McDonald's Sustainability Recommendations

McDonald’s

Team Members: Monica Czagan, Manpreet Dhillon,

Lionel Ouedraogo, Josephine Pham, Paulina Pisarek

Sustainability Strategy

ENBUS 640: Strategies for Sustainable Enterprises

March 27, 2017

Outlinea. Introduction to McDonald’s

b. SWOT, PESTEL, and VRIO

c. Strategic Plan

1. Growth Projection

2. Short-Term

▶ Recommendations

▶ Evaluation and Control

▶ Timeline

3. Long-Term

▶ Recommendations

▶ Evaluation and Control

▶ Timeline

d. Information on Team Members

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= Course Content

Company Introduction▶ Founded in 1955 in Des Plaines, IL, USA

▶ Headquartered in Oak Brook, IL, USA

▶ Employs 375,000 people in 120 countries

▶ Publicly traded company (NYSE: MCD at U$129/share)

▶ Operates in “Informal Eating Out” (IEO) segment

▶ Restaurants provide substantially uniform menu (burgers, fries, chicken nuggets, coffee, ice cream, etc.) with regional variations

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2016 Sales: U$24.6 Billion

- 3.1% vs. 2015

2016 Operating Income: U$7.7 Billion

+8.4% vs. 20152016 Number of Restaurants: 36,899

+1.0% vs. 2015

▶ Underwent restructuring in 2015 and now operates in four business segments based on growth rates instead of geographic proximity:

▶ U.S.; International Lead Markets; High Growth Markets; Foundational Markets & Corporate

▶ Rationale behind choosing McDonalds for ENBUS 640 group assignment: Assess how a $26-billion company, with seemingly unlimited resources, can achieve sustainability

internally and externally

Sales from Company

Restaurants62%

Rent from Franchisees

25%

Sales Royalties from Franchisees

13%Operating Income

from Company Restaurants

25%Operating Income

from Franchisees

75%

Company Restaurants

5,669 15%

Franchised Restaurants

31,230 85%

SWOT AnalysisStrengths Weaknesses

Iconic brand: Worldwide brand recognition. Standardization and structure: Ability to deliver consistent brand and restaurant experience in 120 countries, albeit with different menu offerings.Operational efficiency: Reduces costs with global supply chain networks. Income diversification: Reduces risks with diverse product

offerings and locations in 120 countries.

Negative perception: The fast food industry is associated with unhealthy eating and obesity.Franchisee management: McDonald’s success relies on close collaboration with its franchisee network; it is paramount that the company continues to improve its relations with this group of stakeholders.

Opportunities Threats

Leveraging technology: McDonald’s has increased its emphasis on digital offerings and customer loyalty initiatives. Evolving customer preferences: McDonald’s has been updating its menu through R&D to include: gourmet burgers, fresh fruit smoothies (for its health-conscious clients).Sustainability initiatives: Continue differentiating itself and improving its brand image through sustainability initiatives.

Fragmented market: The company faces a wide range of competitors – local and international. Environmental pressures: Increased focus from governments and NGO groups on environmental issues such as climate change, sustainable beef, etc.Economic and political climate: Current unstable political and economic climates can negatively impact business in certain parts of the world.

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PESTEL AnalysisPolitical: Government regulations are expected on environmental issues like climate change and the nutritional quality of the food industry. The governments of some jurisdictions, such as Ontario, Canada and the United States, have begun to require and regulate calorie labelling at major restaurant chains.

Government actions that can have an impact include price, foreign exchange or import-export controls, increased tariffs, government-mandated closure of suppliers’ operations and asset seizures.

Operations in some developing nations present a higher risk of political instability, economic volatility, crime, corruption and social and ethical unrest.

Economic:There exists a large variety of competitors (other fast food chains, sit-down restaurants, coffee shops, smoothie bars, sandwich shops, convenience stores, etc.) within the informal eating out (IEO) industry, selling

many different products.

Around the world, multinational organizations must comply with changes in exchange rates; various tax laws and responsibilities; trade regulations and agreements; and constant changes in price of supplies (especially meat), fuel, infrastructure (rent or land taxes), and more.

Social:Following the release of the film Supersize Me in the early 2000s, there has been much pressure to provide healthy alternatives in fast food.

McDonald’s must pay special attention to food safety events, including instances of food-borne illness.

The costs of recruitment and minimum wage vary across the globe. There are also different healthy workplace policies worldwide, such as those against discrimination and those for occupational health and safety.

Consumers with nut allergies need a fast food restaurant from which they can feel comfortable buying convenient and safe food products.

The market for fair trade food products, especially coffee and sugar, continues to grow worldwide.

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Technological:It is expected that, with time, the fast food industry will be innovative when it comes to technology, such as with the introduction of virtual ordering through mobile apps and kiosks.

Environmental:Climate change will increase the likelihood of natural

disasters occurring; these are events that can cause disruptions in the supply chain or prevent customer access to restaurants.

In the US, demand for organic food products has been increasing every year since the mid-2000s, growing at a rate faster than that of non-organic food products.Many environmental non-governmental organizations are calling on individuals and families to eat less meat, particularly beef, in order to reduce their impact on the planet. A Global Roundtable for Sustainable Beef was created to find solutions.

There is pressure from governments and non-governmental organizations to limit waste from food leftovers and packaging due to its environmental impact.

Legal:McDonald’s restaurants can be found in 119 countries globally, meaning that sometimes a “lack of independent and experienced judiciary and uncertainties in how local law is applied and enforced, including in areas most relevant to commercial transactions and foreign investment”, especially in developing nations.

VRIO Framework 6

Competency 1:

Iconic Brand

Competency 2:

Standardization & Structure

Competency 3:

Economies of Scale

Value &

Rareness

The golden arches is named top 15 best brands in the world by InterBrand.

McDonald’s has standardization down to both an art and science – it provides training to employees, which total 375,000 in 2016, to ensure a consistent restaurant experience in 120 countries, albeit with different menu offerings. Without this standardization, it would be very difficult for the company to manage the franchisee model.

Its purchasing power is significant and the company is able to buy in bulk and generate economies of scale to reduce costs. The company currently prioritizes sustainable sourcing on six products it purchases the most: beef, packaging, fish, coffee, palm oil, and poultry.

Imitability It would be difficult to copy the power of the brand and it would require significant marketing resources and time. McDonald’s spent $734.6 million in advertising in 2016 and $832.5 million in 2015, numbers that would be difficult to be replicated by competitors.

While other restaurant chains also have a similar franchisee model which requires rigid standardization and structure, it would be difficult to copy it to McDonald’s scale.

While other companies can try to imitate this, few can purchase ingredients and packaging to the scale of McDonald’s. The company spent $4.9 billion in food and paper expenses in 2016 and $5.5 billion in 2015.

Organization The new company structure, organized around segments that “combine markets with similar characteristics and opportunities for growth”, can take advantage of this competency by sharing

best practices and strategies with similar segments.

The company uses this core competency to create a consistent brand experience worldwide, and has created working groups such as the Food Safety Advisory Council to ensure consistency in quality of products received.

The organization has significant buyer power in procurement policies, such as its stringent Supplier Code of Conduct that focuses on human rights, workplace environment, environmental management, and business integrity. Francesca DeBiase is both the Chief Sustainability Officer and Chief Supply Chain Officer,

and the duality of her role illustrates the company’s recognition of its vast influence over suppliers and potential sustainability impact.

Strategic Plan & Measuring Growth ▶ McDonald's large consumer base and consistent returns to shareholders are indicative of their mature stage of business

growth. Mature companies have passed the state of rapid growth and tend to grow at slower pace as the economy. They have a large consumer base and generate consistent returns to shareholders. Still, the negative perception associated with the fast food industry could impact McDonald’s future growth plans.

▶ Based on the SWOT, PESTEL, and VRIO analyses, McDonald’s should implement a horizontal growth strategy that focuses on expansion of operations into other geographic locations and increasing the range of products offered to current markets.

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Measuring Growth

Economic Objective – Increase market share

▶ Increase sales by 3-5%

▶ Increase franchised restaurant mix from 85% to 95%

▶ Increase operating margin to mid 40% range

▶ Increase earnings per share

Environmental Objective – Reduce environmental footprint

▶ Become an environmental leader in the Informal Eating Out segment and overall restaurant industry

▶ Retrofit restaurants and increase eco-efficiency

Social Objectives – Customer-centric alignment of products and services

▶ Improve digital capabilities to increase access for new and existing markets

▶ Offer healthier menu options to support global healthy lifestyle and improve customer satisfaction

Defining Growth

▶ 3-5% sales growth: With the change in strategy over the last 2 years, McDonald is ready to

build on its momentum. Markets that have seen the introduction of a new customer

experience have seen consistent sales growth: International Lead Market sales increased by

2.8%; High growth segment sales by 4.7%, and Foundational Markets sales by 11.15%.

McDonald's is redirecting a portion of capital saved from refranchising to modernizing the

U.S. estate. The U.S. will have approximately 2,500 Experience of the Future restaurants by the

end of 2017. McDonald’s research shows a correlation between customer satisfaction and

sales growth. In France, research shows that modernizing the restaurant experience

improves overall customer satisfaction from 70% to 88%. With the modernization of its

restaurants and the innovation in its menu, McDonald’s can achieve its target.

▶ Earnings per share (EPS): While McDonald’s experiences slower growth compared to some

of its competitors (e.g. Starbucks), its 2016 EPS of $5.44 is 2.9 times higher than Starbucks’ EPS

of $1.90. McDonald’s aims to provide EPS growth in the high single digits.

▶ Customer satisfaction index: The American Customer Satisfaction Index (ACSI) is a national

economic indicator of customer evaluations of the quality of products and services

available to household consumers in the United States. As an example, ACSI data has been

used to prove that firms with higher levels of customer satisfaction tend to have higher

earnings and stock returns relative to their competitors. The average customer satisfaction

index within the fast food industry is 79/100 while McDonald’s remains in last place at 69/100.

Improving the ACSI score would be important for the success of the company growth plans.

Short Term RecommendationsInternal

Recommendations Evaluation and Control

Reduce G&A Expenses: Continue with initiative to cut $500 million from General and Administrative expenses. These cost cutting tactics are part of the company’s turnaround plan and include restructuring/reorganization of the company, increasing number of franchised restaurant (because they are more profitable than company-owned restaurants).

Behaviour Controls: Implement new procedures and processes with new company structureOutput Controls: Measure dollar savings achieved

Launch a pilot of Net Zero Energy restaurants and assess engineering feasibility and economic viability of such an initiative, as well as roll-out plan firstly for Company-owned restaurants, then provide ways for Franchisee restaurants to be on board. In 2015 , a study on Net Zero Energy restaurant was conducted with Rocky Mountain Institute and the study identified opportunities to significantly increase “burger efficiency” in a restaurant. To reach net zero, the restaurants would need to generate its own energy through solar PV, geothermal, etc. This initiative will increase energy efficiency and reduce utility costs.

Input Controls: Increase employee education and work experience about net zero energy Output Controls: Measure energy consumption, required on-site energy generation to reach net zero, capital dollars required to improve efficiency and reach net zeroBenchmarking: Compare with best in class net zero buildings and competitors’ restaurants to learn best practices

Retrofit Company-owned restaurants to improve energy efficiency and reduce GHG emissions. Currently Company-owned restaurants consume 1.353 kWh/guest and in total produce 193,000 tons of GHG emissions in 2015. Retrofitting can include installing energy efficient equipment (e.g. Energy Star), switching to LED lighting, redesigning the heating, ventilation, and air conditioning system to capture waste heat from the kitchen to heat the restaurant, installing variable frequency drives, using intelligent fume hood system, etc.

Retrofit Franchisee restaurants: Take best practices from the retrofit and implement them at Franchisee restaurants. It is in the Franchisees’ interest to increase the energy efficiency of their restaurants. McDonald’s needs to provide sufficient incentive for Franchisees to participate in this venture.

Output Controls: Measure energy consumption, greenhouse gas emissions, dollars saved before and after retrofitBehaviour Controls: Educate and encourage employees and Franchisees towards energy conservation behaviour Benchmarking: Compare with competitors’ restaurants to assess best practices in energy conservation and where McDonald’s restaurants fall on the energy efficiency spectrum

Improve water efficiency at Company-owned restaurants through initiatives such as installing low-flow

toilets and aerators in faucets, educating employees and guests about water conservation, installing

water-efficient dishwashers, etc.

Output Controls: Measure water consumption and dollars saved before and after retrofitBehaviour Controls: Educate and encourage restaurant employees, Franchisees and their employees, guests towards water conservation behaviour

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Short Term RecommendationsInternal (cont.)

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Review various environmental standards and certifications such as ISO 14001, Environmental

Management System, LEED, and assess if they should be implemented at the restaurant level. At the very

least, the company should review LEED and WELL standards for its new head office in downtown

Chicago. These standards can lead to cost savings and reduction in GHG emissions.

Input Controls: Enhance knowledge of McDonald’s Engineering

team, sustainability team, and external consultants about

environmental standards

Benchmarking: Review competitors’ environmental standards

and certifications

Reduce food and packaging waste in stores, drive-throughs, and delivery through employee training

and guest education. Food and paper currently account for $4.9 billion, or 39% of company owned

restaurants’ expenses. Reducing food and paper waste can contribute positively to net income.

Output Controls: Track dollars spent on food and packaging

purchases and correspond that to sales for an estimate of waste.

Behaviour Controls: Provide procedures to educate guests and

employees about food and packaging waste

Increase recycling and consider composting initiatives through employee training and guest education. Output Controls: Weigh recycling bins to measure the amount of

recycling completed

Behaviour Controls: Provide procedures to educate guests and

employees about recyclingImprove inventory management system with suppliers and distribution companies (who transport

McDonald’s ingredients and packaging from independently owned distribution centres to the

restaurants) to minimize inventory waste (through spillage or spoilage) and increase efficiency.

Input Controls: Educate employees about latest Enterprise

Resource Planning software to improve inventory management

Output controls: Track dollars spent on food and packaging

purchases and correspond that to sales for an estimate of waste

Benchmarking: Compare performance with competitorsContinue close collaboration with suppliers, particularly of the six priority products: beef, packaging, fish,

coffee, palm oil, and poultry, to reach objectives of sustainable sourcing in a cost-effective manner.

Continue to demand more of suppliers through the supplier code of conduct and raising the bar,

incenting suppliers to provide more sustainable offerings.

Output Controls: Working with suppliers, measure metrics such as

percentage of packaging from certified or recycled sources,

percentage of coffee from certified sustainable production, etc.

Short Term RecommendationsExternal

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Conduct a stakeholder analysis to determine primary and secondary stakeholders: franchisees, suppliers, employees, customers, governments, investors, media, etc.

Balanced score card: McDonald’s public relations and/or corporate responsibility teams track the impact of the identified stakeholders over time to judge the accuracy of the analysis, and their selection as primary or secondary stakeholders.

Continue successful partnerships with existing stakeholders like the Global Roundtable for Sustainable Beef, Ronald McDonald House Charities, and others.

McDonald’s public relations and/or corporate responsibility teams track the number of partnerships and judge the stakeholders’ satisfaction with the company’s engagement processes.

Conduct a product life cycle impact assessment for the top selling products in various categories (sandwiches, sides, desserts, beverages, etc.).

Input and output controls: Use activity-based costing to determine the cost of externalities from the product life cycle. McDonald’s procurement team analyzes the impact assessments and adapts them to procurement guidelines. Behaviour controls: McDonald’s operations team analyzes the assessments to improve product production life and waste recovery.

Return to having one corporate sustainability report instead of

dividing it between coffee, beef, and packaging. Decide on one format and frequency that will remain consistent to allow for transparency and comparison.

Input controls: McDonald’s adopts a popular global reporting standard, such as GRI, and follows

its guidelines. Evaluation will come from reader feedback and comments from GRI. Third parties will be used to confirm the accuracy of the information.

Participate in government consultations on legislation that can have an impact on operations.

McDonald’s legal team judges when there is an opportunity to get involved in government consultation processes, and tracks and follows up on participation.

Develop a process to strengthen communication lines between McDonald’s and suppliers to improve supply chain management.

Benchmarking: McDonald’s communications and/or procurement teams study how competitors manage their supply chain and relations with suppliers, then create an action plan based on the best practices found.

Design an education campaign to teach customers to responsibly dispose of waste (leftover food, packaging, etc.).

Behaviour controls: McDonald’s conducts regular waste audits at select restaurants to determine the amount of waste that is being properly sorted by customers at McDonald’s restaurants.

Short Term RecommendationsTimeline

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Month 1-6 Month 7-12 Month 13-18 Month 19-24 Ongoing Initiatives

Review environmental standardsReduce food wasteIncrease recyclingImprove inventory management

Net Zero Energy PilotRetrofit Company restaurantsImprove water efficiency of Company restaurants

• Retrofit Franchisee restaurants

Continue with G&A cost savingsContinue close collaboration with suppliers

• Stakeholder determination and analysis

• Begin planning change to sustainability report in time for the next report

• Begin life cycle impact assessment

• Design education campaign about waste management

• Complete life cycle impact assessment

• Prepare roll-out of waste management campaign

• Use life cycle impact assessment to influence procurement processes

• Implement waste management campaign

• Evaluation of waste management education campaign (adaptive)

• Continuing relationships with stakeholder groups

• Participation in government consultations (as-needed basis)

• Supply chain management and improvement of communication lines (adaptive)

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Long Term RecommendationsInternal

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Develop healthy image

• Continue to develop the company’s healthy image

• Moving away from the negative perception of fast food by

focusing on providing good quality, sustainably sourced food

with a focus on monitoring its suppliers while maintaining the

image of a low cost family friendly restaurant

Output Controls: Measure consumer satisfaction and engage the help of

focus groups. Consult ACSI score for U.S. market

Benchmarking: Assess competitor activity around healthy food offerings

Implement a consumer–centric approach

• Focus on generating more appeal in fully penetrated markets

(ex. through continuing modernization of restaurants with a

focus on the consumer experience) to regain customers lost

while retaining loyalty among current customers

Behaviour/Input Controls: Deploy training strategy for front line employees

as well as for back end staff to ensure both the utmost quality of customer

service and food preparation

Output Controls: Conduct employee performance evaluations and

evaluate the condition of restaurants yearly

Improve product offering

• Expand the line of specialty beverage offerings to offset losses

from value menu items, continue development of customizable

menu items

Output Controls: Measure consumer response - examine which menu items

are most popular and why – focus on product quality and development

Encourage participation through prizes and giveaways

Invest in technology

• Lower operational costs through self-serve kiosks and to

increase consumer loyalty through ease of access and

convenience (ex. McDonald’s app, table service, delivery

service)

Output Controls: Monitor and track the costs of day-to-day business

Long Term RecommendationsExternal

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Lead industry: Engage Industry peers and share success of

sustainability initiatives at company-owned and net-zero energy

restaurants.

Market value added - measure the difference between the market value

of McDonald’s prior to acting as a sustainability leader and after based on

capital contributed by shareholders and lenders.

Raise supplier expectations: Require suppliers to share company

commitments to environmental standards, energy efficiency and

waste reduction by including these requirements in supplier

qualification and competitive procurement processes.

Behavioural control - measure costs of supply through reduced supplier

overheads from energy efficiency and reduced waste handling.

Elevate stakeholder partnerships: Create a social compact with

stakeholder partners that have a collaborative vision with the

company to focus on further product sustainability improvements.

Balanced scorecard - Assess earnings per share, customer satisfaction and

internal process improvements to gauge success of stakeholder

partnership model based on the key initiatives identified through the

recommendation.

Localize supply chain: Expand growth and reach in emerging

markets through leveraging local delivery services by incentivizing

local businesses and resources.

Activity based costing - Determine indirect benefit to community through

employment and contracting opportunities and direct cost savings of

leveraging local distribution channels to determine success of growth in

emerging markets.

Long Term RecommendationsTimeline

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Initiatives Year 3 Year 5 Year 10

Healthy image Gather data on consumer perceptions, analyze trends in

regards to health conscious decision making, explore

sustainable food options and suppliers , develop a strategy

to immediately take advantage of any “low-hanging fruit”

if the data so indicates

Integrate sustainable choices on to the McDonald’s menu while

slowly phasing out processed/modified ingredients

Ensure that all restaurants are serving

sustainably sourced menu options

Consumer-centric approach Launch a mandatory customer service training for all front

line staff and a more intense food safety module for back

end staff, commit to a re-training timeline, develop a

timeline for how often each restaurant building will be

evaluated on the basis of consumer appeal

Launch an education plan for the changes coming to the

McDonald’s menu – educate on sustainability and encourage

personal sustainability plans to encourage ideas and feedback

Monitor and evaluate employee

performance , ensure that 100% of

restaurants have had the minimum

number of inspections in the last 10

year period

Product offering Survey the consumer base to identify which products are

most popular/unpopular

Begin to phase out the most unpopular menu items while

enhancing customizable components

Continue to monitor and adjust as

necessary

Investment in technology Survey the technology in all restaurants and compare to

that of competitors

Invest in replacing old technology, introduce more virtual ordering

options for ease of access

Ensure that all restaurants have the

same level of ease of access for

consumers

Lead industry Identify interested industry peers and jointly develop

industry peer engagement model

Lead sustainability conferences, industry synergy meetings and

manage initiatives

Showcase industry peers

demonstrating success in sustainability

with awards and recognition in industry

Raise supplier expectations Develop qualification standards and policies for supplier

qualification. Initiate sustainability training for preferred and

strategic suppliers

Embed requirements in competitive processes for evaluation.

Require flow through savings from preferred and strategic

suppliers that have embedded eco-efficiencies in processes

Maintain existing supplier qualifications

through performance management

and re-qualification

Elevate stakeholder

partnerships

Identify interested stakeholder partners and jointly develop

engagement model

Announce social compact and identify key areas for

improvement and Initiative leaders.

Invite industry peers that have been

showcased to engage in social

compact

Localize supply chain Identify key emerging markets and appropriate tools for

engagement. Develop and launch pilot program

Expand local opportunities beyond delivery services and offer

business development training to further expand supplier

competencies to support regional growth

Potentially develop self sustaining

regional operations for key logistics

and warehousing functions.

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15Team Members

Monica Czagan is a pension analyst in the HR department at the University of Waterloo. She has a Bachelor of Arts in Economics and Business (Honours) from the University of Waterloo. She currently lives in Waterloo, ON.

Manpreet Dhillon is a Senior Contract Specialist at TransCanada PipeLines. She has a Bachelor of Commerce from Simon Fraser University. She currently lives in Calgary, AB.

Lionel Ouedraogo is a Financial Advisor at RBC. He has a Bachelor in Business Administration from Université Sainte-Anne. He currently lives in Halifax, NS.

Josephine Pham is a Marketing Manager at Ecosystem Energy Services. She has a Bachelor of Commerce and a minor in French from the University of British Columbia. She currently lives in Toronto, ON.

Paulina Pisarek is an Environmental Officer at Public Services and Procurement Canada. She has a Bachelor of Arts in Environmental Studies and a minor in Spanish from the University of Ottawa. She currently lives in Ottawa, ON.