Restaurants, Food Services Management Cases

By pjain      Published April 7, 2021, 5:13 a.m. in blog Business-Management   

Restaurants, Food Services Management Cases Lessons

QSR Key factors

  • Ranked by Brand value - market cap? In 2019 data

  • McDonald's emerged as the most valuable QSR (i.e., fast-food) chain with a brand value nearing 130b USD and total assets worth 47.5b USD. McDonald's has, consistently, led this market segment in terms of overall sales and number of restaurants worldwide.

  • Starbucks (SBUX) $46b brand value.

  • KFC (YUM) $17.2b brand value.

  • Subway. $17b brand value.

  • Dominos Pizza DPZ - $9.6b brand value.

  • Pizza Hut - $7.6b brand value.

  • Burger King - $7.1b brand value.

  • Tim Hortons - $6.7b brand value.

  • Chipotle - $6.2b brand value.

  • Taco Bell (YUM) - $6.2b brand value.

Fast Casual FCRs Emerging Segment

In the fast food arena, but its key challenge is a consumer who demands healthier, organic menu choices coupled with fast-food convenience. The Fast Casual restaurant model offers consumers freshly-prepared, healthier selections, higher-quality food in an informal setting at a slightly higher price point and with efficient counter service wanting a "CHANGE" attracting their palates.

  • Healthier, organic menu choices that are freshly-prepared and higher-quality food

  • High-quality ingredients. Their menus feature more natural ingredients, more fresh vegetables and fruits, and customized selections.

  • SPEED OF SERVICE. Combining the ambiance and meal quality comparable to casual dining with the convenience of a quick-service chain, the fast-casual industry has been a model for current and future success. A number of factors, including affordability in conjunction with quality, taste, convenience, and customer service, form the basis of the business model for fast-casual outlets.

  • SLIGHTLY HIGHER PRICE. Affordability is relative. A fast-food meal can cost between $5 and $7, although some now offer premium selections that are priced a bit higher, and most offer "value" options that cost less. Chipotle prices, by comparison, average about $11 per person.

FCRs have been making inroads into QSR's market share.

Chipotle (CMG)

Shake Shack (SHAK)

A burger chain that originated in New York City, has found success offering a casual dining experience at a fast food pace. Shake Shack's stock price soared from $21 to $47 at its 2015 initial public offering (IPO) when it closed at $61 so price was maintained. However 38,000 MCDs vs under 300 Shake Shacks while 2019Q4 revenues were $5b vs $151m. Yet growth was strong at 22% yoy while MCD has long term annual growth of 3%.

Panera (PNRA)

Rapid Growth of FSRs leading - QSRs mostly Saturated

The fast food industry today has grown from over $6 billion in sales in 1970 to over $100 billion today in the United States. It employs over 4 million workers. And, 25 percent of the American population eats fast food on a daily basis.

Overall, fast-food revenues were expected to grow by about 4.2% in 2019 compared to 8.3% for fast-casual restaurants.

QSRs fight back

McDonald's recently reported a 6.47% decline year-over-year sales for the 12 months that ended March 31, 2019. In late 2018, it announced that it was removing all preservatives, fake colors, and other artificial ingredients from seven of its burger selections. Its menu now features a Southwest Grilled Chicken Salad, and you can get apple slices with a kid's Happy Meal.

Customers at Kentucky Fried Chicken now can choose fried or grilled.

Taco Bell has vegetarian options.

USP: Fast - value of your time - hours to shop,prepare,cook vs get it in minutes

USP: Cheaper than you can make it on your won

USP: High Calorie food often vital affordable treat!

McDonald's

Business Model - Franchising Mastery

  1. SUBSCRIPTION MODEL. Franchising for rapid growth and Local Entrepreneur Owner/Operators instead of Company Owned Stores Approximately 93% of total capacity are franchises, which is still below McDonald’s long-term goal of 95%. The advantage of this model is that the revenue stream (rent and royalty income received from franchisees) is far more stable and, most importantly, predictable, while the operating costs are measurably lower, allowing for an easier path to profitability. McDonald's, because it has control over the land and long-term leases, can leverage its market position to negotiate deals. As has been noted by analysts, this is akin to a subscription, where the subscriber (the franchisee) pays a fixed amount each month.

  2. Battle tested, copy-everywhere foolproof system that is reproducible The foundation to McDonald’s success has been its system which has allowed it to grow and mature

  3. Support and Education of the franchisor

  4. Bankable "Business in a Box" - contained risks. Normal businesses need for each new unit/location to test out and shake out the kinks. A professional business analysis identifies for business owners where they are deficient in cash management, controlling their costs, having a dashboard with all the information needed to manage their business, and having productivity-based excess profit incentives for their employees. Once these deficiencies are identified, a highly trained business consultant can be brought in to rebuild the foundation of the business with the proper methods, systems, controls and incentives to make the business better with state of the art systems so the company can be more efficient, productive and profitable to reach its goals for both the business and the family.

  5. Brand control from napkins, cups, plastic containers - all of which have to be bought from parent corp.

Real Estate is key to its Business Model - MCD OWNS LOCATION

Real Estate Control and ownership in Hands of MCD. Real estate is the biggest location purchase and development risk in franchisee licensing. If control is not exerted, if franchisee owns the property the brand and image can suffer immensely.

McDonald's makes money by leveraging its product, fast food, to franchisees who have to lease properties, often at large markups, that are owned, scouted and built by McDonald's.

Due to its track record and reputation, banks are very happy to lend to MCD at low rates - far lower than what a typical franchisee would be able to.

MARGINS - What Do Franchisees Get?

McDonald's operating margins are Double Quarter Pounder thick — north of 40%!

How is that possible in a business whose very purpose is providing inexpensive food? The answer lies in the fact that the food is even cheaper to prepare than one might think. Some menu items — coffee, for instance — sell for dozens of times their cost. Note to people who think nothing of paying $5 for an iced mocha — you’re drinking a few pennies worth of beans, boiled in water that's too cheap to measure, and some chocolate syrup.

Franchisees are lured by the impressive margins that make McDonald's franchises an almost guaranteed moneymaker. They have to put up hundreds of thousands of dollars in investment, and show prior business experience and stability to follow through.

McDonald's has notoriously strict criteria for its franchisees (net worth, liquidity, etc.). Additionally, the franchisees are also responsible for paying salaries, ordering supplies, and paying rent/owning the premises. So, why become a franchisee? The lure is that McDonald's provides them with an almost guaranteed moneymaker due, in large part, to the impressive margins.

Keys to its Niche

  • Understand Segment of High Quality Fast Food
  • Instead of Sit down, slow cooked, expensive "restaurant" quality burgers, they focussed on delivering great hot food fast and cheap.

Operations - Better Business system

McDonald’s innovation was creating a better business system—better methods, systems and controls—than existed at the time in the food industry so that it could lower its costs and sell its products cheaper to the public, which allowed it to grow and be more profitable.

Speedee Service System - genesis of "fast food" - between 1953 and 1962, McDonald’s promoted its “system” with a logo featuring a character with a hamburger for a head and called him “Speedee”. The logo featured the name “McDonalds’s” with the character holding a sign which said, “I’m ‘Speedee’”.

This early efforts towards refining industrial like process repetition and efficiency not only set the basis for McDonald's success from the standpoint of customers' expectations, but also help McDonald's stay on top in a fast paced American culture where producing at a quick pace is now commonly expected.

  • SPEED is reflected as a core value that filters everything else!

    [McDonald's doesn't] put something on the menu until it can be produced at the speed of McDonald's. - CEO James Skinner, 2010

Product Portfolio that is fresh and Relevant to Today's Consumer

The original menu only included a hamburger, cheeseburger, fries, shake and beverages.

Innovation - Take Risks, Testing

Innovation stemming from responsiveness its customers and franchisees has played a big role in McDonald's fending off stagnation over the years.

While there have been failures like the McLobster and McPizza, without taking those risks, McDonald’s probably would not have grown into the global juggernaut that we know of today.

Even though McDonald’s practices consistency, the company isn’t afraid to take risks and tinker with their menu. These menu innovations (along with items developed in the corporate test kitchen) have allowed for McDonald's to develop product offerings for all meal times and the snack periods that fall in between, allowing for greater profitability.

Over the years, the chain has added breakfast items, the Happy Meal, McNuggets, Filet-O-Fish, salads and the McRibs.

In contrast others like Subway stuck with a stale menu, MCD remains very relevant and risk taking.

Work with Franchisees and Test Locally, then Launch

A sampling of products that were introduced after being developed by some observant and innovative McDonald's franchisees:McDonald's Happy Meal Happy Meal Filet-O-Fish Big Mac Hot Apple Pie Egg McMuffin McFlurry

Response to Fast Casual FCRs in 2018

McDonald's recently reported a 6.47% decline year-over-year sales for the 12 months that ended March 31, 2019. In late 2018, it announced that it was removing all preservatives, fake colors, and other artificial ingredients from seven of its burger selections. Its menu now features a Southwest Grilled Chicken Salad, and you can get apple slices with a kid's Happy Meal.

Cross-sell and Up-Sell

MCD has perfected the art of the cross-sell when you take the product you're going to buy and co-promote other products with it.

This is great way to increase sales, but make sure that you don’t overwhelm the customer.

  1. One key of MCD is despite its lean manufacturing system - it does maintain 3+ levels of burgers as the key item.

  2. Wait for them to order first, gain more information about the sale and realize why it adds value to the final purchase.

  3. McDonald’s has arguably the most famous cross-sell of all-time, “Would you like fries with that?”

Another effective example of this is Amazon’s “Frequently Bought Together” feature. And how about the effective cross-sell of, "Those who searched for this, (item, book, shirt, shoe, baby item), also searched for these six other items."

Razor-and-Blades strategy

Burger - Fixed easy to produce - little variation for speed!

Oldie Goldie: Milkshakes upsell

Milkshakes have a vital "breakfast commute job" - Clayton Christensen - competitive advantage/strategy master at Harvard.

Oldie Goldie: Famous Fries are vital upsell

which is why you hear so many people proclaim their love for McDonald’s fries. The fries have a look and taste that you will find exactly the same no matter where you are in the world. You can count on it.

Salads to keep up with Health Trends

Today McDonald’s has diversified into premium salads and yogurt parfaits for more health conscious consumers.

Coffee to keep up with Starbucks

It is known for fast, premium coffees to compete with Starbucks.

Marketing, Most Recognized Brand, Trusted Content

A strong brand presence helps your business build credibility and memories with your customers that will convert them into lifelong advocates.

We all relate to the McDonald’s brand which was refined and became a trusted moat that keeps competitors away! - Starting with the "Golden Arches" - Relatable easy name - McDonald’s is very Mom-and-Pop - With a number served in billions, it gains prestige over Mom-and-Pop's Burger - It uses 'Mc' XYZ and fiercely protects that just like Apple has built a core brand around the 'i' we see everywhere on multiple iPods, iPhones, iPads, etc.

Traditional One-Way Marketing too Stagnant, Staid pace

For decades even upto 1990s TRADITIONAL marketing was typically “we’ll develop a campaign and run it for a full year, then we’ll think about it again in a year.”

By 2019 seemed they had gotten a little complacent—that we were stuck in a traditional one way mode, where MCD CEO says "we were more just broadcasting old themes."

Staying Relevant to Future Customers - Engage and As a brand, you want people to discover you.

New Digital and Social Media - Feedback is Vital

But now brands have to be in an always-on marketing environment, driven largely by social media. We’re putting ideas out there and getting consumer feedback all the time—we’re in constant iteration mode.

It is trying to reconnect with Millenials deeper ensure that their brand continues to be relevant.

Like T-Mobile which aggressively promoted itself as exciting tech-favored brand. MCD similarly wants to really engage customers in areas that they’re passionate about.

Pop culture’s a great way to do that; our campaigns featuring [rapper] Travis Scott and [singer] J Balvin have paid off in a big way. I think Nike does a great job of engaging customers and using pop culture to keep their brand relevant. In the retail space, I have a lot of respect for how Walmart has engaged with their associates to address questions about their corporate brand. There’s a rich trove of best practices out there to learn from.

Of course, when it’s no longer a one-way communication, that comes with an added level of risk. You never know exactly what you’re going to get back from customers. But the flip side is that there’s also greater authenticity. My view is that in this day and age, you have no choice—if you want to control the message, you will be an inauthentic brand and you won’t have any resonance. So you just have to accept the unpredictability and risk as part of the bargain to be a relevant brand today. To manage that risk, though, you have to make sure your creative teams are nimble. As you hear feedback, you need to pivot and respond appropriately. - Kempczinski . MCD CEO

Identification with Minorities

Identification with Spoiling the Kids, Toys

McDonald’s has created an emotional experience that takes us back to our childhood. Most of us have a bond with McDonald's that is almost unbreakable -- seen as dad spoiling the kids by taking them to eat.

Actualize value of philanthropy in Local Communities

McDonald’s is also known for giving back to the community through the Ronald McDonald House Charities, college scholarships, fundraisers and mentorship programs. McDonald’s, like so many other philanthropic businesses, have realized that giving back is just good for business. By sharing the same values with customers, businesses can create loyal advocates and increase their revenue.

Customer experience

Obsessive Quality Control - You can Count on!

Copy Everywhere CONSISTENCY

Customers know what to expect and can rely on that knowledge when making a decision on where to eat

Consistency is a religion at MCD. It doesn't matter if you're visiting a McDonald's in California or Connecticut, America or Australia—you're going to have a similar experience wherever you are.

Dump old food Discipline - no soggy fries!

Predictive Analytics - How much to Make

Training "Business in Box" Franchisor Model

  1. Battle tested, copy-everywhere foolproof system that is reproducible The foundation to McDonald’s success has been its system which has allowed it to grow and mature

  2. Ray Kroc launched the Hamburger University as a training school that emphasizes “consistent restaurant operations procedures, service, quality and cleanliness.” The curriculum is based upon the four concepts, as well as lessons Kroc learned from his initial years in operating the franchise. Consistency, of course, is vital to any franchise system and Hamburger University has systematically taught McDonald's franchisees how to run a restaurant the way Ray Kroc envisioned over 60 years ago.

Use of Automation, Technology and Machinery

Ray Kroc was originally a shake machine salesman and had an affinity for selling and boosting profits with technology.

Even much later in 2019 MCD went on a tech buying spree!

2019 March acquiring Dynamic Yield, a personalization and decision logic technology firm based in New York and Tel Aviv to be utilized mainly in the drive-thru—but later via kiosks and mobile devices as well.

2019 march McDonald’s bought a 10% stake in Plexure, a New Zealand mobile app developer to improve back-end and front-end features, customer functionality and customer targeting.

2019 Sep it bought artificial intelligence startup Apprente, which uses its A.I. capabilities in the area of speech recognition and automated voice assisting to be utilized mainly in the drive-thru—but later via kiosks and mobile devices as well.

2019 Dec bought Dutch company Adyen NV in December for mobile app payments.

Growth and Talent Management

Low Turnover vital for Quality Service

Just like Zappos and Costco have fanatic employees that are paid more than competitors, MCD is able to retain employees. One way is to spot the stable ones and then retain esp. by growing them. It not only reduces turnover

HR Operations Innovation

Apply Thru process. the franchise is now even giving potential employees the chance to start their applications via voice assistants such as Alexa or Google Assistant. According to McDonald’s, it , is the first voice-initiated application process. As of early 2020, Apply Thru is currently available in the United States, Australia, Canada, France, Germany, Ireland, Italy, Spain and the United Kingdom. But the company plans to expand the capability into other countries.

Spot Talent From first day

  • McDonald's knows how to spot talent and tap into the "hidden talents" of employees.
  • MCD does it by taking the "lowest skill tier" and giving them pride.

Career growth for Talent that Knows Business from Ground Up

  • Did you know that 40% of McDonald's executives actually began as hourly employees?
  • McDonald’s rewards these employees by allowing them to work their way-up INSIDE the company, not having to rotate meaningless jobs.

This builds a company that is full of employees who know the business inside and out and are extremely loyal.

Timeline

1940 - Richard and James McDonald were the two brothers founded McDonald’s in San Bernadino, California.

1948 they came up with a factory like system "Speedee" to enable while you wait rapid drive-thru burgers. The restaurant was efficiently serving a large number of customers...and those customers seemed pleased with the food they were receiving.

1955 Ray Kroc bought the rights to their “system” and branding after he ventured to San Bernardino, California in 1954 after receiving a larger than normal order for the milkshake multi-mixers he was selling and then greatly impressed by the brothers' success. Kroc opened his first McDonald's in 1955 in Des Plaines, Illinois.

Ray Kroc Sold Franchises. It was Ray the shake machine salesman to create the modern day McDonald’s corporation.

1961 Ray Kroc was tired of having to get approval of the brothers for every innovation or change, and he bought out the McDonald brothers for the, then hefty, sum of $2.7 m

1961 Ray Kroc launched the Hamburger University as a training school that emphasizes “consistent restaurant operations procedures, service, quality and cleanliness.”

1975 Drive-Thru. In response to requests from soldiers who weren't permitted to get out of their cars while wearing their fatigues in public, MCD added the first McDonald's drive-thru near Fort Huachuca in Sierra Vista, Arizona. Additional drive-thru locations in Georgia and Oklahoma City soon followed. Now drive thrus are a vital part of the customer experience esp. in 2020 when Covid hit.

2015 Oct All Day Breakfast introduced. As MCD hit a sales slump it removed it 10:30am breakfast barrier to go all day on them menu. Customers responded very positively.

2018+ Refined pre-ordered/paid drive thru pickup experience - helped maintain sales in 2020 Covid-19.

  • Ray Kroc won big - in 25 years, he had over 4000 stores and 3 billion in sales. His enthusiasm and common sense of approach to business made him very successful and wealthy along the way to the top. ​

  • 2017 - McDonald’s has over 35,000 outlets in 126 countries. So much has McDonald’s changed the way we eat, it also has had a global impact. They serve close to 70 million customers — roughly 1% of the world's population — per day. The Economist newspaper has created the “Big Mac Index”—the comparison of a Big Mac’s cost in various currencies as an informal judge of the parity of the purchasing power of the world currencies!

  • 2020 Covid Did not hurt thanks to your investments in “3 Ds” of delivery, drive-thru, and digital! Our cash flow went down about $2 billion in 2020. Our franchisees were under significant financial stress; there was a lot of anxiety. But by the fourth quarter of 2020, the company’s global systemwide sales—at $25.8 billion—had fully recovered to its 2019 fourth-quarter sales.

Nearly one in eight of workers in the U.S. have at some time been employed by McDonald’s.

Core Values from Mission statement to 2030!

McDonald's even had a mission statement long before mission statements were a thing. "Quality, Service, Cleanliness and Value"

Quality

It has strict quantitative standards for this.

Service Speed

Simpler is Better than Complexity and More profitable

MCD learned during the 2020 Covid pandemic is that if we simplify our business and focus on what we’re great at—like drive-thru and our core menu items (reduced variety and complexity) —there’s a fantastic benefit for our customers. We’ve seen our customer service scores go up across the globe. We’ve seen our productivity and our restaurant-level margins improve. It was a great reminder about the embedded cost of complexity in our P&L. It wasn’t obvious where that complexity was, but now that we’ve discovered it, we’re committed to keeping our business simple.

Cleanliness

Value

It has strict quantitative standards for this. Legendary Michelin chef, Ferran Adria, once said of the Big Mac: "Ferran Adria and the 100 best chefs in the world cannot do better for the price."

Experience of the Future EOTF Growth driver for 2019 and beyond

Restaurant modernization and technological upgrades to transform the restaurant service experience and enhance customer's perception of the brand.

Dine-In Declining

It is unlikely that post-pandemic that dine-in will come back to where it was. In Europe, dine-in was 65 percent of our business in some markets; it might be less postpandemic. So dine-in will still be important, but takeaway channels, like delivery, drive-thru, and order ahead with curbside pickup, will stay elevated for the foreseeable future.

Delivery Growth driver for 2019 and beyond

Prior to 2017, delivery was a $1 billion business for us, largely in Asia. By the end of 2019 delivery sales were over $4 billion and we continued to see very strong growth in 2020 as MCD expanded the number of restaurants offering delivery to more than 30,000, 95% of US and nearly 65% globally.

In 2018, McDonald's expanded the number of restaurants offering delivery and it is now available in over half of the global system. McDonald's has been, and intends to be, quite proactive in keeping up with the current trends when it comes to expanding its brand and business. In 2017, McDonald's announced it would partner with Uber Eats for home delivery for the first time in the U.S and followed that up by adding Doordash and GrubHub in 2019. These partnerships are part of a strategy to keep up with the newer generations who prefer home delivery over pickup.

2020 Covid Did not hurt thanks to your investments in “3 Ds” of delivery, drive-thru, and digital! Our cash flow went down about $2 billion in 2020. Our franchisees were under significant financial stress; there was a lot of anxiety. But by the fourth quarter of 2020, the company’s global systemwide sales—at $25.8 billion—had fully recovered to its 2019 fourth-quarter sales.

Much of delivery is done through third-party operators, like Uber Eats, DoorDash, Just Eat Takeaway, and Deliveroo, but in some markets—like parts of Asia, Australia, and Germany— MCD is actually experimenting with hybrid models, including self-delivery.

In top markets, the drive-thru service times are now about 30 seconds faster than they were two years ago. We think we can get even faster—and we’re also thinking about ways that the digital experience might work in drive-thru. So, for example, if you are a customer using the app, maybe you have a dedicated drive-thru lane.

Digital Growth driver for 2019 and beyond

By evolving the technology platform, McDonald's is expanding choices for how customers order, pay and are served through additional functionality on its global mobile app, self-order kiosks, and technologies that enable conveniences such as table service and curb-side pick-up.

Internal EC and Loyalty Program - Owning Customer Data!

Some delivery orders are, as you said, initiated directly on the sites of MCD's delivery partners. Going forward, we expect that many delivery orders will be placed on their own MyMcDonald’s platform, providing them with important data to understand our customers’ preferences and cravings.

MCD's loyalty program, called MyMcDonald’s Rewards, in the US later this year and in all our major markets over the next couple of years. The MyMcDonald’s platform is essentially an ecosystem of all the things that you can do via digital touchpoints with McDonald’s—think mobile ordering, payments, delivery, rewards, or deals. I’m excited about all the opportunities for us there.

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