McDonald’s Germany Facing External Difficulties with Ramifications on Overall Decline in Guest Count
Research Paper (undergraduate) 2013 24 Pages
Table of Contents
I. Current Situation
2. SITUATIONAL ANALYSIS- CURRENT SITUATION
3. PORTER’S FIVE FORCES
3.1 THREAT OF NEW ENTRANTS
3.2 DEGREE OF RIVALRY
3.3 THREAT OF SUBSTITUTES
3.4 BARGAIN POWER OF BUYERS
3.5 BARGAINING POWER OF SUPPLIERS
4. BRAND POSITIONING
5 SMART OBJECTIVES
6. SWOT ANALYSIS- ENVIRONMENTAL CHANGE.
7. RECOMMENDED STRATEGIES
1 PLAN TO WIN
Germany is the most important European market for McDonald’s. (Sauer 2013, p. 10) “The modern society is on the go, and there is plenty of demand for a quick bite at all times of the day.” (Franchise Help 2013) So why is it that quick service restaurants, such as McDonald’s are suffering a persistent decline in guest counts? The market is experiencing major shifts in trends, due to press criticism and altering health awareness along with rising food costs and economic recession. The focus on the quality served in
fast-food restaurants increases even more. Industrial processing and weight increase due to unhealthy fats and sugars find themselves under heavy criticism. Books and documentations such as “Super-Size Me” or “Fast Food Nation” make public awareness even more sensitive of the negative health consequences. And even if McDonald’s “responded to the issue by adopting healthier choices in their salads plus campaign and have had some measure of success, the shadow of bad press still hangs over the industry.” (Franchise Help 2013) Along with the new awareness of customers, this might make the company face new challenges. Because success in catering is a matter of taste; just like the pickles on the cheeseburgers. Society is constantly changing. If a company wants to stay
on top, it has to face this change; moreover, it needs to become part of it. McDonald’s is over and over again being challenged to comply with their customer’s wishes; and it is not getting easier, but harder by the day.
2. Situational Analysis- Current Situation
Germany is the fourth-biggest market for McDonald’s worldwide. But the guest count at the market leader is shrinking. (Unknown 2013, p. 14) This is alarming, because if McDonald’s Germany is doing badly, this has ramifications on the entire company and its shareholders. Manufacturers and suppliers are influenced by the reduced quantity delivered and the increasing flexibility which is demanded from them.
However, as the record shows, McDonald’s Germany still managed to up its annual sales for 2012 by 1.6% to € 3,247 bn. 2.7 m guests were welcomed every day scattered across
1440 restaurants in Germany. (Annual Report 2012 n.d.) But that is only one side of the coin: even though growth remains, most of it is accounted for by the newly opened stores, rather than improving revenues of the existing ones. (comparable sales) (Franchise Help 2013)The main risk for McDonald’s is the overall declining guest count. In order to tackle this trend, standards have to be optimized by the operations department, which in turn leads to austerity measures that might have a negative effect on customers. The sales- dependent marketing contribution is also affected and would be inevitably cut, too. The penetrations strategy could not sustain, anymore. This would create a downward spiral, which would be hard to stop.
McDonald’s has changed its strategy every ten years now, in order to remain successful. Since 2003 McDonald’s has pursued their international business strategy “Plan to win” , which can be found in Appendix 1. (Schneider 2007, pp. 155-157) But how is it possible that there is a persistent decline of customers in Germany, despite the established “plan to win” ? According to the statements of the franchisee, Michael Rottenberger (2013), there are assumptions that this strategy is not applied consistently and with sufficient passion in Germany. There are different views on the implementation in Germany. Franchisees
expect a return of investment. The parent company, however, benefits from franchise fees and rents which are dependent on turnover.
A successful marketing strategy is an integral part of a stable turnover.
It is decisive that the departments marketing and operations interact with each other. Marketing should lure customers to restaurants and the operations department is to make sure that these customers return in the future. In theory, the marketing department sets the trends with its subdivision research departments. According to the trends they set, the operations department develops suitable products and launches them. Since August 2012, however, the implementation has turned out to be extremely difficult. (Rottenberger 2013) It was not possible to create sufficient purchase incentives. The marketing department is now making plans about moving away from the low price strategy. As a result, four price categories, the low price offer, the snacking offer, the medium-price segment and the premium level have been developed in order to attract a great majority. This new orientation of the price strategy requires that suppliers, the operations employees and the restaurant teams adjust their strategic viewpoints accordingly. This switch is time- consuming, but McDonald’s does not have time. All efforts which were made within one year did not result in stopping the loss of customers and did not up sales, either. Nor did personnel changes in the board of directors lead to the changes desired. An analysis of the external business environment can possibly bring some light into the dark.
3. Porter’s Five Forces
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Figure1:Porter’s Five Forces Framework
Michael E. Porter (1998) developed a structural analysis for industries, which helps companies to explore their environment in order to achieve superior value. Due to this context, the important message for companies is that they always have the possibility of identifying those strategic innovations that improve their profitability. (De Wit, B. & Meyer, R. 2010, p. 265)
3.1 Threat of new entrants
In spite of the fact that costs of entering the fast food market might be extraordinarily high due to economies of scale just like those of McDonald’s, it is still likely that new competition could enter the market. Furthermore, new entrants might not have such as strong distribution networks at their disposal as big companies do and therefore, their products would be more expensive and they would have difficulties in keeping up with existing chains. Moreover, distribution is put on the same level with quality and food safety. Especially in times of food scandals, a closer look is taken at the quality of the products. As a result, it is far more difficult for entrants to remain competitive in the long run. New entrants also have a location disadvantage because big chains, which can afford to pay higher rents, have already taken the most profitable. In most cases start-ups cannot keep up with the opening hours, which is inevitable for competitiveness. A further hurdle is that companies have to spend a huge amount of capital on marketing in order to gain a foothold in the fast-food segment. New entrants have the best opportunities if they enter the niche market whether in terms of food or beverage trends. They can thus react faster and more flexible to changes of any kind. In times of individualization and a decline in brand loyalty, new entrants have the possibility of taking market shares from big companies.
3.2 Degree of rivalry
McDonald’s competitors range from upscale restaurants to small fast food stalls. As the threat of new entrants into the fast food market is relatively moderate, the rivalry is all the higher. The hypercompetitive market of the fast food industry is becoming fiercer and fiercer. To any location a McDonald’s restaurant opens its gates at, other competitors follow within a short period of time, because McDonald’s location analysis is considered to be one of the safest. As the informal eating-out market is shared out between the total number of suppliers, this leads to fewer customers per location. (Franchise Help 2013)
Apart from the trend of new cultural cuisines, fresh takes on a traditional store or the rising number of delivery services, there are : “many more types of quick-service restaurants than ever before”. (Franchise Help 2013) Above all, newcomer restaurants such as soup and salad bars, bagel shops and sushi stores spring up like mushrooms and increasingly
threaten McDonald´s. On the one hand McDonald´s are still at the top, but on the other hand they lost a market share of 5% compared to its rivals, Subway and KFC, which recorded an increase of 12%. (Unknown 2013, p. 5)There are no severe risks so far, but this development should give food for thought. However, McDonald´s greatest advantage was and is its availability. Customers appreciate that McDonald`s offers fast and delicious food at any given time, near almost any location. Another advantage is the fact that McDonald`s does not have one single competitor of its own size. McCafé is McDonald’s answer to the increasing number of coffee shops; and with their breakfast meals they compete with the bakery chains, in addition.
3.3 Threat of substitutes
The selling of substitute products is enormous due to the keen competition between rival sellers in the fast food industry. The fact that health awareness is constantly increasing results in customers looking more and more for substitute products. Furthermore, they want to escape the reputation of buying unhealthy and greasy food. Moreover, retailers have moved with the times and are offering more and more attractive alternatives. McDonald’s is even more threatened by substitutes because its products are undifferentiated and comparably easy to copy.
The introduction of products with “local” taste could reduce the number of substitute products. For instance, McCafé’s product range could be expanded by offering local pastries; this would increase the regional relevance and take market shares from bakery stores at site. In addition, they have the possibility to enter whatever food/beverage line they want, which is limiting the threat. Furthermore, McDonald’s economies of scale limit the competitiveness of substitute products in terms of value for money.
3.4 Bargain Power of Buyers
According to a current trend, which spread to Germany, the bargaining power of McDonald’s customers is gaining momentum. Customers’ loyalty is in decline and the emotional relationship with the brand vanished into thin air within the past few years. McDonald’s will have to take measures in order to acquire new target groups. Current trends, such as increasing health-awareness or the so-called “cocooning” are a pain in the neck for McDonald’s. As customers pay more and more attention to what they eat, the “Salads Plus Campaign” was launched to fit in with this trend. However, the company did not implemented the campaign neither consistently nor persistently. Even though the company remains competitive in terms of prices and continues to offer 1+1 combinations
to lure those customers who make their decisions based on prices, the number of customers is still plummeting, and some customers have completely turned their backs on fast food. McDonald’s Germany cannot achieve such a high customer frequency as in the United States as long as cooking at home is more affordable than eating out. Product
differentiation could be the silver bullet. In the fast food industry, in particular, it is essential to offer products which stand out from competition.
3.5 Bargaining Power of Suppliers
A crucial contribution to company´s success is the strategically orientated partnership between McDonald’s and its suppliers. McDonald’s internally speaks of t he “three legged stool" (Pater 2000, p. 11), whereas one leg represents the suppliers. After all, the bargaining power of McDonald’s suppliers is relatively low, even though McDonald’s
receives all goods from one supplier only: HAVI Logistics. As McDonald’s has had a good relationship with HAVI Logistics for decades being its main client, the bargaining power is fairly stable. Losing McDonald’s as a client would ruin HAVI Logistics. If this buyer- supplier relationship was to come to a sudden end, McDonald’s would have the upper hand due to their purchasing power. Still, such change would be a strong blow to them, since in terms of quality, service, hygiene or value for money it is very hard to achieve HAVI’s level. In terms of food service logistics, economies of scale are of great significance. They are the ones who can draw the most benefits and can pass them on to their clients.
Figure 2 provides a summarised framework of the power of each of the five forces on axes. (Johnson and Scholes et al. 2013, p. 80)
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Figure2: Five Forces Framework applied to the German Fast Food Industry