Presentation of Team A2 for the Competitive Strategy course at IESE

1. McDonalds: beyond burgers
Competitive Strategy 14 March 2012
Professor Marco Tortoriello Team A21

2. 8
1 As the consumer food industry stagnated,
McDonalds had to look for alternative avenues of
growth
When the world consumer food
industry was volatile… … McDonalds had an existing pilot
Consumer foodservice value growth in project to provide a possible source of
% growth
World  McCafe was first introduced in Melbourne,
North America 8 Australia in 1993
Western Europe
 Early outlets with McCafe reported 15%
4 4 more revenues than the normal McDonalds
3 3 outlets
1  By 2001, McDonalds expanded to 300 stores
worldwide
5
-1  McDonalds introduced McCafe as a product
line across in stores in the US
-3
 By 2008, McDonalds increased McCafe
stores worldwide to 1,300
 Further expansions planned worldwide. In
-9 2011 McDonalds Canada announced
1999 2000 2001 intentions of opening a McCafe in every
outlet
Source: Euromonitor, McDonalds Annual Reports 2

3. ,
1 The coffee market is an attractive market with
growth potential and good returns
World-wide coffee market increased with Gross margin for coffee players is 51% on
2% p.a. average
Million bags of coffee Gross margin in percent
58 Starbucks
Caribou Coffee
56
132 54
132
130
130 52
Ø 51
128 127 50
126 +2%
48
124 123
122 5 46
120 119 119 44
118
42
116
114 113 4
112 111
2
110 109
0 0
2001 02 2003 04 2005 06 2007 08 2009 2002 2004 2006 2008 2010 2012
Source: www.ico.org 3

4. 46
1 The specialty coffee industry is characterized by
low threats despite competitive rivalry
 Threat of Substitutes - Low
Drink with addictive character:
 2.25 billion cups/day consumed
Substitute are tea, juices,
 energy drinks and milkshakes
Culturally part of daily routine
Suppliers Bargaining Power Bargaining Power of Buyers
- Low - Low
 25 million small producers of Competition - High  Fragmented buyers
coffee beans  Monopolistic  Taste preferences and brand
 Many providers of roasting  Price, quality and loyalty are important drivers
facilities  Multiple customer profiles
scale matters
 Premium demanded for including convenience, price
quality and organic products sensitive and connoisseur
Threat of New Entrants - Medium Traditional
Single store cafe’s have very Complements
 limited barriers to entry  Merchandise – coffee
Specialty coffee chains need cups, mugs, T- Shirts etc.
scale and thus high capex  Cookies, donuts and short
for prime locations eats
Source: World Development Vol. 30, No. 7, pp. 1099–1122, 2002 4

5. ,
2 McDonald’s can surpass Starbucks as the largest
coffee retailer by bringing McCafe to ~50% of its
stores
McDonalds has two times the stores of Starbucks
Thousands of stores world-wide Competitive advantage
35 McDonalds’ size allows it to
cover Starbucks’ retail
30 McDonalds network at a lower cost:
 Installing McCafe’s in 50%
25 of the McD stores will
make the retail network
20 larger than Starbucks
Starbucks  McCafe capex is one third
15 of Starbucks capex (USD
315k)
10 Dunkin’  McDonalds has 20% more
Corp1
cash (USD 2.5bn) than
5 Starbucks (USD 2.0bn) on
balance sheet to expand
0
2001 2002 2003 2004 2005 2006 2007 2008 2009
1 Dunkin’ Corp is the parent company of Dunkin’ Donuts and Baskin Robbins (icecream)
Source: McDonald’s balance sheet 9/30/2011; Starbucks balance sheet 01/01/2012; McDonalds annual report 2009 5

6. 2 McDonalds’ strong capabilities allowed it to roll
out a coffee retail chain with less effort than
competitors
Infrastructure Broad retail network - 32k stores, translates into capabilities to scale up fast
at lower costs (McCafe costs 1/3 of the USD 315K spent for a Starbucks
store)
HR High quality training programs to quickly re-train employees for new roles
Technical Proven experience in developing products that fit with customer taste,
Development ability to standardize products and operations on world-wide scale
Operations and Logistics Marketing & Sales Services
 Guaranteed access to quality  Established regional  Ability to draw on its
supplies due to exclusive and marketing strategy and experience in fast
long-term contracts with suppliers media relations would food to have faster
such as Kraft result in a effective and service times for
 quick campaign for new McCafe products
Existing supply chain network
products
can be easily leveraged to better  Can reach a wider
integrate and roll out new product  Strong brand recognition customer
lines faster drives traffic and quick base through
 adoption and increase of drive-through stores
Franchised operations make it
sales of new product and longer opening
easier to increase stores with
lines hours
lower capital expenditure
Source: McDonalds 2010 Annual Report, Business Week 6

7. 1%
3 McCafe has lower prices than Dunkin’ Donuts and
Starbucks, and McDonalds overall has lower
COGS
Price of a medium latte coffee in Orange Cost of Goods Sold as percentage of sales 1
County
Percent of sales in 2011
USD in 2011
McCafe 2.89 23%
Dunkin’ 3.00 -0.36 20% -28
Donuts
Starbucks 3.25 51%
To increase demand for its McCafe products, McDonalds and DD have lower COGS than Starbucks
McDonalds priced its products below competitors  Less costly raw materials (less specialized coffee)
 Smaller assortment of exotic coffees
1 COGS based on COGS / sales from company financials; for McCafe: (paper + food) / sales
Source: Analyst Reports; Industry Reports; Company; Company Financials 7

8. 3 Introducing McCafe increased McDonalds menu
range and enabled it to access a broader
customer base
Premium – Up Scale The positioning rationale
 By introducing McCafe,
The Coffee Bean McDonalds is able to broaden the
& Tea Leaf base of their target customer
whilst sticking to their price
Starbucks
segment
 McDonalds broadened its menu
Dunkin’ YUM! Brands
Limited Broad range to keep the customer
Donuts McDonalds longer in the store and spread the
Menu Menu
Range McDonalds + McCafe Range visits more evenly over the day
Burger King  Main competitors - Dunkin
Donuts and Starbucks – differ
Wendy’s substantially in price
 YUM! has the broadest menu
range, but divided over multiple
brands (Pizza Hut, KFC, Taco
Bell). Thus, McDonalds has the
No Frills – Low End advantage of a unique brand
across all its products
Source: Company websites 8

9. 3 McDonalds is close to the leading edge of the
productivity frontier; Dunkin is more differentiated
Fast-food
Differentiation
Gross profit / sales1 Coffee to go
Drivers of Differentiation
Coffee retail
100
 Second Cup increased gross margin by
The Second Cup
90 increasing same-store sales with more than 30
different premium coffees
80  Wendy’s has lowest opex mostly because it
Dunkin’ Corp
has consolidated overhead in one center
70 YUM! Brands
 Dunkin’ Corp is more differentiated
60 because it has:
Caribou Coffee Company  A broad geographic distribution of its
50 ~10k points of sale
Peet’s Cofee and Tea  A mix of value and premium items
Starbucks McDonalds  A high willingness-to-pay for coffee to go
40 Kraft Foods  High margins and low COGS on donuts
Burger King McDonalds 2001
30 Sara Lee  YUM! drives up WTP by having:
 Multiple brands (KFC, Taco Bell, Pizza
20 Wendy’s Hut)
 Large scale (35k retail stores)
10
 McDonalds benefits from:
 Large-scale purchasing capabilities
0
 Broad geographic coverage
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18  Introduction of new product lines
1 All data 2011 averages, except for Burger Opex turnover
King 2010 gross profit / sales (1/(opex/sales) 1
Source: Google Finance; Thomson One; Company Financials; Analyst Reports 9

10. 4 McDonalds adapted the McCafe concept to
incorporate a lounge store-in-store concept…
GERMAN
EXAMPLE
Factors United States Germany
Annual to go coffee  100 liters/person  150 liters/person
Market consumption
factors
Market phase  Young market  Developed
#1 Competitor  Starbucks  Tchibo
Product positioning  McCafe drinks as product  Store-in-Store concept
extension
Adap- Distribution  Drive-through  Lounge area in McD store
tation Example product  Extra Large Soy Latté  Groß Milchkaffe
Target customers  Transit  Young, social
Photos
Source: Euromarket International 2010; Euromarket International 2011 10

11. 4 …and its scale and established local operations
gave McCafe a competitive advantage GERMAN
EXAMPLE
McDonalds’ resources Advantages for McCafe
 Large retail presence – 1,415 stores  Easy to roll out McCafe stores – 764
Scale  Significant market share – 27% stores currently
 Tap existing customers with McCafe
 Long market presence – 41 years  Knowledge of taste preferences
Learning  Tested concept in a German-speaking
 Austria served as a test market
country
Production/  Established supply chain  Easier to push new product
Sourcing extensions to (franchised) stores
 Remodeling existing stores to  Capital expenditure is a third of
Design incorporate store-in-store concept Starbucks (USD 315k)
 Strong supplier relationships
 Strong supplier relationships
Cost  Franchised set up leads to lower
 81% of stores franchised
capex costs for McDonalds group
 Existing stores remodeled  Increased sales per square foot
Utilization  Training of existing employee base  Pooling leads to higher utilization
 Fast-food production efficiencies  Waiting time 32% below Starbucks
Efficiencies
 Standardized practices  Easy to introduce new products
Source: “unternehmen” www.mccafe.de 01 March 2012 “McDonalds.”Euromarket International. August 2011 11

12. 600
5 Since its introduction in 2006, McCafe has grown
rapidly in number of stores and revenues GERMAN
EXAMPLE
McCafe store-in-stores grew 37% p.a. McCafe revenues grew 13% p.a.
Number of German McCafe store-in-stores 1 Revenues in EUR million
600 +13% 578
800 764 545
740 550
+37%
700 500 462
600 450
540 402
400
500 5 350
400 300
293 250
300
200
214
200 150
100
100
50
0 0
2006 2007 2008 2009 2010 2007 2008 2009 2010
1 2007 and 2009 estimated based for 2006-2010 CAGR
1 Only yearly data available on Caribou Coffee: yearly sales uniformly distributed over quarters
Source: Euromonitor 2011 12

13. ,
5 The launch of McCafe boosted stock performance
above competitors and decreased sales variance
McDonalds’ stock price increased with 30% p.a. after …while decreasing the variance of
McCafe introduction vs 20% p.a. for Starbucks and sales growth
outperformed YUM! Brands at growth of 16% p.a.
QoQ sales growth 2001-2006
USD standard deviation in percent
110 Starbucks
McDonalds
100
YUM! Brands McDonalds 5
90
80
70
60 Starbucks 7
50
40 +30% 16%
30 20%
20 YUM! Brands 21
10
0
1998 2000 2002 2004 2006 2008 2010 2012
1 Only yearly data available for Caribou Coffee: yearly sales uniformly distributed over quarters
Source: Thomson One; Company Financials 13

14. 6 The dominant strategy is to maintain current price
status quo to increase industry profitability
Starbucks maintains Starbucks reacts
 The current status quo has a  Starbucks could probably react by reducing
price differential between prices equal to McDonalds
Starbucks and McCafe of 36 USD  This would take the price sensitive customer
cents or 11%
McDonalds
back to Starbucks as it enjoys the perception
maintains
 Gross margin of McDonalds and of providing premium coffee
Starbucks are similar at around  We believe that this scenario is unlikely as
45% McDonalds has the gross margin
leverage and complementary revenue
streams to react
  If Starbucks were to reduce prices,
McDonalds reacts
McDonalds has already positioned
itself as the lower-cost option and McDonalds will react to ensure that the
will not react without a Starbucks price differential is maintained
reaction  This outcome will not impact customer
 Unlikely that McDonalds will patterns largely but may have some impact
reduce prices if Starbucks maintains on overall coffee consumers
as it will not bring them any further  We believe this will lead to lower industry
benefit
profits as the rest will have to follow suit
Source: Team A2 analysis 14

15. 6 Establish a core McCafe product and develop at-
home coffee solutions to mitigate competitor’s
actions
Competitor’s actions Impact on McDonalds Mitigation measures
 The Starbucks and Dunkin  The broad menu range
Donuts challenge in main distinction of nsure that core
stream fast foods. McDonalds will be competency in food is
Main diluted if the competition sustained with a strong
stream Bacon and Gouda moves towards a similar focus on healthier
and Artisan S/W product extension options
product Starbucks strategy
extension
 Starbucks and Dunkin evelop campaigns to
 Emulation by Burger King, Donuts already have a establish a core McCafe
Wendy’s, Pizza Hut etc. presence in hot breakfast coffee product which is
meals. as associable as the Big
Mac (Frappucino for
 The Dunkin Donuts and  At-home coffee Starbucks)
Starbucks push towards at- solutions (beans, K-
home coffee (beans, Cups) is aimed at getting
powder, K-Cups) the customer accustomed evelop and market at-
At-home to a particular blend and home coffee solutions
products thereby increasing the such as McCafe K-Cups
resistance to change. and coffee blends to
develop customer tastes
and build brand loyalty
Source: Team A2 analysis 15

16. 7 McDonalds should increase its profits by
expanding the McCafe concept

A Roll-out more McCafe store-in-store concepts worldwide
 Store-in-store increased sales with 15% in Australia
 Need to increase time spent in store per customer and sales per customer
 Decrease variance in sales overall and throughout the day

B Introduce McCafe at home products
 Develop a McCafe taste which increases store-visits and same-store-sales
 Increase revenue stream by adding a product line
 Increase the brand recognition of McDonalds as a coffee producer

C Develop healthy complementary products for McCafe
 Drive up sales per customer
 Attract a different segment to McCafe because of its more healthier positioning
Source: Team A2 analysis 16

17. Questions?
17