The Financial Analysis and Solution of McDonald’s

Introduction

McDonald’s is the world's biggest chain of hamburger fast food restaurants which offer different American foods and serving around 68 million people everyday in 119 nations with over more than 36,000 outlets. A McDonald's restaurant is managed by either a franchisee, an affiliate, or the corporation itself. The McDonald's Corporation income originates from rent, royalties, and fees paid by the franchisees, as well as sales in company-operated restaurants. McDonald’s has many advertising campaigns and promotions over the years. They give people an image “portraying warmth and a real slice of everyday life” due to their advertisements can show they understand customers’ needs and requirements. Moreover, their goal is to provide customers heartwarming service through their environment and staffs. In recent years, McDonald’s upgrade their restaurants to provide a modern and pleasant dining like they will provide phone chargers in their restaurants and salad bar to give customers have a delightful dining experience.

Financial Analysis

The revenue of McDonalds is determined by rent, income from franchised, service fees and company operating revenue. Customers usually purchase McDonald’s products due to high popularity and efficiency, and it has many branches especially in USA. From the annual report 2015, we can noticed that the revenue from $25,441 millions in 2014 to $25,413 millions in 2015, which decrease by 7%. This may due to it has many rival companies, such as KFC, Burger King and Subway. They have a fierce competition between them, as consumers have more choices, so the market share of McDonald’s is apportioned. At the same time, people are more care about their health as McDonald’s food contains excessive sugar and salt which are easy leads to obesity, so more people alert this and tried to cook at home or to prevent patron in a fast food restaurant.

Net income of McDonald’s decreases from $4758 millions in 2014 to $4529 millions in 2015 and 64.6% of the revenue are the cost of goods sold. We can see that the company spent a larger proportion cost in food and paper relatively than in payroll & employee benefits and occupancy and other operating expenses. This can be explained that some region of McDonald’s stores providing foods with relatively low price compared with the cost of goods sold as well as the firm almost cost a reasonable price from customers among different countries. In addiction, the firm also use many papers to pack the food and give out extra seasoning for free. For example, as extra ketchup is free, people may abuse asking for ketchup and this leads to a rise in cost of food. Moreover, McDonald’s are now mainly use paper bags to pack the food which are more environmental, but the cost of paper bags is relatively higher than the cost of plastic bags.

To further analysis the revenue framework, from the income statement in 2015, it is found that the company-operating stores contribute about 65% of the total sales but franchised stores contribute only about 35% of the total sales. However, the cost of goods sold of franchising is rather lower than the company-operating one, which are 23.7% and 84.7% to the own sales revenues respectively. That means the franchising business have a great potential for increasing the revenues of McDonald’s.

Solutions and Recommendations

As shown in the financial statement, the sales revenues start declining since 2013 and it drops even more in 2015. In addiction, it is found that the proportion of costs to revenues is increasing. To improve the financial position of McDonald’s, the recommendations will mainly aim at booming the sales revenues as well as lowering its costs.

To increase the sales figures, McDonald’s can

1. Adjust its business structure

From now, the proportion of the company-operated restaurants and franchised restaurants are about 80% and 20% respectively. According to the financial statement in 2015, it is found that the franchised restaurants contribute about 35% of the total sales, though its operating expenses is only about 15% of the total operating costs. This shows that the franchised restaurants have a relatively higher sales margin. By increasing its proportion in the business, the revenues can be improved.

However, there may be some potential risk if the number of franchised restaurants is increased. According to Zeidman (2014), although the sales performance of franchised stores is always better than that of the stores owned by the company, it can be difficult for the company to control the operation of the business having great amounts of franchised shops since the operators of the franchised stores are always the third people to McDonald’s. Therefore, by considering the benefit and potential risk of franchised stores, it is recommended that McDonald’s should adjust its business structure by increasing the proportion of franchised restaurants to about 35% while reducing the company-operated restaurants to about 65% so as to increase its sales revenues as well as lowering the potential risk.

     2. Change its marketing strategy

Although McDonald have already released new products every certain period, the popularity and sales of those new items are significantly different. For instance, the product series of Minions is not hot in Hong Kong, however, the new ‘Sweet potato sensation’ product line are rather famous than Minions one. Hence, we suggest McDonald’s can make those regular limited products become regular products as well as cut the non-profitable items in order to increase the sales and decrease the cost of wasted ingredient, so that the company can gain more profits and have larger market share.

A part from replacing some inconspicuous regular products with limited popular products, McDonald’s can also release those hot items to the near areas, especially multicultural cities as these customers are much willing to try and accept new flavor.

While to lower the costs, McDonald’s can

1. Cut down the main production costs

It is shown on the financial statement that the majority of operating costs for the company-operated restaurants come from food and paper, which occupies for about 37%. To lower the expenses costed by food, McDonald’s can charge the fees from the customers for extra sauce requested, for example ketchup. In this way, it can prevent unnecessary waste