McDonald’s France Think Global, Act Local
Elizabeth Dunn Aaron Harris Ben Jackson Amy Stewart
This work is licensed under a Creative Commons Attribution-ShareAlike 3.0 Unported License.
McDonald’s France
Doug Goare is the new President of McDonald’s Europe and is looking over some worrying news reports. His new position, which he assumed in October of 2011, means he is now responsible for the company’s 7,000+ restaurants in 40 countries, but his prized possession, and the department which seems most likely to keep him up at night, is McDonald’s France.
Humble Beginnings The McDonald’s known today started in 1940 as a single barbecue place owned by brothers Richard and Maurice (Dick and Mac) McDonald. From there it morphed into a drive-in hamburger stand, where an entrepreneurial salesman named Ray Kroc found it. Recognizing the potential, Kroc bought the expansion rights in 1954 and by the following year had not only opened his first McDonald’s, but also incorporated the restaurant as the McDonald’s Corporation. Seven years later, Kroc completely bought out the McDonald brothers for the small sum of $2.7 million, hoping to build the number one chain in the country. The concept caught on, and by 1958, 100 million hamburgers had been sold. By 1969, that number was up to five billion. 1984 saw 50 billion, and the 100 billionth hamburger was sold in 1994, at which point the corporation quit counting exact figures in favor of using the familiar term ‘billions and billions’ on signage. In its first few years of existence, McDonald's did not grow very quickly. After opening the first location in 1955, there were only 34 restaurants by 1958. But during the next year, groundbreaking took off and 67 new restaurants opened, bringing the total to over 100. In general, however, growth remained slow, taking 33 years to open 10,000 restaurants. (Still, business was good and the company had reached all 50 states by 1970 and realized $1 billion in annual sales by 1972.) After that, another round of rapid expansion hit and it took only eight additional years to hit 20,000 locations. Beginning in 1997, the chain would set a pace of opening 2,000 new restaurants per year, averaging one every five hours. In the midst of domestic growth, Kroc did not forget about international opportunities and in 1967 opened the first foreign McDonald’s in British Columbia, Canada. Using strategies of wholly owned subsidiaries, joint ventures, and franchise agreements, Kroc continued his march through foreign locales and by 1991, 58 countries hosted at least one of over 3,600 international McDonald’s restaurants. Foreigners loved the concept as well as Americans and showed it through
Think Global, Act Local
2
McDonald’s France
their purchases, boosting international sales to a 37% share of total systemwide sales. The strongest markets were Japan, Canada, Germany, Great Britain, Australia, and France. Currently, the McDonald’s name “is the single most advertised brand name in the world, 1” and as the world’s largest quick-service restaurant organization with over 33,000 restaurants in 119 countries on six continents, it serves an average of 64 million people daily. Keeping in trend with early results, as of 2008 over 70% of revenue came from the United States, Canada, Japan, China, Australia, the United Kingdom, France, and Germany2. The company has continued to show growth each year and 2011 returned the highest figures to date: almost $5 billion in profit on nearly $86 billion in systemwide sales. (See Exhibit 2 for previous six year figures.) Another key indicator of McDonald’s’ success is its stock performance. The company went public in 1965, offering shares at $22.50 each. A single investment in 100 shares ($2,250) in 1965, if left untouched, would have grown to 74,360 shares worth over $5.7 million as of December 2010. As the closing bell on the stock exchange rang on March 1, 2012, shares were trading at $99.25 each. To help fuel continued growth and diversify its portfolio, McDonald’s purchased several outside businesses. It began with Aroma Café (an upscale coffee and sandwich shop based in the UK) and Donato’s Pizza (a pizza chain based in the US) in 1999 and followed with the bankrupt Boston Market (a home-style meal chain based in the US) in 2000. In 2001, it bought a 33% interest in Pret A Manger (an upscale ready-to-eat sandwich chain based in the UK). Also in 2001, it sold Aroma Café, only one year after purchasing it. Despite its phenomenal success, there have been a few bumps along the road. The 90’s was a period of aggressive growth, with the majority happening internationally. The number of locations grew to over 11,000 by 1998, while the number of host countries jumped to 114 by the same year. In the United States, the number of locations increased from 9,000 in 1991 to 12,500 in 1997, and that posed a problem with existing franchisees who had to deal with cannibalization from the new stores. To ease some of the growing pains, McDonald's cut back on domestic expansion and only opened about 400 new restaurants in 1997. Furthermore, to help close up communication gaps between franchisees and management, the organization was restructured down to just five geographic divisions.
1 http://www.fundinguniverse.com/company-histories/McDonalds-Corporation-company-History.html 2 http://www.mcdonalds.com/us/en/home.html Think Global, Act Local
3
McDonald’s France
Another casualty in the slowdown of the 90’s was staffing. In 1998, for the first time, McDonald’s cut jobs at the headquarters level, laying off 525 employees (about a 23% reduction). Because of this, the company took a $160 million charge which then caused a decrease in net income - $1.64 billion in 1997 to $1.55 billion in 1998 - for the first time since going public.
Locations More than 80% of the 33,000 McDonald’s restaurants are franchises. Franchisees enjoy the backing of the McDonald’s Corporation, but pay regular fees such as a percentage of monthly sales and take on the majority of costs themselves, including start-up (approximately $545,000) and equipment/pre-opening (approximately $1.5 million). As McDonald’s has grown, it has developed stand-alone buildings (with or without drive-thrus), store fronts in office-type buildings, space inside shopping malls and large stores such as Walmart, and attached to gas stations. Physical structures vary as location, space, and culture dictate. The McDonald’s Corporation does not supply food to franchisees, but it does help set up suppliers through preapproved listings. Any potential supplier is thoroughly investigated and must adhere to very strict quality standards and safety regulations. According to the McDonald’s website, its requirements, ‘which meet or exceed USDA standards, are among the strictest in the restaurant industry.’
Domestic Marketing McDonald’s uses multiple mediums to advertise, including radio, television, newspapers, billboards, and sponsorships. Since its inception several campaigns have launched, beginning with 1960’s successful slogan, ‘Look for the Golden Arches’. Other notable slogans include ‘You Deserve A Break Today’, ‘Did Somebody Say McDonald's?’, ‘Food, Folks, and Fun’, and ‘We Love To See You Smile’. And in 2003 came the still used ‘I’m Lovin’ It’ campaign, which was the first global campaign ever, running in over 100 countries. This was the first success in a while, as it helped increase samestore sales by 2.4% over the entire year. Also as part of its advertising, McDonald’s has long been associated with many movies and television shows, often putting specially related collectible toys in Happy Meals. It also uses a variety of games to entice customers, such as Olympic giveaways, Monopoly, and miscellaneous scratch-offs and sweepstakes promotions. One in particular was 1997’s very popular Teenie Beanie Baby promotion, in which approximately 80 million toys were snatched up almost overnight.
Think Global, Act Local
4
McDonald’s France
McDonald’s has been supporting various charities and events since 1968, when it sent hamburgers to US Olympic athletes competing in France. Since then, it has been a regular Olympic supporter, becoming an Official Sponsor in 1976. In addition, McDonald’s is big in the sports world, sponsoring FIFA, NHL, NBA, NASCAR, and IndyCar events. Other alliances include Walt Disney and the Defense Department (‘America Supports You’ military campaign), as well as countless local sports, educational, and charity-based partnerships. McDonald’s also operates the Ronald McDonald House Charities, giving temporary housing at little to no cost to families of seriously ill children in hospitals. The first Ronald McDonald House was opened in Philadelphia in 1974, and by 1986, there were 100 locations. As of 2012, there are over 300 worldwide locations.
Environmental Efforts In response increasing consumer demand for better conservation efforts, McDonald’s has taken several steps to improve its processes and output. One such step involves the amount of packaging on each food item. In the 1970’s, an average meal used approximately 46 grams, but that amount has now been reduced to 25 grams, a 46% reduction. Other areas of improvement include coffee beans and milk. McDonald’s now only uses those beans certified by the Rainforest Alliance; and uses organic milk for milkshakes and hot beverages. McDonald’s has also implemented a recycling program for its used cooking oil, in many cases turning it into biodiesel fuel for its delivery trucks. In a first for the quick-service restaurant industry, McDonald’s opened the world’s first hydroflurocarbon (HFC)-free restaurant in 2003 in Denmark. The result is that the restaurant does not use Freon in its refrigerants, thereby helping cut down on harmful climate changing emissions. As further proof of its commitment, McDonald’s’ efforts at efficient packaging and recycling have been recognized by the Environmental Protection Agency (EPA). Also, the Campus Office Building received the LEED-EB Platinum award in 2009, in recognition for its ‘green’ initiatives.
Think Global, Act Local
5
McDonald’s France
Expansion Abroad McDonald’s international expansion started with the 1967 opening of its first Canadian restaurant in Richmond, British Colombia3. The progress into other foreign markets moved slowly at first. McDonald’s also opened in Puerto Rico in 1967, but did not open in another country until 1970. During the 1970s McDonald’s opened restaurants in 25 more countries, the most important being Japan, United Kingdom, Germany, France, Australia, Brazil, Sweden, the Netherlands, Hong Kong, Austria, New Zealand, Switzerland, Singapore, Ireland and Belgium. The 1980s saw expansion into 16 more countries including South Korea, Taiwan, Spain, Italy, Mexico, Philippines, Argentina, Malaysia, Venezuela, Thailand, and several other smaller European countries. In the 1990s McDonald’s incredibly entered into 60 more countries, the largest of which are China, Poland, Portugal, Indonesia, Israel, Russia, South Africa, Saudi Arabia, Chile, Czech Republic, Greece, Ukraine, Romania, India, and Egypt. 4
Major Markets The top markets for McDonald’s by number of stores are the United States, Japan, Canada, United Kingdom, Germany and France. First launched in 1971 and with 3891 locations by 1999, Japan is McDonald’s largest market outside of the United States 5. Much of the success of McDonald’s in this country is attributable Den Fujita, a former long-time president of McDonald’s Japan. His entrepreneurial spirit and open-mindedness greatly interest McDonald’s corporate team. Mr. Fujita pushed for the first McDonald’s to be in one of the busiest parts of Tokyo, a break from McDonald’s tradition of seeking suburban locations. Mr. Fujita understood the cultural dynamics and traditionalism of Japanese suburbs in the 70s and 80s. Much to the surprise of McDonald’s headquarters, the opening of the first Japanese location set a new world record for McDonald’s single-store sales its opening day6. McDonald’s strength in Japan increased from that point on. The model of locally owned franchises mixed with corporate leadership which included Japanese entrepreneurs allowed McDonald’s to continue to offer its classic American hamburgers and fries, but with menu items customized for local tastes. Some specialty items from Japanese menus include shrimp burgers, different types of seafood wraps, and the Teriyaki McBurger. The Japanese have even expanded
3
http://www.mcdonalds.ca/ca/en/our_story/our_history.html
4
http://www.ftc.gov/be/seminardocs/04beyondentry.pdf
5
ibid
6
http://money.cnn.com/magazines/fortune/fortune_archive/1986/09/15/68039/index.htm
Think Global, Act Local
6
McDonald’s France
on the concept of gigantic American-style burgers with the MegaMac – essentially a Big Mac with four meat patties instead of two. 7 Canada is the third largest market for McDonald’s, second in international markets. McDonald’s Canada also had an important driving figure from very early on. George A. Cohon started as a franchisee and ultimately helped to develop and unite McDonald’s restaurants all over Canada. In 1971 he was named President and CEO of McDonald’s Restaurants Canada. By 1977 McDonald’s was coast-to-coast in Canada and became the country’s largest foodservice organization in 1981. By the late 1980’s and early 1990s, under the direction of Mr. Cohon, McDonald’s Canada gained enough clout to be able to take the initiative to open its own restaurants in another country – Russia. Contributions from Canadian subsidiaries remained important throughout the 1990s, even to the point that the McFlurry, a Canadian invention, was added to McDonald’s menus across the globe. 8 As with McDonald’s Japan, the inclusion of local executives and franchise agreements allowed for internationally standard menu items as well as other items with local flare. A couple of extreme examples are the McLobster Roll and Poutine, consisting of “French fries topped with cheese curds and gravy.”9 The United Kingdom is the fourth largest market, but the first location in that country (3000th globally) opened with little fanfare in 1974. The company started a television and cinema marketing campaign in the following years and continued to add locations across the country until McDonald’s corporate assumed total control of the subsidiary in 1983. Over the years McDonald's has mitigated legal, ethical and environmental problems including concerns about human health. Early transparency with nutrition reporting and supply sources as well as the more recent incorporation of healthier menu options have helped to drive further expansion. 10 The unique menu items of interest seem to revolve around the aforementioned health concerns. The McDonald’s United Kingdom website has whole sections for Deli and Salads. Customers have the option of a sandwich or a wrap each served with a patty consisting of chickpeas, coriander and cumin. There are four different chicken salads from which to
7
http://www.tofugu.com/2008/11/02/the-japanese-mcdonalds-menu-im-actually-lovin-it/
8
http://www.mcdonalds.ca/
9
http://foodnetworkhumor.com/2009/07/mcdonalds-menu-items-from-around-the-world-40-pics/
10
www.mcspotlight.org
Think Global, Act Local
7
McDonald’s France
choose. Of the six total sides offered, three are healthy options: garden salad (not counted above), carrot sticks, and a fruit bag. 11 McDonald’s employs the ‘Think Global, Act Local’ mantra and it appears to be working. Though the company is continuously expanding, when entering new markets it adapts to suit local food preferences and customs. For example, the location in Jerusalem is kosher, restaurants in Arab countries use "Halal" menus that adhere to Islamic laws for food preparation, locations in India use lamb instead of beef, Japanese restaurants offer shrimp, German sites sell beer, and Italy offers cakes and tarts.
In France Opening in 1979, Strasbourg, France seemed to be a clear choice for McDonald’s move into the country. Being so close to Germany, residents in Strasbourg were already familiar with the McDonald’s brand. But the brand quickly realized that it needed to adopt in order to last. Burger King entered the French market in 1981. During this time, fast food was not a huge industry in France. In fact, the French just about opposed the food due to their preference towards quality cuisine. Burger King’s strategy of “transplanting the American restaurant” failed and by 1997, BK had closed its 39 French stores. But this failure can be more attributed to Burger King’s lack of regard towards the French culture. Other fast food chains that accommodated the French thrived. From 1983 to 1996, the fast-food industry in France grew by nearly 1,500 restaurants. Overall, the market value increased 5 times while McDonald’s expanded to 542 restaurants. Its strongest competitor, Quick, grew to 258 restaurants. Perhaps the most important success factor for McDonald’s in France was its ability to cater to the French consumer. In 1995, McDonald’s began using French cheeses such as chevre and bleu, rather than cheddar. They also added wholegrain French mustard sauce to the menu. Three separate campaigns have added huge success to the brand.
“Uniquely French” Serving high end coffee and pastries at a separate counter, McCafe has brought the French coffee shop feel to McDonald’s. The French baking conglomerate, The Holder Group, supplies all the pastries – products with an 80% profit margin. “I set up taste tests for my friends between McDonald’s macaroons and those of Lauduree, and almost no one
11
www.mcdonalds.co.uk
Think Global, Act Local
8
McDonald’s France
can tell the difference,” states Alexis Lemoine of McDonald’s France. 12 The addition of McCafe not only adds to the embourgeoisement of the brand’s image, it also increased revenue by 5%. The addition of coffee and dessert has also resulted in the average consumer spending nearly $15 per visit (4x what the US consumer spends). McDonald’s introduced the McBaguette in August 2011. Considering that the French consume 9x more sandwiches than hamburgers (70% of these sandwiches are served on baguettes), adding this bread option was a necessary step. One McDonald’s spokesman commented that “today, we are a part of French daily life. Our priority is to integrate locally while offering out traditional products…The French are passionate about bread and crazy about baguettes. We’re gradually responding to a natural demand.”13 The non-franchised fast-food industry was controlled by the thousands of French bakeries around the country. Adding the baguette to the menu allowed McDonald’s to move into this market as well. The McSalad restaurant may be the furthest play from traditional McDonald’s. Targeting wealthier business workers, McSalad is an all-salad restaurant. Allowing customers to place orders online, McSalad can maximize the short lunch break. You won’t find any burgers, fries, or shakes in a McSalad restaurant – only the very healthy stuff. McDonald’s France has also made huge strides in the green movement. Partnering with Greenpeace, McDonald’s aims promote a strong environmentally friendly image. Aiming to reducing gas emissions by over 50%, recycling seven thousand tons of frying oil for bio-diesel fuel, and exchanging the red background in its logo for green, McDonald’s France has taken great efforts to improve its reputation. The restaurant chain recently spent $5 million on renovations to create an ambiance within its stores. Hard, plastic furniture has been replaced with sleek, modern, and comfortable furniture. In 2005, free wifi was added in each restaurant (US McDonald’s did this in 2010). The subdued signage is also very different than that of the US. The golden arches are not as prominent and many people don’t realize they are passing a McDonald’s until they are right in front of it. Restaurants are all locally-owned franchises. The chain currently has a growth rate of about 30 restaurants per year. The average employee age has increased to 26, while turnover rate remains at about 80%. To combat this issue, McDonald’s France has instituted a series of reward programs and readily gives its employees diplomas and certificates for their achievements. In addition, employees from each store are brought in for marketing and product launch decisions.
12
http://knowledge.wharton.upenn.edu/article.cfm?articleid=2906
13
ibid
Think Global, Act Local
9
McDonald’s France
Issues going forward McDonald’s still faced challenges, however. The French have a long tradition of world-class food, and look on Americanstyle fast food with disdain. For many French, “MacDo is the symbol of malbouffe, or bad food and bad eating — a major slur.” One French citizen from Burgundy even went so far as to say he’d “never take his two young sons to eat chez Ronald.14” Adding to these image issues was Morgan Spurlock’s documentary Supersize Me which claimed McDonald’s was the “epitome of malbouffe.” McDonald’s has also come under criticism by anti-globalization protestors, particularly a group led by a man named José Bové. Bové, a farmer and prominent member of the French food movement, bulldozed a McDonald’s franchise while it was under construction in Milau in 1999. Despite being convicted and serving a sentence, he continued to protest McDonald’s as a symbol of anti-unionism and unchecked globalization. He claimed that McDonald’s “trample[ed] local culture – such as French cuisine15” As McDonald’s continues its unprecedented growth in France, Doug Goare faces a major image issue. Although the McDonald's in Paris' 15th Arrondissement brims with customers, Goare must carefully consider his next move.
14
http://www.npr.org/blogs/thesalt/2012/01/24/145698222/why-mcdonalds-in-france-doesnt-feel-like-fast-food
15
http://www.commondreams.org/headlines01/0813-01.htm
Think Global, Act Local
10
McDonald’s France
Exhibit 1 - Segment and Geographic Information
2011
In millions
U.S.
$
Europe APMEA Other Countries & Corporate Total revenues U.S. Europe
Europe
Europe
10,886.4
9,569.2
9,273.8
6,019.5
5,065.5
4,337.0
1,571.9
1,328.3
1,190.1 22,744.7
$
3,666.2 $
3,446.5
$
3,231.7
3,226.7
2,796.8
2,588.1
1,525.8
1,199.9
989.5
111.0
29.9
31.7
Europe
7,473.1
$
6,841.0
$
10,865.5 $
10,467.7
$
10,429.3
12,015.1
11,360.7
11,494.4
5,824.2
5,374.0
4,409.0
4,285.1
4,772.8
3,892.2
$
32,989.9 $
31,975.2
$
30,224.9
$
786.5 $
530.5
$
659.4
1,130.1
978.5
859.3
614.1
493.1
354.6
199.1
133.4
78.8
$
2,729.8 $
2,135.5
$
1,952.1
$
446.0 $
433.0
$
423.8
570.3
500.5
483.2
267.5
232.4
202.9
131.2
110.3
106.3
APMEA Other Countries & Corporate Total depreciation and amortization
Think Global, Act Local
$
(2)
8,529.7 $
Other Countries & Corporate U.S.
(1)
$
APMEA Total capital expenditures
7,943.8
$
Other Countries & Corporate U.S.
$
24,074.6
APMEA Total assets
8,111.6
27,006.0 $
Other Countries & Corporate U.S.
8,528.2 $
2009
$
APMEA Total operating income
2010
1,415.0 $
1,276.2
$
1,216.2
Source: McDonald’s 10-‐K Filing, Feb 24, 2012
11
McDonald’s France
Exhibit 2 - 6 Year Summary
$ $
2011 18,29 3 8,713 27,00 6 8,530
2010 16,23 3 7,842 24,07 5 7,473
2009 15,45 9 7,286 22,74 5 6,841
$ $ $ $ $ $ $ $
5,503 5,503 7,150 2,571 2,730 4,533 3,373 2,610
4,946 4,946 6,342 2,056 2,135 3,729 2,648 2,408
4,551 4,551 5,751 1,655 1,952 4,421 2,854 2,235
32,99 0 12,50 $ 0 14,39 $ 0 1,021
31,97 5 11,50 5 14,63 4 1,054
30,22 5 10,57 8 14,03 4 1,077
4.58 4.58 2.26 76.76 6,399 26,33 8 32,73 7 61,14 7
Dollars in millions, except per share data
Company-operated sales
$ $
Franchised revenues Total revenues Operating income Income from continuing operations Net income Cash provided by operations Cash used for investing activities Capital expenditures Cash used for financing activities Treasury stock repurchased (9) Common stock cash dividends Financial position at year end: Total assets
$
Total debt Total shareholders’ equity Shares outstanding in millions Per common share: Income from continuing operationsdiluted Earnings-diluted Dividends declared Market price at year end
$ $ $
5.27 5.27 2.53 100.3 $ 3 6,435 27,07 5 33,51 0 67,64 $ 8
Company-operated restaurants Franchised restaurants Total Systemwide restaurants Franchised sales (10)
Think Global, Act Local
2008
2007
2006
16,561 6,961
16,611 6,176
15,402 5,493
23,522 6,443
22,787 3,879
20,895 4,433
4,313 4,313 5,917 1,625 2,136 4,115 3,981 1,823
2,335 2,395 4,876 1,150 1,947 3,996 3,949 1,766
2,866 3,544 4,341 1,274 1,742 5,460 3,719 1,217
28,462
29,392
28,974
10,218
9,301
8,408
13,383 1,115
15,280 1,165
15,458 1,204
4.11 4.11 2.05
3.76 3.76 1.63
1.93 1.98 1.50
2.29 2.83 1.00
62.44 6,262 26,21 6 32,47 8 56,92 8
62.19 6,502
58.91 6,906
44.33 8,166
25,465
24,471
22,880
31,967
31,377
31,046
54,132
46,943
41,380
Source: McDonald’s 10-‐K Filing, Feb 24, 2012
12
McDonald’s France
Exhibit 3 - SWOT
Strengths
Weaknesses
•
Financial position - diversified
•
Growth is too rapid; cannibalization
•
Internal training program
•
Not environmentally friendly
•
Foreign market
•
Food is not healthy enough
•
Brand recognition
•
Food is low quality
•
Charitable work / sponsorships
•
Weak customer service perception
•
Different store formats
•
Local food customization/adaptation
•
Convenience
•
Strict quality control standards for suppliers
Opportunities
Threats
•
Greater international expansion
•
Environmental / protest groups
•
Home delivery
•
Economy / currency exchange rates
•
Presence inside existing businesses
•
Saturated industry
(i.e. as in Walmart)
•
Obesity epidemic; consumers going
•
Improve supply chain
healthy
•
Offer additional healthy menu items
•
Competition catching up
•
Make a louder noise against obesity
•
Price / product wars
problem •
Make larger advances in being socially and environmentally responsible
Think Global, Act Local
13