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McDonald's Restaurants

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The McDonald's brand is almost as universal as Coke. The group's 36,000th restaurant opened in 2014, and those golden arches now spread across 119 countries, welcoming some 69m customers every day. Not enough, the company still says. On any day McDonald's still only serves less than 1% of the world population, leaving plenty of room for growth. However profits fell dramatically in 2002 and the group took unprecedented steps to close under-performing outlets, even pulling out of a few markets altogether. That move appeared to have paid off by 2004, and McDonald's reported strong growth for much of the following decade, even in the face of an economic downturn. A key factor was the broadening of the menu with an enhanced range of breakfast items, healthier chicken and salad meals and premium beverages. The company also pushed aggressively into the coffee shop sector, in several key international markets as well as the US. However the reviving US economy brought fresh challenges from 2013 onwards. Domestic sales suddenly stalled, despite a frenetic burst of menu innovation, as customers moved away to less established rivals, while international performance was dented by a variety of different challenges in regional markets. Even after several changes of management, those troubles have yet to be fully resolved. The biggest problem seems to be securing consistent growth in the company's key market, the US. See also: McDonald's Australia | McDonald's UK

Advertising

Who handles advertising? Click here for account assignments from Adbrands.net. McDonald's Corp declared its own advertising expenses for 2016 to have been $646m. In addition, franchisees spend a significant additional amount on local marketing through cooperative units.

Brand Value

Interbrand's Best Global Brands survey ranked McDonald's as the world's #12 brand in 2016, with an estimated brand value of $39.4bn. Millward Brown's Brandz survey ranked McDonalds as the world's #9 brand in 2016, with an estimated value of $88.7bn. Both surveys use different measurement criteria.

Competitors

See Restaurants Sector index for other companies

Brands & Activities

Despite its evergreen role as a convenient target for healthy eating campaigners (a position it does not wholly deserve), McDonald's effectively weathered the downturn which dented performance in 2001 and 2002, and was once again delivering steady growth in profits as well as sales in the late 2000s. Like it or not, the brand power of McDonald's is considerable, and the company has long shown itself to be a master of promotional opportunity. Its skill in managing a global food service business is second to none and envied by all its peers. However, a surge of stronger performance from rivals Burger King and Wendy's, combined with global economic uncertainty, caused a wobble during 2012 for newly appointed CEO Don Thompson. This was exacerbated by the recovering US economy, which appeared to be encouraging customers to trade up to other restaurant chains. The continuing turbulence caused Thompson to resign after two years. His successor Steve Easterbrook eventually managed to deliver a modest turnaround by 2017 but the improvement remains fragile.

McDonald's is the world's leading restaurant operator by revenues, and had 36,899 branches in 120 countries by the end of 2016. (Yum! Brands has over 40,000, and Subway more than 44,000 but both have lower revenues). Total systemwide sales were just over $85.0bn, up 3% year-on-year.

In recent years, the group has steadily reduced the percentage of outlets it operates itself in pursuit of a target of 20% in each of its main international markets. A revised target was announced in 2015 by which the group will reduce the number of owned outlets to as little as 10% of the total by the end of 2018, and just 5% over the longer term. Only around 5,670 restaurants were owned and operated by McDonald's at the end of 2016, down from almost 8,200 in 2006. Most of the remaining 31,230 outlets are run by franchisees, apart from the Japanese outlets which are owned by an affiliate organisation. The single biggest franchise owner worldwide is Arcos Dorados (or "Golden Arches"), with more than 2,100 outlets spread across Latin America and the Caribbean.

In terms of outlets, the US is McDonald's most important territory by far with 14,155 restaurants at the end of 2016. Canada is home to around another 1,450 outlets, although the group lags behind local market leader Tim Horton's by revenues. However, the going got tougher in 2012 in the US, as a result of more intense competition from a revitalised Wendy's and - to a lesser extent - Burger King as well as lukewarm response to higher-priced launches such as an Angus Burger and Fish McBites, both of which were later withdrawn. Another launch, a new Chicken McWrap, performed less well than expected though it remained on the menu. Those mis-fires resulted in the first monthly decline in US same-store sales for almost a decade mid-year, forcing the group to counter with a much bigger push for traditional value-priced options.

In 2015, McDonald's finally bowed to public pressure and extended the breakfast menu all day, allowing customers to order the immensely popular Egg McMuffins in the afternoon and evening if required. That had an immediate positive effect on sales, though those benefits began to taile off again towards the end of 2016.

Other changes included a streamlining of the menu to reduce the number of different fixed menu choices, but also the introduction of "pick your own" customised burgers. Under the banner of "Create Your Taste" diners were offered self-service digital order screens to design their own meal items from a variety of options. However, this system never really took off in the US and was downgraded in early 2017 to offer a fewer number of customised options.

Marketwatcher NRN estimated US systemwide sales of $36.4bn in 2016, more than double the next largest restaurant chain (Starbucks) and more than four times closest rival Burger King. McDonald's had 46.4% share of the limited service/burger sector, down slightly on both of the two previous years. All growth in the burger sector has been generated by the second tier of chains such as Sonic, Dairy Queen and Jack In The Box.

The group's second biggest market by outlets is Asia-Pacific/Middle East/Africa with 10,345 outlets, including around 3,150 in Japan. The group's Japanese operation was initially created in 1971 as a joint venture with local entrepreneur Den Fujita. It issued an IPO in 2001. McDonald's now has a stake of around 50%. The Fujita family sold its 25% shareholding in 2005 to investment group Longreach, and the remaining shares are publicly held. However the fastest growing market is China, with around 2,750 stores by the end of 2016. In 2017, the group announced plans to sell all company-owned stores in that country, as well as master franchise rights for all other outlets, to a consortium led by Chinese state investor CITIC.

In Europe, the system comprises around 7,855 outlets. There are more than 1,250 restaurants apiece in Germany, the UK and France, but no other European country has more than 520 stores. Europe is also the group's most lucrative market financially, contributing the highest proportion of revenues. This partly because of a higher proportion of company-owned restaurants in the region, as well as higher revenues per individual outlet. (The average annual sales for each company owned restaurant in Europe were $3.9m in 2012, compared to $2.9m for each US outlet. However the profit contribution was significantly lower, partly as a result of occupancy and lease expenses). During 2007, the group sold all its remaining stores in Latin America to franchisees. According to Euromonitor research, McDonalds has around 7.5% of the global "informal eating out" market by sales, and 3.8% of the entire global restaurant industry.

Despite McDonald's reputation for a rigidly consistent worldwide format for all its stores, the group is actually extremely flexible with its menu, adapting food for the local market, and regularly testing a huge variety of different limited edition meal concepts. The underlying menu is generally the same, but France has the toasted croque McDo as a standard item; Australia has the 100% Australian-grown McOz with beetroot; Japan has the Teriyaki McBurger. In India, McDonald's serves only chicken and lamb, not beef, and a wider range of vegetarian option in accordance with local customs. It opened its first-ever vegetarian-only restaurants in 2012 in two local towns housing holy temples, and 2016 saw the launch of the chicken-based Maharaja Mac. Argentina, Israel and the US all have some kosher restaurants. In Taiwan and other Asian markets the group began serving rice burgers - beef or chicken on a toasted rice patty - in 2005. And as anyone knows who's seen the movie Pulp Fiction, in metric countries like France and Germany, the Quarter Pounder is known as the Royale or McRoyale. (The Big Mac is the Big Royale). In 2001, the group even introduced a McFalafel sandwich in its Egyptian restaurants. However, otherwise, the company's Filet-O-Fish and McNuggets main courses and McFlurry desserts are widely available in virtually all markets.

McDonalds has also experimented with alternative restaurant formats. The most successful of these has been the McCafé, a coffee-bar format first introduced by McDonald's Australia, and now expanded into more than 40 other countries. Outlets serve a variety of teas, coffees and cold beverages as well as baked goods and other snacks. The concept was rolled out in the US in 2009 in what the company described as the biggest launch in its history. The fast-food giant has installed espresso coffee bars in virtually all of its domestic outlets, offering a similar menu to that of Starbucks including cappuccinos, lattes, mochas and the Frappé, a rival to Starbucks' Frappuccino. McDonald's even teamed up with Kraft to introduce packaged coffee in US supermarkets from 2015 under the McCafe brand. Australia remains McCafe's most established market by outlets with more than 400 locations, but the biggest for now is Germany, where the chain's 500-plus outlets now constitute the country's leading seated coffee-shop, ahead of Starbucks. (The official market-leader Tchibo offers only counter-serve coffee rather than chairs and tables). Adding to the overall offer, many restaurants in many markets are open 24 hours, and some even offer home delivery, especially in Asia.

The group has in the past also experimented with non-McDonald's brands. However these generated only minimal revenues compared to the main brand, and were all divested. The biggest was Boston Market, a leader in fast-casual instore dining, serving a selection of what it calls "home-meal replacement" dishes, such as roast chicken, meatloaf and steaks. McDonald's sold its remaining shares in the business during 2007. Until 2006, the group also owned Chipotle Mexican Grill. It issued an IPO in early 2006, and divested the remaining shares by year-end. A joint venture with US-based Italian restaurant chain Fazoli's was established in 2002, but discontinued a year later. Also in 2003, the group also sold its 200 Donatos pizza restaurants back to founder Jim Grote (at a substantial loss). In 2001, the group acquired a minority stake in UK-based sandwich-maker Pret a Manger, and funded the extension of that chain into New York, Hong Kong and Tokyo during 2003. The Japanese operation was later closed. Those shares were sold in 2008. The group even dabbled in non-food services, acquiring a minority stake in Redbox, an automated DVD rental kiosk chain. These shares were sold in 2009.

McDonalds has faced a number of challenges since 2000. The most serious of these has been the steady increase in worldwide concerns over health. These began with a (largely unjustified) shift away from beef in several European markets as a result of BSE meat contamination fears. More serious for McDonald's has been the impact from growing awareness of the importance of a healthy diet, and the rising incidence of obesity, especially in children. McDonald's has featured prominently as the favourite whipping boy for nutritional activists, and some of these attacks have been especially vicious, not least the film documentary Super Size Me and Eric Schlosser's books Fast Food Nation and Chew On This. The group successfully weathered part of this storm with the introduction of a range of salads and other healthy alternatives. However, it is still regularly targeted by parent groups in the US. In recent years, this opposition has focused most specifically on Happy Meal promotions, and especially the free gifts, which are said to encourage unhealthy eating.

In a bold move to deliver greater transparency about its production processes, as well as to puncture a few unflattering myths, McDonald's Canada produced a series of viral videos in 2012 answering customers' questions by showing exactly how its food is made. Food quality remains a consistent challenge facing all restaurant chains, especially in Asia, and McDonald's has grappled with several scares in recent years. As a symbol of the West it also came under attack in Russia during 2015 from government regulators in what was widely regarded as a politically motivated retailation for American sanctions relating to the Ukraine conflict.

McDonald's is a major sports sponsor, supporting US NASCAR and CART racing, basketball and soccer. It has sponsored the FIFA World Cup since 1994, and in 2014 renewed its support until at least 2022. It has also been a long-term sponsor of the Olympics. Its first connection with the Games was at the 1968 Winter Olympics in Grenoble in France, when it airlifted burgers to homesick US competitors. It became an official sponsor of the US Olympic Association in 1976, and has been a top tier global sponsor since 1996. The most recent renewal of its sponsorship was set to run until 2020, but in a surprise turnaround in 2017 it announced plans to cancel that relationship after the 2018 Winter Games. In many cases it also acts as the official foodservices supplier at these events.

In 2004 the group granted a license to Chinese firm Shanghai Longhurst to produce a range of McKids branded apparel for children. These launched in 2004 in Asia. McDonald's has marketed a limited range of McKids clothing through Wal-Mart in the US since 1997, but this deal expired in 2004. The group is also an active supporter of charities, and runs a US network of Ronald McDonald Houses providing accommodation for families of hospitalized children.

Financials

After a decline in profitability (though not in top-line revenues) in 2001 and 2002, the group's overall financial performance was firmly back on track by the mid-2000s. However, there was a slight stumble in performance during the course of 2012 in the US with some slippage in profits. However full-year revenues rose 2% (it would have been 5% without currency fluctuations) to a record $27.57bn. Net income slipped just under 1% (also as a result of currency) to $5.46bn, from the previous year's record $5.50bn.

There was a new high of $28.11bn for 2013, but the following year proved very challenging. Reported revenues for 2014 slipped back 2% to $27.44bn, although the decrease was created entirely by currencies. Revenues were flat at constant rates, but same store sales slipped by 1%. In the US, same store sales fell by more than 2% and customer numbers by more than 4%; compared to 0.6% and over 2% in Europe; and over 3% and almost 5% in the APMEA region. Group net income fell by 15% to $4.76bn, its lowest level since 2009. The US accounted for 32% of revenues in 2014 and Europe for 40%. A little over two-thirds of revenues come from the company's own restaurants, with the remainder as fees and royalties from franchisees.

The turnaround finally began to deliver results in the second half of 2015, especially in 4Q. For the year as a whole, though, revenues tumbled another 7% to $25.41bn, largely as a result of currencies. At constant rates they would have risen 3%. Net income fell 5% to $4.53bn also as a result of currencies.

Despite the continuing turnaround mid-year, McDonald's US recovery appeared to stall in the final quarter of 2016, with comparable same-store domestic sales slipping by 1.3% in the final three months. That was partially an unflattering comparison against the launch of all-day breakfast at the end of 2015. This proved popular with customers, but after the initial surge of interest it resulted in lower total spending per visit. Breakfast options are generally cheaper than tradititional all-day fare. At the same time, the strong dollar impacted on international revenues, as did the decision to begin selling off company-owned stores to franchisees. For the full year, global comparable sales were up 3.8%, but revenues slipped 3% as a result of currencies and refranchising to $24.62bn. Company-owned outlets accounted for 62% of revenues or $15.3bn. Net income rose 3% to $4.69bn. The US accounted for just over a third of reported revenues, but almost half of operating income.

After that slight wobble, McDonald's turnaround held firm in 2017, with global comparable sales up 5.3%. Systemwide sales were up 7% in constant currencies. For the year, net income rose 11% (despite a one-off 4Q tax reform impact) to $5.2bn, while operating income was up by 23%. Revenues slipped to $22.8bn, reflecting refranchising of outlets.

For 2018, global comparable sales rose 4.5%, but consolidated revenues continued to decline, reflecting the refranchising program. Reported figure for the year was $21.02bn. Systemwide sales rose 5% in constant currencies. Net income was up 14% to $5.92bn.

Management

Jim Skinner retired as CEO of McDonald's in June 2012, and was succeeded by Don Thompson, previously president & COO. However, the following couple of years presented the group with numerous challenges, and Thompson took the decision to step down in Jan 2015. He was replaced by Steve Easterbrook, previously EVP & chief brand officer. Formerly the European marketing chief, Easterbrook returned to McDonald's in 2013 after a year or so as head of restaurant chain Wagamama. Easterbrook went on to replace virtually all of the group's senior management team. Longserving non-executive chairman Andrew McKenna retired in 2016 after 12 years in that role, and was succeeded by Enrique Fernandez.

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Background

Burgers were already an American favourite by the time brothers Dick and "Mo" McDonald turned their barbecue drive-in in San Bernardino, California into a self-service burger stand in 1948. The precise derivation of the term hamburger is unclear. There are many stories surrounding its creation, but it is unquestionably an American invention. Primarily it was an adaptation by German immigrants newly arrived in America of a recipe from the German city of Hamburg for chopped beef meatloaf, broiled but left raw inside. In the US this became known as Hamburg steak, and it was first mentioned in print in 1884 in the Boston Evening Journal. Later it became a delicacy served in the town of Hamburg, New York. Another contributor to the modern hamburger was John Montagu, the 18th century Earl of Sandwich, who had given his name to the archetypal quick meal over 100 years earlier when he demanded a steak served between two slices of bread so that he didn't need to get up from the gambling tables to eat.

A number of American entrepreneurs later took credit for serving the first Hamburg steak in a sandwich, but the most widely accepted appears to be Fletcher Davis, a lunch counter owner from Athens, Georgia, who reportedly caused a sensation at the World's Fair Exhibition in St Louis in 1904 with pan-fried chopped beef patty served between two slices of bread. The popularity of this "Hamburg sandwich" spread rapidly across the US during the first half of the 20th century, and was fixed in its modern form by another entrepreneur, former fry-cook Walter Anderson, who in 1916 replaced the bread slices with a specially designed bun. Five years later he opened the first dedicated hamburger restaurant, the White Castle, in Wichita, Kansas.

Certainly the concept seemed to work well enough for the McDonald brothers, who saw sales at their drive-in soar after they shifted to burgers. But it was entrepreneur Ray Kroc who turned the concept into a household name. A distributor of milkshake mixers, Kroc was one of Dick and Mo McDonald's suppliers. In 1954 he acquired exclusive franchising rights for the McDonald brothers' burger stand concept, acting as their agent for new franchisees and opening his own restaurant in Des Plaines, Illinois the following year. Kroc's business grew rapidly, and he bought out the McDonald brothers in 1962 for $2.7m, a large sum at the time but just a fraction of what the business would go on to generate.

Kroc took the company public in 1965 and began a policy of international expansion two years later. First destinations were Canada and Puerto Rico. Over the next 20 years the group colonized, on average, two countries a year. A key year was 1971, in which the company opened its first restaurants in Japan, in Europe (in The Netherlands) and Australia. The UK got its first McDonald's in 1974. During the 1960s, the company also experimented with secondary brands including more upmarket burger joints Hottinger's and Ramon's, but these were quietly shelved after poor performance.

Ray Kroc died in 1984, but the pace of expansion continued to accelerate after his death. In 1996 alone, McDonald's made its first appearance in 12 new markets. A year later, McDonald's signed a 10-year exclusive deal with Disney to cross-promote each other's brands. However, the US also became the source of increasing tension between the company and its franchisees. Most of the company's best-known trademarks had been invented by owner-manager franchisees. The Filet-O-Fish, for example, was invented in 1963 in a predominantly Catholic neighbourhood by a Cincinnati franchisee who noticed sales dropped regularly on Fridays, the day Catholics traditionally abstain from red meat. Other innovations from franchisees include core brand the Big Mac (invented in 1968 by Pittsburgh franchisee Jim Delligatti), the Egg McMuffin (introduced in 1973) and Chicken McNuggets (1983). Head office introduced the Arch Deluxe burger in the US in 1997, but it generated disappointing sales, made even worse by the disastrous and confusing Campaign 55, in which Big Mac prices were reduced to 55 cents, provided buyers also made additional purchases. Franchisees also claimed that the company was too keen to undermine their business by opening new stores indiscriminately and lacked a cohesive nationwide marketing strategy.

With limited opportunities for opening new stores in the US, McDonald's began teaming up with other retailers including Amoco petrol stations and Wal-Mart stores to open in-store franchises. In 1998 the group announced plans to buy into Mexican food chain Chipotle Mexican Grill, its first move towards a secondary brand. In 1999, the group took a further step towards "partner brands" when it acquired UK coffee shop chain Aroma. The group also quietly rolled out a chain of McCafe sandwich bars and coffee shops in 15 countries including Australia, Italy, Japan and Portugal. In 1999, the group purchased US-based pizza chain Donatos, with 140 restaurants. Later that year it agreed to pay $173m to acquire the Boston Market chain of restaurants, then sheltering from creditors under Chapter 11 protection.

Looking for new ways to extend its brand beyond restaurants and cafes, McDonald's began testing own-brand ketchup through retail outlets in Germany, Austria and Poland in early 2000, and launched a range of children's clothing through Wal-Mart. In late 2000 and early 2001, McDonald's began to come under severe pressure in Europe when the discovery of the first cases of BSE, so-called "Mad Cow Disease" led consumers to stop buying beef products. The group confirmed that it expected a "challenging" time, and attempted to counter the sudden fall in sales with the introduction of alternative meals, such as Germany's McFarmer, a burger made entirely out of pork. Later that year, the group announced the acquisition of a 33% stake in the enormously successful UK-based sandwich shop chain Pret a Manger. In the US the group began testing a new Diner Inside format in selected restaurants, expanding the menu to include a range of other diner-style meals.

BSE concerns later spread to other countries in Asia and Latin America, although the domestic market remained largely immune. Instead US sales came under a different sort of pressure. In 2001 the group was inadvertently touched by a scandal not of its own making, when it was revealed that an employee of the company's promotions agency, Cyrk-Simon, had been "fixing" McDonald's consumer promotions. The so-called McScandal was rapidly followed by a slowdown in financial performance, as the restaurant chain began showing signs of reaching saturation in its global markets. Following a drop in net income for fiscal 2001, and equally disappointing results for the first three quarters of 2002, chairman & CEO Jack Greenberg announced his retirement. He was replaced by former group president Jim Cantalupo.

Cantalupo, at 59 only a year younger than Greenberg, was regarded by some as an interim candidate while Australian-born Charlie Bell, a long-time McDonald's staffer then still aged in his forties was groomed for the top job. Soon afterwards, the group's Japanese joint venture issued a dramatic warning that its profits for 2002 would be almost wiped out after a failure to boost sales with cut-price deals. In the US also McDonald's was drawn into a brutal price-cutting war with Wendy's and Burger King, as each of the chains cut the prices of its entry-level meals to just 99 cents. The group reported its first ever quarterly loss as a public company at the end of 2002 as it allowed for the cost of closing more than 700 outlets around the world, but primarily in the US and Japan. The group also pulled out of several countries altogether as a result of economic uncertainty. Net income for the year fell 45% to $893m, the group's poorest performance for more than a decade.

This was followed by a new challenge in the US over healthy diets and America's growing obesity problem. As the biggest and best-known of the country's high-calorie food retailers, McDonald's was singled out by several commentators for negative criticism. The company responded by introducing a more health-conscious range of foods, including reduced-fat burgers, salads and fruit and yogurt desserts. This led to a complete overhaul of McDonald's corporate strategy, and primarily a shift away from growing by being bigger to growing by being better. The group also introduced its first ever unified global marketing campaign, rolling out a series of commercials worldwide based around new campaign slogan I'm Lovin' It. The debut ad, produced in Germany by Heye & Partner but used worldwide, was slated by many critics, but appeared to strike a chord with consumers. Sadly, the company's return to form was marred by the sudden and unexpected death of CEO Cantalupo from a heart attack in April 2004.

Later that year, the group declared another significant change in marketing strategy. Chief marketing officer Larry Light said at a conference that the company had abandoned the concept of delivering a single universal marketing message through television advertising. Instead the company would, he said, market itself worldwide via the four "cultural languages" of sports, fashion, music and entertainment. First up was sports, led by the group's position as one of the lead sponsors of the 2004 Olympics. Although the group continued to demonstrate a steady improvement in sales and profitability, while also making a clear commitment to low-fat meal alternatives, it remained the most high-profile target for anti-obesity protests. Documentary Super Size Me was an unexpected hit with movie audiences around the world over the summer and autumn of 2004, recounting the alarming effects on the health of film-maker Morgan Spurlock over the course of a month spent eating only McDonald's Happy Meals. The group appeared to shrug off the effects of that negative publicity also, with continuing strong performance.

However the role of McDonald's CEO began to appear tragically fated. Following the death of Jim Cantalupo, former COO Charlie Bell was appointed as his successor. Yet within just weeks of the appointment, Bell was diagnosed with cancer. Prompt treatment appeared not to have cured the illness, and he stepped down as CEO in November 2004 to fight the disease. Tragically, he died less than two months later, at the age of just 44.

Last full revision 11th October 2017

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