SWOT analysis of McDonald's 2018

Ovidijus Jurevicius | March 17, 2018

This is McDonald's Corporation SWOT analysis 2018. For more information on how to do a SWOT analysis please refer to our article.

Company Background

Key Facts
Name McDonald’s Corporation
Founded May 15, 1940
Logo
Industries served Restaurants
Geographic areas served Worldwide (37,241 restaurants in 120 countries)
Headquarters Oak Brook, Illinois, United States
Current CEO Stephen J. Easterbrook
Revenue (US$) 22.820 billion (2017) 7.3% decrease over 24.622 billion (2016)
Profit (US$) 5.192 billion (2017) 10.8% increase 4.687 billion (2016)
Employees 235,000 (2018)
Main Competitors Burger King Worldwide, Inc., Darden Restaurants, Inc., Doctor's Associates, Inc. (Subway), Domino’s, Inc., Dunkin' Brands Group, Inc., Yum! Brands, Inc. (KFC), Starbucks Corporation, Wendy’s Company and many other restaurant chains.

McDonald’s Corporation’s business overview from the company’s financial report:

"General

The Company operates and franchises McDonald’s restaurants, which serve a locally-relevant menu of quality food and beverages sold at various price points in more than 100 countries. McDonald’s global system is comprised of both Company-owned and franchised restaurants. McDonald’s franchised restaurants are owned and operated under one of the following structures - conventional franchise, developmental license or affiliate. The business relationship between McDonald’s and its independent franchisees is of fundamental importance to overall performance and to the McDonald’s Brand. This business relationship is supported by an agreement that requires adherence to standards and policies essential to protecting our brand.

The Company is primarily a franchisor, with more than 90% of McDonald's restaurants currently owned and operated by independent franchisees. Franchising enables an individual to be their own employer and maintain control over all employment related matters, marketing and pricing decisions, while also benefiting from the strength of McDonald’s global brand, operating system and financial resources.

The Company’s typical franchise term is 20 years. The Company requires franchisees to meet rigorous standards and generally does not work with passive investors. The business relationship with franchisees is designed to ensure consistency and high quality at all McDonald’s restaurants. Conventional franchisees contribute to the Company’s revenue through the payment of rent and royalties based upon a percent of sales, with specified minimum rent payments, along with initial fees paid upon the opening of a new restaurant or grant of a new franchise.

Products

McDonald’s restaurants offer a substantially uniform menu, although there are geographic variations to suit local consumer preferences and tastes. In addition, McDonald’s tests new products on an ongoing basis.

McDonald’s menu includes hamburgers and cheeseburgers, chicken sandwiches, wraps, french fries, salads, oatmeal, shakes, desserts, sundaes, soft serve cones, pies, soft drinks, coffee and other beverages. In addition, the restaurants sell a variety of other products during limited-time promotions.

McDonald’s restaurants in the U.S. and many international markets offer a full or limited breakfast menu. Breakfast offerings may include Egg McMuffin, Sausage McMuffin with Egg, McGriddles, biscuit and bagel sandwiches and hotcakes.

Quality, choice and nutrition are increasingly important to our customers and we are continuously evolving our menu to meet our customers' needs.”[1]

You can find more information about the business in McDonald's official website or Wikipedia’s article.

McDonald's SWOT analysis

Strengths

1. The second-largest restaurant network serving customers in over 120 countries

As of 2018, McDonald’s operates the second-largest restaurant network in the world. In total, the company and its franchisees operate 37,241 restaurants in 120 countries.

Figure 1. Largest quick service restaurant (QSR) chains by number of locations in 2018
Rank Brand Name Locations
1. Subway 43,772
2. McDonald's 37,241
3. Starbucks 27,339
4. KFC 21,487

Source: The respective Companies’ financial reports and official websites [1][2][3][4][5]

In terms of sales, McDonald’s outrivals any other QSR chain in the world with US$22.820 billion in sales in 2017 alone (earning slightly more than Starbucks). The sheer size of the company’s restaurant network is a strength that provides many advantages over competitors, including:

  • Economies of scale. The company can share its fixed costs over many restaurants locations, which makes McDonald’s one of the cheapest places to eat at.
  • Huge gains from implementing best practices. The company can identify better ways of performing tasks, managing restaurants or hiring new employees and can achieve huge gains by implementing these best practices in its vast network of restaurants.
  • Market power over suppliers and competitors. Due to its size, McDonald’s can exercise its market power over suppliers by requiring lower prices from them. The company clearly demonstrates this with The Coca Cola Company. Because of McDonald’s and The Coca Cola Company’s agreement, no other restaurant chain can sell Coca Cola drinks for lower prices than McDonald’s, even if it means losing the business to PepsiCo. The Coca Cola Company could easily get out of such agreement if McDonald’s wouldn’t be so huge and would generate less income for The Coca Cola Company.
    McDonald’s can also use its size to affect the competition by underpricing some of its items or driving them out of the best locations.
  • Wide audience reach. McDonald’s restaurant network allows the chain to reach more customers than most of its rivals could reach. According to the Company’s CEO[6], in five of its largest markets, 75% of population lives within 3 miles of McDonald’s restaurants. Wide audience reach does not only help the company to target more customers and increase brand awareness, but also to introduce new services, such as home delivery.

Weaknesses

1. Lack of focus on improving food quality

In 2017, McDonald’s revealed a new global growth plan.[1] The company outlined the following 5 key objectives it focuses on to successfully achieve growth:

  • Enhancing digital capabilities;
  • Delivery in the U.S.;
  • More ‘Experience of the Future’ restaurants in the U.S.;
  • New cash returns;
  • New financial targets.

The problem is that these objectives do not address the key problem McDonald’s customers have with the chain. It’s food quality.

In a Consumer Reports survey[22] 32,000 respondents identified McDonald’s as the worst fast-food chain from a list of the 21 largest fast-food chains. The chain scored lowest in food quality and freshness.

Figure 2. Best rated burger chains in 2017

In-N-Out Burger chain was rated as the best burger chain and scored 88 points, while McDonald's scored only 71 points and was rated as the worst burger chain.

Source: Consumer Reports [22]

A different study by Consumer Reports,[23] which evaluates the fast-food chains on their efforts to eliminate the ‘antibiotic’ meat from their supply chains, rated McDonald’s only with a score of C+. McDonald’s has eliminated all the chicken raised with medically important antibiotics (antibiotics, which are also used in treating human illnesses) from its supply chain, but has made little effort to do so with beef and pork.

The chain should review its strategic objectives and focus on food quality, which the consumers care most about. That’s one of the best ways for McDonald’s to regain their lost customers and to stop current customers from searching for better quality food in other fast-food chains.

Opportunities

1. Further expansion of home delivery in the U.S. and other major international markets

McDonald’s introduced its first food delivery service in the U.S. in 1993,[24] and since then, rapidly expanded it into many Asian, Middle Eastern and Latin American countries. The company had little success with the delivery service in the U.S. Nonetheless, across various markets, including China, South Korea and Singapore, delivery has generated sales of nearly $1 billion for McDonald’s in 2016 alone.[6]

In 2016, McDonald’s announced home delivery service in 200 cities in the U.S.[25] By July 2017, the company expanded the delivery service to 3,500 locations in the U.S. and in total to 7,800 restaurants across 47 countries.[6]

According to Gallup’s research, U.S. home delivery market for QSR restaurants was US$26 billion in 2016. The company estimates that the home delivery for QSR will grow on average by 36.5% annually to US$38 billion by 2020.[27]

McDonald’s home delivery service is still new in the U.S. and the company should further expand the service to the majority of its 14,036 U.S. restaurants.[28]

Threats

1. Intensifying competition

McDonald’s operates in a highly competitive fast-food industry, where it has to compete with international, national, regional and local rivals, each specializing to serve specific consumer segments. As the fast-food industry’s growth has slowed, competition has significantly intensified. McDonald’s traditional rivals like Burger King and Wendy’s are constantly introducing new meals to directly compete with McDonald’s offerings. Another rival, Starbucks, has also changed its strategy. The coffee chain giant is moving away from only selling coffee to becoming a destination for breakfast and lunch. In addition, new rivals like Chick-fil-A and Chipotle are growing faster than the industry’s average and are taking market share from the more established chains like McDonald’s.

In the U.S., fast-food industry is expected to grow 2-3%[34] on average over the next few years. McDonald’s, which is the leader in the fast-food industry, is experiencing slowing sales in the U.S. market mainly due to decreased traffic to its restaurants.[1] Customers, who were eating at McDonald’s now choose restaurants like Five Guys Burgers or similar fast-casual chains, which offer better quality food and customer experience.

McDonald’s will see an ever growing competition in the industry and will have to adapt to consumer and industry trends faster in order to sustain in the business.