Performance comparison of two fast food businesses

The purpose of this article is to measure the performance of two companies in the same area of business, which is fast food industry. This study benchmarks two established global fast food sellers who have expanded operations further afield over their illustrious histories, displaying innovation, vision and success in the operation.

The companies will be assessed using a range of financial methods such as horizontal, trend, vertical and ratio analyses. This will be done based on the company’s financial statements for the last three years. Non-financial performance measures, which are based on evidence of business performance, will also be used. A SWOT analysis will then be done for each company in order to give the reader a concise picture about where both companies are now, and what they can do to improve their position in the market. Each company will then be assessed to see how attractive it is to both investors and employees.

The companies chosen for this report are McDonald’s and Burger King. They are two of the biggest fast food sellers that dominate the not only the UK but also the world fast food sector. When deciding how to position a product, marketing managers need to understand how product differentiation affects competition. Thus, this paper examines the relationship between product differentiation and prices and profits in the fast food industry. These companies were chosen as they are of interest to the author. The two fast food sellers are similar in nature as although they both have a substantial share of the UK market, either they are all famous the world. Therefore their financial data is relatively comparable.

Historical BackgroundNames, addresses and logos of companies:

Address

McDonald’s Plaza

Oak Brook IL 60523

USA

Address

5505 Blue Lagoon Drive

Miami

Florida 33126

USA

Company History

McDonald’s Corporation

McDonald’s Corporation is the world’s largest hamburger fast food restaurants, serving more than 58 million customers every day. McDonald’s concentrate on sells hamburgers, chicken products, French fries, breakfast, soft drinks, shakes and deserts. It represents the trends of Western nations. While at the same time, it faces the criticism over the healthiness of its products. McDonald’s has modified its menu to include alternatives considered healthier such as salads, wraps and fruit. The business began in 1940, with a restaurant opened by brothers Richard and Maurice McDonald in San Bernardino, California. The site of the McDonald brothers’ original restaurant is now a museum. With the expansion of McDonald’s into many international markets, the company has become a symbol of globalization and the spread of the American way of life.

The company operates through five subsidiaries (structured on a geographic basis): McDonald’s USA, McDonald’s Europe, McDonald’s AMEA (Asia, Middle East and Africa), McDonald’s Latin America and McDonald’s International. An additional subsidiary was created in McDonald’s Ventures, which consists of the company’s non-McDonald’s brand.

Burger King Corporation

Burger King often abbreviated as BK, is a global chain of hamburger fast food restaurants like McDonald’s headquartered in unincorporated Miami-Dade County, Florida, United States. Burger King Corporation banner operates the international business. The company began as a Jacksonville, Florida-based restaurant chain in 1953. “After the company ran into financial difficulties in 1955, its two Miami-based franchisees, David Edgerton and James McLamore, purchased the company and rechristened it Burger King. Over the next half century the company would trade hands four times, with its third set of owners, a partnership of TPG Capital, Bain Capital, and Goldman Sachs Capital Partners, taking the company public in 2002.” The current ownership group, 3G Capital of Brazil, acquired a majority stake in the company in a deal valued at $3.26 billion in late 2010.

The company’s business is divided into three geographic segments; the US and Canada; Europe, the Middle East, Africa and Asia Pacific (EMEA/APAC); and Latin America. About 7,512 Burger King Stores are located in the US and Canada. Over 2,379 of the company’s restaurants are located in Europe, Middle East and Africa (EMEA), 672 restaurants in Asia Pacific (APAC) and 1,002 restaurants in Latin America.

Business activities and Product treeMcDonald’s Corporation

McDonald’s operates, franchises, and services a worldwide chain of about 31,000 fast food restaurants in the world. Franchisee, Affiliate and Corporation are three ways, which McDonald’s operate the worldwide stores. About 25% of the company’s revenues come from franchisee outlets. The company and its franchisees use special method to guarantee uniformity in both services and standards. McDonald’s restaurants offer a substantially uniform menu. It also tests a range of new products on an ongoing basis and sells a variety of other products during limited-time promotions.

Source: McDonald’s website

Burger King Corporation

Burger King (BKC) is the world’s second largest chain of fast food hamburger restaurants. Burger King operates more than 11,565 restaurants in 71 countries and the US territories, of which 1,360 restaurants are company restaurants and 10,205 are owned by independent franchisees. Among of these, 7,207 restaurants are located in the US and 4,358 are located in international markets.

Burger King offers a range of reasonably priced food items, which content burgers, sandwiches, salads and breakfast items. The Whopper sandwich is its largest-selling product. Burger King was the first fast-food chain to introduce drive-through service, which now accounts for a majority of the company’s business. But the development of drive-through stores is less than McDonald’s. The company generates revenues from three sources: “sales at company restaurants, royalties and franchise fees and property income from certain franchise restaurants that lease or sub lease property from the company.”

Source: Burger King Website

Financial AnalysisThe following financial analysis of both companies uses the data provided in the Annual reports of each company from Fame or official website. Horizontal, trend, vertical and ratio analyses will be used as rationale to benchmark performance between the firms.

Horizontal Analysis

Conducting a horizontal analysis allows us to compare different items in each company’s financial statements. This can be done over a period of time so that any changes that have taken place can be noted. Therefore it is a useful tool for comparing the performance of two companies. The data below shows the consolidated income statement of both firms between the years of 2007-2009. However, McDonald’s financial report is calculated about in Europe, while Burger King is calculated in UK. Each company’s performance will be analyzed and compared and any notable differences will be discussed below.

McDonald’s: there was an increase from 2008 to 2009 (3.2%) due to the world financial crisis. But there was also a significant decline from 2009 to 2010(11.9%), one reason is that the company is too large to operate.

Burger King: with 6.0% growth from 2008 to 2009, Burger King’s performance is better than its competitors. Following with financial crisis end, there was 8.4% growth between 2009 and 2010.

Gross Profits: This is worked out by taking the cost of sales figure away from turnover.

Both companies even with high increases in operating cost for 2008, they ended up with a small increase in net income. This can be contributed to the exceptional gross profit earnings for the year. McDonald’s gross profit for 2008 increased 3.2%, while Burger King only increased 1.3%. This can be attributed to the McDonald’s grabbed the opportunity of financial crisis. However, McDonald’s and Burger King also suffered a decline in 2009. The main reason is that companies with global operations translate sales and franchise revenue from foreign currencies into dollars. That can boost revenue and profit when the dollar is weaker but hurt results when the U.S. currency is stronger because foreign sales then translate into fewer dollars.

Operating income

The pattern visible for the operating income over the three-year period is different to the other indicators and causal factors are difficult to establish.

It shows a huge increase in 2008, this could be attributed to the considerable increase in gross profit compounded by the operating expenses being trimmed providing a much-improved operating income for the year. In 2008 however, operating income falls, likely due to a combination of a gross profit decrease and an operating expense increase.

Net Profit: this is the actual earnings of the company after all expenses and taxes have been paid and are usually referred to as the “bottom line”.

Both companies are experiencing a small rate of organic growth in the year of 2008. This is despite the economies financial difficulty during 2008; people prefer to choose fast food as their daily food. It is likely that during 2008-09, the rise in turnover is partly down to the high price of fuel, caused by high oil. In Europe, two companies performance reflected Europe’s strategic priorities to upgrade the customer and employee experience, enhance local relevance, and build brand transparency. In addition, McDonald’s enhanced customer trust in our brand through communications that emphasized the quality and origin of McDonald’s food and our sustainable business practices, while Burger King did much better.

Trend Analysis

By conducting a trend analysis we can see the ways in which the companies have changed over the last three years. The year 2007 is taken as the base year and set at 100%. Each following year is then expressed as a percentage of the base year using this equation:

Gross Profits: Whilst both companies experience similar growth in their turnover, McDonald’s experience a decrease in gross profits in 2009-10. Burger King does not have this problem and so they experience almost same level in gross profits over the three-year period.

Percentage Change in Gross Profit

Operating Profit: Both companies experienced increases in their operating profit. This McDonald’s plan is leading to the company becoming more efficient, which is reflected by this increase. Through this, the company has significantly reduced its administration expenses over the three-year period. They have also experienced a rise in ‘other operating income pre operating profit, which has led to the rise in operating profit, despite the fall in gross profit.

Percentage Change in Operating Profit

Net Profit: Burger King net profit remains consistent for the first two years and then drops during the year 2009-10. This pattern is to be expected due to companies with global operations translate sales and franchise revenue from foreign currencies into dollars, which led to people trying to spend less money. McDonald’s Net Profit rocketed in 2008-09, due to the fact that people would like to choose fast food during financial crisis.

Percentage Change in Net Profit

Vertical Analysis

A vertical analysis shows us the relationship between each income statement item to the turnover. In other words, it shows all other figures as a percentage of the turnover or net sales, which is set at 100%. The following equation can be used in order to work this out:

Balance Sheet

A vertical analysis can also be conducted on the company’s balance sheet, representing all items as a percentage of the total assets. In simple terms, this allows us to see where a business spend and receives its money.

“Fixed Assets: Fixed assets are those with a remaining useful life of over one year.” Tangible fixed assets refer to physical assets such as buildings; land etc. and intangible assets refer to items such as goodwill and trademarks. McDonald’s is much bigger than Burger King, which means it has more stores in Europe and UK.

“Current Assets: Current assets are those that are held for less than a year and can be realized quickly. They act as a source of funds for day-to-day activities (Investor Words, 2009).” During the world financial crisis, two companies were under its influence in 2008. While in 2009, two companies had made a quick change. So their current assets suffer from a huge increasing.

“Total Liabilities: This figure is made up of both current liabilities and long-term liabilities. Current liabilities are the debts to creditors and suppliers, which the companies are expected to pay within a year, often in cash.” Long-term liabilities are debts that do not need to be repaid within a year. Burger King has a lower share of long-term liabilities than McDonald’s does. This suggests that Burger King is in a better financial position when it comes to repaying debt, as the majority of their capital comes from Shareholders funds instead of loans.

Ratio Analysis

Conducting a ratio analysis allows us to compare the specific items in each company’s financial statements over the three years period. There are four classifications of ratio analysis: Profitability, Liquidity, Efficiency and Investment. Conducting a ratio analysis from each of the four classifications should give a good overall picture of each company’s performance.

Profitability: Gross Profit Margin

Gross Profit Margin = Gross Profit x 100

Turnover

Gross profit margin allows us to see the proportion of sales that is left over once the costs of sales have been accounted for. This gives us an idea about how much money the company is making on their sales alone, before accounting for other income, administration expenses, interest and tax. This is a particularly relevant measure for this industry as the vertical analysis showed that the cost of sales takes up a huge percentage of the total turnover. Generally, the higher the gross profit margin is the better a company is performing.

Liquidity: Current Ratio

Curent Ratio = Curent Asset

Curent Liabilities

The current ratio is used to test the liquidity of company. A high current ratio of over 2 to 1 suggests that a company would easily be able to pay off its debts using its current assets, putting them in a good financial position.

Efficiency: Asset Turnover

Asset Turnover = Sales (Turnover)

Total Assets

This ratio measures how efficient a company is at utilizing their assets in order to generate sales. A high ratio indicates that a company is making good use of its assets.

McDonald’s is using its assets more efficiently than Burger King. Both companies experience improvement in their asset efficiency throughout the two year period which could again be attributed to the improvement programs that they are both currently running. While in 2009, two companies suffered from a small declining. However, McDonald’s is much better than Burger King.

Investment: Price/Earnings Ratio

P/E Ratio = Market Earnings per Share

Price per Share

This final measure is a clear indication to potential investors, of the earnings they will be receiving. The ratio essentially indicates the price they are paying for a unit of income. If one company has a higher ratio than the other then the relative earnings received is for the price of the share is less than the other company. When comparing two companies they can use as relative prices to determine which one delivers the greatest benefit for their price. In addition, the lower the value, the quicker the investment will be recovered through earnings.

Both companies started in a similar position in 2009-10. This ratio does not necessarily mean the investor will receive less because the fluctuations in share prices paid by each investor may differ greatly, especially in this three year period where the decline was drastic in 2008. However, upon analysis by a potential investor, it may indicate that at the end of 2008’s financial year, Burger King looks to provide slightly better earnings per share relative to the price paid. However this is not rigid, prices fluctuate by the hour and do not always resemble financial performance.

Non-Financial Analysis

It is also important to factor in a variety of non-financial measures of performance in order to help us to assess the position of these companies. This may help to explain why one company is experiencing success over another. The fast food industry in the world is extremely competitive and so a number of different performance measures¼Œ which are thought to be relative to the industry have been used.

Global operations

McDonald’s concentrate on globalization, sometimes referred to as the “McDonaldization” of society. The Economist newspaper uses the “Big Mac index” to describe the McDonald’s globalization. McDonald’s was the first restaurant to consistently offer clean restrooms, driving customers to demand the same of other restaurants and institutions. McDonald’s wants to open a large number of drive-through stores in the world. McDonald’s make a deal with the French fine arts museum, the Louvre, to open a McDonald’s restaurant and McCafé on its premises, in November 2009.

Burger King was successful in the US and then it brought Chicken burger to Europe. Consumers are urged to “cheat on beef”, with the message that Burger King announces can offer more than just beef burgers. The creative marketing is likely to engage consumers, while chicken may appeal to more health to customers. To assist in its global expansion, Burger King has established several subsidiaries to develop partnerships and alliances to expand into new areas. In Europe, Burger King’s subsidiary Burger King Europe GmbH is responsible for the licensing and development of BK franchises in the that market. At the end of 2010 year, Burger King is the second largest hamburger fast food company, which the first one is McDonald’s (32,400 locations) and the fourth largest fast food restaurant chain overall after Yum!(37,000 locations), McDonald’s and Subway (32,000 locations).

Success of Branding and Advertising

“i’m lovin’ it” is an McDonald’s Corporation’s slogan. It was created by Heye & Partner. The English part of the campaign was launched in the UK in 2003. “With the music of Tom Batoy and Franco Tortora (Mona Davis Music) and vocals by Justin Timberlake is famous all over the world.” In Spring 2008, McDonald’s published their new image and slogan: ‘What we’re made of.’ This was to promote how McDonald’s products are made. Packaging was tweaked a little to feature this new slogan. In Fall 2008, McDonald’s started new packaging, eliminating the previous design stated above with inspirational messages, the “i’m lovin it” slogan. “McDonald’s also updated their menu boards with darker, yet warmer colors, more realistic photos of the products featured on plates and the drinks in glasses.” In 2009, McDonald’s expects to have all of this nationwide.

As to Burger King, “Golden Age” of Burger King advertising was during the 1970s when it introduced its Magical Burger King. And then several well-known and parodied slogans appear. In 2003, Burger King published new advertising with the hiring of the Miami-based advertising agency of Crispin Porter + Bogusky (CP+B). They have reorganized Burger King’s advertising with a series of new factors. It centered on a redesigned Magical Burger King character accompanied with a new online presence. A Burger King advertising running in recent weeks declares the “King’s gone crazy”. It shows the burger chain’s royal mascot running through a building and crashing through a plate glass window before being tackled to the ground by men in white coats. The advertising is supposed to trumpet Burger King’s new Burger King Steakhouse XT burger: The “king’s insane” for “offerings so much beef for $3.99,” said the advertising.

Success of Menus

McDonald’s decision to display nutritional information, including calorie and fat content and also on its product packaging well help restore faith in the brand by empowering customers’ menu choices. However, the move does not represent a fundamental change to the company’s overriding mission. It just provides cheap, flavorsome food, served quickly. McDonald’s clearly wants this increased disclosure will restore trust in its products. Indeed, data monitor research shows that transparency is clearly needed: “40% of UK consumers are skeptical about health claims made by food manufacturers, compared to 32% who are trusting”. McDonald’s healthier menu items that have this year helped promote sales in Europe. Consumers will soon be able to read that the “Cheese, Ham and Pepperoni Deli Brown Roll contains 616 calories, compared to 493 in a Big Mac, along with almost 10% more fat and more than double the amount of salt”. Nonetheless, as the world’s leading fast food company, McDonald’s will always perform better.

In contrast to other industry players, Burger King has not focused on making its food healthier in the past, believing that the Superfan values taste over health when making food choices. In 2005, for example, the company invested a lot on fast foods to make them less unhealthy, with less salt, sugar and fat, stating it wanted to focus on providing tasty foods. By focusing on taste, Burger King aimed to gain a competitive advantage and achieve a reputation for producing tastier burgers. While this focus on taste is appealing to the Superfan, health is an issue of growing importance to a large sector of society. Therefore, in order to remain competitive, the company has had to respond to this growing demand for healthier foods. Its rivals have already made health changes to their menus and, with this in mind, Burger King has reformulated some of its menu items. Consumers are urged to “cheat on beef”, Burger King announces that it can offer more than just beef burgers. The creative marketing is to tall consumers, while chicken is more health. Burger King has announced that it will be provided new hamburger named the “Tender crisp Premium Chicken burger” in the UK, Ireland, Sweden and Denmark. At the same time, Burger King wants to create new imagine that consumers go to fast food stores looking for health beneficial products, which will makes them feel better about their choice in turn.

Market share

Burger King has around 7,800 restaurants locally, while McDonalds has whopping 13,000 locations locally. “Burger King has approximate 21.9% of the market share, while McDonalds has more than double that, a whopping 44% market share of the fast food industry.” Comparatively, McDonalds has been expanding rapidly into the international market; in fact McDonalds has expanded in many third world countries, which include India, China, etc. Although Burger King also has international reach, it’s nowhere near McDonalds reach. Burger King has managed to expand in only a handful of international markets.

Company PotentialMcDonald’s SWOT Analysis

McDonald’s SWOT Analysis

Strengths

Market-leading position

Robust all-round growth

Strong brand equity

Opportunities

Alliance with Warner Home Video

Innovations in the Menu

Rising Hispanic population in US

Strengths

McDonald’s is the world’s largest foodservice retailing chain. McDonald’s serves one of the world’s favorite and most well known menus. The company has shown a strong growth in revenues. Its consolidated revenues have increased at a compounded annual growth rate. All segments of the company have witnessed strong growth. Europe, McDonalds’s largest geographical market, saw revenues increase by 14.7%. McDonald’s has a well-established brand that appeals to varied age groups and customer profiles. The Business Week magazine has ranked “McDonald’s” as one of the ten most recognized brands in the world, a position that creates significant opportunities for the company. The company makes some of the largest selling fast foods in the world.

Weaknesses

The company witnessed an operating loss from its non-McDonald’s brand restaurant operations. Operating losses from both these segments have lowered McDonald’s overall profitability. McDonald’s revenue per employee compared quite poorly with the average figures in the foodservice and restaurants industry. This indicates that the company’s per employee productivity and profitability is lower than that of its competitors, a disadvantage in a fiercely competitive marketplace. During 2007-2009, McDonald’s selling, general and administrative (SG&A) expenses for Europe region increased substantially. Increasing SG&A expenses in these segments have adversely affected the overall profitability of McDonald’s.

Opportunities

A popular live-action series featuring Ronald McDonald will help further McDonald’s popularity, especially amongst children. The company can cash in on this and boost its revenues. McDonald’s continues to evolve its menu in order to maintain its leading market position. New products and branded everyday value remain a focus for McDonald’s, as the company continues to refresh its offerings with its Euro Saver Menu in several European markets.

Threats

The company is facing pressures due to an increase in raw material prices. Owing to various import restrictions and higher demand, prices of beef. Further, the prices are expected to remain high during 2010 also. Beef is the major raw material for the company’s products. A further hike in beef prices can have a negative impact on company’s profitability. Over the past few years there has been a newfound emphasis on healthier eating. With a change in lifestyle, people are becoming more aware of the negative effects of unhealthy eating habits. This has a direct effect on the sales of the fast food chains that are associated with unhealthy food. Consumers are showing increased preference for fat-free and healthy food products. Food items containing trans-fat are losing market share as they are linked to cardiovascular diseases. Some negative publicity could adversely impact the revenues of the company, especially as consumers and government bodies all over the world get more conscious about health effects of fast food.

Burger King SWOT Analysis

Burger King SWOT Analysis

Strengths

Strong market position and brand equity signifying customer acceptance

Greater franchise mix-an attractive business model

Innovative marketing campaigns and advertising to provide greater visibility

Opportunities

Expansion in existing and new markets-the rate of expansion in 2009 was 28% higher than the prior year

Initiatives such as remodeling and usage if Bluetooth to enhance operational efficiency

Positive outlook for quick service restaurant segment

Strengths

Burger King enjoys a strong market position with 11,925 restaurants operating in 73 countries and US territories. It is the world’s second-largest FFHR chain as measured by the total number of restaurants and system-wide sales. Additionally, BKC’s Burger King and Whopper brands are two of the most widely recognized consumer brands in the world. Overall, the company’s established brand image has enabled it to penetrate various global markets. The company leverages its strong market position to gain economies of scale and increase its bargaining power. BKC utilizes innovative marketing, advertising and sponsorships to drive sales and generate restaurant traffic. Strong and innovative marketing efforts will provide better visibility to the company, which will in turn have an impact on the revenue generating capacity of the company.

Weaknesses

Declining comparable sales growth-2009 recorded the lowest rate in three years BKC recorded a decline in its comparable sales growth in the recent past. Despite positive comparable sales growth across all reportable segments during 2009, comparable sales for the period were negatively impacted by significant traffic declines during the third and fourth quarters across many of the markets in which BKC operates. This was primarily driven by the continued adverse macroeconomic conditions, including higher unemployment, more customers eating at home, heavy discounting by other restaurant chains and the H1N1 flu pandemic. Declining comparable sales growth indicates the necessity of the management to focus on various product offerings that caters to the value conscious customers during times of poor economic conditions.

Concentrated operations in terms of geographic presence and dependence on selected distributors-increases business risks.

Opportunities

Expansion in existing and new markets-the rate of expansion in 2009 was 28% higher than the prior year. Burger King is focusing on expanding its presence in existing and new markets. Expanding presence in existing and new markets will allow the company to establish a global footprint and favorably impact its revenue generating capacity. Initiatives such as remodeling and usage of Bluetooth enhance operational efficiency.

Threats

The fast food industry is intensely competitive and Burger King competes with many well-established food service companies on the basis of product choice, quality, affordability, service and location. As the restaurant industry has few barriers to entry, the company competes with large competitor base including restaurant chains and individual restaurants that range from independent local operators to well-capitalized national and international restaurant companies. McDonald’s and Wendy’s are BKC’s principal competitors. The company also competes against regional hamburger restaurant chains. The company also competes against national food service businesses offering alternative menus, such as Subway, PaPa Jones and Pizza Hut. Some of the Burger King competitors have greater financial, non-financial and other resources, which may help them to react to changes in pricing, marketing and other segment in general better than Burger King.

Investor Potential

This section will examine the attractiveness of investment into McDonald’s and Burger King. The following two graphs show the variations in each company’s share price over the three financial periods looked at throughout this reports. Both companies’ graphs are taken from Yahoo! Finance as this website showed the fluctuations during the three years that the financial analysis was conducted, allowing the share price to be compared to the businesses financial success. Share prices vary depending on how a company is performing; with more investors buying shares when they think the company is about to experience success. Success leads share prices to rise, due to the laws of supply and demand.

McDonald’s share price

This graph shows that McDonald’s experienced an overall increase in share price during 2006 to 2010. This could be due to the success of the McDonald’s strategies, suggesting that the company has adopted a successful growth strategy and encouraging people to invest.

Burger King share price

Burger King have seen a steady drop in their share price relative to their drop in net profit in 2007-08, which could lead investors to become less attracted to the company. However, Burger King does have quite a strong growth strategy