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PESTEL analysis of McDonalds and the food industry

Introduction

McDonald’s is the largest fast food chain in the world. There are approximately 35,000 McDonald’s stores across 119 countries, and they jointly serve around 68 million customers a year (McDonald’s, 2014). Each McDonald’s is either run as a franchise, or by the McDonald’s Corporation itself - in the UK, approximately 65% of McDonald’s restaurants are run as a franchise, and the remaining 35% are run by McDonald’s themselves. There is a relatively stringent application process involved in becoming a McDonald’s franchisee – McDonald’s themselves lists some of the requirements, including:a high level of integrity, business experience, experience within the food industry, the time and ability to complete a minimum of nine months franchisee training, a full time commitment to the opportunity, and a high level of investor capital (McDonald’s, 2014b). Such commitment to ensuring the strength and commitment of their franchisees has perhaps contributed to the strength of the McDonald’s brand, which is among the world’s best-recognised and well-regarded, particularly in the fast food market (Moskowitz, 2014)

This essay will examine the current business environment McDonald’s operates in through a PESTEL analysis, to examine the general external business environment and the specific industry factors that may affect the business. The results of this essay can then be used as the background for a SWOT analysis to highlight the specific strengths and weaknesses of the McDonald’s business model and its potential future opportunities and threat, which should help to determine the best strategic direction for McDonald’s to take in the coming years.

PESTEL Analysis

A PESTEL analysis examines the external business environment facing a firm in 6 main areas; Political factor, Economic factors, Sociological factors, Technological factors, Environmental factors and Legal factors. Though a single organisation is normally unable to directly affect the external factors facing it, a conglomeration of companies can exert some pressure on these factors, particularly any political factors through the intelligent use of political lobbying. Proper understanding of these factors allows the organisation to highlight areas of business opportunity when combined with proper understanding of the business’ strengths, and also potential threats to the business when combined with a proper understanding of the firm’s weaknesses (Baines et al, 2011). Thus, for effective strategic planning, analysis of the external factors is the most important step before performing an analysis of the business’ intrinsic strengths and weaknesses through a SWOT analysis.

Political

The fast food industry is often a target for government initiatives aimed at improving health and reducing obesity, particularly in European countries. In 2003, after the publication of a report by the Scientific Advisory Committee on Nutrition (SACN) on the link between general levels of salt intake among the UK population and heart disease, the UK government introduced initiatives to reduce the amount of salt in many foodstuffs, including many products within the fast food industry in general, and McDonald’s in particular. In response, McDonald’s reduced the overall salt content of its UK menu by around 14% (Food Standards Agency, 2005).

In Germany, a recent food labelling initiative required all fast food restaurants to provide clear indications of a number of nutritional factors for each of their meals, including salt and sugar levels, calorie content, saturated and unsaturated fat levels, and a traffic-light label indicating the overall level of healthiness, with green indicating both low calorie and low fat options, and red indicating high calorie, high fat options (Hurt et al, 2010). Similar initiatives have been implemented in the UK, France and the Netherlands, though reports indicate that the introduced food labelling has little impact on overall demand within the fast food industry (Grunert and Wills, 2007).

In Denmark, a government initiative in 2003 placed restrictions on the amount of artificially created unsaturated fats, known as Trans Fat, or TFA, which have been shown to be heavily involved in increasing cholesterol and thereby heart disease risk., TFAs are present in many food industries that rely on deep fat frying, as they can be used for far longer than more conventional oils while still staying relatively fresh (Choe and Min, 2007). Prior to the imposed restrictions, a meal of Chicken McNuggets and Medium French Fries at a typical Denmark McDonald’s had, on average, 30g of Trans Fat. After the restrictions, the same meal had on average less than 1g of Trans Fat (Hurt et al, 2010).

In the US, by comparison, the fast food industry is far more self-regulating, with little to no government intervention at all, despite many published reports on the link between fast food industry advertising and childhood obesity (Wilson and Roberts, 2012). This is due to two main factors: firstly the US political system as a whole tends to be far more committed to laissez-faire economics than even its most right-wing European counterparts – in general, there is far more political inertia to overcome (Skousen, 2009). Secondly, the fast food industry has an aggressive and concentrated lobbying presence in the capital (of which McDonald plays a significant role), and is politically savvy enough to avoid or negate any proposed regulation that makes it through (Wilson and Roberts, 2012). The fast food lobby has thus far defeated proposed restrictions on Trans Fat content similar to those enacted in Denmark, a proposed ‘soda tax’ on sugary drinks, and policies aimed at controlling the amount of sugar, salt and fat in children’s meals (Wilson and Roberts, 2012). This helps to keep McDonald’s US profit margins higher than those countries where such restrictions have been imposed (Schlosser, 2012).

Economical

The recent economic recession was incredibly disruptive for firms in many industries, reducing revenues and profits across the board, and decreasing consumer demand for many goods and services (Kliman, 2012). However not all firms and industries were adversely affected – some actually saw revenue and profit opportunities increase during the economic downturn due to higher demand - these tend to be firms and industries that are seen to provide ‘value for money’, of which the fast food industry is one (Bems et al, 2010). Fast food restaurants can be seen as imperfect substitutes for more traditional restaurants; many consumers prefer to eat out at a fast food restaurant as a cheaper alternative to a more expensive traditional restaurant. In 2008, near the height of the crisis, the fast food industry in the UK actually saw increased growth in terms of revenue of 4.5%, with an overall increase in demand for McDonald’s products of around 4% (Key Note, 2009). Other countries that saw similar increases in demand in the fast food industry in general and McDonald’s in particular include Japan, France and Belgium (Economist, 2010).

By comparison, in the US the demand for McDonald’s products over the recession did not increase as in Japan, the UK and France, but more importantly it did not decrease either – this during a time where demand in the overall US restaurant industry fell by around 6% (Economist, 2010). These figures paint a picture of the fast food industry being relatively recession proof; however, as a Moody’s report (2009) cautions, this may not always be the case. Consumers may choose to eat at home rather than going out in particularly severe recessions, substituting home-cooked meals for restaurant ones, value-for-money or otherwise. They may also focus their demand on low-cost, ‘budget’ menu items with particularly low profit margins. Indeed, during the recession Burger King saw its US profits fall by around 6% as customers increasingly turned to its dollar menu options which it had chosen to focus on as a marketing strategy during the recession, with demand for those items increasing by as much as 20%. A number of Burger King franchises actually sued the corporation after requiring them to promote and sell double-cheeseburgers at $1, when they cost $1.10 to make (Economist, 2010). Such poor marketing strategies undoubtedly led to Burger King’s fall in profits during the recession – in contrast, McDonald’s continued to focus on its more expensive standard menu options, and actually increased marketing spend by 7%, as many companies cut back (Ritchie, 2010).

Sociological

While McDonald’s and the fast food industry in the US has manage to dodge most proposed regulation aimed at reducing the unhealthiness of many of their products, they have been perhaps less successful in dodging the negative public opinion over the same issue. Fast food in general has seen its public image decline as society in general becomes more health conscious –the preceding decades have seen a rise in many societal health-based food initiatives, such as increased demand for unprocessed and organic foods, and a growing public awareness of obesity and heart disease and its links to high-fat foods. In 2004 Morgan Spurlock, an American social-commentary filmmaker in the same vein as Michael Moore, created the documentary Super-Size Me (2004), where he ate only McDonald’s for 30 days, for 3 meals a day (breakfast, lunch and dinner). He did not allow himself to have any other food during that time, and had to upgrade to a super-size meal whenever asked, which had double the amount of fries of a medium sized meal, and also came with a 42 ounce coke. After the 30 day period, he had gained 1 stone and 10.5 pounds of extra weight which represented a 13% body mass increase, had a cholesterol level of 230 (where levels below 200 are considered healthy) and had developed cirrhosis of the liver (Spurlock, 2004). There have also been many damaging reports made about the fast food industry in general and McDonald in particular, including a number of studies that have suggested fast food addiction shares many of the same characteristics as drug addiction (Garber and Lustig, 2011; Volkow and Wise, 2005). A paper by Johnson and Kenny (2010) found that high-fat food triggered many of the same dopamine receptors in rats as those triggered by cocaine or heroin, and can override standard eating responses and lead to bout of compulsive, addictive-like eating.

In response to this, McDonald’s has phased out the super-size option for all of its US meals (the UK supersize meal option had been phased out in 2001 due to very low demand, and had not been introduced in any other countries) and began offering more healthy menu options, including fruit smoothies, salads, milk, water and fruit (Pompper and Higgins, 2007). They have also launched a number of innovative marketing campaigns aimed at highlighting the new range of healthy alternatives, a policy that is estimated to cost an additional $35million in marketing costs (Vizard, 2013). Such an approach appears to have been effective, with no sales decline reported in any month over the last 10 years (Vizard, 2013).

Technological

The advent of the internet has opened up many opportunities for low-cost, high-impact marketing across a range of firms and industries. Increasingly, firms are being judged more and more strongly on their online presence and perceived technological savvy – it can seriously harm a business’ image if they are seen as out-of-touch with the modern technological world (Chaffey, 2009). Marketing opportunities using the internet are many and varied and can range from intricate, involved, multi-layered viral campaigns, through website design and functionality to a simple social media presence. While the fast food industry was slow to catch on to the benefits of internet marketing in the beginning, most firms have now embraced its potential, and McDonald’s is at the forefront.

As well as taking the (now somewhat standard) step of establishing a strong social media presence, with the creation of both a Facebook page and twitter account in 2009, McDonald have also run a number of successful online marketing campaigns, including an ‘Ask McDonald’s Youtube campaign in 2012, where over 20,000 questions from the public were answered, with most being based around the quality and supply chain of McDonald’s food and burgers. Many of the questions were answered through short Youtube videos, some of which have gathered over 10 million views, and most of which were received very positively (Macmillan, 2012).

However, as with most other firms, the internet has proved to be a double-edged sword in terms of marketing success for McDonald’s. There have also been a number of negative articles posted on Facebook and Twitter about the company and its products, including an obvious hoax post that claimed a batch of McDonald’s hamburgers in Oklahoma had been found to have been contaminated with ‘human meat’ (Hooton, 2014, p1). Despite the obvious falseness of the claims (the posts were taken from a joke news site, satirising the Tesco horse meat scandal of 2013) many people online believed the stories, claiming to be sickened by them, and declaring they would boycott McDonald products from now on (Hooton, 2014). Such false information is easily spread online with little to no information regulation; firms can be at the mercy of false accusations and internet pranks. Also, in direct contrast to the successful Youtube campaign was a perhaps less successful Twitter campaign, where McDonald’s promoted the #Mcdstories hashtag for twitter users to post their stories and positive experiences with the firm. However, as there was no ability to either control or properly interact with the responses as with the Youtube campaign, the campaign collapsed almost immediately with a glut of negative anti-McDonald’s tweets, outweighing the positive responses by around 10 to 1 (Kolowich, 2014). Careful monitoring of the company’s online presence and quick response to such incidents will go some way to mitigating the potential damage.

Environmental

In recent years, environmental issues have come to the forefront of public consciousness with the rise of many green initiatives and movements. In response, many businesses now include some form of environmental damage mitigation to counteract the negative environmental aspects of their typical business production methods; typical methods include the replanting of trees to offset carbon emissions caused by the transportation of goods, a reduction in the amount of paper used in the administrative side of the business, energy-saving initiatives such as the turning off of lights, electrical appliances and computers when facilities are not in use, and a reduction in the amount of packaging used in the production process (Satya, 2002).

Environmental concerns about a business’ operations are particularly pronounced in the food industry, as food production techniques are often associated with poor environmental controls, particularly in emerging third world economy producers, and budget meat suppliers (Foster et al, 2007). Indeed, a number of protests have been levelled at many fast food firms in general, and McDonald’s in particular – on 19th July 1985, Greenpeace in the UK declared an “anti-McD Day of Action” (Veggis, 2014, p1) which involved demonstrations, protest marches and pickets of many McDonald’s stores across the UK. The ‘Day of Action’ has been repeated every year on the same date, and protests against “the promotion of junk food, the unethical targeting of children, exploitation of workers, animal cruelty, damage to the environment and the global domination of corporations over our lives” (Veggis, 2014, p3). In 1997, two of the protestors were sued by McDonald’s for libel, after repeating some of these claims in many McDonald’s restaurant. The judge found in favour of McDonald’s for some of the allegations of libel, but found others had some truth to them and could not be considered libellous, including claims that they “falsely advertise their food as nutritious, risk the health of their long-term regular customers” and “are culpably responsible for cruelty to animals reared for their products” (Justice Bell, 1997, p13).

In response to this, McDonald’s have initiated a number of Corporate Social Responsibility (CSR) policies centred on reducing the environmental impact of the business; they currently participate in ‘Earth Hour,’ an initiative that encourages many businesses to turn off their lights and unused equipment on a specific hour each year, to reduce their carbon footprint. They have also sought to reduce the environmental impact of their packaging, seeking out more biodegradable packaging in many markets; they have initiated paper-reduction policies in many of their administration centres, and they have also instigated investigations into the care and management of the animals reared for their product supply, with a view to ensuring no unnecessary cruelty or inhumane treatment is taking place (McDonald’s, 2014c)

Legal

The specific legal environment in which McDonald’s operates is highly dependent on the specific country and market in question; however, most of the markets that McDonald’s operates in have some form of a Health and Safety legal framework, particularly with regard to food preparation. Many, if not all of the countries McDonald’s operates in has some form of public health inspection system with regard to food producers - in the UK, it is the Food Standards Agency, while in the US, it is the Food and Drug Administration (Campbell et al, 2008). In both markets, any employees with food-handling capabilities must take part in food-hygiene training at the company’s expense. McDonald’s has implemented a system that adds additional controls to those required by either health agency, and as their customer-facing website states, “there are at least 70 safety checks on beef and chicken every day. In fact, McDonald’s rigorous standards have been used by government agencies as models for their own regulations” (McDonald’s, 2014d, p1). In this way, their dedication to food safety over and above that required by law can be used as a marketing tool, to emphasise their commitment to quality (Campbell et al, 2008).

There are also a number of employment laws to consider in each market, including those regulating the maximum length of an employee’s daily and weekly working hours, the requirements for employee breaks and facilities, tax and payroll requirements, business registration and accountancy standards for reporting profit and loss (Jones, 2013). McDonald’s tends to adhere to the same legal standards across markets for each of these areas, even in markets with less stringent regulations or legal requirements than those of the UK or US markets (McDonald’s, 2014a).

Conclusion

In conclusion, McDonald’s faces a number of challenges from its external environment, including the threat of further government health regulation in the US, social concerns about the unhealthiness of their products, adverse publicity from hoaxes or failed marketing campaigns on the internet, and additional protests regarding the environmental impact of the business.

Through understanding these challenges, McDonald’s marketing and strategy managers can use the business’ strengths, such as its commitment to food quality and safety, its successful marketing campaigns, and the overall strengths of its brand, to turn these challenges into potential business opportunities. In order to do so, they can use the information provided by this PESTEL analysis as the groundwork for a comprehensive SWOT analysis, to enable the intelligent setting of future strategy for McDonalds. In this way, they can help to ensure McDonald’s remains a market leader in the fast food industry.

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