Lovin’ it in the UK: An Evaluation of the Strategic Changes in McDonald’s UK - McDonalds Essay Example
Lovin’ it in the UK: An Evaluation of the Strategic Changes in McDonald’s UK
Unprecedented as the world’s leading consumer foodservice company, McDonald’s had claimed a global icon status that represents an all-American brand name - Lovin’ it in the UK: An Evaluation of the Strategic Changes in McDonald’s UK introduction. Currently, McDonald’s operates and franchises more than 31,500 restaurants in 119 countries on five continents, which generate over US$19 billion in revenues annually. On a typical day, the McDonald’s System serves 2.5 million consumers in the UK. The company also operates other restaurant concepts under its partner brands: Boston Market and Chipotle Mexican Grill, which are located primarily in the US. However, in 2003, the company sold the previously owned Donatos Pizza and announced a scaling back of its other partner brands. In the UK, the company also has a stake in Pret A Manger (McDonald’s UK Website).
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Despite their pop icon status and their strong “I’m Loving It” advertising mantra, everyone is not loving McDonald’s as it is the favourite target of criticism on many grounds over the past few years. The company has been accused of the exploitation of entry-level workers and ecological damage caused by agricultural production and industrial processing of its products with high levels of packaging waste. McDonald’s has also been criticised for its litigious and heavy-handed approach to preserving its image and copyrights (Wikipedia Website, 2006).
Widespread criticisms are directed towards their “unhealthy” products, a film documentary Super Size Me (2004) showed the iniquities of the dietary values of their products. Director Morgan Spurlock ate nothing but McDonald’s food for a month to see the consequences of such a diet. His health seriously declined as his body weight rose over the course of that month. Some suggest the film contributed to McDonald’s decision to discontinue the super size option for its meals. Not only did the company face further negative criticism because of the film, McDonald’s retaliated by officially dismissing the film as irresponsible. Meanwhile, the so-called McLibel Two have reopened the scars left by the longest trial in English legal history by taking their case to the European Court of Human Rights. The company is also braced for compensation claims from obese former customers who claim their health suffered by eating too many burgers (Dialog NewsEdge, 29 September 2004).
Quite recently in the UK, bad news hounded McDonald’s as it decided to close 25 outlets in an attempt to curb losses as poor British sales drag down its European business. The closures cost the fast-food chain $40 million. McDonald’s last set of results showed revenues for the company as a whole reached a record $20 billion for 2005. Net income increased 58% for the year, as the Plan to Win strategy of restaurant revamps, promotion campaigns and new, healthier menus attracted extra custom. However, sales have continued to decline in the UK with McDonald’s CEO Jim Skinner commenting that the country remained a “challenging environment” (Datamonitor, 1 Mar 2006).
Consequently, McDonald’s recorded its first ever global loss in the last quarter of 2002 and in Europe sales plunged 3.8% in January 2003. To combat this, McDonald’s underwent a fundamental revolution in its approach to menus, marketing and consumers in 2003. In the UK, McDonald’s is improving its standards and continued to work with government and health officials to investigate improvements (Euromonitor, 29 November 2005).
Upon realisation of all these controversies, will McDonald’s rise again to redeem its world renowned image? What will be the appropriate strategies that the company should undertake to counter future losses in sales and in customer trust? Will the company still be viable in the UK? This paper will attempt to evaluate the current internal and external factors in the UK that the company should resolve to be able to come up with insightful recommendations.
McDonald’s in the UK
It is unusual that the UK have only a relatively small proportion of McDonald’s restaurants as franchise operations. The first English restaurant was built in Woolwich in 1974 and was a product of a joint venture between Bob Rhea (a franchisee from Ohio) and McDonald’s. In 1977, this had increased to thirty restaurants, and by 1982 this had reached 200 restaurants. In 1986, McDonald’s bought out Rhea’s 45% share for $38 million. Since that time, however, McDonald’s UK has only slowly franchised parts of the operation. In 1993, this stood at only 11%, but by 1996 over 20% were franchise operations. McDonald’s UK management state that they expect to have closer to 30% being franchises by early in 2001 (Royle, 2000, p. 32).
According to the Euromonitor (2004) report, the company was operating 1,250 McDonald’s restaurants throughout the country. In 2003, the company introduced a revitalisation strategy, operating on both a global and local level. For McDonald’s in the UK, the issue is no longer simply opening the right type of restaurant in the right location, but also engaging with real issues concerning the local community.
As a global company, McDonald’s business model is slightly different from that of most other fast food chains. In addition to ordinary franchise fees, supplies and percentage of sales, McDonald’s also collects rent. As a condition of the franchise agreement, McDonald’s owns most properties. Since rent is a fee that is not linked to sales, this practice allows McDonald’s more control over its franchisees (Rumbelow, 1 February 2001).
Competitive Positioning in the UK
What have McDonald’s burgers brought to Britain? First, McDonald’s has helped change the British dining experience. Inexpensive meals and snacks, of a consistent quality, are readily available at over a thousand outlets in Britain. Restaurant hours are very long, and include Sundays, which support the expanded Sunday shopping hours in many British cities. Often McDonald’s has the longest open hours of any shop or restaurant on a downtown street, and is therefore the most visible local business, with its lights glowing in the dark British winter. As discussed earlier, children and teenagers are especially welcomed, and can often create their own social spaces in individual restaurants. “Take-away” dining, which was well known in Britain at fish and chip and ethnic restaurants, has expanded and, as in the United States, has changed the meaning of a family meal, especially in urban locations (Debres, 2005).
McDonald’s focuses its operations on fast food with its world famous burger brand and also owns a third of Pret a Manger in the UK. The company aims to satisfy consumers’ desire for fast food products at affordable prices in a more upmarket eating environment, with McDonald’s intent on broadening its UK consumer base. To support its new strategy, McDonald’s launched a new global advertising campaign, calling it “I’m lovin’ it”.
McDonald’s also began an innovative rollout of e-media internet terminals in 2003 with Data Vision Europe, a designer and manufacturer of touch-screen computer technology solutions. A milkshake- and burger-proof computer solution, The Woody touch-screen terminal was modified especially for McDonald’s, with a smart and durable solid oak frame and stainless steel keyboard. This has been an important move in order to stay ahead with the youth of today, which has grown up with mobile phones and messengers instead of Game Boys and walkmans (Design Week, 8 April 2004).
Despite negative press and an adverse trading environment, McDonald’s maintains its position as a leading player in consumer foodservice, second only to Enterprise Inns in the UK. Within fast food, it remains the number one with a value share of 9% share in 2004. Its main strengths lie in its mass appeal to consumers and its international brand recognition. McDonald’s is consistently named among the top 10 most recognised brands worldwide.
McDonald’s has always capitalised on the strong appeal to families and children with Ronald McDonald and by offering birthday parties for children. Teenagers like to hang out there as an affordable place to eat before going to the movies, for example (Barber, 2001). In addition, once consumers grow up with a certain brand, they will continue to frequent the restaurants, especially when they are as heavily advertised as McDonald’s. Finally, the “I’m lovin’ it” campaign helped to attract new consumers as it features mostly younger men and women going to McDonald’s as part of following a balanced diet and lifestyle.
Table 1. McDonald’s Restaurants Ltd Operational Indicators 2004
Financial year end
System wide sales 2004
% change over 2003
Net earnings 2004
% change over 2003
Number of units per major brand (2004)
Number of employees
Source: Euromonitor International
Recent Strategic Improvements at McDonald’s UK
McDonald’s initiated a diversification programme that led to the company introducing its McCafé format and acquiring Aroma in 1999. Subsequent events resulted in a complete turnaround, with McDonald’s disposing of Aroma in March 2002, selling it to Caffè Nero. While April 2003 McDonald’s announced a new revitalisation plan, embarking on a new strategic course. This reflects a fundamental change in its approach to tackling declining sales and putting the company on a course of recovery and long-term sustainable growth. Instead of relying on diversification to deal with changing consumer attitudes, the company is now trying to adjust its flagship brand to adjust to the changing market conditions. In the implementation of the new plan, the company is improving the taste of its core menu and has a number of new products that are proving popular with consumers. It expanded food choices in its Happy Meal and introduced a range of salads. In addition, it launched the “I’m lovin’ it” campaign in an attempt to attract new consumers and to update its image (Company Press Release, August 2004).
Apparently triggered by recent criticisms about the nutritional value of their menu the company gained consciousness about health concerns, McDonald’s added to their menu salads and McTreats, such as low-fat Chicken Salsa Flatbread, alongside the notorious Big Macs and Chicken McNuggets. McDonald’s is also planning to introduce further new products in 2004 to satisfy consumers’ expectations for fresh, healthy and value-for-money food propositions. McDonald’s already improved both décor and outlet layout over the review period to tempt consumers (McDonald’s UK Website).
When rumours scattered that combined with the dressing, the newly offered salads contained as many calories as burgers, McDonald’s introduced new low-fat salad dressings in addition to a breakfast menu comprising items like porridge, a fruit bag and juice. Due to pressure from the government regarding issues of food labelling, advertising and food safety, McDonald’s also started to provide detailed nutrition information on all of its products. According to Sue Baic of the British Dietetic Association, she welcomed the burger giant’s attempts to change its menu but said there was still room for improvement. She said the healthy options must be equally as attractive, available and affordable as the less healthy one (Dialog NewsEdge, 29 September 2004).
On side of their workforce, McDonald’s employees are recently trialling a new innovation in flexible working being pioneered by the company. They called it the Family Contract enables two people from the same family working in the same McDonald’s restaurant to cover each other’s shifts – with no prior notice. McDonald’s believes the Family Contract is a UK first which could re-define flexible working as we know it. Employees are now putting pen to paper on the contracts – at a time which many psychologists say is the most stressful of the year. It is set to benefit busy mums juggling childcare and work, students with last minute deadlines and people who care for a parent or relative. David Fairhurst, Vice President for People at McDonald’s, introduced this scheme. Fairhurst elaborated that their employees are incredibly diverse but they have one thing in common – hectic lives. For that, Fairhurst conceptualized the Family Contract to help their staff juggle their busy lives. He said that “By giving our employees the freedom to manage their shift commitments, we will increase their motivation and enjoyment of work. That is fundamental to our business because it is a simple fact that happy employees mean happy customers” (Company Press Release, 26 January 2006).
Improving the Employee Relationship: Motivation and Commitment
According to Staw (1986), one of the earliest pursuits to create “happy/productive” worker concept involved the search for a relationship between satisfaction and productivity. Staw elaborated that the idea was that the world might be neatly divided into situations where workers are either happy and productive or unhappy and unproductive. Thus, Staw proposed that if this were true, then it would be a simple matter to specify the differences between management styles present in the two sets of organizations and to come up with a list of prescriptions for improvement.
Furthermore, Staw argued that attitudes such as job satisfaction may be as much “dispositional,” that is, a function of a person’s relatively stable characteristics, as they are “situational,” or a function of reaction to specific circumstances. Thus, he contends that such attitudes as job satisfaction may not be easy to change. Likewise, he emphasizes that workers’ job performance also is not always easy to modify, since it is often strongly affected by many other factors, including technological and operational processes, in addition to workers’ attitudes. Thus, in his view, it is a potentially difficult task for organizations to bring about a happy-productive worker combination. However, he offers some basis for optimism that this can happen if one or more “motivational systems” are considered and implemented effectively. The three approaches involve individually-oriented, group-oriented and organizationally oriented sets of action steps. He concludes that, using one or more of these approaches, “it is at least possible to create changes that can overwhelm the forces for stability in both job attitudes and performance.”
According to Overell (9 February 2006), McDonald’s world of work is difficult to comprehend without remembering the youth factor. In fact, sixty per cent of staff are under 21. Furthermore, 25,000 of its UK workforce, McDonald’s is their first job and a first taste of non-academic learning. This is why critics scoff at the way the company celebrates those who “graduate” from its programmes, it is possible that those celebrations are perceived differently by teenagers who are put up in a fancy hotel for the first time and schmoozed by the top brass. Even international bestseller author Douglas Coupland defined a “McJob” as “a low paying, low-prestige, low-dignity, low-benefit, no-future job in the service sector”. This is why David Fairhurst, McDonald’s UK HR Director, tasked himself a major part of his job to seek to engage with what he calls the “perception gap” about McDonald’s.
He noted that “Employees hear all this stuff about McDonald’s — and, yes, labels like ‘McJob’ hurt — but they see a completely different reality day to day. People are always amazed when I say we do not have a problem with either turnover or absence here. Okay, we are not a career destination for everybody and we don’t pretend we are — our staff can name their hours and that is the kind of flexibility they want. But 75 per cent of our managers start as crew members, so the conversion process clearly works, and they stay with us for an average of 10.2 years.”
With that, in the McDonald’s European Corporate Responsibility Report 2005, they showcased an endorsement from think-tank The Work Foundation about the company’s commitment to development, with all staff working towards food hygiene qualifications. The foundation assured that after training, McDonald’s pay rates appear to increase quite dramatically, and to significant points well above the national minimum wage (NMW). In late 2005, the company was also awarded a “world class” score for its people management strategy by Investors in People.
External Factors – PEST Analysis
Political – In 2003, weak market conditions for high street restaurant business and other factors resulted in UK region’s revenues declining by 11.3%. Market concentration is a disadvantage for the company as compared to its peers who have global operations. Moving in 2005, there were rumours that Whitbread would be facing shareholder pressure to break itself up because of intense private equity interest in the leisure group’s businesses (Datamonitor, 2005).
In addition, the HACCP as a tool for minimising risks within a food safety management system is essential to maintaining health standards in restaurants. Today there is no legal requirement to use HACCP, although there is a legal requirement for all food businesses to have some sort of food safety system. The Food Safety (General Food Hygiene) Regulations 1995 say that caterers must identify the steps in activities that are critical to ensuring food safety. The UK government is planning to bring the UK into line with the rest of Europe in making the full adherence to the HACCP mandatory by 2007, placing the burden of training and new equipment purchase on proprietors. It has been widely mooted that the government may well make quick chilling units obligatory for operations wishing to chill and reuse foodstuffs (FSA, 2006).
Economic – McDonald’s, due to the inherent nature of restaurant and fast food businesses, is significantly exposed to consumer spending trends and business demand. Consumer spending is expected to slow in 2005 as rising interest rates reduce disposable income. The UK’s feel good factor may also be falling, as rising unemployment and a cooling housing market combine to dampen the consumer mood. A weak UK economy could materially impact demand for the company’s services as they are driven by discretionary expenditure (Datamonitor, 2005).
Social – According to a European lifestyle survey conducted by the GfK Ad Hoc Research Worldwide and Wall Street Journal in 2003, people from the UK currently go out to eat more often than the residents of any other northern European country, including France. 71% of consumers eat out more than once a month. Currently, there is considerable uncertainty in the economy with continued threats of depressed consumer expenditure or a fall in house prices, together with the effects of this war on consumer spending. However, house prices are still booming in certain areas, interest rates are low, personal disposable income increasing and UK unemployment is at a 27-year low. These factors may have staved off the long-heralded recession at a consumer level and it is yet to materialise across consumer foodservice.
However, the survey informed that UK consumers are not spending excessively, with 84% of people in the UK spending only £21 or less when they eat out. This places spending just ahead of Americans’ average spend and well behind the Italians, the Belgians and the Dutch. Women, in particular, find themselves under increasing time pressure as they try to fulfil their roles in the workplace and at home. Consumers are looking for time-saving solutions. This means that fast foods have advantage over the fine dining restaurants as more individual control over time and the search for quality quick food to be eaten at home or when out became a fundamental trend, a key social demographic shift in consumers’ increasingly busy and ever changing lifestyles. Eating habits mirrored this and became more fragmented and more mobile. There is increasing demand for more frequent, quicker and convenient food solutions. The search for convenience in eating out is important but UK consumers also demand more fun and entertainment, more ethnic and exotic meals and better-quality and better-tasting food.
Technological – McDonald’s places high importance on product development, as it updated its several times to come up with greater variety and healthier options. This is a key area of interest currently, with obesity reaching dangerous levels in many markets and much media and consumer interest in the correlation between obesity and fast food consumption. In the US, McDonald’s was unsuccessfully sued in 2002 by two New York teenagers claiming that eating at the chain made them obese. The so-called McLibel Two have reopened the scars left by the longest trial in English legal history by taking their case to the European Court of Human Rights. Compensation claims from obese former customers who claim their health suffered by eating too many burgers is hounding the company. Thus, the company rolled out its Salads Plus Menu in Europe, introduced first in Germany, the UK and France. This represented the biggest shake-up to the company’s permanent menu in its history. Some burgers were removed and main course chicken salads, yoghurts, fruit and organic milk were launched in the UK and Germany at the end of March, before being introduced across the continent. The new products were developed at a McDonald’s food studio in Paris by French chef Olivier Pichot (The Economist, 15 April 2004).
Internal Factors – SWOT Analysis
McDonald’s has an almost unassailable position in consumer foodservice, with sales nearly twice those of its nearest competitor.
McDonald’s currently has a rejuvenated corporate identity, having implemented its new slogan “I’m lovin’ it” at every level.
McDonald’s benefits from a wider geographical spread than other competitors and is thus less reliant on mature and competitive US fast food.
Following its sale or closure of a number of non-core interests, the company now has a considerably more streamlined portfolio.
Due to its size, McDonald’s benefits from economies of scale and is able to draw on impressive financial strength.
While McDonald’s achieved an excellent performance in profits in 2003, there is still much progress to be made before it recovers ground lost during in 2004.
McDonald’s initial results to menu and marketing changes were excellent in 2003. However, the brand is planning more innovation in 2004 and it will require considerable skill to shift the emphasis of the brand whilst retaining consumers and brand identity.
Increased selling, general and administrative (SG&A) expenses in Europe during the fiscal year 2004 amounted to 14.4% from $424 million in 2003 to $485 million in 2004. Increasing SG&A expenses in these segments have adversely affected the overall profitability of McDonald’s (Datamonitor, 4 June 2005).
McDonald’s revitalisation strategy and new global marketing campaign appear to be resulting in strong growth, which seems set to continue in the near future.
The introduction of a new salad range and a healthier menu focus in Europe is likely to result in good growth for year end 2004 and could influence menu innovation globally.
McDonald’s McKids licensing range should provide excellent growth in 2004, if it is successfully positioned to appeal to both children and adults.
As the leading brand in consumer foodservice and a leading US brand, McDonald’s remains under attack from many sources and must continue to face challenges including boycotts, media attacks and even physical attacks on outlets.
Consumer concerns regarding weight and nutrition are high and rising, which could prove challenging for McDonald’s core burger offering and may result in damaging legislation being introduced in key countries.
Although McDonald’s does not currently face any competitor of its size, it has experienced long-term erosion by smaller or innovative players, like Burger King and Yum Burgers in the UK.
As McDonald’s UK is now facing financial pressures due to an increase in raw material prices, low sales and intense competition, their “Plan to Win” strategy remains to be a very appropriate roadmap, as they try to maintain financial discipline without diminishing product quality and workforce enthusiasm. With their aim of making the customers still “the boss”, McDonald’s heritage of innovation encourages their System to embrace change and continuously improve their overall customer experience.
With its long history, McDonald’s have pioneered drive-thrus, creating a successful breakfast business, staying open later, reimaging restaurants, introducing premium salads or encouraging people to lead balanced, active lives. As the world’s leading restaurant organization, McDonald’s could try make a difference in the future by gaining leadership equals action to advance the changes they want to achieve in their company. This is the reason why McDonald’s is bent on addressing three critical areas – adding even more choice and variety to our menu, providing nutrition education and supporting physical activity. For a fast food chain, the changes that McDonald’s had to re-integrate is daunting, but they are willing to advocate these improvements because of their intention to promote a balanced, active lifestyle as positive actions on behalf of their valued customers.
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