Introduction To Service Industry Restaurants Marketing Essay

Introduction To Service Indus campaign Restaurants Marketing EssayThe food service exertion continues to grow in volume and revenue every year and typically divides itself into two categories full-service restaurants and prompt-food restaurants. Each individual restaurant is in competition with separate food service trading operations within the same geographical bea. The quick food restaurant industry is highly competitive. McDonalds competes with other restaurants through the quality, variety and hold dear perception of food products offered. McDonalds Corporations primary(prenominal) competition comes from other fast-food restaurants most nonably, YUM Brands Inc, Wendys International, Dominos and Burger King.Figure1 The total revenues of the major players in the fast food industry (www.ycharts.com)The figure represents the market care of McDonalds in the fast food industry. McDonalds Corporation (MCD) has company operated and franchise restaurants all everywhere the wor ld. They are the leading global food service retailer by means of over 30,000 restaurants in more than than 117 countries, serving about 50 million people every day. Franchising plays a major role in McDonalds system with 26,216 were operated by franchisees (including 19,020 operated by conventional franchisees, 3,160 operated by crackmental licensees and 4,036 operated by foreign affiliated markets (affiliates)-primarily in Japan) and 6,262 were operated by the company. Their total revenue in 2009 was $ 23 billion. McDonalds success in the fast food industry stems from their main success factors which are branded affordability, menu variety and beverage choice, convenience and daypart expansion, ongoing restaurant reinvestment and operations excellence. These success factors are used to promote McDonalds brand image, provide customers with quality products and disparateiate themselves from othercompetitors like YUM Brands (YUM owns brands like KFC, Pizza Hut, Taco Bell and Long John Silver) afterwards extensive research, analysis and valuation, it is found that McDonalds corporation is up-to-dately an undervalued company and rated as a Market Outperform and thus I recommend this broth as a Buy.Executive SummaryThe food service industry is one of high competition however, McDonalds has been able to obtain the position as the leader in market capitalization with a market capital of $74.6B in 2009. While McDonalds has deployed high amounts of capital, the company manages its asset base with high inventory turnover maculation also maintaining cost efficiency. manufacturing Demand DriversThe market of the food service industry attributes much of its growth to global sales and revenue. Despite tough environment, McDonalds delivered an extraordinary year of growth, posted strong sales and increased market parcel of land around the world. In 2009, global comparable sales increased 3.8 percentage, fueled by solid gains in the United States (+2.6 percent), Eur ope (+5.2 percent), Asia/Pacific, Middle East and Africa (+3.4 percent), Latin America (+5.3 percent) and Canada (+5.8 percent). wages per packet for the year increased 9 percent to $4.11 (13 percent in constant currencies), go consolidated operating income increased 6 percent (10 percent in constant currencies). We also transcended $5.1 billion to shareholders through share repurchases and dividends paid, bringing our three-year cash return total to $16.6 billion-notably at the high end of our stated target of $15 to $17 billion for the years 2007 through 2009.Globally, McDonalds caters and adapts to different cultures and societies, while still providing them with the same McDonalds experience. With a significant portion of McDonalds sales derived from international stores, foreign denominated sales should generate additional earnings leverage accustomed the weakening of the US horse against other currencies.McDonalds is well positionedMcDonalds is able to maintain a loyal c ustomer base, and compete with the existing competitors by introducing variation to their menu, such as the Dollar Value Menu. Also, in order to adhere to a more concerned wellness concise society, McDonalds has implemented holistic approach which consists of High-Quality Choices for customers, Consumer-Friendly maintenance Information and communicate responsibly. The Happy Meal, which has been a long standing childs favorite, now has options such as fruit instead of French Fries and all sportsmanlike meat chicken nuggets. As for one McDonalds company goals is to adhere to outstanding customer service, strengthens the maintenance of long standing customers, as well as develop new relationships with customers of a new generation.Franchising business modelWithin Fast Food restaurants franchise models are common. Franchise models can grow faster utilize others capital. Franchises fork out to be pay rentand royalties based on a percent of sales along with minimum rent payments, and initial fees. On the other hand, company-owned models have greater control over pricing, operations and can close underperforming restaurants more quickly. In 2009 the total no of franchised restaurants was 26,216 compared to 25,465 in 2008 and the number of company operated restaurants reduced by 3.6%. The total revenue from franchises in 2009 was $7,286.2 zillion an increase in 4% compared to 2008.McDonald Franchises taxation from FranchisesKey challenges and AdaptabilityIntensity of competition Competitors of the industry also try to compete with similar products therefore, leading to price wars. McDonalds created a Dollar Value Menu, in response to competitors such as Wendys 99 cent menu. Overall, the industry has essay various product differentiations in order to accumulate greater market share, but most consumers are drawn to the classics. McDonalds is doing more and more to compete with health focused restaurants like Subway. Nutritionist and other leading experts have bee n hired to join the McDonalds team in order to ensure that the correct items are added to the menu, while still keeping and improving the classics that they are famous for. For example, the chicken nuggets that we all grew up on are now 100% white meat. McDonalds is flexible in their menu to conform to the changing tastes of society.Bargaining Power of Suppliers In recent years the industry has had a small problem with beef, because of the outbreak of the mad cow disease. This problem raised the cost of beef in Europe tremendously but the cost actually went up around the world because of the beef famine in Europe. The suppliers that sell to McDonalds have a strong voice also because of the fact that the switching cost for McDonalds as a whole would be so tremendous, so any problems or disputes would be worked out with there suppliers.Comparative Ratio AnalysisRatio analysis helps us analyze the financial trends of preceding years and extrapolate those trends into future day years for McDonalds and its corecompetitors within the industry. It is divided into three areas fundamentals, growth and profitability, and capital structure of the company. Liquidity ratios are used to regain how liquid the firm is, and how it will meet its obligations. This also helps us determine how risky the firm is by determining if the company is employing an adequate amount of obligation or risk to generate profit. Profitability ratios give us the perspective profitability of the firm is operating. The ratios will help in accurately valuing the company at its current condition, compare its performance against competitors, and project the future results of the company.Fundamentals of McDonalds (MCD) vs. YUM Brands (YUM) disconcert 1Financial ConditionCompanyIndustry AverageSP 500Debt/ loveliness Ratio0.741.821.13Current Ratio1.41.31.4Quick Ratio1.31.21.2Interest Coverage30.618.828.0Leverage Ratio2.13.83.8Book Value/Share13.1211.9522.35The industry fair is compute as an average of competitor brands like YUM, Burger King and Wendys.Current ratio Since 1999 McDonalds has experienced a steady increase in their current ratio. The present current ratio of 1.4 is higher compared to industry average of 1.3. This increase shows that McDonalds has more ability to pay off their short term debts from the sale of their currents assets. Overall, McDonalds is in plum advantageously shape because their current ratio is growing.Receivables turnover McDonalds has consistently been well below its competitors YUM with accounts receivables turnover. This means that they arent collecting their accounts receivables as promptly as their competitors. This prevents McDonalds from reinvesting and expanding their restaurants which is a major showtime of revenue. This also allows for a greater chance of default on their accounts receivables.Asset Utilization This ratio indicates how profitable a company is relative to its total assets. The return on assets (ROA) ratio illustrates how well management is employing the companys total assets to make a profit. The higher the return, the more efficient management is in utilizing its asset base. McDonalds Asset Turnover has consistently been lower than its competitor YUM since 1999.Debt to Equity Ratio The debt- honor ratio is another leverage ratio that compares a companys total liabilities to its total shareholders equity. McDonalds has maintained a fairly low Debt to Equity Ratio of 0.74 which means that the company has an efficient amount of equity that can cover the cost of its liabilities compared to Yum of 3.14 or the industry average of debt to equity ratio of 1.82.Book value per share This is an indication of how much shareholders are paying for the net assets of a company. McDonalds book value of 13.12 is higher than the industry average (11.95) or YUM (3.05)Net Income The net income for McDonalds suffered a dip of 23% in 2007 but recovered in the year 2008, 2009. The total net income in 2009 was $ 4,555 Million compared to YUM who had a net income of $1071MillionShareholders Equity Shareholders equity represents the amount by which a company is financed through common and preferred shares. The average Shareholders Equity for MCD is $13,287M compared to YUM who has a $709M.Dividend MCD has consistently grown in dividends over the years. This is one of the most attractive features of MCD. Comparing the dividends of MCD and YUM, MCD has 25% increase on YTY compared to YUM who has only 14%.Growth and ProfitabilityTable 2Investment slip aways %CompanyIndustry AverageSP 500 happen On Equity34.848.221.4Return On Assets16.213.17.5Return On Capital17.615.410.0Return On Equity (5-Year Avg.)22.729.016.4Return On Assets (5-Year Avg.)11.410.17.6Return On Capital (5-Year Avg.)13.012.510.3The industry average is calculated as an average of competitor brands like YUM, Burger King, and Wendys.Revenue Growth The global recession has affected the revenue of both the companies. By year 2009 the cons umer demand and currency exchanges have helped recover to pre-recessionary levels.EPS and Growth The portion of a companys profit allocated to each outstanding share of common stock. recompense per share serve as an indicator of a companys profitability. The EPS for MCD is 4.11 which have increasedfrom 9% from the previous year while the EPS for YUM is 2.26. The growth of EPS has been fluctuating due to the global economic crises.Profit Margin A higher profit margin indicates a more profitable company that has better control over its costs compared to its competitors. MCD has a profit margin of 20% compared to Yum is 10%.Return on Equity (ROE) Return on equity measures a corporations profitability by revealing how much profit a company generates with the money shareholders have invested. The ROE for MCD is 34.8 which is less than the industry average of 48.2. From the above figure we can infer for 2009 the ROE for YUM is 180%, but this has not been consistent over the years. For a long term investor this is not good.Capital Structure ChartsTable 3 determine RatiosCompanyIndustry AverageSP 500Current P/E Ratio16.420.922.4P/E Ratio 5-Year HighNA6.815.8P/E Ratio 5-Year LowNA3.22.4 expenditure/Sales Ratio3.212.332.03monetary value/Book Value5.307.113.21Price/Cash Flow Ratio12.7011.9013.80The industry average is calculated as an average of competitor brands like YUM, Burger King, and Wendys.Market Capital Market capitalization represents the existence consensus on the value of a companys equity. McDonalds in 2009 had a market capital of $67.3B compared to YUM brand that had a market capital of $16.35B. It also represents the market estimate of a companys value, based on perceived future prospects, economic and monetary conditions.Price to Earnings Ratio A stock with a high P/E ratio means that investors are expecting higher earnings growth in the future compared to the overall market, as investors pay more for todays earnings in prospect of future earnings growt h. From the table 2 McDonalds PE is 16.4, which is below the industry average of 20.4. However there are limitations since the ratio depends on the earnings per share. McDonalds earnings per share of 4.24 are above the industry average of 1.43.Price to Book Value This ratio used to compare a stocks market value to its book value. A lower P/B ratio could mean that the stock is undervalued. From the above figure McDonald has a stable P/B ratio compared to the Yum. From table 3 the P/B ratio for McDonald is 5.31 which is below the industry average of 7.11.Price to Sales ratio The P/S ratio measures the price of a companys stock against its annual sales. From table 3 we can understand that the P/S ratio for McDonalds is 3.21 compared to the industry average of 2.33. This means that the investor would be paying $3.21 for every dollar of McDonalds sales.Price to Cash Flow Ratio This ratio compares the stocks market price to the amount of cash flow the company generates on a per-share basi s. McDonalds has a Price/Cash Flow ratio of 12.70 which is higher than the industry average of 11.90.ConclusionIn our overall analysis of McDonalds Corporation using a variation of methods and models, we have conclusively found that McDonalds is currently undervalued in the market and is a Buy. The Method of Comparables was used, which included such ratios as Price/Earnings, Price/Book, Price/Sales, and Price Earnings growth ratio valuations. The ratio valuations were calculated by finding the industry average and using a varying of other factors to project an expected share price. The industry average is calculated as an average of competitor brands like YUM, Burger King, and Wendys.Price to Book Ratio$Industry Average of Price to Book value7.11Current Book Value of McDonald13.12Estimated price of share$93.28Current Market Price69.37 tracking Price to Earnings RatioIndustry Average of Trailing Price to Earnings Ratio17.9Current McDonalds earnings per share$4.11Estimated Market pric e$73.59Current Market Price69.37Dividends Yield Ratio AnalysisIndustry Dividend Average (%)2.73McDonald Dividend per share2.2Expected share price found by dividing McDonalds(Dividends per share)/ (Industry average Dividends yield ratio)$80.50Current Market price$69.37Forward Price to Earnings RatioIndustry Average of Forward Price to Earnings Ratio14.73Current McDonalds earnings per share$4.11Estimated price of share$60.54Current Market Price69.37All Data obtained from Yahoo finance on 13/016/2010From the above calculation the estimated price of McDonald is between $60.54 $93.28. However McDonalds corporation has faced previous legal philosophy suits on being held accountable for obesity, similarly following the litigation process of cigarettes and tobacco companies. The courts ruled against this issue in McDonalds favor, making this a remote future risk factor. In addition, MCD in its effort to be a more socially responsible corporate citizen, by supporting a healthier society, h as highly-developed light and healthy menu items in order to give customers additional eating options and in doing so, broadening the array of its customer base while go its existing customer base with healthier menu options.