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McDonald's Corporation

McDonald's Corporation - Financial and Strategic Analysis Review
Reference Code: GDCPG31248FSA

Company Snapshot Company Overview

Key Information McDonald’s Corporation (McDonald’s) is one of the leading
quick service restaurant operators in the US. The company
McDonald's Corporation, Key Information specializes in offering hamburgers, cheeseburger, chicken
Web Address www.mcdonalds.com sandwiches, French fries, salads, milk shakes, desserts
Financial year-end December and ice cream sundaes, Big Mac, Quarter Pounder,
Number of Employees 400,000 Chicken McNuggets and Egg McMuffin. In addition, it
serves premium salads, chicken, yogurt, bottled water, and
NYSE MCD
fruits. It operates more than 31,967 restaurants that serve
Source : GlobalData
58 million people in more than 118 countries every day.
Out of these, 25,465 are operated by franchisees, while
Key Ratios 6,502 are operated by the company.
McDonald's Corporation, Key Ratios
SWOT Analysis
P/E 17.12

EV/EBITDA 13.02.00 McDonald's Corporation, SWOT Analysis
Strengths Weaknesses
Return on Equity (%) 32.43

Debt/Equity 75.38 Market Leading Brand Declining Market Share in the
Sector
Operating profit margin (%) 30.08
Wide International Presence
Dividend Yield 0.03 Pending Lawsuits
Strong Focus on Quality
Note: Above ratios are based on share price as of 21-Apr-2010

Source : GlobalData
Opportunities Threats
Share Data
Rising Sales in the US Currency and Interest Rate
McDonald's Corporation, Share Data Restaurant Industry Risk
Price (USD) as on 21-Apr-2010 70.36
Product Innovation and Menu Rising Manpower Costs
EPS (USD) 4.11 Diversification
Book value per share (USD) 13.03.00 Government Regulations
Huge Potential in the
Shares Outstanding (in million) 1,107.40 Emerging Markets

Source : GlobalData
Source : GlobalData

Performance Chart
McDonald's Corporation, Performance Chart (2005 - Financial Performance
2009)
The company reported revenues of (U.S. Dollars) USD
22,744.70 million during the fiscal year ended December
2009, a decrease of 3.31% from 2008. The operating
profit of the company was USD 6,841.00 million during
the fiscal year 2009, an increase of 6.18% over 2008.
The net profit of the company was USD 4,551.00 million
during the fiscal year 2009, an increase of 5.51% over
2008.

Source : GlobalData

McDonald's Corporation- Financial and Strategic Analysis Review Reference Code: GDCPG31248FSA
Page 1

Quarter Pounder with Cheese.2% and 17. assure best practices and drive continuous improvement. Strength . of these 18. The growing US restaurant industry coupled with product innovation and menu diversification could ensure a strong future for the company.7%. It operates in four reportable segments namely. increasing competition and government regulations.137 are operated by foreign affiliated markets. soft drinks. In 2008. the company's operations could be hampered by the pending lawsuits. McDonald’s operates across 118 countries worldwide. coffee and other beverages. The company and its franchisees purchase food. A higher than sector average* operating margin may indicate efficient cost management or a strong pricing strategy by the company. Strength . the company works closely with the suppliers to encourage innovation. This was above the S&P 500 companies average* of 12.2% for the fiscal year 2008. The company's globally recognized brand and strong focus on quality differentiates the company from its competitors.502 are operated by the company. also approved by the company. the Middle East and Africa (APMEA). Europe. It is engaged in the franchising and operations of McDonald’s restaurants. The countries Australia.Market Leading Brand McDonald’s enjoys a strong market position in the food service industry. McDonald’s has established and strictly enforced high quality standards and accordingly approves these independent suppliers. Furthermore.Overview McDonald's Corporation (McDonald's) is one of the largest food service companies across the globe. McDonald’s is one of the world’s most valuable and renowned brands and has a leading position in the branded quick service restaurant business across all the countries where it operates. a quality assurance board. 4. provides strategic global leadership for all aspects of food quality and safety. McFlurry desserts. composed of the company’s technical. distribute products and supplies to most McDonald’s restaurants. the Asia Pacific region. accounted for 55% of Europe’s revenues. However. 42. cookies. For this. french fries. The most famous products of the company include hamburgers and cheeseburgers. Chicken McNuggets.Efficient Use of Resources The company's return on equity (ROE) was 32. It also supports the company’s new product launches as well as market expansion strategies. Big Mac. The company is also engaged in the research and development activities located in the US. safety and supply chain specialists. The quality assurance process not only involves ongoing product reviews. The Other countries segment includes Canada and Latin America. but also on-site inspections of suppliers’ facilities. and Asia.Expanding Operating Margin The company's operating margin was 27. the US. The company operates 31.402 are operated by conventional franchisees. Filet-O-Fish. McDonalds was ranked as the most admired food service company by Fortune magazine.9% of total revenues. shakes.967 restaurants. During the year 2008.39% for the fiscal year 2008.Strengths Strength . McDonald's Corporation. which helps it attract and serve a diverse customer base. Europe and APMEA segments accounted for 34. The company's strong brand equity coupled with efficient marketing and promotional activities helps the company to attract and retain a loyal customer base. packaging. The operating margin has increased 1037 basis points (bps) over 2007 which may indicate management's high focus on improving profitability.Financial and Strategic Analysis Review Reference Code: GDCPG31248FSA Page 2 . Strength .McDonald's Corporation McDonald's Corporation . Germany and the UK. In addition. Europe.SWOT Analysis SWOT Analysis . McDonald's Corporation . A higher than sector average* ROE may indicate that the company is efficiently using the shareholders' money and that it is generating high returns for its shareholders compared to other companies in the sector. Independently owned and operated distribution centers. several chicken sandwiches. and 6. soft serve cones. the US. France. This broad international presence provides the company a diversified source of revenue.Wide International Presence Wide geographical operations helps the company generate diversified sources of revenues as well as reduces the risks of overdependence on a particular market. 2. premium salads. equipment and other goods from numerous independent suppliers. The company has quality assurance labs around the world to monitor the quality of these products. and Other countries. In the Europe segment. This also helps the company in mitigating the various risks associated with the overdependence on a particular region. Strength . This was above the S&P 500 companies average* of 14. China and Japan collectively accounted for over 50% of APMEA’s revenues.926 are operated by developmental licensees. Chicken Selects. sundaes. pies. collectively.9%. The company’s strategy to provide high quality products to consumers increases the brand image and gives it a competitive advantage.3%.Strong Focus on Quality A strong focus on high quality product offerings helps the company generate brand loyalty.

it can capitalize on this rising restaurant industry. the company launched many new products such as the egg. as well as failure to provide nutritional information about its products. McDonald's Corporation . McDonald’s is concentrating on menu variety and beverage choice. In addition. The company's underperformance could be attributed to a weak competitive position or lack of innovative products and services. Iced Coffee and Sweet Tea in 2008.Threats Threat . it is estimated that almost all these economies will post negative growth in 2009.7% in 2007 to 1% in 2008.Financial and Strategic Analysis Review Reference Code: GDCPG31248FSA Page 3 .Declining Market Share in the Sector The company's compounded annual growth rate (CAGR) for revenue was 6. and again in January and December 2005. and false advertising.Opportunities Opportunity . McDonald's Corporation . where it recently opened its 1. negligent misrepresentation and concealment.5% over 2008. On the other hand. Various complaints have also been filed against the company alleging its misrepresentation of french fries and hash browns as free of wheat. the emerging and developing economies recorded a GDP growth rate of 6. the GDP growth rate of advanced economies came down from 2. China’s GDP grew at 9% while India grew at 7.3% in the previous year and is estimated to be 3.McDonald's Corporation McDonald's Corporation . Weakness . Furthermore.Rising Sales in the US Restaurant Industry The company can gain from the booming restaurant industry. McDonald’s is aggressively developing more restaurants in China. meeting the demand of increasingly sophisticated and value-conscious consumers. The growing economy in these countries has generated new employment opportunities for the residents and has provided a boost to their earnings. The company also introduced branded locally-relevant new products such as the premium chicken line in Australia and New Zealand. an increase of 2.Product Innovation and Menu Diversification The company’s strong focus on new product development creates huge opportunity for the company. it is prone to currency risks and interest rate risks. They alleged McDonald’s engaged in deceptive advertising. As the company is the leading restaurant operator in the US. This was below the S&P 500 companies average* of 11. Any unfavorable outcome of such lawsuits could have a material impact on the company’s business. everyday affordability and convenience in the US market. it introduced Southern Style Chicken products. in 2009. an increase of 4% over 2008. unjust enrichment. the sales at full service restaurants are projected to reach USD 182. the sales of US restaurant are expected to reach USD 566 billion in 2009. Apart from adding up expenditure due to payment of compensatory and punitive damages.3% in 2009.9 billion in 2009. In February 2003. with continued emphasis on value and convenience. The company operates in 118 countries spread across the regions of North America. These sales are driven by expanded menu choices. Latin America. representing 4% of the US gross domestic product and employing 9% of the US workforce. The industry is expected to remain an economic powerhouse. A broad and customized menu offering could help the company attract and serve a broad customer base and in turn increase its profitability. this industry is considered to be a major part of American lifestyle. deceptive trade practices acts.Currency and Interest Rate Risk Since McDonald’s operates in a geographically diversified environment. Furthermore.3% in 2008.Huge Potential in the Emerging Markets The fast paced growth in the emerging economies offer a huge growth potential for the company by leveraging its strong brand and product portfolio. Opportunity .8 billion in 2009. who became obese from eating McDonald’s products. the company can look out for new growth avenues in these regions and expand its presence. Complaints have also been filed against McDonald’s for violation of state consumer fraud acts.Pending Lawsuits Various lawsuits have been filed against the company. despite containing derivatives of these ingredients. tomato and pepper McPuff in its Chinese menu. amended complaints were filed against the company on behalf of individuals in New York under the age of 18. Opportunity . gluten and/or milk. During the fiscal year 2008. As the consumers spend approximately 48% of their food budget in restaurants. According to National Restaurant Industry (NRA) report. In the US. failure to disclose certain additives and ingredients.3% in 2008. Despite the global economic slowdown. the sales of Quick Service restaurants are projected to reach USD 163. which could have an adverse impact on its brand image. The same was 8. This rise in disposable income of the people has changed their buying behavior. the company has been expanding its stores in most of the cities. In Russia and India too.000th restaurant.Weaknesses Weakness . an increase of 1% over 2008. Europe. the Asia McDonald's Corporation. such lawsuits also tarnish the brand image of the company. A lower than sector average* revenue CAGR may indicate that the company has underperformed the average sector growth and lost market share over the last four years.05% during 2004-2008. With the competition at its peak and markets getting saturated.1%. unfair competition act. According to IMF.

it may face labor strikes that might result in huge losses. Inc.4% of those restaurants and 8.Financial and Strategic Analysis Review Reference Code: GDCPG31248FSA Page 4 . coffee shops. with respect to production processes. The company is also subjected to certain health and safety regulations. as well as tarnishing its brand image. as well as various state agencies. Threat . The federal minimum wages have increased from USD 5. thereby hampering its market position. street vendors. Similar wage hikes have been witnessed in both developed as well as developing countries across the world. which in turn may adversely affect its margins. Given the competitive environment and rigid liquidity scenario. In the US.000 restaurants that generated about USD 370 billion in annual sales in 2008. Thus. product quality. particularly Euro. If the company is not able to maintain the product quality and consumer loyalty. could have a major impact on the company’s financial performance.Rising Manpower Costs The labor costs have been on a rise globally. especially in the US and could have a major impact on the company’s operational efficiency. Wendy’s. With the company’s employee base of about 400. the Department of Agriculture. Over 60% of the company’s revenues are generated outside the US. is subjected to various regulations by federal governmental agencies.85 per hour in July 2007.1% of the sales. Rising competition may also force the company to reduce its prices. sales and borrowings from different markets. advertising of its businesses is subject to regulation by the Federal Trade Commission. It is further expected to increase to USD 7. McDonald’s restaurant business accounts for 2.15 per hour in 1997 to USD 5.Government Regulations The company. menu variety. failure of which may expose the company to new liabilities or may hamper its existing operations. the Federal Trade Commission. Similarly. These companies primarily compete on the basis of their price. it becomes very important for the company to distinguish its product and service offerings through a clear and unique value proposition. the Environmental Protection Agency and the Department of Commerce.Intense Competition The competition in the food service industry is fierce. delicatessens and supermarkets. Thus any foreign currency fluctuations. Key branded competitors of the company include Starbucks Corporation. NOTE: * Sector average represents top companies within the specified sector The above strategic analysis is based on in-house research and reflects the publishers opinion only McDonald's Corporation. storage and distribution. If it fails to comply with future price hikes. packaging. Also about 45% of the company’s debt is denominated by foreign currencies. product quality and convenience. quick-service eating establishments. labeling. Yum! Brands. British Pound. including the Food and Drug Administration. it is bound to come under pressure due to the pay hikes. any change in the interest rate might also affect the group’s operating expenses and result in diminished earnings.25 per hour by July 2009. The company should comply with all such stringent governmental regulations. Threat . service. and Burger King Corporation. which could result in a decline in its profitability. The company’s competition in the broadest perspective includes restaurants. being a producer and marketer of food products. convenience food stores. the company is exposed to currency risks associated with the purchases. there are approximately 575. the Middle East and Africa. this intense competition could reduce the sales volume of the company. Threat . Thus to survive and succeed in a stiff competitive environment.McDonald's Corporation Pacific region. including those issued under the Occupational Safety and Health Act. it becomes difficult for the company to attract and retain competent employees at reasonable pay. pizza parlors.000 people. In addition. Australian Dollar and Canadian Dollar.