food products.

McDonald’s Success: Now We’re Here

Arguably the major reason McDonald’s has been so successful is because of their

superior brand recognition. It was ranked number nine in Interbrand’s 2014 Best Global Brand

rankings with a brand value of over $42 million.25 This high brand recognition allows

McDonald’s to engage in profitable strategic partnerships with top brands such as Coca Cola and

Heinz as well as sponsorships with Disney and DreamWorks.26 When customers go to

24 Wendy's Is Changing Up Its Strategy To Attract Millennials 25 McDonald’s – Best Global Brands 26 10 Secrets of McDonald’s Success

McDonald’s, they know exactly what it is they are going to receive: a fast, cheap, and consistent

quality meal, thus fulfilling Kroc’s early visions.

McDonald’s distinguishes its products to appeal to different consumers and their

changing preferences. This strategy shines through their global expansion and their ability to

alter menus to appeal to different cultures. The company offers of shrimp burgers and corn

alternatives to French fries in Hong Kong, even offering an item labeled the McSpaghetti in

Italy.27 These menu adaptations have been successful in areas that other QSRs lack because

McDonald’s has been able to market these differentiated products to specific consumer groups.

An increasing trend toward nutrition and fitness, especially among the millennial generation, has

led to McDonald’s adoption of healthier alternatives such as fruit and vegetables and

implementation of more visible and available nutritional information. In addition, the company

developed the dollar menu to appeal to lower income families and introduced new menu items

such as coffee and wraps. This allows McDonald’s to expand its market share, avoid stagnation,

and obtain a completely different group of customers.28

The Industry

Suppliers

Most QSRs have a high volume of undifferentiated suppliers that provide the meat

products, buns, sauces and syrup, milk products, vegetables and fruits, pastries, coffee, soft

drinks, packaging and equipment.29 These products are considered commodities and the

suppliers are compelled to price similar to the market. Many industry players have strong brand

27 Why is McDonald’s So Successful? 28 The McDonald’s Success Story 29 SUPPLIERS AND PURCHASING

recognition and significant market share; McDonalds is the leader in the fast food industry with

over 21% of the market, which can be seen in Exhibit 1. McDonald’s purchases supplies in bulk

to save money. Maintaining healthy supplier relationships is important as is in a business

relationship. Prices of these commodity supplies have risen in recent years due to rising prices of

livestock, corn, wheat, and other products. Due to the highly competitive industry environment,

the price increase has shrunk margins. Profit margins in the industry have been less than 10% in

recent years.30 In light of this trend, McDonalds tends to source its inventory from suppliers that

are located close to the operations. McDonald’s has been able to maintain a very high profit

margin compared to the industry at 19.8%, which can be seen in Exhibit 3.

Soft-drink suppliers of the industry consist mainly of Coca-Cola and Pepsi, who are

powerful brands and dominate market share in the soft drink industry. They provide QSRs with

drink dispensers and the necessary syrups. Many QSRs have long-term contracts with these

suppliers due to the competitive nature of the soft drink industry.

Buyers

QSRs sell directly to consumers through chains across the country and internationally.

Buyers are extremely price-sensitive, and count on McDonald’s and its competitors to give them

the most for their buck.

In recent years, the consumer has become increasingly health-conscious. A number of

books and documentaries have been released purporting the unhealthiness of the fast food

industry, and as a result customers have demanded healthier fast food options. QSRs thus have

responded by making healthier options available.

30 Fast Food Industry Report

Distribution and Technology

McDonald’s has wide distribution channels spanning internationally, and has utilized

recent technological innovations, spanning from a mobile application to Point-of-Sales (POS)

technology. This POS platform makes kitchens more efficient by communicating with cooks

and lessening transaction time, thus increasing productivity and generating more sales. It also

collects sales data for use by managers to determine popular menu items and the busiest times of

day for each restaurant.31

Fast Casual Industry

The up-and-coming “fast-casual” industry poses a real threat to the QSRs. Some

successful examples of fast-casual restaurants include Panera Bread, Zaxby’s chicken, and

Chipotle. In the first six months of 2014, McDonald’s sales stagnated or stayed the same at over

14,000 of its restaurants. Meanwhile, the number of fast-casual chains has nearly doubled over

the past decade, while the number of McDonalds outlets has only grown slightly.32 Furthermore,

the changing consumer preference toward quality of food has been trumping price-consciousness

in recent years, as customers are willing to pay more for a “better quality” meal. A 2014

Consumer Report survey reported that out of 21 burger joints, McDonald ranked last on the list

in terms of Consumer Preference; Burger King and Jack in the Box also ranked very low.33

Meanwhile, fast-casual burger restaurants ranked highest.

Competition

31 McDonalds Wants It Their Way 32 McDonalds Real Trouble: Its Losing The Millennials 33 Consumer Reports Slams McDonalds, Taco Bell, KFC

There are now over 230,000 fast food companies competing for market share and the

same group of consumers.34 Fast food companies have to compete with similar quick service

restaurants as well as higher-end, non-traditional fast food franchises such as Starbucks. The

market is saturated with numerous competitors that offer comparable products, and thus there are

fewer customers per location.35 Quick service restaurants are constantly engaging in price wars

with each other, leading to more fickle customers. Morningstar analyst R.J Hottovy argued that

rivalry “appears to be on the rise, with chains increasingly competing with one another on the

basis of price and product differentiation.”36 Changing consumer preferences towards healthier

options and non-traditional fast food have forced companies to be innovative and remain up to

date with these changes. QSRs need to respond with “new offerings, pricing and strategies to

lure consumers back-in.”35 Rising costs of food, recessions, and the shift towards a more health-

focused society are all relevant in the current industry.

McDonald’s Bad Perception

Despite its reign as the leading fast food company in the world, McDonald’s has gone through its

fair share of legal trouble, which has affected its brand perception, both domestically and

internationally.

Super Size Me

In 2004, a man by the name of Morgan Spurlock starred in a documentary that changed

the perception of McDonald’s, and the rest of the fast food industry, forever. Super Size Me

unveiled the unhealthy truths of the quality of McDonald’s food, and its harmful effects on

34 Topic: Fast Food Industry 35 Fast Food Industry Analysis – Cost & Trends 36 Fast-Food Outlook: Intense Competition, Margin Pressures

Spurlock’s body, as he ate nothing but the restaurant’s food for 30 days. That same year,

McDonald's stock price tumbled by 56 percent in 10 months and reported their first quarterly

loss. Sales at existing stores were not growing, and in some instances, declining. 37

Interestingly enough, McDonald's turnaround was attributed to the popularity of the

Dollar Menu, which originally became a permanent part of the menu in 2002. It increased sales

by 33% while increasing share price by 170%.38 McDonald's also opened up fewer stores in

succeeding years, while improving the service and the aesthetics of the current

ones. Information on sales of premium, healthy options compared to Dollar Menu items can be

found in Exhibit 4.

The company responded to the allegations in the documentary in a number of ways.

First, the day before the movie opened to the public, they introduced a “Go Active” menu. It

included a “Happy Meal” for adults, consisting of a salad, water, and a “stepomoter” which

could be used to count the number of steps each customer took per day. McDonald’s withdrew

the Super Size menu options altogether. They also released an “Eat Smart, Be Active” initiative,

and provided fruit, salads, vegetables, and yogurt in stores.38

McDonald’s retooled its PR efforts to emphasize the larger debate on obesity and a

healthy diet. They released a series of newspaper ads that drew attention to the expanded salad

menu.40

37 Salads or No, Cheap Burgers Revive McDonald’s 38 McDonalds Phasing Out Supersize Fries, Drinks

The documentary also had an effect on the corporation’s sales internationally. In the UK,

pre-tax profits dropped 72%.39

McDonald’s has since made efforts to appeal to a wide variety of customers through

menu variety. Exhibit 5 shows the ten most popular menu items at McDonald’s. McDonald’s

offers breakfast foods, salads, and café items, all in addition to their traditional menu. Customers

have been very loyal to McDonald’s and their classic menu items despite the negative portrayal

of the nutrition in the media.

The McLibel Case

In 1986, a small group of activists, London Greenpeace, released a leaflet called “What’s

Wrong with McDonald’s” accusing McDonald’s of corrupt practices. It discussed topics ranging

from the corporation’s animal cruelty, to the destruction of rainforests, exploitations of staff, and

the sale of unhealthy food.

McDonald’s responded by picking five individuals from the group and telling them to

apologize, or risk getting sued in court. (They could not sue London Greenpeace as a whole

because it was only an association of individuals.) Three of the accused stood down, but two,

Helen Steel and Dave Morris, refused to give in to McDonald’s.

In 1990, McDonald’s served libel writs to the pair, and the trials began in 1994.40 The

individuals were found guilty and were fined, but McDonald’s didn’t force them to pay the fined

amount. Regardless, the trial and its worldwide media coverage made McDonald’s a symbol of

corrupt practices in the eyes of many. 39 The Aftermath: How Super Size Me Effected the Food Industry 40 Famous Cases: McLibel

Where’s the Beef?

In 1990, McDonald’s announced that it would no longer use beef fat as an ingredient in

its French fries, leading many to believe that their fries were now vegetarian. Throughout the

subsequent decade, multiple lawsuits were brought against the corporation for the continued use

of beef flavoring in the infamous fries.41 The lawsuits ended in 2002 when McDonald’s agreed to

pay $100 million to vegetarians and religious groups, in addition to issuing an apology.

As a result of the many lawsuits against the company, McDonald’s formed a Dietary

Practice/Vegetarian Advisory Panel to advise them on relevant dietary restrictions and

guidelines.41

McDonald’s Business Model and Success Story

McDonald’s, with its more than 35,000 restaurants worldwide in more than 100 countries

serving approximately 70 million people worldwide, earns its revenue through two sources: sales

from company operated McDonald’s restaurants and rent and royalty payments from its

franchised stores.42 As seen in Exhibit 7, sales by the company owned restaurants for the nine

months ended 9/30/14 were $13.873 billion and revenues earned from franchised restaurants

were $6.997 billion, which is consistent with the former typically accounting for approximately

67% of revenue and the latter the other third of revenue.

41 McDonald’s Settles Beef Over Fries 42 McDonald’s: Not in the Burger Business

Sales by the company-owned restaurants are recognized on a cash basis and are presented

net of sales and other sales-related taxes. Revenues from the franchised restaurants from rent and

royalties are based on a percentage of sales in addition to minimum rent payments and initial

fees. Revenues from restaurants licensed to foreign affiliated and developmental licensees also

include a royalty as a percentage of sales and any initial fees.43 The rent and royalties are

recognized in the period earned whereas the initial fees are recognized when a new restaurant

opens or when McDonald’s grants a new franchise term.38

Although sales from company owned restaurants accounts for the most significant

proportion of revenue, the franchises are the true source of profit for McDonald’s in terms of

operating margin. As seen in Exhibit 8, over 80% of the McDonald’s locations are franchised.

The company is able to retain bargaining power with franchisees because they can offer more

volume and profit for franchisees than any other global competitors.44 McDonald’s business

model of franchising is low cost and a predictable and reliable source of cash flow for the

company. McDonald’s owns the land and building that the franchise operates in, but the

restaurant is responsible for the costs associated with operations and daily management. This

allows McDonald’s to be able to rely on low maintenance and reliable income, usually for a long

period of time such as 20-year franchise arrangements.39

Current Environment

Fast Casual Restaurants

43 McDonald's Corp. (MCD) | Revenues 44 McDonald’s Analysis: I’m Still Lovin’ It

Fast-casual restaurants provide an exciting, new middle ground between sit-down dining

and quick service restaurants. According to Exhibit 9, there was a larger increase in customer

traffic to fast-casual restaurants than there was for QSRs from the years 2009-2013. QSRs like

McDonald’s have to decide how to deal with these newcomers in the market. Fast casual

restaurants blur the lines between a traditional fast food restaurant (Burger King, McDonalds)

and a traditional casual sit-down restaurant (Applebees, Chili’s). Since fast casual is a relatively

new way to categorize restaurants, it can be difficult to determine what exactly qualifies a

restaurant as “fast casual.” Fast Casual magazine presents four main qualities, service type, food

quality, atmosphere and décor, and menu prices; that separate a fast casual restaurant from a

traditional fast food or wait-service restaurant.45

A fast casual restaurant often provides limited table service but many utilize pick-up

areas. Most establishments will not have a drive-thru option. Although these factors are helpful

in determining what qualifies as “fast casual,” one of the more distinguishing factors is the

quality of the food, including how it is prepared. Fast casual restaurants typically operate under a

“made to order” system and feature fresh food. Many boast organic ingredients or attempt to

limit preservatives in their food. Atmosphere characteristic of a fast casual restaurant is relaxed

but more up-scale than a fast food restaurant. They often feature paintings or a unique seating

area. Prices at fast casual restaurants tend to be higher than their fast food counterparts. This is to

reflect the slightly higher service, better ingredients, and perceived healthiness of the food

compared to fast food rivals. Fast casual restaurants are six times more likely to have whole-

grain or whole-wheat items on their menu than their fast food rivals.46

45 Defining Fast Casual 46 Fast Casual Branches Out

Current examples of fast casual restaurants include Chipotle, Zaxby’s, Five Guys Burgers

and Fries, Panera Bread, among others. Some in the industry say that only a majority of the

criteria have to be met for a restaurant to be classified as fast casual. Fast Casual magazine uses

Culver’s as an example of a restaurant fitting most of the criteria.45 Culver’s has a drive-thru and

seems like a typical fast food at quick glance. But the food is made to order, interior is typically

nicer, and it has a slightly higher price point. Fast Casual magazine says that a restaurant that has

a value or dollar menu is typically disqualified from being a fast casual restaurant.45

There is a gray area in what is considered a fast casual restaurant and what is not. Subway

is an example of a restaurant that fits many characteristics of a fast casual restaurant but is not

considered a fast casual restaurant by most people in the industry. Subway features fresh, healthy

food, and allows customers to customize their orders. But décor at most Subways is basic, menu

items are relatively affordable, and many Subways are located in gas stations or other combined

locations. The model that Subway uses to prepare and serve food is identical to many fast casual

restaurants. One food critic humorously noted that Subway “was using the assembly line process

when Chipotle's Steve Ells was in diapers”.47 Recently the lines between traditional dining, fast

casual, and quick service are becoming even more indistinguishable. As mentioned before,

Culver’s has a drive-thru and many consider it a fast casual restaurant. Panera Bread is starting to

experiment with a drive-thru option at restaurants and the initial stages of the trial have been

successful. Panera locations that add a drive-thru option see increases in sales by about 25%. 46

Fast casual restaurants only account for 6% of the current restaurant market share but

they are rapidly growing and expanding. It was the only segment of restaurant market that grew

47 The Term “Fast Casual” Has to Go Away

in the last five years.48 Fast casual restaurant’s sales grew by 11% and individual restaurants

grew by 8% in 201349. Revenue numbers for a restaurant like Chipotle are lower than

McDonalds but Chipotle’s revenue growth has been nearly 20% over the past five years. At

Chipotle, the average guest count per company store has risen by 5% and 2.3% over the last two

years.49 McDonalds, meanwhile, has seen a decrease in average guest count of 1.3% in the past

two years.

Do they change their base strategy and attempt to offer a comparable experience? How do the

companies draw their customers back from the fast-casual diners?

Mo’ Money, Mo’ Problems?

According to Business Insider, McDonald’s is not only fighting an external battle with

fast-casual restaurant but is also facing serious internal problems. At 189.5 seconds from drive-

thru order to pick-up, McDonald’s service is 9 seconds longer than the industry average.50 A

quick service restaurant without quick service leads to increasingly unhappy customers. Why is

a company known for it’s speedy service losing in this category? A main component is

McDonald’s increasingly complicated menu. The menu has expanded over 70% since 2007.51 A

large menu necessitates more knowledgeable employees; meaning increased training costs for

the company and further foreseeable complications.

In addition to service and competition challenges, customers are changing. Consumers

want to know details: what is in their food, how it is made, as well as its effect on their health.

This relatively new movement complicates the job of QSRs like McDonald’s. In 2000, Eric

48 Fast Casual Restaurants Gobble up Market Share 49 How the Fast Casual Segment is Gaining Market Share 50 McDonald's Drive-Thrus Are Getting Slower 51 McDonald's CEO Reveals The Brand's 4 Biggest Problems

Schlosser wrote the book “Fast Food Nation,” which was later released in documentary form in

2006. Schlosser performed extensive research using himself as a guinea pig. Schlosser

commented,

“During the two years spent researching this book, I ate an enormous amount of fast food. Most of it tasted pretty good. That is one of the main reasons people buy fast food; it has been carefully designed to taste good. It’s also inexpensive and convenient. But the value meals, two-for-one deals, and free refills of soda give a distorted sense of how much fast food actually costs. The real price never appears on the menu.”52

The law eventually responded to the uproar of the health-conscious. The “Patient

Protection and Affordable Care Act” (PPACA) became law in 2012 and required restaurant

chains with more than 20 locations to list their nutritional information at the point of purchase.53

The new demands on QSRs to be not only quick and delicious but also healthy mean expensive

advertising as well as revised processes, ingredients, and menu choices.

McDonald’s problems do not end at changing customer tastes. Consumers are becoming

increasingly conscious of ethical standards and sustainability. Accusations of poor ethical

standards and adverse economic impact are flying towards McDonalds. People claim that

McDonald’s targets children and allows cruelty to the animals, as well as hurts the economies of

third world countries. Not all claims can be supported, but the damage to public image is

important in the long-term success of the company.

Donald Thompson, the current CEO and President of McDonald’s, was raised in the

infamous Cabrini-Green Chicago housing project. Thompson overcame the odds and studied

engineering at Purdue University before going on to start his career at a defense manufacturer

that is now a part of Northrup Grumman. Thompson joined McDonald’s as a robotic engineer in

52 Fast Food Nation: The Dark Side of the All-American Meal 53 The Future of Quick-Service Restaurants (QSR)

199054, quickly rising through the ranks to become CEO in July 2012, succeeding Jim Skinner.

He is the company’s first African-American CEO55. Thompson eats food from McDonald’s

nearly everyday and claims to have lost twenty pounds last year56. Thompson has a tough job

ahead of him as he serves as CEO. He needs to create a plan for the company to face the

multitude of assertions against both its practices and its product.

As the leader in the fast food industry, lawmakers and consumers are looking to

McDonald’s to set a better standard. Are the changes McDonald’s are making enough to bring

back the health-conscious consumer or is their customer base shrinking in a changing

environment? How can the company respond to customers and go beyond legal requirements to

prove their nutritional value? McDonald’s has to adapt to the continuously changing market and

avoid stagnation. They have been on top for years; the question is, can they stay on top and deal

with the challenges presented to them?

54 New McDonald’s CEO Don Thompson’s Path 55 McDonald’s CEO Don Thompson Still Lovin’ It 56 McDonald’s CEO Claims to Have Lost Twenty Pounds

Exhibit 1

Source: "The QSR 50." Tory. N.p., n.d. Web. 04 Nov. 2014

Top$50$Brands$of$Fast$Food/Casual$Dining$(2014)

RANK COMPANY/CHAIN$NAME2013$U.S.$SYSTEMWIDE$SALES$(MILLIONS)

%$MARKET$SHARE$(among$top$50$only)

2013$U.S.$AVERAGE$SALES$PER$UNIT$(THOUSANDS)

NUMBER$OF$FRANCHISED$UNITS$IN$2013

1 McDonald's $35,856.30 21.73% $2,500.00 12,739

2 Subway=* $12,735.00 7.72% $490.00 26,427

3 Starbucks=* $11,723.00 7.11% $1,310.00 4,408

4 Wendy's=* $8,787.00 5.33% $1,510.00 4,745

5 Burger=King=* $8,502.50 5.15% $1,200.00 7,103

6 Taco=Bell $7,800.00 4.73% $1,406.00 4,878

7 Dunkin'=Donuts $6,700.00 4.06% $872.70 7,648

8 Pizza=Hut $5,700.00 3.45% $861.00 7,355

9 ChickOfilOA $5,052.60 3.06% $2,846.50 1,713

10 KFC $4,300.00 2.61% $942.00 4,285

11 Panera=Bread $4,284.00 2.60% $2,465.00 910

12=(tie) Sonic=DriveOIn $3,800.00 2.30% $1,109.00 3,126

12=(tie) Domino's=Pizza $3,800.00 2.30% $762.10 4,596

14 Carl's=Jr./Hardee's $3,400.00 2.06% $1,310.00 1,964

15 Chipotle=Mexican=Grill=* $3,169.00 1.92% $2,169.00 0

16 Jack=in=the=Box=1 $3,108.50 1.88% $1,380.90 1,786

17 Arby's $3,032.00 1.84% $921.00 2,313

18 Little=Caesars=* $3,025.00 1.83% $800.00 3,310

19 Dairy=Queen=* $2,985.00 1.81% $659.00 4,527

20 Papa=John's $2,494.80 1.51% $837.00 2,542

21 Popeyes=Louisiana=Kitchen $2,179.70 1.32% $1,298.00 2,172

22 Panda=Express $1,989.90 1.21% $1,285.00 60

23 Whataburger $1,588.40 0.96% $2,096.00 125

24 Jimmy=John's $1,466.70 0.89% $878.80 1,774

25 Five=Guys=Burgers=&=Fries=* $1,138.20 0.69% $1,027.00 805

26 Zaxby's $1,073.40 0.65% $1,845.40 497

27 Bojangles' $925.20 0.56% $1,727.80 349

28 Culver's $905.60 0.55% $1,875.40 487

29 Steak='n=Shake $895.00 0.54% $1,750.00 103

30 Church's=Chicken $855.40 0.52% $713.70 946

31 Papa=Murphy's=* $779.70 0.47% $577.00 1,327

32 Checkers/Rally's $723.40 0.44% $930.40 449

33 Long=John=Silver's $663.00 0.40% $745.00 890

34 Krispy=Kreme=* $626.00 0.38% $2,565.00 155

35 Del=Taco $622.50 0.38% $1,136.30 247

36 White=Castle $612.40 0.37% $1,268.20 0

37 El=Pollo=Loco=* $604.00 0.37% $1,500.00 237

38 Quiznos=* $601.00 0.36% $360.00 1,400

39 Boston=Market $600.90 0.36% $1,298.00 0

40 Qdoba=Mexican=Grill $592.60 0.36% $1,017.00 317

41 Tim=Hortons=* $589.50 0.36% $1,125.00 857

42 Jason's=Deli $588.00 0.36% $2,399.80 106

43 Einstein=Bros.=Bagels=2 $573.00 0.35% $895.00 392

44 InONOOut=Burger=* $558.20 0.34% $1,955.00 0

45 Wingstop=* $540.20 0.33% $974.00 569

46 BaskinORobbins=1 $513.00 0.31% $207.90 2,460

47 Jamba=Juice $500.00 0.30% $737.00 535

48 Moe's=Southwest=Grill $498.20 0.30% $1,007.00 524

49 Captain=D's=* $477.50 0.29% $920.00 243

50 McAlister's=Deli $459.00 0.28% $1,511.40 275

Exhibit 2

Burger Segment of the Fast Food Market

2011

2012

2013—unavailable

2014

Source: "Top 50 Breakdown by Market Segments." Rosie. N.p., n.d. Web. 04 Nov. 2014.

Exhibit 3

Source: "Fast-Food Chains Aren't as Rich as Protesters Think." Yahoo Finance. N.p., n.d. Web. 23 Nov. 2014.

Exhibit 4

Dollar  Menu  Sales  vs.  Premium  Option  Sales  (Daily  Average)  

Menu  Item   Premium  Chicken  Sandwich  Premium  Salad   Dollar  Double  Cheeseburger  

Average  Price   $4.20   $4.69   $1.00    

Average  Amount  Sold   50   50   400  

Revenue/day   $210     $235     $400    

Source: Warner, Melanie. "Salads or No, Cheap Burgers Revive McDonald's." The New York Times. The New York Times, 18 Apr. 2006. Web. 23 Nov. 2014.

Exhibit 5

Source: "10 Most Popular McDonald's Menu Items of All Time - HowStuffWorks." HowStuffWorks. N.p., n.d. Web. 04 Nov. 2014.

Exhibit 6

McDonald’s Balance Sheet

Source: United States. U.S. Securities and Exchange Commission. EDGAR. McDonald's Corp Form 10K. N.p.: n.p., n.d. Web. 04 Nov. 2014

Exhibit 7

McDonald’s Income Statement

Source: United States. U.S. Securities and Exchange Commission. EDGAR. McDonald's Corp Form 10K. N.p.: n.p., n.d. Web. 04 Nov. 2014

Exhibit 8

Franchise Units

YEAR U.S. CANADIAN INTERNATIONAL COMPANY OWNED

2014 12,757 1,170 15,067 6,689

2013 12,678 1,114 14,459 6,642

2012 12,605 1,152 14,125 6,598

2011 12,546 1,125 13,407 6,439

2010 12,477 1,097 12,764 6,399

Percentage Franchised versus Percentage Company Owned

YEAR U.S. CANADIAN INTERNATIONAL

TOTAL FRANCHISED

COMPANY OWNED

2014 35.75% 3.28% 42.22% 81.25% 18.75%

2013 36.33% 3.19% 41.44% 80.96% 19.04%

2012 36.56% 3.34% 40.97% 80.86% 19.14%

2011 37.43% 3.36% 40.00% 80.79% 19.21%

2010 38.11% 3.35% 38.99% 80.45% 19.55%

Source: "McDonald's Franchise Information." Entrepreneur. N.p., n.d. Web. 19 Nov. 2014.

Exhibit 9

Source: "Key Trends Explaining Our $628 Price Valuation For Chipotle -- Trefis." Trefis. N.p., n.d. Web. 04 Nov. 2014.

Exhibit 10

Source: "IndexMundi Blog." IndexMundi Blog. N.p., n.d. Web. 23 Nov. 2014

Year Fast(Casual QSR2013 8% 0%2012 9% 1%2011 6% 0%2010 6% )1%2009 4% )3%

%(Change(in(Customer(Traffic

Exhibit 11

Source: The Wall Street Journal. Dow Jones & Company, n.d. Web. 23 Nov. 2014.

ENDNOTES

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