Porter’s Five Forces Analysis of McDonalds
|Industry||Restaurants (Food and Beverage)|
|Headquarters||Chicago, Illinois, USA|
|CEOs||Christopher J. Kempczinski|
|Revenues||USD 23.18 billion (CY22)|
|Profit||USD 6.18 billion(CY22)|
|Competitors||KFC, Starbucks, Chipotle Mexican Grill, Yum Brands, Domino’s Pizza|
McDonalds is the largest fast food retail chain in the world service burgers, French fries, sugar drinks, coffees, and a variety of items serving around 70 million customers daily. The company has an extended branch network of more than 40k branches in more than a hundred countries globally. McDonalds ranks 223rd on Forbes Global 2000 (2022) and 152nd on Fortune 500 (2022) lists. The company also holds the title of world’s second largest private employer (after Walmart) with 1.7 million employees.
The company posted revenues of USD 23.2 billion (same as compared to SPLY mostly because of exchange translation losses) while the profits plunged from USD 7.5 billion to USD 6.2 billion, down -18% YoY as inflationary pressures (especially high food and energy prices) grasped the company.
Porter’s Five Forces Analysis of McDonalds
McDonalds Rivalry among Existing Competitors
- Aggressive Competition
The fast food business is a highlyaggressive industry which competes not just with international chains but also local restaurants. McDonalds provides quick, hassle-free burger and fast food experience. McDonalds competes on the basis of Price, Taste and Service and strives to become a leader on all ends.
- Burger King
Burger King is McDonald’s largest competitor with more than 12,300 retail outlets with more than 90% franchised to independent owners. The company ranks 97th on World’s Most Valuable Brands by Forbes (2020). The company made revenues of USD 2.38 billion in CY21, +18%YoY as world moved back towards their workplaces and crowds scattered in streets. There were more dine in clients. Moreover, the profitability was USD 838 million in CY21, +72% as the company was able to maintain margins due to passing on cost impacts.
McDonalds Threat of New Entrants
- Low Working Capital Requirements to attract new comers
The working capital needs of food business is essentially low. The cost of an outlet in US can be around USD 4000-5000 every month which is constantly increasing because of cost-push inflationary pressures. These food ventures also have to watch out for inflationary pressures in terms of raw materials like Chicken, beef, milk, potatoes which are required in large amounts every single day and have almost doubled in prices.The low working capital requirements makes it easy for new entrants to experiment with food business and is most common for new start-ups, albeit survival rate being too low.
- Marketing and Branding Expenses
McDonalds spends heavily on marketing and branding activities because they have to keep people coming back. In 2020, McDonalds allocated USD 1.62 billion to marketing expense according to Julia Franc.
- Highly Regulated
The food and hospitality sector is immensely regulated with applicability of most local and international regulations. As McDonalds operates as world’s largest international chain, it is liable to know and follow almost all local laws along with the US laws. As we have seen in previous years, government regulation on limited operating hours, head count entrance and other Covid-19 related measures have severely impacted the business.
McDonalds Bargaining Power of Suppliers
- Low Supplier Dependence
McDonalds have a diverse supply chain with hundreds of suppliers. Also, the company imports potatoes, chicken to keep up with quality standards. This reduces the supplier dependence, and food being perishable commodities bring immense focus on timely deliveries to retail outlets. McDonalds have done wonders in this field and we hope efficiencies to continue.
- Impact of Pandemic
The past few worlds have reshaped the world order. The old world order was to go for work and malls and then get fast food in the process to have an overall dining experience. The new world, however, is to work from home, order groceries from home and then eat at home. The Fast food chains are extremely essential to the economy as they are a consistent source of tax revenue for the governments. According to BDO, Food and hospitality consists of roughly 9.5% of the GDP. After the impact of Pandemic, these outlets which were heavily dependent on in-house customers had to slightly change their business model (while they are already doing a lot of deliveries). These companies invested immensely in technology to boost up performance and increase the delivery chain efficiencies.
McDonalds Bargaining Power of Buyers
- Broad Client base
McDonalds has a diversified client base with more than 70 million customers daily from around a 100 different countries. The company has successfully managed itself as the most selling fast food chain.With the high number of dinning and delivery alternatives available and low switching cost, customer’s repeated purchase are on a declining trend. To manage that, McDonalds keep investing in innovating marketing tactics like inserting small toys in Happy Meals for kids or celebrating Valentine’s Day with a new sweet item.
- Increase prices with increasing costs
There are some sectors like Food, energy, clothing that can pass on the impact of inflation without much interference of regulators.However, for international food chains like McDonalds, this cost push comes at a lag during which the store owners have to bag in the losses. McDonalds intends to become aneveryday munching place for local’s fast food needs.Most people are switching to local and other cost effective alternatives as they have become cost conscious with the overall decrease in disposable incomes.
McDonalds Threat of Substitute Products or Services
- Low Switching Cost
McDonalds have a lot of competition not just from international giants like Dunkin, Pizza Hut or other but also local steak houses. Another problem is customers have always changing taste and if they find someone else’s burger better that would hinder McDonalds repeated purchase. Thirdly, in many countries these alternatives are available at such low prices that McDonalds doesn’t seem a better option anymore.
- Health Alternatives
Due to increasing trend towards healthy alternatives and bio-vegan and climate friendly campaigns there are high chances that any such trend create substitution threat. Especially after COVID-19 the focus is more towards hyenic measures and healthy alternatives,COVID-19 increased the home office trend and dues to lock downs a mass faced obesity issue and people are more keenly focusing their eating and dietary habits.
- Annual Financial Statements, Quarterly and Annual Results (2022-21), Company website [online], Available at: Financial Information
- Forbes, (2023), McDonalds [online], Available at: Forbes
- Fortune, (2023), McDonalds [Online], Available at: Fortune
- The Wall Street Journal, Topic: McDonalds [online], Available at: Wall Street Journal
- Julia Faria, (2020), McDonald’s Corporation advertising spending in the United States from 2009 to 2020 [Online], Available at: Statista
- BDO, (2022), Supply Chain Disruptions Weighing on Restaurants’ Food And Product Inventory [Online], Available at: BDO
- Andrew Marquardt, (2022), Coke, McDonalds and Starbucks suspend business in Russia, as only a few holdouts remain [Online], Available at: Fortune
- Billie Howard, (2023), A Conversation With McDonald’s Tariq Hassan On ‘Brand Performance’ Marketing + The Future Of Consumer Empowerment [Online], Available at: Forbes
- Eleanor Pringle, (2023), McDonald’s new A.I. ordering system isn’t going exactly to plan as bewildered TikTokers document drive-thru fails: ‘Not a ketchup packet! Oh, my God’ [Online], Available at: Fortune
- Trefis Team, (2023), What to Expect from McDonald’s Stock Post Q4? [Online], Available at: Forbes
- Eleanor Pringle, (2023), McDonald’s customer given $5,000 in cash instead of a sausage McMuffin—and he’s gone viral for returning it [Online], Available at: Fortune