As mentioned in Section 2.5 earlier, a Balanced Scorecard (BSC) technique has been used to measure the financial and business performance of McDonald's. This part of the research will start with an analysis of McDonald's (McD) performance over a three year period followed by an analysis of its closest competitor, Burger King (BK).
BK was chosen mainly because of its similar product assortment, and customer target. Although McD is much bigger in terms of its size, it still provides me with good insight on its performance by comparing it against BK. BK is the second largest fast food hamburger restaurant chain in the world as measured by number of restaurants and system−wide sales (BK annual report, 2009). BK uses the year end June 30th as its financial reporting period while McD year-end is Dec 31st.
Extracts of McD income statement, balance sheet and cash flows can be found in Appendix 3, 4 and 5 respectively while extracts of BK income statement, balance sheet and cash flows can be found in Appendix 6, 7 and 8 respectively. The ratio formulae and spreadsheet formulae for each ratio used are in Appendix 9 and 10 respectively.
Analysis of McDonald's financial performance
Profitability ratio
Return On Capital Employed (ROCE)
ROCE is used to measure returns on capital invested. ROCE indicates the percentage of return on capital employed in the business and can be used to show the overall profitability and efficiency of the business (Accounting for Management, 2009).
2007
2008
2009
Profit before interest and tax ($millions)
3,879.0
6,442.9
6,841.0
Total assets ($millions)
29,391.7
28,461.5
30,224.9
Current liabilities ($millions)
4,498.5
2,537.9
2,988.7
Capital employed ($millions)
24,893.2
25,923.6
27,236.2
McD ROCE (%)
15.58
24.85
25.12
BK ROCE (%)
14.14
15.88
15.26
Table 3.1: Return on capital employed for financial year 2007 to 2009
Source: McDonald's and Burger King Annual Report, (2007, 2008 & 2009)
Figure 3.1: Return on capital employed for financial year 2007 to 2009
Source: McDonald's and Burger King Annual Report, (2007, 2008 & 2009)
Year 2007
The ROCE of 15.58% fell by 1.45% from previous year (2006), mainly due to a decrease on its operating income by 12.5% as operating expenses increased by 14.85%. Increase in operating expenses were mainly attributable to substantial increase in impairment charges from $134.2million in 2006 to $1,670.3million in 2007 mainly due to the occurrence of Latam transaction (Annual report, 2007).
In 2007 McDonald's sold its businesses in Brazil, Argentina, Mexico, Puerto Rico, Venezuela and 13 other countries in Latin America and the Caribbean (company refers to these markets as "Latam") to a developmental licensees and incurred impairment charges of $1,681million. This loss in value was due to a historically difficult economic environment and volatility experienced in many of the markets (Annual report, 2007).
Current liabilities increased by 52.4% due to an increase in its short-term borrowing from undertaking notes payable worth $1,126.6million in 2007 and increases in current maturities of long-term debt from $17.7million in 2006 to $864.5million in 2007. Total assets only increased by 1.44% mainly from an increased investment in affiliates by 11.69%. This resulted in capital employed being reduced by 4.27%.
Year 2008
ROCE had increased by 59.5% due to improvement in its operating income by 66.01% as operating expenses reduced by 9.67%. Reductions in operating expenses were due to:
Reduction in impairment charges to $6million from previously incurred of $1670.3million mainly on Latam transaction.
Other operating income increased significantly from $11.1million received in 2007 to $165.2million received in 2008. Other operating income comprise of gains on sales of its company-operated restaurant, gains from purchase options exercised by franchisees and equity in earnings from unconsolidated affiliates and partnership businesses (Annual report, 2008).
Current liabilities dropped by 43.5% due to repayment of notes payable undertaken in 2007 and 96.3% fall in current maturities of long-term debt. There is little fluctuation in the value of total assets over the three year period. In 2008, it dropped by 3.16% due to 11.63% reduction in accounts and notes receivable.
Year 2009
ROCE increased slightly to 25.12% due to further reduction in operating expenses by 6.88% attributable to:
McD recorded a pre-tax income of $65.2million related to the resolution of certain liabilities in connection with the 2007 Latam transaction (Annual report, 2009).
Other operating income further increased by 34.56% as McD are selling more of its company-operated restaurants in associated with its refranchising strategy in its major markets (Appendix 1) and from the improved results of its affiliates (Annual report, 2009).
Although current maturities of long-term debt continues to fell by 43.08%, current liabilities increased by 17.76% owing to increase in income taxes payable worth $202.4million and 13.69% increased on accrued payroll and other liabilities which contain the recognition of liability element of derivative instruments. McD is exposed to global market risks and uses foreign currency denominated debt and derivative instruments to mitigate these risks (Annual report, 2009).
Total assets increased by 6.2% due to 33.3% increase in miscellaneous other assets which contain the recognition of assets element of derivative instruments (Annual report, 2009).
Competitor analysis
BK achieved lower ROCE than McD in each of the three year period, suggesting BK was probably inefficient in managing its investing shareholders' funds.
BK's PBIT showed a fluctuating trend over the three years (Appendix 2.1) due to the increasing trend of its operating expenses. Operating expenses increased in each year primarily due to food, paper and product expenses which increased by 20.91% throughout the three-years.
BK needs to improve its PBIT to increase the shareholders return on the capital invested in the company.
Net profit margin (NPM)
NPM is the percentage of after-tax profit a company generates per dollar of sales (Small Business Finance Tips, 2010). NPM portrays the company's ability to convert sales into profit. A higher NPM indicate more effective a company is at cost control.
2007
2008
2009
Net profit ($millions)
2,395.1
4,313.2
4,551
Net revenue ($millions)
22,786.6
23,522.4
22,744.7
McD Net profit margin (%)
10.51
18.34
20.01
BK Net profit margin (%)
6.63
7.72
7.89
Table 3.2: Net profit margin for financial year 2007 to 2009
Source: McDonald's and Burger King Annual Report, (2007, 2008 & 2009)
Figure 3.2: Net profit margin for financial year 2007 to 2009
Source: McDonald's and Burger King Annual Report, (2007, 2008 & 2009)
Year 2007
NPM of 10.51% fell by 6.45% from previous year. Sales by company-operated restaurants and revenues from franchised restaurants increase by 7.85% and 12.43% respectively. However, net profit dropped by 32.42% drove down the NPM which were due to:
Increased of operating cost due to impairment charges of $1,681million incurred in respect of Latam transaction
Increase in interest expense by $8.2milliom due to higher average interest rates (Annual report, 2007)
Non-operating income dropped by 16.3%. Non-operating income consists of interest income earned on short-term cash investments (Annual report, 2007).
Higher income tax rate of 34.6% were applicable for year 2007 (Annual report, 2007).
Year 2008
In 2008, NPM increased by 7.83%. As total revenue continued to increase at a low rate of 3.23%, net profit increased substantially by 80% with the following reasons:
Reduction in operating costs by $1828.1million or 9.67%. Except for franchised occupancy expenses which increased by 7.95%, all operating expenses had reduced minimally with an increased on other operating income as explained above.
Company recognized a pre-tax gain of $160.1million on the sale of its minority ownership interest in U.K.-based Pret A Manger (Annual report, 2008).
Lower income tax rate of 30% were applicable for 2008 (Annual report, 2008).
Year 2009
Total revenue fell by 3.3% owing to a 6.62% decrease in sales by company-operated restaurant caused by McD's decision to refranchise selected company-operated restaurants in its major markets (Appendix 1). The progression towards a more heavily franchised restaurant business model was because of rent and royalty incomes received from franchised restaurants are stable with low costs and less capital intensive (Annual report, 2009).
However, net profit increased by 5.51% resulted in NPM to increase by 9.11% becoming 20% for year 2009 with the following reasons:
6.88% drop in operating costs. Except for franchised occupancy expenses which increased by 5.8%, all operating expenses continued to reduce marginally, with an increased on other operating income as explained above.
Interest expenses for 2009 decreased by 9.45% primarily due to lower average interest rates (Annual report 2009).
A pretax gain of $94.90million resulted from selling its minority ownership interest in Redbox Auto Retail, LLC (Annual report, 2009).
Lower tax rate of 29.8% were applicable (Annual report, 2009).
Competitor analysis
BK's NPM were much lower than McDonald's. Referring to figure 3.2, in 2009, BK achieved NPM of only 7.89% while McD achieved 20%.
This means that BK's operating costs were 86.62% of its total revenues while McD operating costs was 69.9% of its total revenues. Higher food, paper and product expenses primarily as a result of the net addition of 69 company restaurants in 2009 and significant increase in commodity costs with the negative currency exchange impact increases BK's operating costs (BK annual report, 2009). BK weakness in cost control led to its failure to record higher net profit.
Liquidity ratio
Current ratio
Current ratio is widely used to make an analysis of company's ability to meet short-term obligations (Accounting for Management, 2009).
A general rule of thumb for current ratio is company with current assets more than twice the current liabilities (2:1) is considered to have good short-term financial strength (Kaplan, 2007).
2007
2008
2009
Current assets ($millions)
3,581.9
3,517.6
3,416.3
Current liabilities ($millions)
4,498.5
2,537.9
2,988.7
McD Current ratio
0.80:1
1.39:1
1.14:1
BK Current ratio
0.93:1
0.89:1
0.77:1
Table 3.3: Current ratio for financial year 2007 to 2009
Source: McDonald's and Burger King Annual Report, (2007, 2008 & 2009)
Figure 3.3: Current ratio for financial year 2007 to 2009
Source: McDonald's and Burger King Annual Report, (2007, 2008 & 2009)
Year 2007
Referring to figure 3.3, current ratio of 0.8 in 2007 was at its lowest point. The excess of current liabilities over current assets were due to increased in McD short-term debt. McD had undertaken notes payable amounting to $1126.6million and the current maturities of long-term debt had increased to $846.5million from 17.7million in preceding year.
Current assets had dropped by 31% from previous year, mostly due to the derecognised of assets of business that was previously classified as held for sale and discontinued operations. Cash and equivalents drop by 6.9% due to lower net income reported for the year 2007.
Year 2008
Current ratio improved by 73.75% to 1.39:1 as current liabilities reduced by 43.5%. The repayments of notes payable previously undertaken and reduced of current maturities of long-term debt by 96.32% caused McD current liabilities to decrease.
Current assets drop slightly by 1.8% due to 11.63% reduction in accounts and notes receivables. However, this fall has no major impact on McD current ratio due to higher reduction in its current liabilities.
Year 2009
McD cash balances dropped by approximately 13% were due to increase in cash used for financing activities particularly in repayment of debt obligation, purchasing treasury stock and payment of stock dividends (Annual report, 2009). This caused current assets to decrease by 2.88%.
Current liabilities increased by 17.76% due to accrued payroll and other liabilities increased by 13.69% which consist of recognition of liability element of derivatives instrument. McD also had an obligation to income taxes payable worth $202.4million.
The decrease in current assets coupled with higher increased in current liabilities caused current ratio fell to 1.14:1 which represent 18% decreased.
Competitor analysis
As can been seen from figure 3.3, current ratio attained by BK was below 1 in each of the 3 years and exhibited a decreasing trend over the 3 years. This decreasing trend implies deterioration in the liquidity position of BK.
BK's current assets decreased (Appendix 2.3) as BK experienced weakening in its cash balances. Cash balances dropped by 28.41% throughout the three years as BK used more cash for its financing activities mainly in repayment of term debt and capital leases (BK annual report, 2008 and 2009).
Current liabilities increased by 11.13% throughout the three years primarily due to significant increase in current portion of long-term debt and capital leases from $5million in 2007 to $67.5million in 2009 (Appendix 7).
Gearing ratio
Debt-to-equity ratio
Debt-to-equity ratio indicates how much the company is in leveraged by comparing what it owed to what in owned. In other words, it measures company's ability to borrow and repay money (Value Based Management.net, 2010).
A high ratio generally means that a company has been aggressive in financing its growth with debt (Investopedia, 2010).
2007
2008
2009
Long-term debt ($millions)
7,310
10,186
10,560.3
Short-term debt ($millions)
1,991.1
31.8
18.1
Total debt ($millions)
9,301.1
10,217.8
10,578.4
Total shareholders' equity ($millions)
15,279.8
13,382.6
14,033.9
McD Debt-to-equity ratio
0.61:1
0.76:1
0.75:1
BK Debt-to-equity ratio
1.32:1
1.12:1
0.91:1
Table 3.4: Debt-to-equity ratio for financial year 2007 to 2009
Source: McDonald's and Burger King Annual Report, (2007, 2008 & 2009)
Figure 3.4: Debt-to-equity ratio for financial year 2007 to 2009
Source: McDonald's and Burger King Annual Report, (2007, 2008 & 2009)
Year 2007
Debt-to-equity ratio for 2007 of 0.61:1 being the lowest among the three years, however, had increased by 12.96% from previous year. This was attributable to increase in total debt by 10.62% with net issuances of $572.6million (Annual report, 2007).
The slight fall in shareholders' equity was caused by 23.69% increase in common stock in treasury. In 2007, common stock in treasury stood at 495.3million shares (Annual report, 2007).
McD retained earnings increased from preceding year but only by 2.39% as higher dividend payments were made to McD shareholders despite lower net income reported for that year.
Year 2008
The ratio increased by 24.59% to 0.76:1 as total debt increase by 9.86%. In 2008 company borrowed 40billion Japanese Yen ($440million) via floating rate syndicated term loan maturing in 2014 which contributed to the increase in debt obligations with a net issuances of $1,045.7million (Annual report, 2008).
Total shareholders' equity continued to decrease by 12.42% due to dropped in accumulated other comprehensive income by 92.43% as McD incurred loss in foreign currency translation of $1223million (Annual report, 2008). Furthermore, increase of McD common stock in treasury by 21.04% also contributed to the decrease in shareholders' equity.
Year 2009
Although debt-to-equity ratio dropped slightly to 0.75:1 (refer figure 3.4), total debt continued to increase by 3.53% with net issuances of $219.3million (Annual report, 2009).
Increased in total shareholders' equity by 4.87% was due to gain on foreign currency translation of $714.1million (Annual report, 2009) and increased in retained earnings by 12.64% as higher net income was reported in 2009. The small increased in retained earnings each year was due to company's decision to declare higher dividend per share in each year.
Common stock in treasury continued to increase by 12.64% amounting to 583.9 million shares as at year 2009 (Annual report, 2009).
Competitor's analysis
BK debt-to-equity ratio is above 1 for 2007 and 2008. BK rely slightly more on debts rather than equity to finance its operations since debt is normally the cheapest form of long-term financing, due to the tax deductibility of interest.
In 2009 debt-to-equity ratio improved to 0.91 as BK total debt decrease by 6.17% (Appendix 2.4) and its equity increased by 15.43% with 57.14% increase in retained earnings. However BK debt-to-equity ratio is still higher than McD.
Interest-coverage ratio
Interest-coverage ratio measures of the number of times a company operating income can cover interest expenses (Braun et al., 2010).
The lower the ratio, the more burdened the company is by debt expense. For any company in any industry, an interest-coverage ratio below 1 indicates the company is not generating sufficient revenues to satisfy interest expenses (Investopedia, 2010).
2007
2008
2009
Net profit before interest and tax ($millions)
3,879
6,442.9
6,841
Interest expenses ($millions)
410.1
522.6
473.2
McD Interest-coverage (times)
9.46
12.33
14.46
BK Interest-coverage (times)
4.03
5.28
5.92
Table 3.5: Interest-coverage ratio for financial year 2007 to 2009
Source: McDonald's and Burger King Annual Report, (2007, 2008 & 2009)
Figure 3.5: Interest-coverage ratio for financial year 2007 to 2009
Source: McDonald's and Burger King Annual Report, (2007, 2008 & 2009)
Year 2007
Interest expenses increase by 2% although lower debt levels were reported in 2007. This is primarily due to higher average interest rates and stronger foreign currencies (Annual report, 2007).
Since operating income fell by 12.5%, means less income were available to cover the increased in interest expenses which led to interest-coverage fell from 11.03 times in 2006 to 9.46 times in 2007.
Year 2008
Interest expenses further increased by 27.43% mostly due to higher average debt levels, and to a lesser extent, higher average interest rates (Annual report, 2008). As at 2008, McD long-term debt obligation were $10,186millions which increased by 39.34% from previous year.
The increase in operating income by 66.1% made it feasible for McD to pay its increased interest payment. Interest-coverage improved to 12.33 times.
Year 2009
McD interest-coverage ratio improved to 14.46 times. Year 2009 interest expenses had dropped by 9.45%, primarily due to lower average interest rates, and to a lesser extent, weaker foreign currencies (Annual report, 2009) although long-term debt had increased by 3.67%.
As operating income continued to increase by 6.18%, company increases its capability to pay the reduced interest expenses when due.
Competitor's analysis
It looks like BK as well has no trouble in paying its interest expenses when it falls due. The interest-coverage ratio for BK revealed an upward trend over the three years.
Interest expenses reduced by 8.21%, reflecting a reduction in the amount of borrowings outstanding due to early prepayments of its debt and a decrease in rates paid on borrowings in 2008 (BK annual report, 2008). Interest expense further reduced by 14.61% in 2009 reflecting a decrease in rates paid on borrowings during the period (BK annual report, 2009).
Investor ratios
Earnings per share (EPS)
EPS is the portion of a company's profit in cents attributable to each equity (ordinary) share. EPS is widely used as a measure of company's performance. Investor will also look for growth in EPS from one year to the next (BPP, 2009).
2007
2008
2009
Net profit ($millions)
2,395.1
4,313.2
4,551
Weighted-average number of shares outstanding (millions)
1,188.3
1,126.6
1,092.2
McD EPS ($ per share)
2.02
3.83
4.17
BK EPS ($ per share)
1.11
1.40
1.48
Table 3.6: Earnings per share for financial year 2007 to 2009
Source: McDonald's and Burger King Annual Report, (2007, 2008 & 2009)
Figure 3.6: Earnings per share for financial year 2007 to 2009
Source: McDonald's and Burger King Annual Report, (2007, 2008 & 2009)
Year 2007
McD EPS dropped by $0.85 from previous year EPS of $2.87. This dropped were caused by the fell in net income for year 2007 by 32.42% due to the occurrence of Latam transaction.
The weighted-average number of shares outstanding reduced as number of shares purchased by McD net of stock option exercised increased 8.4% to 495.3million shares from 456.9million shares in preceding year (Annual report, 2007).
Year 2008
EPS improved immediately in 2008 to $3.83 per share. Displaying approximately 90% increased which represent an outstanding growth rate.
This relates to 80% increase in net income after tax coupled with a further 5.19% decrease in its shares outstanding. The number of shares purchased by the company, net of stock option exercised increased by 10.1% which reduce the number of average shares outstanding.
Year 2009
McD's EPS grew by 8.88% to $4.17 as its net income after tax further increase by 5.51%. The number of shares outstanding further reduced by 3.05%. At year-ending 2009, treasury stock purchased, net of stock option exercises amounted to 583.9miilion shares which was 7.08% increased from 2008 (Annual report, 2009).
Competitor's analysis
BK's EPS also reported an increasing favorable growth. However it is still lower than McD. Referring to figure 3.6, as at year 2009, BK's EPS stood at $1.48 while McD EPS were at $4.17. The enormous gap of $2.69 might worry BK's investors as they are earning lower per share indicating poor performance of BK.
Dividend cover
Dividend cover measures the ability of businesses to pay its dividend from profits. High dividend cover means company has the option to raise dividend if it wishes and can easily maintain to pay same dividends if its earnings decline (biz/ed, 2010).
A dividend cover ratio below 1.5 is risky, and a ratio below 1 indicates a company is paying the current year's dividend with retained earnings from a previous year's (QFinance, 2010).
2007
2008
2009
Earnings per share ($ per share)
2.02
3.83
4.17
Dividend per share ($ per share)
1.50
1.625
2.05
McD Dividend cover (times)
1.35
2.36
2.03
BK Dividend cover (times)
8.54
5.6
5.92
Table 3.7: Dividend cover for financial year 2007 to 2009
Source: McDonald's and Burger King Annual Report, (2007, 2008 & 2009)
Figure 3.7: Dividend cover for financial year 2007 to 2009
Source: McDonald's and Burger King Annual Report, (2007, 2008 & 2009)
Year 2007
Dividend cover of 1.35 times in 2007 fell by 52.96% from 2.87 times in 2006. EPS was lower in 2007 due to lower net income realized. Despite lower EPS, company increased its dividend per share by $0.50.
Year 2008
In 2008, company's decision was to further increase dividend per share to $1.625, which is 8.33% increase. With 89.6% increase in McD EPS, this enables dividend-coverage of 2.36 times.
Year 2009
As company continues increasing its cash dividends to $2.05 per share which equals to 26.15% rise from previous year, the dividend-coverage fell to 2.03 times as EPS increased by only 8.88%.
Competitor's analysis
BK displayed a higher dividend cover than McD over the three year period. This is because lower dividend per share is being paid to shareholders. Dividend per share was at $0.13 in 2007 and rose to $0.25 in 2008 and maintained at this level in 2009 (Appendix 2.7).
BK and McD's ability to pay steady dividends over time and its power to increase them, delivers a good future performance of the company.
Analysis of McDonald's customer perspective
Customers play a significant role in assuring the long-term survival of every business. Thus, it is vital for businesses to keep satisfying their customers.
The customer perspective addresses the question of how customers perceive the company. Customers are commonly concerned with the company's attributes such as the price, the quality, the sales service quality and the delivery time of product or services. Customer's satisfaction is critical for company to achieve its financial goals (Braun et al., 2010).
2007
2008
2009
U.S (%)
4.5
4
2.6
Europe (%)
7.6
8.5
5.2
APMEA (%)
10.6
9
3.4
Other countries & Corporate (%)
10.8
13
5.5
Total
6.8%
6.9%
3.8%
Comparable sales and comparable guest counts are key indicators used to analyse a McDonald's performance. It also acts as an indicative of acceptance for the company's initiatives as well as local economic and consumer trends (Annual report, 2009).
Table 3.8: Comparable global sales increases from 2007 - 2009
Source: McDonald's Annual Report, (2009)
2007
2008
2009
Guest counts growth (%)
3.8%
3.1%
1.4%
Table 3.9: Comparable guest counts growth from 2007 - 2009
Source: McDonald's Annual Report, (2007, 2008, 2009)
Table 3.8 and 3.9 showed the percentage increase in global sales and guest counts in each year. Therefore, it can be assumed that McDonald's has great customer loyalty. However, it is interesting to note that in 2009 global sales increased by only 3.8% compared to an increase of 6.9% in 2008. This represent an approximately 50% reduction in global sales increased. The rate of guest counts growth also reduced each year. It reduced by 54.84% in 2009 from 3.1% in 2008 to only 1.4% in 2009.
The cause for this reduction needs to be investigated by McD. It could be due to customer dissatisfaction towards McD services, or caused by customers changing preferences and taste towards a healthier food. However, such information is inaccessible probably due to the confidential issues. If this trend continues in 2010, McD may be facing reductions in its future sales.
Other than that, McD had displayed great extent in ensuring continuing customer satisfaction. These actions also contribute to the increased customer visits. Some of McD actions include (Annual report, 2007):
Offering extended or 24 hour services offering early morning coffee or a late night snack
Introducing drive-thru to the increasingly mobile populations in China, Russia, U.S. and Canada
Delivery services directly to customers' homes or offices in Singapore, Egypt and other countries in Asia and the Middle East
Branded affordability menus such as Ein Mal Eins in Germany, the Dollar Menu in the U.S. and China Amazing Value Menu
Reimaging. Investment in its restaurant locations and layout to enhance customer convenience
Furthermore, a Customer Satisfaction Opportunity scores indicate that customers are satisfied with McDonald's managers and crew services with improvisation on its customer satisfaction score for both drive-thru and dine-in services in nearly all of the key markets around the world (Annual report, 2008).
Analysis of McDonald's internal business process perspective
This perspective addresses the question of what business processes the company should surpass to satisfy its customer and financial objectives. Excelling in internal business process can affect customer satisfaction, which will also affect the company's financial success (Braun et al., 2010). This perspective allows managers to determine how well their business is operating.
Food and paper, and selling, general and administrative expense as a percentage of revenue were used to describe the efficiency of McDonald's cost controlling.
2007
2008
2009
Food and paper expense ($millions)
5,487.4
5,586.1
5,178
% increase/(decrease) in food and paper expense compared to previous year
7.35%
1.8%
(7.31%)
Sales by Company-operated restaurants ($millions)
16,611
16,560.9
15,458.5
% increase/(decrease) in sales by Company-operated restaurants compared to previous year
7.85%
(0.3%)
(6.66%)
Percentage of sales (%)
33.03%
33.73%
33.5%
Table 3.10: Food and paper expense as a percentage of sales for 2007-2009
Source: McDonald's Annual Report, (2009)
From table 3.10, there is minimal fluctuation in the percentage. Food and paper expense fluctuates due to the fluctuation in the commodity costs (Annual report, 2009). Food and paper expense increased by 1.8% in 2008 and company-operated sales fell slightly by 0.3%. In 2009, food and paper expenses dropped by 7.31%, thereby improving food and paper expenses as a percentage of revenue by 0.23%. Overall, McD are efficient in controlling its food and paper expenses.
2007
2008
2009
Selling, general & administrative expense ($millions)
2,367
2,355.5
2,234.2
% increase/(decrease) in selling, general & administrative expenses compared to previous year
3.11%
(0.49%)
(5.15%)
Total revenues ($millions)
22,786.6
23,522.4
22,744.7
% increase/(decrease) in total revenues compared to previous year
9.05%
3.23%
(3.31%)
Percentage of total revenues (%)
10.39%
10%
9.82%
Table 3.11: Selling, general & administrative expenses as a percentage of total revenues
for 2007-2009
Source: McDonald's Annual Report, (2009)
Selling, general and administrative expenses as a percentage of revenue continues to fall in each year as displayed in table 3.11 in line with decreasing in selling, general and administrative expenses from year 2007 to 2009. This suggests that McD has good control in controlling these expenses. Selling, general & administrative expenses were incurred to support Systemwide restaurants (Annual report, 2009).
Analysis of McDonald's learning and growth perspective
Learning and growth perspective addresses the question of how a company can continue to improve and create value. Learning and growth perspective provides the foundation needed to improve internal business operations, sustain customer satisfaction, and generate financial success (Braun et al., 2010). Employees are an important factor that helps to create value for most organisations and especially for McD.
McD believe that a team of well-trained individuals with diverse backgrounds and experiences drives high levels of commitment, which is essential to its continued success (McD CRR, 2009).
2007
2008
Percentage of crew members satisfied that they receive the training needed to do a good job
84%
85%(i)
Percentage of managers who feel the person they report to supports their professional development
83%(ii)
82%(i)
Note (i): Not including Canada
(ii): Not including Japan and Canada
Table 3.12: Employment experience for financial year 2007-2009
Source: McDonald's Corporate Responsibility Report, (2009)
Based on table 3.12, there is an increase in the employee satisfaction level, mainly on training, to 85% in 2008. However, in 2008 15% of employees are unsatisfied with the training plan that they had received. This could lead to poor performance from the unsatisfied employees which will inevitably affect services given to their consumers. There is a percentage decrease in the manager' satisfaction level in developing their professional career.*
However, the following recognition achieved by McD implied that it had provided a quality working environment (CRR, 2009):
Financial Times UK, Top 50 Companies Where Women Want to Work
Fortune Magazine, Top Places for Minorities to Work
Working Mother Magazine, Top 10 Diversity Champions
Hispanic Magazine, Top 50 Corporate Women in America
Black Enterprise Magazine, 40 Best Companies for Diversity
Another factor that could be measured is innovation. Innovation is needed to remain competitive in highly changing environment. Company needs to accommodate changes in customer tastes and preferences to remain relevant in the market.
McD are known for its innovative menus, for example; in 2009 Angus Third Pounders are introduced in U.S. and McCafe premium coffees (Annual report, 2009); in 2008, McDonald's introduced Southern Style Chicken products, Iced Coffee and Sweet Tea (Annual report, 2008), and in 2007 introduced the Lemmon Shrimp Burger in Germany and Southwest Salad in the U.S. (Annual report, 2007).
The success of McD innovation can be proven by its increasing revenue and the continued existence of their famous menu. Table 12 below provides a list of McD previous innovative menus that are still selling in the existing market.
Year Introduced
McDonald's menu
1965
Filet-O-Fish sandwich
1968
Big Mac
Hot Apple Pie
1973
The Quarter Pounder & Quarter Pounder with Cheese
1975
Egg McMuffin
1979
Happy Meals
1983
Chicken McNuggets
1987
Fresh toasted salads
1997
Chicken McGrill & Crispy Chicken sandwiches
Table 3.13: List of McDonald's menus with the year of its introduction
Source: (McDonald's, 2010)
Conclusions and recommendations
The occurrence of one-off Latam transaction in 2007 resulted in deterioration of McDonald's performance for year 2007. However, this deterioration does not mean poor performance as the substantial impairment charges incurred do not mirror the operating performance of a company.
McDonald's profitability performance over the three-year period is promising and improving each year. Net income increased by 90% throughout the three-year period although it's total revenue showed a slight fluctuating trend. McDonald's is efficient in controlling its costs despite of the economic uncertainty. This is shown by the high percentage of its revenue that had been converted into profits each year. Shareholders are satisfied and their investment had been compensated by a pleasing return.
In terms of liquidity, current ratio tends to fluctuates partly due to the fluctuation in current liabilities. Although current ratio achieved in 2007 is below 1, it is not a worrying matter. This is because a company that operates in cash businesses and which can dominate its suppliers are solid, even though it may seem to be illiquid. Subsequently, the current ratio had improved to above 1.
McD gearing level is satisfactory as it does not rely heavily on borrowings. The gearing level is lower than its competitor. McD are also able to generate income that is sufficient to cover the interest expenses. McD is perceived to be less risky by creditors and thus stays at ease in acquiring future financing.
Shareholders and investors of McDonald's ought to be pleased with the high returns made available to them in the form of earnings and dividend payment. The increase in earnings per share in each year signals the rate of growth on a per share basis. Earnings per share increased more than doubled throughout the three-year period. McDonald's was able to increase the dividend per share each year which reflects the company's confidence in the continuingly strengthening of its cash flow.
Looking at non-financial perspective, customers' satisfaction towards McDonald's is outstanding. With a growing number of customers served each year and in 2009 reached 60million customers served daily, McDonald's are capable of attracting new customer and retains its existing customer. McDonald's product development strategy proved to be successful when it was able to increase its global sales from introducing new menus.
However, as already mentioned, the growth rate in the number of customers it served is declining. McDonald's should investigate the causes of this decline. A possible way is by conducting customer surveys to all different target market it served. This way, McDonald's are able to recognise which target market is weakening and actions and promotions could be enhanced to attract that customer market.
An issue that had always haunted McD is the healthiness of its foods. McD products are widely known to cause obesity and other diseases including cancer. Although McD had justified itself by introducing healthier meals and being more transparent regarding its food nutrition, the increasing health awareness among the community might contribute to the declining growth rate.
In terms of McD internal business process, they have a sound cost control. An efficient cost controlling system translates to increased net income achieved throughout the three-year.
For McD learning and growth, employees' are basically satisfied with the training and professional development opportunities in McDonald's. However, McDonald's needs to further improve in this area in order to sustain and create value. McDonald's innovative process of introducing new attention-grabbing menus appeared to be McDonald's competitive advantage for it to grow, sustain and survive in the food service industry.
With regards to project objectives stated in Section 1.3, I achieved the first objective to analyse the financial performance of McDonald's on a 3 year period by applying financial ratios. The financial position of McDonald's is strong with profitability and liquidity, gearing and investor ratios seem balanced.
The 2nd objective to evaluate the business performance of McDonald's was partly achieved but I was not satisfied with the results achieved. This is due to the limiting and incomplete information encounter as mentioned in Section 2.3.4.
Lastly, I also achieved the 3rd objective to enhance my analytical and IT skills, and extend my overall communication and interpersonal skills for future professional development and employment role. This is because this RAP enables me to put these skills into practice. IT skills were improved from extensively using Microsoft office in preparing my RAP. Communication and interpersonal skills are enhanced during the meetings with mentor and the presentation which is being held in front of live audience.
