This course has focused on developing and strengthening problem solving, critical thinking and analysis in Micro Theory. This assignment is a short paper, structured on the attached news article. It is worth 5% of the course grade.
Please read the instructions carefully, with particular attention to the deadline.
Read the attached article from The Guardian newspaper, and answer the following questions:
1. Analyze the market structure for fast food restaurants. Use information about the supply side and the demand side of the market.
2. What advice do you have for the McDonalds CEO, based on your answer to 1.
Length of paper
• Your paper must be no more than 500 – 800 words in length. This does not include the Reference list and / or any diagrams you may wish to add.
• Please use 12 point font, double spacing and at least 1 inch margins.
Criteria for grading
• The paper will be evaluated for writing, content, logical arguments, and the completeness of the analysis.
• It is the sole responsibility of the paper’s author to submit a paper with correct spelling and grammar. Poor grammar and spelling will decrease your letter grade.
A hard copy of your paper must be submitted on the day of your final exam. There will be no exceptions / extensions of this deadline.
• You may use outside resources, such as articles, newspaper reports, books and so on. You may use any published or online resource, but their use must be appropriately cited (see bullet point below) and you MAY NOT use verbatim language as your sources. You also MAY NOT ask another individual for help with the content of your paper. The final paper that you turn in, must be your own.
• Any outside resources used, MUST be cited in the text of the paper and listed numerically in the Reference List at the end of the paper.
Article : Consider the following article: McDonalds in Crisis The Guardian May 2015
McDonalds in Crisis The Guardian May 2015
Last weekend, Steve Easterbrook, the new British chief executive of McDonald’s and lifelong fan of the less-than-glamorous Watford Football Club, celebrated as his team secured promotion back to the Premier League after an eight-year absence. “Incredible achievement. Great run-in under pressure. Faultless,” he tweeted before turning back to his own personal challenge: How to resurrect the world’s biggest burger chain.
This weekend, Easterbrook will be putting the final touches to a plan he will be hoping receives similar reviews. On Monday, Easterbrook will reveal his strategy to turn around the 60-year-old company which is rapidly losing customers. The Golden Arches are looking increasingly tarnished. After decades of expansion that saw McDonald’s march into China, Russia and expand around the world, the burger brand is no longer flavour of the month. A million people have turned their back on McDonald’s in 2014, and profits went with them. Last year McDonald’s’ annual net income dropped 15% to $4.7bn – making 2014 one of the worst years in the company’s history.
Easterbrook, a 47-year-old father-of-three, is under no illusions about the scale of the task ahead of him, and has billed himself as an “internal activist” and “constructive agitator” unafraid to challenge convention at the company he first joined in London more than 20 years ago.
“We need to act now, and we need to make an impact. I’m not looking for incremental steps,” Easterbrook said last week as he announced the sixth straight quarter of sagging sales, depressed profits and another miserable outlook. “As you go through turnarounds … they are a little bumpy by nature. And that does require some bold and decisive decision-making.”
Easterbrook, who declined to be interviewed by the Guardian and has not spoken to any other media since taking over on 1 March, has not yet provided any details of his turnaround plan, which will be unveiled at the company’s headquarters in Oak Brook, Illinois. The furthest he has gone is to say he will be “challenging some of the conventional thinking on multiple fronts”.
Financial analysts and restaurant consultants reckon that McDonald’s main problem is that it has largely ignored the changing tastes and ideals of its core American customers – and thus backed itself into the stickiest of corners. Easterbrook will find it hard, they argue, to catch up with the new wave of hipper, rival fast-food chains such as Shake Shack, Panera Bread and Chipotle, while at the same time staying cheap and fast enough to satisfy its remaining loyal customers.
“Can it be done I’m just not sure it can,” said Patty Johnson, global food analyst at market research firm Mintel. “McDonald’s is such a huge operation, it’s not easy to turn around the Queen Mary or even make slight changes in direction.
“The consumer is continuing to evolve away from McDonald’s’ core mission which was to provide exceptional value in a quick manner. The operation was set up to produce food ahead of time, so when you got to the drive-through it was all waiting for you. They had it down to a science.
“But the consumer has evolved from wanting everything cookie-cutter. We are now all about innovation and individualisation. [People] want gluten-free, vegetables, hold-the-mayo, we want ‘this’ but we don’t want ‘that’, we’re very specific. But providing for that will push up costs and wait times, jeopardising McDonald’s’ core values of speed and time.”
Johnson said McDonald’s’ biggest challenge is winning over the most fought-over demographic: millennials (people who became teenagers around the year 2000). “These are the people having kids right now. They have a whole different value equation, it’s not just about price and quality.
“It’s about morality and ethics and wanting a healthy lifestyle,” she said.
“They’re not dieting, they’re making lifestyle changes and are saying ‘I don’t want fast food on my agenda.’ But when they do decide to have an indulgence day or a cheat day they are upgrading to a better-quality experience.”
They are having that experience at Chipotle, Shake Shack, Five Guys, Smashburger, or Panera Bread. Chipotle, a Mexican grill that encourages choice, has come to symbolise American millennials’ health and ethical demands with its pledges to try to source mostly organic produce, rule out genetically modified foods and use only “responsibly raised” meats and dairy products from cows given daily access to pasture. It’s worked like magic for both Chipotle’s PR and its bottom line, with profits in the quarter to the end of March up nearly 50% to $123m on sales up just over 20% to $1.1bn.
McDonald’s has tested a new initiative called Create Your Taste that would allow customers to create individualised burgers costing up to $8 with fries and a drink – compared to $5 for a standard value meal. But Create Your Taste, which has so far been rolled out to 2,000 stores, is expected to get the chop on Monday.
A pared-back version called TasteCrafted, that will take less time to make and cost McDonald’s thousands of franchisees less than the roughly $100,000 they would have had to spend to install special Create Your Taste work stations, was announced on Wednesday.
Easterbrook was given a grilling over the cost of Create Your Taste at his first public appearance as McDonald’s CEO at a closed doors “Turnaround Summit” for US franchisees (about 80% of McDonald’s restaurants worldwide are franchised) at the Sands casino in Las Vegas. That meeting came just three days after he took over as chief executive from Don Thompson on 1 March.
While franchisees remain wary, Wall Street appears a little more optimistic now that Thompson has gone. McDonald’s shares, which gained just 0.3% over Thompson’s two-and-half-year tenure, have risen by 8.5% since his exit was announced on 28 January.
According to a survey by Janney Capital Markets’ restaurant analyst Mark Kalinowski McDonald’s’ relationship with its franchisees is more fraught it has ever been.
He found that average score of the relationship between franchisee and head office, marked on a 1-5 scale where 1 is poor and 5 is excellent, is currently just 1.48, down from a historical average of 2.1. One of the 32 franchisees in the survey described relations as “ the worst I have ever seen!”. Another said: “The suits in Oak Brook still don’t get it.”
Aaron Allen, a global restaurant consultant, reckons “the odds are very stacked against Easterbrook” being able to convince franchisees, shareholders, employees and, most importantly, customers of his turnaround plans less than a year after Thompson promised the same thing.
“There is just too much for one CEO to do,” Allen said. “McDonald’s has picked way too many fights with way too many people. They’re fighting Taco Bell over breakfast and Starbucks over coffee. They’re trying to be too many things to many people… I suspect it’s too late and they’re going to get a shellacking.”
Allen reckoned McDonald’s’ recent moves to improve its ethical and health image by increasing US workers pay (by $1 to $9.90 from July), widening the range of healthy options and phasing out antibiotic-reared chicken was a “begrudging change”.
“They have continually fought these things, they were first pressurized by Supersize Me [in which film-maker Morgan Spurlock documented the effects on his physiology from eating nothing but McDonald’s for 30 days], then a barrage of other fast-food documentaries like Food Inc, Food Matters and Fast Food Nation. They ignored it, but now it has finally reached Middle America, and Middle America has changed its eating habits before McDonald’s has changed its menu.”
While McDonald’s in the US largely ignored the criticism in 2006, Easterbrook, who was only weeks into the job as CEO of McDonald’s UK, debated with Fast Food Nation author Eric Schlosser on the BBC’s Newsnight programme as the book hit the headlines.
The CEO – who briefly left McDonald’s to head two more middle-market chains, Pizza Express and noodle bar Wagamama – went on to set up a website encouraging the UK public to challenge McDonald’s about the provenance of its ingredients and the treatment of his workers. Questions included “what conditions do the chickens live in before slaughter ” and “do your staff spit in the burger if you order plain ” McDonald’s USA recently launched a similar campaign.
Jack Russo, an analyst at investment bank Edward Jones, said Easterbrook’s track record in the UK and then growing McDonald’s in Europe at a faster pace than the US suggested the new man “can get things turned around”. But he added: “They need to go further, they have to use more organic and natural ingredients. These aren’t options any more, this is what millennials demand. Kids may still gravitate there, but you’ve got to give the parents a reason to take them. The offering hasn’t changed much and it’s got a little stale.”
Allen agrees that McDonald’s is failing to resonate with millennials. “They are the most important segment as they have the highest discretionary spending, but they are health and ethically conscious,” he said. “Making the world a better place resonates very well with millennials, and McDonald’s has fallen off course. Young people are often anti-chains, and McDonald’s is the world’s best-known chain. They’re migrating to Shake Shack which even though it’s a chain feels independent.”
Allen said that by feeding 69m people a day across the world, McDonald’s has a moral duty to improve the health of its food. “But at the end of the day, if you’re McDonald’s you don’t want consumers to want healthier food and fresher food, because they’re just not able to deliver it.”
With more than 36,000 restaurants worldwide, including 14,350 in the US, sourcing enough baby carrots for Happy Meals or even cucumbers for new healthier wraps proved challenges too far. “Even if they wanted to go organic, for example, they just wouldn’t be able to,” Allen said. Indeed Chipotle, so often held up as an example McDonald’s should follow, has itself struggled to source enough of the ethically sound ingredients it is famous for.
Changing one of the world’s biggest supply chains will be a huge challenge, said Allen – but not as immense as repairing McDonald’s reputation among both customers and its own staff. “They’ve got to help us all feel less ashamed about going to McDonald’s. From the customers to the employees, everyone is ashamed of going into a McDonald’s.” Even though staff are paid similarly in Starbucks, Chipotle or Shake Shack they’re not ashamed. If you have 420,000 employees who are not proud of where they work that will reflect in the service and quality.”
McDonald’s Artisanal Food Competitors:
• Shake Shack: It started life as a single hot dog stand in Manhattan’s Madison Square Park. Little more than a decade later, Shake Shack has expanded to 63 outlets in nine countries and floated on the New York stock exchange earlier this year. The company has a market value of $2.56bn – which works out at $40m a restaurant. McDonald’s market value of $93.7bn works out at $2.6m a store. It started life selling hot dogs and frozen custard, today it is most famous for its Shackburgers made from a “proprietary Shack blend” with “no hormones and no antibiotics ever”.
• Chipotle: A Mexican grill which has come to symbolise American millennials’ health and ethical demands, last month reported a 47.6% jump in quarterly profits to $123m on sales up 20.4% to $1.09bn. It opened 49 new restaurants, taking it to a total of 1,831 in the 22 years since its foundation in Colorado. McDonald’s took a big stake in Chipotle, which sells burritos, tacos and chilli bowls, in 1998, but sold out again in 2006 when the chain had 500 locations.
• Panera Bread: Fast casual bakery chain Panera Bread has expanded to 1,880 locations in 45 states, the District of Columbia, and Ontario, Canada. Its sandwiches, paninis, pasta and flat breads have proved popular with younger customers, but its expansion plans led to a $10m drop in first quarter profits to $32m.
• Five Guys: Five Guys, which is named after its founder Jerry and Janie Murrell and their sons Matt, Jim, Chad and Ben, opened its first restaurant in Arlington, Virginia in 1986. It now has more than 1,000 stores open and a further 1,500 in development. The company, which only uses freshly ground beef, says there are more than 250,000 possible ways to order a burger in its joints.
• In-N-Out Burger: When the first In-N-Out Burger was opened by Harry and Esther Snyder in the Baldwin Park suburb of Los Angeles in 1948 it was the first drive-thru hamburger stand in California. The couple said their plan was simply to give customers “the freshest, highest quality foods you can buy and provide them with friendly service in a sparkling clean environment”. A second outlet opened in 1951, but while the burgers proved popular company expansion was slow. There were 18 restaurants when Harry Snyder died in 1976. It has since expanded to 300 locations across California, Nevada, Arizona, Utah and Texas, but the family-owned company has resisted franchising or expansion to the east coast or abroad.