Custom «Mc Donald’s» Essay Paper Sample
Mc Donald leads the global market in terms of sales margins in the fast food business. The company has more than 32,400 subsidiary branches globally with a market presence in over 100 countries worldwide. In the Unites States (US) alone, there are 14,000 golden arches locations in the country. The company is popular for its Big Marcs, Quarter Pounders and Chicken McNuggets and its eateries are characterized by drive through designs or dine in restaurants. Mc Donald restaurants are commonly found in airport eateries and other busy locations. A great proportion of Mc Donald restaurants are majorly run through franchises and such like agreements (Pae, 2009).
The company has of late undergone a lot of problems in its managerial structure, some of which are poor management, inadequate marketing, and changing customer preference with fast foods. These are some of the issues that are currently holding the company back from effectively growing in today's fast food industry. Over the past few years, the company has embarked on a globalization strategy where it has expanded into global markets around the globe including China, Australia, Japan and such like destinations. Just like any other company, Mc Donald has many strengths and weaknesses that either threaten its financial position or compliment its current high rankings in the fast food market. A great contributor to its current success entails the numerous franchising contracts the company has given. They have accounted for a great part of the company's sales (Pae, 2009). The company has also been on the forefront in adopting new strategies like the "plan to win strategy' which incorporates the four P's of marketing: product, place price, promotion. This strategy has partially contributed to the success of the company but other factors are also in play.
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This study seeks to carry out a forensic financial analysis of the company as a current business practice. Considering the financial dynamics of the company, this study will analyze the factual reporting of the company's assets, liabilities, cash flows, sales and other financial measures as measures of risk analysis for the company. With this analysis, the company could be able to uncover devious areas in the financial statements of the company and point out areas where the company could be exposing itself to adverse financial positions.
Mc Donald has undergone a considerable turnaround in the last three years or so. This is an apparent observation considering the analysis of the company's revenue in the periods of 2007-2008. The net income steadily rose from $20.895 billion to $22.796 billion and $23.522 million across the periods of 2006, 2007 and 2008 respectively. There was however a drop in sales revenue to $22.744 billion in 2009 (Forbes, 2010). This drop was mainly attributed to a slow growth in sales revenue and decreased profit margins due to increased operational costs and miscellaneous expenses. Compared to previous years, the company has made significant gains in revenue collection but the company is not out of the woods yet, in terms of its operational challenges because it needs to rejuvenate its position in the fast food industry to stay afloat in the coming years.
Mc Donald's total revenue in the third quarter of 2009 was approximated at $6.046 billion (Forbes, 2010). During the same year, the dollar dropped significantly, decreasing the profit margins over the next quarter. As at the end of the 2009 fiscal year, the company underwent subsequent months of decreased sales revenues which painted a bleak future for the company. The total revenue collected was 5.973 billion at the end of 2009 and 5.610 billion in the first quarter of 2010 (Forbes, 2010). However, it should be noted that during 2009, the global economy was also on a down-turn and the company was a victim of it, just like any other organization. However, it is worth mentioning that the company took a big leap in sales revenues in the preceding years starting from 2005 to 2008.
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A Du Pont analysis on the company's financial statements shows that the company was greatly hit by poor global economic conditions towards the close of 2008 and close of 2009 fiscal years. The company therefore needs to persistently improve its efforts to achieve financial prosperity. The profit margins through the company's income statements show dismal increases in profit levels. In 2009 it was approximately 11(Forbes, 2010). This implies that for every item they sold, worth a dollar, they only obtained 11 cents worth of profits. This was a drop of approximately 4 units as compared to the previous year. This also implies that the company is not doing such a commendable job in keeping its expenditures at minimum. Apart from the global economic slump, another reason why the company has experienced low profit levels is the constant expansion efforts into other markets. In essence, the company has adopted a trend of pouring its profits into starting up new franchises around the globe. The net income for the company has consequently been depleted and the profit levels have also decreased.
Asset Turnover Ratio
The asset turnover ratio shows that the company is poorly coping in using the company's assets to make a profit. Generally, this is an alarming situation for most companies but Mc Donald has in the past experienced consistent low asset turnover ratios. This trend was still observed even when Mc Donald was at the pinnacle of the fast food industry. The return on assets also shows that the company is experiencing a low net income in comparison to its asset levels. Like explained earlier in the study, the probable cause for this observation is its numerous expansion efforts. However, interestingly, the company has started to accumulate a lot of cash in its reserves. In the period of 1998 and 2002 the company had approximately kept $415 million while at the close of 2003; the net reserves were approximated at $646.4 million (Forbes, 2010). The figures have consistently kept on increasing with net reserves currently slated at close to a billion dollars. This explains why the asset turnover ration has been improving especially around the period of 2003- 2008.
Return on Equity
The return on equity for the company is significantly lower than expected, though an improvement from preceding years. Return on equity practically represents the returns on the shareholders' investments. Again, these low postings have been attributed to foreign expansions. As depicted earlier from the company's expansion efforts, close to 98% of the company's revenues are constantly being reinvested into new ventures.
The debt to equity ratio depicts a trend whereby the company accumulates a lot of debt and other forms of liability in comparison to the return on equity. By June 2010, the debt to equity ratio was approximately 0.8 (Forbes, 2010). This depicts an improving financial position for the company especially if the company expects to give its shareholders dividends in the coming years.
Current Debt to Equity Ratio
The current financial statement for Mc Donald depicts a trend whereby the company's current assets are slightly more than the current liabilities. Its total debt to equity ratio for the first half of 2010 was 0.81 (Forbes, 2010). This is an attractive addition to the company's financial position, because it portrays that the company can effectively service its loans or debts. This also implies that the company operates on a good liquidity level. However, the general impression created by the company, disregarding its financial performance of 2009 shows that the company has been making considerable gains in the past few years and its well on its way towards making a turnaround. This can be best manifested through its financial ratio in the periods of 2007 to 2009 and its performance in 2010 so far. The company's financial figures depict a significant improvement in the company's financial position and also make the statement that the company is doing well alongside the radical changes it made in earlier years.
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In order for Mc Donald to stay afloat in the coming years, it is inevitable that the company keeps the debt levels and operating costs at a bare minimum; at least just to support its operations. It should also slow down its expansion efforts. Inherently, it needs to avoid the kind of pitfall it found itself in 2002 due to rapid expansion; otherwise, it would find itself in a difficult position trying to succeed in turning the company around.
Mc Donald's principles of corporate governance have been based on individual and professional integrity. The success of the company has also been built on the trust of its customers around the world, based on the fact that the company can provide safe and cheap food. The company also boasts of treating its clients with respect and employees with utmost diligence. In other words, the company has been able to provide quality food through proper treatment of its customers and employees alike. The company also has a high ethical conduct, is dependable, truthful and serves its customers and stakeholders well. This has been part of the corporate governance pillars to which the company has been thriving on for the past 45 years or so (MC Donald, 2009).
The boards of directors are custodians of the company's integrity and ethical conduct. The company has in the past operated under the principle that proper corporate governance is the key to providing good returns to stakeholders and ensuring the company achieves high standards of success. The company has also achieved high levels of success through these practices and still remains to be a leading entity in the fast food market. However, the company believes that the journey towards achievement of good corporate governance is a long one and incorporates all stakeholders of the organization. In accordance to its corporate governance structure the governance structure is always being reviewed annually in accordance with the company's policies. The financial officers are normally bound by a code of ethics which ensures they operate under certain specifications that prevent errors or frauds. These codes of ethics are available on the company's website and are transparent enough to conform to any corporate policy guidelines (MC Donald, 2009).
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MC Donald currently has an internal audit committee occasioned by the duties of the board of governance as an oversight body. This committee is entrusted with a number of duties such as appointment, compensation and overseeing the duties of the company's auditor. In addition to the duties of the audit committee, all pre audit and non audit recommendations are supposed to be approved by the audit committee. These include all payments, policies of the company (including stock options and pension funds). These functions ensure the auditor doesn't make any wrong recommendations (MC Donald, 2009).
At Mc Donald Company, the audit committee is entrusted with a lot of duties and also has many core functions in the organization such as pre-approving requirements and disclosure, delegation of pre-approval, prohibiting certain services, monitoring procedures, disclosing pre-approval policies, among others (MC Donald, 2009). In this regard, this becomes a weak area for management because this committee has a lot of control in the company and there is no regulatory body that oversees its activities. Moreover, the board of directors has a lot of influence on this committee thereby making its vulnerable to the company's wishes. The influence of the shareholders should be more visible in composing this audit committee and shareholders should be given a more proactive role in formulating the policies of the company. Alternatively, the company should always seek the services of an external auditor at all times for corporate administrative functions. Other aspects of the corporate functions are effective.
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Strategic Issues Problems and Challenges
In the past years, Mc Donald's had been undergoing a rocky financial terrain, most likely brought about by underperformance. Its growth in revenue has been unstable in the past few years too. The company has been experiencing a considerable increase in sales revenues from the year 2006 to 2008 but in 2009 there was a significant drop in revenues. In 2006, the company reported total revenues of $20.895 billion; $22.796 billion in 2007; $23.522 billion in 2008 and $22.744 billion in 2009. It is however believed that the country's drop in revenue collection for the period of 2009 was brought about by the recent economic meltdown, though previous drops in revenue collection were attributed to poor management, poor marketing and a slow response to consumers' marketing needs (Forbes, 2010). Some of the problems the company has been facing are addressed below
Eminent Challenges in Customer Service
Many factors have been attributed to the dwindling performance of Mc Donald's revenue performance but over the recent years, the company has been majorly faced with the problem of poor service delivery which is in turn impacted negatively on the company's financial performance. Recent market studies done in 2007 exposed Mc Donald as among the fast food restaurants with the lowest customer service delivery (Pae, 2009). In addition, the company was once ranked lower in customer service than the IRS by a consumer report in 2007 (Pae, 2009). Primarily, this was caused by the company's high employee turnover. There are also consumer reports targeting the company because of its slow service at the drive through window. Currently, the company is ranked the fifth in the drive through window in terms of speed and nineteenth in terms of accuracy. Considering the company's reliability in terms of speed and accuracy at its drive through windows, the company could be losing approximately $97,000 dollars annually. This approximation is enhanced by fact that the company sources 60% of its sales from drive through windows. The approximation is that the company is losing at least 1% every 6 seconds (Pae, 2009).
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Despite the company's optimism about its future financial performance there is an overwhelming feeling of skeptism among critics of the company's financial performance (Schlosser, 2001, p. 13). Most of the negative opinions come about because of the doubt in the company's ability to sustain long-term growth margins. More criticism comes out of the company's inability to sustain product innovation and its ability to deal with competition. Some critics even went as far as questioning the significant improvement in the company's performance around the periods of 2006-2008 questioning the attribution of success on either the company or on the performance of the dollar and the market. In other words, some people don't believe that the company's newly implemented strategies have anything to do with the company's improved performance. Nevertheless, there is an evident need for the company to develop core competencies which will enable the company build a competitive advantage globally.
Most fast food restaurants and hamburger chains, including Mc Donald, need to shift from high calorie foods to less calorie foods, such as baked potatoes and Deli sandwiches, which are healthier. Mc Donald therefore needs to struggle to meet consumer expectations with regard to health concerns through a modification of its menu.
The biggest challenge to a company's long-term sustainability and enhancement of profit margins, primarily lie on the level of competition. Mc Donald has been experiencing increased competition in the past few years. Burger King is primarily the biggest threat to Mc Donald's sustainability in the industry because it is the second largest fast food hamburger restaurant globally. The company has over 11,400 locations around the globe and a market presence of over 58 destinations worldwide. Just like Mc Donald it derives its biggest revenues from its drive through window with 55% of its revenues being sourced from this method (Pae, 2009).
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Burger King reported 18% revenue growth by the close of 2008 while Mc Donald reported a 4% increase. In 2009 the company reported revenues of close to a two and a half billion dollars (Pae, 2009). Burger King has some distinct assets such as the one of a kind whooper, with an extraordinary charbroiled taste, plus an organizational policy which compels its workers to prepare hamburgers according to the way the customers want. In addition, Burger King has been able to uniquely position itself in the fast food industry by enclosing its patio seating design that offers the perfect dining experience to its customers. Moreover, its menu is distinctly unique because in addition to its Whopper Burger, the company offers Croissan'wiches and other French delicacies that uniquely stand out from its competition.
Staying on the Offensive
Through the adoption of this strategy, Mc Donald will seek to stay as a proactive market leader in the fast food industry. Moreover, by the adoption of this strategy, the company will always be one step ahead of its competitors and force them to play catch up. As compared to Burger King, which is the strongest competition for Mc. Donald, the company still commands a huge market with a 33% stake in the fast food industry as compared to Burger King's 15% (Pae, 2009).
The company can adopt new technological methods in food preparation to maintain its position as a fast food leader in the global market. More new product offerings should be added to the restaurant menu to keep up with the changing customer needs, while at the same time satisfying their individual needs. In essence, the company will be improving its customer service to stay ahead of competition. It is especially important that the company improves its customer service because it was ranked among the lowest customer service providers; even lower than the Internal Revenues Service. To improve on these poor rankings, the company should also embark on revamping its training to enhance its work force to orient them with the latest customer oriented services (Peterson, 2010, pp. 34-40).
Fortifying and Defending Strategy
This strategy should be adopted to slow down competitors from gaining ground as well as preventing other market entrants from distorting the market equilibrium. This strategy works best with companies that have already established a market presence. Mc Donald is a viable company. The company can therefore adopt a number of tactics to improve its industry dominance and reflect a positive financial statement. The Fortify and defend strategy would be in tandem to the company's global expansion efforts. In other words, the company should enhance its market presence globally to prevent or discourage new companies from entering the fast food industry. In alignment to this strategy, the company can also invest in research and Development (R&D) to develop new technology that would cut it above its competition.
Diversification has not only been proved to work in fast food industries but in other economic sectors as well. If Mc Donald intends to improve its financial position, the company should adopt this strategy. With the current revolution from high calories foods to low calorie items, the company should be ready to embrace new items on its menu. The company should therefore make low calorie hamburgers and salads to attract more customers who'll in turn increase the company's revenue. If the company will be successful in developing attractive low calorie food, it will be well ahead of its competition because it would have a created a competitive advantage over close rivals such as Wendy's and Burger Kings (Pae, 2009).
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Mc Donald already commands the highest fast food global presence. My recommendation is that the company should direct its expansion efforts to less saturated markets. Its foreign expansion efforts should therefore be undertaken strategically and with tact. The company therefore needs to increase its foreign expansion efforts in Asia and the Pacific region. Considering companies expand to capitalize on the core competencies of a region and increase its market base. Mc Donald should also expand into viable African Markets. This market is less saturated and also has relatively cheaper factors of production as compared to other worldwide markets. Considering Mc Donald has a strong competency in producing and selling quick and relatively cheap food to a wide variety of its customers, it can effectively thrive in new markets. These expansion efforts will also be complimentary to the efforts of wading off competitors which will in turn increase the profitability margins while the increased customer base will increase revenue collection (Pae, 2009). Most importantly, the company should venture into a market after proper market research. Currently, emerging markets seem to be viable locations for expansion.
Since the inception of Mc Donald restaurants, the company has seen its ups and downs. The company's core competencies should be critically used to propel the company to new financial heights. Every challenge the company faces is potentially a viable opportunity it can use to rejuvenate itself and prove to all its stakeholders, shareholders and the general public that it can beat the odds and become a leading force in future corporate success. The strategies advanced would be beneficial to the company considering it is already on course in implementing some, while others still have untapped potential. Despite the global downturn that contributed to a slow down of business and poor financial postings, the general impression of the company is that it is slowly coming out of the downturn and is making a turnaround. The company's management should however, never forget the core competencies, such as franchises, which have made the company what it is today.