Part I
In the year 2012, McDonald had a total revue of $27.567B. This was the total revenue from the firm together with the revenue from its franchised firms. The company alone made $18.603B, an increase of 2% from the previous financial year. In the same year, Yum made total revenue of $13.633B, with $11.833B from the company and $ 1.800B from its franchised and licensed firms. Burger King made $ 1.966B in revenue, in 2012. Though McDonald’s faced a lot of competition from Burger King Worldwide (BKW) as of 2012, the highest competition that the company faced was from Yum!. McDonald is larger than Yum in terms of size. In the first 9 months of 2012, McDonalds had revenue of $20.6B compared to $9.5B from Yum. At the end of the financial year, McDonald was still leading with more revue than the two competitors. The profit margin of the two companies is 19.7% for McDonald, 13.3% for Yum. Although Yum! Has three brands and more shops than the other two companies, McDonald has more sales than the rest and more profit margin. The other two are catching up pretty quick with McDonald especially Burger King with its new type of fries, satisfries. From this, we can deduce that McDonalds in the leading company of the three in the fast foods market.
The three companies rely heavily on franchisees and licensees with Yum commanding about 75%, 89.64% for burger king and 80% for McDonald’s. Burger King has been able to come up with new and better products which have helped it stay in the competition league. Its current innovation satisfries, french-fries that have less calories and fat, has made the company face the giant of the fast food industries McDonald. In the last year and the opening of this year, the sales of McDonald have reduced due to the effects of the satisfries. Yum’s! Brand pizza hut is looking to invest more in technology for its restaurants. The product is still in the testing stage but when it is unveiled the company will earn more profits from it. They are looking into using electronic tables for ordering instead of the tablets, where customers can sit at their table and design the type of pizza they want and order. The best part is that the table will be adorned with video games where customers can enjoy themselves before they are served.
PESTELI analysis
PESTELI analysis involves the analysis of a company’s risks due to external environment factors. This analysis should be carried out considering the following risks; political, economic, social, technological, environment, legal and international. All these factors have risk effects on international companies. The three companies above will also suffer some sort of risk through these factors as they are all international companies that have large numbers of restaurants all over the world. For political risks, when a country’s politics are not stable, then the risk of a company losing its customer base and even closing its operations is high as bad political environment can lead to war. With the companies having many operations outside U.S, in countries like those situated in Asia, the risk is high as some of these countries are constantly fighting thus affecting the company’s operations (Cateora, Mary and John 21).
Economic risks are associated with the economic levels of the world and the country the company is operating in. in case of any recessions, the company suffers high risks, and in case of any boom, the risks of the company are very low, these international companies are also affected by economic factors like fluctuations of the currency. As the financial reports of all the company’s restaurants have to be prepared in a common currency, the converting of one currency to another may reduce the profits of the company especially if the currency of a certain company is not stable at the moment. The social risks involve what the company suffers from the different cultural and traditional aspects of the people they deal with. With this, such international companies have to adhere to the social standards of the countries they decide to operate in. as the social environment changes in a country, these companies have to make sure that they are changing with them, so as to satisfy all their needs.
The technological risks also pose as a big factor that affects the companies. The world is changing at a very high rate in terms of technology. These companies have to ensure that they change with the world. The era of queuing for the food is gone, and now companies are using tablets to make orders and serve their customers. Yum! is looking into bringing a new form of technological change where they will be using electronic tables. Things like these should be considered, and if they aren’t. The companies will suffer great risk of competition. For the legal risks, the companies have to ensure that they adhere to the different laws that they encounter in the different countries that they operate in. every country has its own legal processes in terms of taxation and ways of operating, and these companies have to ensure they cooperate, failure to which, there operations may even be made illegal in those countries. In legal issues too, the companies have to make sure that they cooperate with their franchisees and licensees to avoid legal battles that cost them a lot of money, time and bad publicity. Another risk is the international development. As these companies looking into increasing their market share through opening up new restaurants in foreign countries, they should first have a feasibility study of these countries, to see whether they will be successful or not. The risks can be high when the study is not carried out well as some of the ideas and concepts might not be compatible with the foreign country’s ways of life.
The European market has changed in the recent affecting McDonalds profits from the region. Some of the challenges that the company has faced from the region include; stiff competition from both new and upcoming companies, law suits from the customers with two obese teenage girls suing the company for their condition, the negative publicity from an award winning documentary Super- Size Me and the bestselling book Fast Food Nation that depicted the company as an extremely detrimental factor to human health. The challenge that Yum! faces from this market is big competition from McDonalds since McDonald’s has more stores in the region than Yum! (2012 Yum!).
McDonald’s and the Porters Five analysis
The first factor is the threat of competition that McDonald’s faces. The fast foods industry is very competitive and the factors that make it so are the advertising capabilities of the company and the competitors and location is the company’s outlets and those of the competitors. Their major competitors are Yum! Brand and Burger King. The company also faces threat from new entrants in the market, which is very high due to ease of access into the market, low startup costs and low regulation limits. A good example of the new entrant is SubWay’s market penetration. The threat than the company faces from substitutes is low- moderate due to the high availability of its products across all the markets and their introduction of local taste products (McDonald’s Corporation/ 2012 annual report).
Another factor of porter’s five analyses is the bargaining power of the suppliers. Being the largest restaurant chains in sales, the company has a high bargaining power over their suppliers as most of these suppliers owe their existence to McDonalds. This lowers their costs of raw materials which gives them a high competitive price. Another factor is the bargaining power of their buyers which is low. Due to the low quantity of purchases and industry limitations, the buyers have less chances of switching their tastes and preferences. The company has also a high brand image through uniqueness and differentiation, which lowers the bargaining power of the buyers (Baek 12).
Porter’s five analyses also include the issues that the company faces. McDonalds faces among many, nutritional issues. They are taking away the traditional nutrition values and replacing them with fresh and healthy food through mass production. Another issue is the advertising sector where the company spends around $2B annually for advertising costs. The company has also faced issues such as employment ethics. It is criticized for paying low salaries to its employees, giving part time jobs that have low rights and conditions and non-union associations for the employees. The company has rectified this by giving more importance to things like individual goals other than the organizations goals.
The risks that the company shows are financing and market risks. Since the company borrows on a long term basis it is exposed to the impact of interest rate changes and foreign fluctuations. Some of the debt obligations of the company contain cross- acceleration provisions and restrictions on the long-term debt of certain subsidiaries, and on the company. To reduce the interest expense, the company uses major capital markets, derivatives and bank financings. The risk factors that Yum faces are laws relating to nutritional contents, nutritional labeling, and menu labeling and product safety. The company has suffered much from any of the above risks. The other risk is compliance with the Americans with Disabilities Act where the company is supposed to design all their facilities in such a way that they accommodate the disabled. To the present, the company has not been affected by this risk. Another risk that Yum can face is law suits from its employees or their employees resigning due to bad conditions. The company believes that though the largest numbers of their employees are part- timers, there compensation benefits are attractive.
In the reporting of the financial statements and any other financial information Yum! gives more detailed information than Burger King and McDonald. From their financial reports Yum has given detailed information of how many chains they hold and the revenues from these restaurants. They have also given detailed accounts of the compensations that their directors and top management gets. Other details concerning the voting rights of the shareholders, operational and management details and other additional stakeholders have been given. The company has also given detailed information of the largest shareholders in the company and how many shares they hold. The revenue policies of the three firms are similar.
Part II: Valuation using multiple companies (2012)
Works Cited
Baek, B. S. Burger King Worldwide Annual Report: BUS 210 Financial Accounting Summer,
2013. Web. Accessed on 22 March 2014 from
<http://investor.bk.com/conteudo_en.asp?idioma=1&conta=44&tipo=43575>
Cateora, Philip R., Mary C. Gilly, and John L. Graham. International marketing. 14th ed.
Boston: McGraw-Hill Irwin, 2009. Print.
McDonald’s Corporation/ 2012 annual report. 2013. Web. Accessed on 22 March 2014 from
<http://www.aboutmcdonalds.com/content/dam/AboutMcDonalds/Investors/Investor%20
2013/2012%20Annual%20Report%20Final.pdf>
2012 Yum! Brands Annual Customer Mania reports. 2012. Web. Accessed on 22 March 2014
.
