Competitive Intelligence/Business Analysis Report: David vs. McDonald s Compiled for [Client] December 2008 Please note: A "description of user and question" section was included in this sample to put the report in context, but that section is not included (or necessary) in final reports. Information provided in any report is considered current and thorough to the best of the researcher s knowledge. Reports should not be considered legal or business advice. Business analysis is provided solely to synthesize research findings. Ultimate business decisions are the sole responsibility of individual business owners.
2 Table of Contents Description of user and question 3 Executive Summary 4 Management Profile 5 Company Profile 6 Financial Analysis 7 Market Summary 7 Competitive Analysis 8 Resources 10
User and Question {This section is not included in a report, but is given in the sample to provide context} David Doe runs a small, local coffee shop and has already survived two years in a Starbucks market. He s done this by providing quality gourmet coffee at a significantly lower price point than Starbucks, and his shop features a drive-thru window as well as café seating. David also sells reasonably priced sandwiches and snacks made by a local catering company. David has heard that McDonald s is entering the gourmet coffee market, and he s concerned that McDonald s will present significant competition to his business. He would like to know more about McDonald s entry into the coffee market, whether this will have a negative impact on his sales, and what he can do to stay competitive. This report is assembled to give David an overview of his competitor -- McDonald's -- and to provide possible ways to gain a competitive edge over his competition (as evidenced in the research and supported by statistics). All the information in this report is based on research findings, and a Resources section is included for David to further examine the information provided. 3
4 Executive Summary: David vs. McDonald s With a $1.7 billion marketing budget, McDonald s has its eye on taking over some of the premium coffee market. They plan to do this by offering espresso-based coffee drinks at fast food prices and speed. Combine this with their new healthy menu focus, and small coffeehouses might start to get nervous. For several years, small coffeehouse owners have had to find ways to compete with the premium coffee giant: Starbucks. Many owners have competed by offering healthy lunch options, lower prices, and even drive-thru service. But is there a new threat coming? Will McDonald s follow through and enter the market? In a word, yes. McDonald s has seen a 40% increase in coffee sales since introducing their premium roast blend in 2006. They re expanding their breakfast menu to get more early-morning customers (and coffee drinkers) into their restaurants. It s probably safe to say they re in it to win it with their Plan to Win business strategy. This doesn t leave small chain and independent coffee shop owners out in the cold, though. There are three ways small business can still compete with the big guys: Create a distinctive atmosphere. Give your customers a reason to choose your restaurant over someone else s. Go multiconcept. Offer a lunch and dinner menu, or a desert menu, or a smoothie menu the point is, offer a menu. Diversify and attract customers to the afternoon and evening dayparts. Implement the dual-drive-thru model. Have two sets of equipment (that s right, two). One for drive-thru use, and one for in-house use. This will speed up your delivery time, and might even make you faster than the big guys who typically only use one machine at a time. Unfortunately for small businesses, large corporations are only just beginning to see the potential in the $12 billion specialty coffee market. This means more competition for the little coffee guy. But small businesses have an advantage in that they can more quickly adapt to changing consumer tastes. With the right atmosphere and concept, there s no reason to think McDonald s will be taking over the coffee market any time soon. (Even if they ll probably take a pretty big chunk.) Management Profile: Jim Skinner, McDonald s Vice chairman and CEO Jim Skinner was elected as Vice chairman and CEO of McDonald s in 2004. He had previously served as President of McDonald s Europe and served for several years as Executive Vice President and international relations partner for Europe, the Middle East, Africa, and India. According to his profile at the McDonald s corporate website, Skinner began his career with the company as a restaurant management trainee in 1971. Skinner s rise within the company is often used as evidence that promotional possibilities are possible, and in fact encouraged, within McDonald s corporate culture. According to some accounts of Skinner s history with McDonald s, he actually began working for the company as a crewmember in 1966. From there he went on to
5 management training and rose through the district management ranks. Skinner took ten years off from McDonald s to serve in the U.S. Navy, during which time he worked in electronics. After returning to McDonald s, he joined their international management team in 1992. In 2004, Skinner became the third person to serve as CEO in seven months. The previous two CEOs were forced to resign due to health problems. It was an unexpected promotion for Skinner, who said in an interview on the subject, "Did I think I was going to be CEO of the company? Probably not... But was I ready? Yes." From the beginning of his tenure, Skinner has focused on improving sales through increased quality at existing restaurants rather than through location expansion. One of the improvements implemented under Skinner was adding health-conscious items to the menu. Hoover s business profile of McDonalds points out that films such as Super Size Me and Fast Food Nation, both of which criticized fast food, may have played a part in Skinner s decision to improve the nutritional value of foods served within the chain. Hoover s has described Skinner s growth strategy as being better rather than bigger. In a profile of Skinner for Financial Times London, author Jen Wiggins takes note of Skinner s enthusiasm for productivity and growth at McDonald s. She quotes him as saying I don't want to be hanging around anybody that doesn't get up today wanting to do it better than yesterday." Skinner s confidence in the new direction McDonald s is taking is also evidenced in the following quote he gave regarding the company s move into the gourmet coffee segment: "When you can (sell coffee) at the speed of McDonald's and the price of McDonald's, who can challenge us really?" It is apparent from quotes such as these that Jim Skinner is driven to ensure McDonald s continues to grow in the quick to order restaurant segment, and that includes the gourmet coffee market. Company Profile: McDonald s McDonald s is the top performing fast food company in the world. Founded in 1948, it now boasts 31,000 flagship restaurants in 120 countries. McDonald s corporation also owns stakes in several alternative chains and foreign chains such as UK s Pret a Manger. In 2003 McDonald s corporation implemented a new business strategy known as Plan to Win. Part of the new strategy was the I m Lovin It! ad campaign and a shift toward healthier menu items. Plan to Win was developed under the leadership of then- CEO Jim Cantalupo and later CEO Charlie Bell. Cantalupo and Bell each suffered serious health problems in 2003-2004 and first Cantaloupo then Bell were both forced to resign due to their respective illnesses. With Jim Skinner s election to CEO in 2004, he pledged to continue the Plan to Win strategy to further McDonald s growth. According to a Barron s report, since implementing the Plan to Win strategy McDonald s same-store sales increased from minus 2.1% in 2002 to plus 6.8% in 2007. The Plan to Win strategy is two-fold: First, McDonald s has refurbished approximately 8,000 of its 31,000 U.S. restaurants, with more improvements to be made. Second, the menu has been revamped as previously mentioned with more health-
6 conscious selections, increased breakfast menu options to compete with other chains brisk breakfast sales, and the introduction of premium coffee to gain a foothold in the premium coffee market. Expansion has been de-emphasized in favor of increased quality at existing stores. With regard to coffee sales, McDonald s debuted its premium roast coffee line in 2006 and saw a 40% increase in coffee sales by the end of 2007. The success of the new premium roast coffee blend and popularity of upscale coffee merchandising has lead McDonald s to devote a $1.7 billion marketing budget to launching a new combined beverage business known as the McCafe. McCafe restaurants will feature a coffeehouse-like environment with comfortable chairs, plasma screen televisions, free WiFi access, and premium espresso drinks all with an existing McDonald s restaurant. As of March, 2007 there are 30 McCafe restaurants operating in the United States, and another 800 McDonald s are currently offering McCafe drinks without the separate coffeehouse environment. The McCafe environment has been in use in Australia since the 1990s and the concept has proven successful in that country. McCafes offer traditional coffeehouse fare such as pastries and smoothies, and they are generally upscale standalone restaurants comparable to Starbucks in the U.S. McDonald s plans to offer McCafe premium drinks in all 14,000 of its U.S. restaurants by 2009. This is expected to increase McDonald s bottom line by $1 billion. There is some skepticism that McDonald s will be able to logistically pull off a premium coffee service within a fast food restaurant, especially considering the upscale environment that many people come to expect when buying premium coffee drinks. However, others point to the convenience of drive thru service and the fact that many people who stop for breakfast at McDonald s will likely buy their premium coffee there as well rather than make a second trip to Starbucks or another premium coffee provider. Financial Analysis Since the Plan to Win strategy was implemented in 2003, stock prices for McDonald s have steadily increased, causing McDonald s to be one of the few companies to have a consistently rising stock price over the last five years. In fact, stock prices went from a low of about 12 in 2003 to a current price around 54. According to Barron s, McDonald s saw a 266% stock price increase for the five years leading to 2007. With the combined efforts of healthier menu options, an increased breakfast line, and the entry into the premium coffee market, McDonald s is primed to continue growing. Especially if they are able to pull off the logistics of providing premium coffee drinks in a quick to order environment. McDonald s sales have steadily increased globally as well as domestically. Even if there is a downturn in the U.S. market, McDonald s is aggressively looking to expand in emerging markets such as China where the next Olympics will be held. McDonald s had revenues of approximately $21.5 billion dollars in 2006, and the company has seen steady increases in revenue since 2003. According to the most recently available financial information at Hoover s Company Records, McDonald s had a oneyear sales growth of 5.5% and a one-year income growth of 36.2%. As of 2006 they also had a 54.4% Debt Ratio and a 22.9% Return on Equity. As one of the largest companies in the world, and with a marketing budget of $1.7
7 billion, McDonald s has the resources available to follow through on their ambitious and aggressive Plan to Win strategy. Market Summary To return specifically to their premium coffee line, the specialty coffee market is currently a $12 billion industry. McDonald s $1 billion projected stake in the market would hardly be considered a monopoly. In fact, McDonald s director of menu development, Lisa Frick, has said in interviews that the company s modest $1.99 to $3.99 prices for specialty drinks aren t meant to compete with Starbuck s strong claim on the upscale coffee market segment. Some in the industry have pointed out that McDonald s is not likely to convert loyal Starbucks consumers. McDonald s strength lies in convenience and pairing with an extensive fast food breakfast menu. As McDonald s shifts its corporate image and branding to stress health-conscious convenience, more customers are likely to become McDonald s consumers. It s likely this shift is already reaping benefits for McDonald s. A 2007 Brand Keys Customer Loyalty Engagement Index study ranked McDonald s number one in the fast food category for meeting or exceeding brand user s expectations. This comes after eleven years of consistently ranking at the bottom of the list. There was more good news for McDonald s in the Brand Keys index. In the coffee category, McDonalds came in second just behind Dunkin Donuts. Both chains were ranked above Starbucks. This study also points to a fact many in the industry are already aware of: McDonald s and Dunkin Donuts have not previously been seen as being in the same league as Starbucks. Certainly they cannot compete with the Starbucks environment, but they are beginning to compete on a taste, value, and convenience level. As consumers become more coffee savvy, more fast food restaurants are offering premium coffee selections, and the consumer will have a choice between convenience and environment with coffee flavor being nearly (if not completely) equal. This is perhaps one reason why McDonald s is not just adding espresso drinks to existing restaurants, but also attempting to create a McCafe environment. Competitive Analysis The environmental factor may very well decide who succeeds in the premium coffee market. With McDonald s preparing to offer espresso drinks at reasonable prices, this could potentially cut into the non-starbucks coffeehouse business people who may have survived in a Starbucks world by offering comparable drinks at a lower price. One of the reasons Starbucks gained popularity was because they offered an environment where customers could purchase high quality coffee drinks and a place to relax in a comfortable environment. They essentially created a chain out of the local neighborhood coffeehouse. Local businesses, which also provide a comfortable environment, were then left to compete on price or services. Where does this leave David s local neighborhood coffeehouse? Smaller coffee chains and shops have been competing for years by offering smoothies, sandwiches, and fresh baked goods to entice customers away from Starbucks. A recent article in Nation s Restaurant News, a trade journal for the restaurant industry, interviewed owners of several small drive-thru coffee chains and discovered that success
as a small business depends on two things: speed in delivery and a high-traffic site. They also noted that diversity in food items helps bring customers in during the afternoon and evening dayparts. With McDonald s entering the fray, the consensus among the business owners interviewed seemed to be that multiconcept coffeehouses might be the only ones that survive. Some of the multiconcept restaurants featured full menus at lunch and dinner. Others featured desert items, smoothies, and Italian ice. The other absolute necessity listed was the use of the dual-drive-thru model. With this model, there is separate equipment for drive-thru orders and in-house orders. This allows drive-thru orders to be processed very quickly, ideally in under a minute, so a customer never has to sit at the window while in-house coffee is being made. The combination of two sets of equipment and a limited menu selection means small drivethru restaurants are able to provide service as efficiently, or more so, than even McDonald s. By utilizing the multiconcept restaurant and the dual-drive-thru models, a small coffeehouse or restaurant should be able to maintain a competitive edge in the premium coffee market. Particularly if attention is paid to in-house environment and service as well. 8
9 Resources The Associated Press. McDonald's february sales rose 11.7%. (2008, March 11). New York Times, p. C.8. Bryson York, E. McD s grande plan: become a java giant. (2008, January 14). Advertising Age, v. 79, p. 3. Cebrzynski, G. Starbucks-dominated category wakes up and smells mcd s espresso rollout. (2008, January 21). Nation s Restaurant News, v. 42 p. 1-2. Hein, K. McD s, sam adams in line with shifting loyalty drivers. (2008, February 18). Brandweek, v. 49 p. 7. Hoover s (2008). McDonald's Corporation. From Hoover's Company Records In-depth Reports. McDonald s (2008). Jim skinner. Retrieved March 15, 2008, from McDonald's Corporation Web site: http://mcdonalds.com/corp/about/bios/jim_skinner0.html Racanelli, V. Ready for the back burner. (2008, March 17). Barron s, p. 47. Reuters Investor. (2008). Dow Jones Weekly prices 16-Sep-2007 to 16-Mar-2008. Retrieved March 16, 2008 from Factiva database. Stansbury, R. Burgers & lattes. (2008, March 9). McClatchy - Tribune Business News, wire feed. Retrieved March 12, 2008 from ABI/INFORM Dateline database. (Document ID: 1442573151). Walkup, C. Drive-thru-coffee players brew up new tactics as McD s espresso rollout looms. (2008, February 18). Nation s Restaurant News, v. 42 p. 7. Wiggins, J. Unlikely spinner of mcdonald's plate. (2007, August 27). Financial Times, p. 8.