STRATEGIC MANAGEMENT

McDonalds and the McCafe coffee initiative

Engin PEKER 20103108012

McDonald s and the McCafe coffee initiative

McDonald's Restaurants of Canada, Ltd. is the Canadian branch of the popular fast-food restaurant chain McDonald's. One of Canada's largest fast-food restaurant chains, the franchise sells food items including hamburgers, chicken, french fries and soft drinks all across the country. McDonald's is known for its high fat and calorie foods, but it also has alternatives such as salads, juices , coffee and milk. McDonald's was previously Canada's largest food service operator before being overtaken by Tim Hortons in 2005. The slogans used in Canada are "i'm lovin' it" (in English) and "c'est a que j'm" (in French). McDonald's Canadian operations are based in Don Mills, Ontario, in North York. The current McDonald's Canada President is John Betts. The company was founded by Chicago-born George Cohon. The first store opened in 1968 as the Western Canadian franchisee and operated with the U.S. operations. Cohon was the Eastern Canadian franchise and opened his store in 1968. In 1971, Cohon merged the two operations to one national operation. Cohon was responsible for developing the eastern Canadian franchises. The first McDonald's restaurant in Canada was opened in 1967 in Richmond, British Columbia by western franchise owners. It was also the first McDonald's restaurant outside of the United States. In 2007, McDonald's Canada had 1,400 stores (including Wal-Mart Canada locations) in Canada, and more than 77,000 Canadian employees. Although McDonald was one of the leader in Canada s food industry, in recent years company s sales wasn t growing in direct relation with industry growth company s sales were increasing but its market share was declining. According to Ralph Sgro, the owner-operator of Burlington branch, main barrier for sales growth was quality of coffee, dominant purchase throughout the day for Canadians. McDonald in Canada had been attempting to enter the coffee industry, but without big success, it owed only 7,1% of coffee market. So this time company needed something revolutionary and Ralph Sgro decided to introduce McCafe to Canadian customers. McCaf was a full-service coffee bar, located in a McDonald s restaurant as an extension to the front counter or located as a stand-alone restaurant. More than 300 McCafs existed worldwide, in 19 countries including the United States. McCaf s main objective was to eliminate coffee as a barrier to sales growth, but the main question was the fact: was McCafe a short-term solution or could it eliminate barrier and give company ability to improve its sales in breakfast and snack market.

PESTEL analysis: Political factors - The political situation in Canada is stable. This means that the governmental policies and change in government don t affect the performance of the company. Company s main obligation to the government is different types of taxes. Generally these are business taxes. Economical factors We can see the impressive economic growth of Canada from the graph. The country s economic conditions were improving and this, of course, had positive impact on the company s performance. Social factors - Canada s 2011 population is estimating 34,663,035. Average growth rate of population is 1,08%. This means that number of potential customers is increasing. And also Canada is multinational country. The majority of population is British, French and German. McDonald s should take into consideration all this aspects while introducing products to customers. Technological factors- Canada shows rapid technologic development and new technologies means faster and more hygienic production in the restaurant . Environment factors- according to the fact that Canada is well known for its nature there are strict environment protection regulations. In this case McDonald s has a big advantage because all materials that are used for packaging or saving products can be recycled. Legal factors- According to the fact that Canada is developed country and their laws are based on English common law, customer protection laws are quite strong that s why there are great costs associated with a breach in quality or service in the form of litigations and lawsuits.

Five forces model Rivalry: Currently in the fast food industry there is intense competition for growth in market. Wendy s , Burger King , Subway ,Wendy s ,KFC , Taco Bell and Pizza Hut are the main rivals. Threat of new entrants: Threat of new entrants is quite low in this industry, market is saturated with globally known companies, which have strong brand recognition. New entrants must spend a large amount of capital on advertising and promotion of their brand for a success. Suppliers power: Suppliers in this industry can be divided in two groups :

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Commodities Beverage

The commodities suppliers have less power over restaurant industry, because commodities supplier number is high and most of the prices are determined by the market. But in beverage market we ve got different situation, there are two major competitors in this aria: Pepsi and Coca-Cola. These companies have huge supplier power over fast food industry, because they represent two most demanded and well know soft drink companies in the world. But in McDonalds case, we know that company has long-time and stable relationship with Coca-Cola. Both companies have global brand recognition, that s why they managed to build strong partnership and operate in a way that is profitable for both sides. Buyer s Power: The buyer power in the industry is high, there are huge amount of companies offering almost similar products with almost similar prices, this means that customers switching costs are quite low. In this case, although customer loyalty is quite changing in the industry, company managed to attract huge amount of customers with the help of brand recognition. Threat of Substitute: If companies concentrate on the idea of fast and healthy foods more, it can be a threat of substitude. Fast food means unhealthy food for most of the people. McDonalds has always been famous for its low cost and high quality products. That s why it always attracted customers who were price sensitive. According to Mr. Ralph Sgro the main barrier for the sales growth was coffee. That s why company decided to expand the scope of its operation in coffee market by introducing new product line McCafe. - Missing ingredient for success. Before introducing McCafe to Canadian restaurant industry McDonalds main competitors like Wendy s, Tim Hortons, KFC, Pizza Hut and Taco Bell implemented almost same strategy which has driven McDonalds to the conclusion that the two products together, fast food and coffee, presented bigger value for customers, then they did separately. First six months of testing McCafe showed that company s total sales increased by 30%. McDonalds without McCafe could not overcome its main barrier for sales growth coffee (quality and taste) Coffee is one of the most daily demanded products for Canadians and It is directly associated with breakfast. Breakfast and fast food industries are related industries, which produce complementary but not substitute products, and in order McDonalds to increase the time of stay and number of customers in their restaurant they must offer wide variety of products with appropriate quality and price to them, and McCafe is the one.