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8/17/2019 Management Accounting Project 2_D6 (Finalized).pdf
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Section 1 – Company Background, Industry Overview and Competitor Analysis
1.1 Company Background
McDonald's Corporation is the world's largest chain of hamburger fast food restaurants.
A McDonald's restaurant is operated by either a franchisee, an affiliate or the corporation itself. The
corporation's revenues come from the rent, royalties and fees paid by the franchisees as well as sales in
company-operated restaurants.
McDonald's primarily sells hamburgers, cheeseburgers, chicken products, french fries, breakfast items, soft
drinks, shakes and desserts, serving more than 58 million customers daily.
1.2 Industry Overview
In order to have a clearer outlook of the industry and competitors, Porter’s Five Forces Model (Please refer to
Figure 1 in the Appendices) is adopted to analyze the fast food industry.
1.2.1 Competitive Rivalry within an Industry
To start with, the competitive rivalry within the fast food industry is high as the products offered by each
company are similar. Competition is ferocious as there are many firms in the industry and the customer
loyalty is low as customers are eager to try new products. McDonald's, however, manages to retain market
share by becoming a cost leader and offering differentiated products together with prominent marketing
efforts.
1.2.2 Threat of New Entrants
In general, the barrier of entry into the fast food industry is low as there are no government interventions on
introduction of a new fast food provider. Thus, it is very likely for companies to enter the industry. Indeed,
countless fast food companies offer burgers and fries around the globe. Yet McDonald’s has been the
dominant player with more than 32000 shops worldwide, obtaining much of the market share.
1.2.3 Bargaining Power of Suppliers
The bargaining power of suppliers is poor as raw materials such as beef and bread and other food are readily
available in many countries, and the supply of such materials can be considered as perfectly competitive,
where suppliers have not much power to alter the supply conditions.
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1.2.4 Bargaining Power of Customers
The bargaining power of customers, on the other hand, is strong as there are many companies providing
similar products. Customers also tend to try new offerings, increasing the chance of turning away to
competitors. In response, large firms like McDonald’s regularly launch marketing campaigns to promote latest
products to attract customers back to make purchases.
1.2.5 Threat of Substitute Products
Since westerners are used to having burgers and sandwiches, there are few substitutes to burger and the
threat is low. The threat of substitutes is higher in Asia-Pacific region as there are caterers providing fast
Chinese or Japanese cuisines, such as Café de Coral and Yoshinoya. In response, McDonald’s has attempted to
capture customers by providing rice burgers, but it was not well-received.
1.3 Competitor Analysis
Out of the many fast food companies, Yum! Brands, Inc., a mother company of KFC, Pizza Hut and 3 other
brands, Burger King and MOS Burger were chosen. Yum! Brands, Inc. offers a wide range of fast food
worldwide while Burger King is comparable to McDonald’s in terms of nature of operations. MOS Burger,
originated in Japan, is an emergent company expanding in Asia.
1.3.1 Inventory Management
The low days’ of sales in inventory for companies except MOS Burger suggested that large fast food
companies like McDonald’s have already switched to Just-In-Time (JIT) inventory policy to reduce cost of
storage and maintenance on quality of food to the lowest.
1.3.2 Profitability Analysis
The sales revenue obtained recorded a drop for most companies in 2009 due to the recession brought by the
financial tsunami, but McDonald’s has recorded huge sales revenue, more than twice as much as Yum! Brands
Inc. and almost ten times of Burger King, maintaining high gross and operating margin. The return on assets
and equity are also appreciable while the huge return on equity by Yum! Brands, Inc. is actually due to the
equity deficit caused by a huge debt from Pepsi.
1.3.3 Cost Control
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these marketing costs in the “selling, general & administrative expenses”2 item. The marketing strategy of
McDonald’s also addresses the challenges faced in these recent years concerning the intensive pressure from
external competitors, the rising concern over health from parents as well as the environmentally friendly issue.
This is expected that McDonald’s will continue to promote itself as the fast-food provider with qualitative
services and food. It will continue its involvement in environmental actions to address the concern, as well as
in the corporate responsibility by using “green” as the concept. No great changes are foreseen in the overall
marketing strategies of McDonald’s.
For the advertising costs, McDonald’s allocates its budget for its advertisements worldwide on TV, billboards,
newspaper etc. Despite the traditional displays, McDonald’s also exposes itself to the digital world by focusing
on the online advertising targeting at the younger generation. The advertising cost amounted to $611.5
million in 2005 and increased by 14.4% to $699.8 million in 2006. There was a smaller percentage increase of
2.64% in 2007. Although there records a decrease in advertising costs for McDonald’s in recent years, it is still
reasonable for McDonald’s to increase the promotion by intensive advertisements as a means to trigger sales
in the times of the economic recovery in order to trigger the need of McDonald’s food or to introduce
customers’ of McDonald’s new products. The forecast is made based on the optimistic view on the recovery of
the economy gradually.
It is likely for the advertising cost to increase on a steady rate to a similar level of 2007, before the major
sports events held, which were expected to bring certain fluctuation to the currency and thus the expenses
allocate (McDonald’s, 2007, 2008, 2009). Therefore, the advertising expense is expected to have a 3% growth
in 2010 to $670 million3
as the economic recovery is in the primary stage, with quite an uncertain prospect for
all industries. McDonald’s is expected to have a positive change in the advertising cost addressing the online
marketing and the consolidation of brand image in face of competitors, but not as much as the increase in
2006. Similarly, it is expected that an increase in the overall marketing expense can be observed in the year
2010, with the level of 4.12% increase to $2326 million, in the situation better off than 2007, but the progress
is not as obvious as that in 2006.
2 For the selling, general & administrative expense account, it only reflects the spending of McDonald’s marketing and related costs
on the company owned stores. All comparison and prediction are thus made based on the expenses for its stores owned.3 The estimated number is only based on the assumption of the trend of increasing expenses in relevant account.
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2.2 Pricing Strategy
Flexible strategies are used by McDonald’s in accordance with different product promotion as well as the
economic situation. Product line and bundling are introduced in McDonald’s worldwide, providing limited
choices with few interchangeable options. Promotional pricing is often used, especially in Hong Kong,
introducing weekly promotion products or meals in a lower price to trigger sales. Penetration pricing is for
new product launching like the coffee of McCafe. Value pricing is special as it appears in times of economic
downturn to meet the demand of cheaper meals. As there are competitors offering more upscale dining
experience charging a higher price, and some traditional rivals competing in the market giving lower price
meals on an eroded margin, it is thus less likely for McDonald’s to have a huge change in the pricing strategy
for either increasing the price which shifts customers to competitors, or lower the price which may further
reduce the profit margin that is impossible to support the quality of goods and services delivered.
Section 3 – Sales Forecast
3.1 Sales
Revenues of McDonald’s consist of company-operated sales and revenues from franchised restaurants
including rent and royalties based on a percent of sales.
According to the consolidated operating income statement of the years 2007, 2008 and 2009, the sales of
company-operated restaurants remained relatively the same from 2007 to 2008 and fell by 7% from 2008 to
2009. The revenues from franchised restaurants rose by 13% from 2007 to 2008 and 5% from 2008 to 2009
( McDonald’s Corporation, 2009). It implies that some company-operated sales shifted to franchised sales in
the past two years due to the re-franchise strategy which led to a decrease in consolidated revenues because
the company could only receive a certain percentage of the franchised restaurants’ sales as income.
In recent years, McDonald’s has been putting much effort into re-imaging itself, improving services and
planning to aggressively open about 600 new restaurants in three years in China (McDonald’s Corporation,
2009), so it is expected that the sales of both the company-operated restaurants and franchised restaurants
will increase in 2010 due to a more optimistic economic outlook as well as the strategies mentioned above.
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3.2 Cost of Goods Sold
On the other hand, the cost of goods sold will also be expected to increase because of inflation with the global
inflation rate of 3.7% in 2010 (“Proper role”, 2010). However, since McDonald’s adopts bulk purchases, the
impact of inflation may not be huge. The increase in sales volume will lead to a rise in total cost of goods sold
and the inflation will add a slight increase to it as well.
Section 4 – Inventory Management
In this part, we will look at the two major components of McDonald’s inventory, holding costs and inventory
costs.
What used to be the case was McDonald's would pre-cook a batch of hamburgers and let them sit under heat
lamps. So, raw materials like bread, beef, cheese and chicken were to be kept for as long as possible and
eventually discarded while they could no longer be sold. This incurs a fairly holding cost and ordering cost.
With new burger making technology, McDonald’s is capable of making burgers faster and thus the time
between placing an order and receiving it is shortened. Also, with the implementation of Just-In-Time system,
the finished products sitting in the inventory are greatly reduced. This ensures the company to properly
manage inventory effectively even in times of inflation without holding too much inventory. This also
facilitates rapid inventory turnover, better and responsive cost controls. In 2010, we can expect that the
inventory level will be more or less similar to the ones of previous years.
Section 5 – Capital Expenditure Analysis
5.1 Definition
Capital expenditure is the expenditure incurred for buying new assets or adding value to existing assets. The
assets are expected to be used for more than one period. It is probable that future economic benefits
associated with the assets will flow to the enterprise.
5.2 Assumptions
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fixed cost – “Occupancy” expense as whole (including franchising occupancy cost), it has been reduced slightly
from 2007 to 2009 by 1.50%. “Selling, general and administrative expenses” decreases by 5.61% within these
3 years.
6.2 Cost Control
With the pressure of inflation and increasing production cost, McDonald’s corporation uses respective tactics
to control its costs. Through ownership of land and building or long-term lease of restaurant sites, despite
facing high inflation in rental costs, McDonald’s successfully controls its rental and occupancy expenses which
is a major component of fixed costs (McDonald’s Corporation, 2010). For “Payroll and employment benefits”,
it has been reduced significantly because McDonald’s has increased the proportion of franchised restaurant
worldwide. Due to a smaller proportion of corporate-owned restaurants, it reduces the manpower cost
needed. For “Food and paper” cost which constitutes cost of goods sold, McDonald’s maintains rapid
inventory turnover to ensure that there is no idle inventory which ties up cash or causes wastage of food
inventory. Therefore, it can keep the food cost lowered, even under the upward pressure brought by inflation.
6.3 Projected Cost Analysis
With the tactics used by McDonald’s as stated above, using the previous annual rates of change as reference,
it is anticipated that all four categories of costs will increase but at a decreasing rate.
Section 7 – Summary and Conclusions
As regard to the optimistic economic outlook and the constantly improving service, both company-operated
restaurants and franchised restaurants are believed to bring increased revenue and loyalties to McDonald’s.
With the view to enhance its competitiveness, it is predicted to see that there will be reasonable increased
budgets for advertising expenses as well. However, Due to the ongoing inflationary pressure, the commodity
as well as selling, general and administrative expenses are expected to increase for the year 2010, assuming
there will be no significant changes in the cost structure of McDonald’s.
Furthermore, along with the possibility of the expansion plan of further addition of restaurants, there will also
be an increasing capital expenditure involved in both opening up new restaurants as well as reinvesting in
existing restaurants. Despite so, it is believed that the extra costs and expenses can well be covered by the
increased revenues.
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References
McDonald’s Corporation. (2006). 2006 Annual Report. Retrieved April 4, 2011 from McDonald’s Web Site:
http://www.aboutMcDonald's.com/mcd/investors.html.
McDonald’s Corporation. (2007). 2007 Annual Report. Retrieved April 4, 2011 from McDonald’s Web Site:
http://www.aboutMcDonald's.com/mcd/investors.html.
McDonald’s Corporation. (2008). 2008 Annual Report. Retrieved April 4, 2011 from McDonald’s Web Site:
http://www.aboutMcDonald's.com/mcd/investors.html.
McDonald’s Corporation. (2009). 2009 Annual Report. Retrieved March 7, 2011 from McDonald’s Web Site:
http://www.aboutMcDonald's.com/mcd/investors.html.
Proper role of the central bank. (2010). Retrieved March 31, 2011 from
http://www.thedailystar.net/newDesign/news-details.php?nid=164755
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Appendices
Table 1: Days’ Sales in Inventory of McDonald’s and its competitors in 2009
McDonald’s Yum! Brands,
Inc.
Burger King MOS Burger
Days’ Sales in
Inventory(days)
3.04 5.96 0 33.37
Table 2: Sales Trend Analysis of McDonald’s and its competitors
Sales
Revenue
2009 2008 2007 2006 2005
McDonald’s
(million USD)
22745.0 23552.0 22787.0 20895.0 19117.0
Yum! Brands,Inc. (million
USD)
10836.0 11304.0 10435.0 9561.0 9349.0
Burger King
(million USD)
2537.4 2454.7 2233.7 2047.8 1940.3
MOS Burger
(thousand
JPY)
60641865 62301887 59890823 58216912 59345939
Table 3: Profitability of McDonald’s and its competitors in 2009
Profitability McDonald’s Yum! Brands, Inc. Burger King MOS Burger
Gross Margin 44.0% 31.0% 36.8% 45.2%
Operating Margin 30.1% 14.7% 13.4% 2.9%
Return on Assets 15.5% 15.7% 7.4% 1.3%
Return on Equity 33.2% 233.6% 22.0% 1.6%
Table 4: Manufacturing Cost to Non-manufacturing Cost Analysis of McDonald’s and its competitors in 2009
McDonald’s Yum! Brands, Inc. Burger King MOS Burger
Manufacturing
Cost as percentage
of sales
56.0% 69.0% 63.2% 54.8%
Non-
manufacturing
Cost as percentage
13.9% 16.4% 23.4% 42.3%
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of sales
Manufacturing
Cost to Non-
manufacturing
Cost
402.9% 420.7% 270.1% 129.5%
Table 5: Definitions of Accounting Ratios (Profitability)
●
●
● , where
● , where
●
Table 6: Inventory at cost, not in excess of market
Year Inventory (million USD)
2006 149.0
2007 125.3
2008 111.5
2009 106.2
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Cash flows from financing activities
Dividends paid (2369.63)
Cash to purchase treasury stock (2657.53)
Cash paid to retire long-term loans (711.12)
Net cash used in financing activities (5738.28)
Net increase in cash and cash equivalents 1197.95
Cash and cash equivalents as at January 1, 2010 1796.00
Cash and cash equivalents as at December 31, 2010 $2993.95
Table 9: Projected Income Statement
Assumptions for the Budgeted Income Statement 2010
All the figures in the Income Statement 2010 are forecasted using the figures of the fiscal year 2009 and 2008. Expenses
and sales are expected to increase largely when compared with the performance and operations in 2009 because of the
economic recovery, though not recovering to the level of 2008.
For the year ended
31st December 2010
For the year ended
31st December 2009
Revenue million USD million USD
Sales by Company-operated restaurants 16,282.44 15,458.5
Revenues from franchised restaurants 7,557.98 7,286.2
Total revenues 23840.42 22,744.7
OPERATING COSTS AND EXPENSES
Company-operated restaurant expenses
-Food & paper 5,367.51 5,178.0
-Payroll & employee benefits 4,119.86 3,965.6
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-Occupancy & other operating expenses 3,682.26 3,507.6
Franchised restaurants-occupancy
expenses 1,362.62 1,301.7
Selling, general & administrative
expenses
2,326.23 2,234.2
Impairment and other charges (credits),
net 30.05 (61.1)
Other operating (income) expense, net (177.84) (222.3)
Total operating costs and expenses 16,656.69 15,903.7
Operating income 7,813.73 6,841.0
Interest expense-net of capitalized
interest of $12.0, $11.7 and $12.3 450.80 473.2
Non-operating (income) expense, net Gain on sale of investment
(15.95) (24.3)
Income before provision for income
taxes 6,748.88 6,487.0
Provision for income taxes 1,980.23 1,936.0
Net income 4,768.65 4,551.0
Earnings per common share-basic: 4.59 4.17
Earnings per common share-diluted: 4.52 4.11
Dividends declared per common share 2.26 2.05
Weighted-average shares outstanding-
basic 983.00 1,092.2
Weighted-average shares outstanding-
diluted 996.67 1,107.4
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Table 10: Projected Balance Sheet
31st December 2010
(Budgeted)
31st December 2009
Assets million USD million USD
Current assets
Cash and equivalents 2994.0 1796.0
Accounts and notes receivable 1161.5 1060.4
Inventories, at cost, not in excess of
market
102.4 106.2
Prepaid expenses and other current
assets
510.5 453.7
Total current assets 4768.4 3416.3
Other assets
Investments in and advances to
affiliates
1278.3 1212.7
Goodwill 2555.1 2425.2
Miscellaneous 1801.3 1639.2
Total other assets 5634.7 5277.1
Property and equipment
Property and equipment, at cost 34482.4 33440.5
Accumulated depreciation and
amortization
(13014.2) (11909.0)
Net property and equipment 21468.2 21531.5
Total assets 31871.3 30224.9
Liabilities and Shareholders’ Equity
Current liabilities
Accounts payable 625.5 636.0
Income taxes 169.3 202.4
Other taxes 293.6 277.4
Accrued interest 221.7 195.8
Accrued payroll and other liabilities 1788.3 1659.0
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Current maturities of long-term debt 17.3 18.1
Total current liabilities 3115.7 2988.7
Long-term debt 11401.8 10560.3
Other long-term liabilities 1464.8 1363.1
Deferred income taxes 1354.6 1278.9
Shareholders’ equity 14534.4 14033.9
Total liabilities and shareholders’
equity
31871.3 30224.9
Table 11: Projected Cash Budget
Cash Budget (in millions) December 31, 2010
Beginning cash balance $ 1796
Cash collections (W1) 25704.525
Total Cash Available 27500.525
Purchase of inventory (W2) (5436.9)
Operating expenses (W3) (10569.312)
Interest expenses (W4) (482.761)
Purchase of property and equipment (W5) (2127.789)
Purchase of restaurant business (W6) (151.528)
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Long-term financing repayment (W7) (711.122)
Treasury stock purchases (W8) (2657.53)
Common stock dividends (W9) (2369.63)
Total Cash Payments (24506.572)
Ending cash balance 2993.953
W1: 1060.4+15458.5x1.05+7286.2x1.1-1060.4x1.07+406x0.98 = 25704.525
W2: 5178x1.05 = 5436.9
W3: (3965.6+3507.6+1301.7+2234.2) x0.96 = 10569.312
W4: 468.7x1.03 = 482.761
W5: 1952.1x1.09 = 2127.789
W6: 145.7x1.04 = 151.528
W7: 664.6x1.07 = 711.122
W8: 2797.4x0.95 = 2657.53
W9: 2235.5x1.06 = 2369.63
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Diagrams / Tables
Fig. 1 Porter’s Five Forces Model
Fig. 2 Ansoff ’s Matrix
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Percentage of Contribution of each member:
AU PO YU - 16.67% (2010239659)
CHAN SHING HO JOHNNY - 16.67% (2010007173)
CHAN WING YIN - 16.67% (2010067381)
CHAU HOW YING - 16.67% (2010011930)
KWAN TSZ FUNG - 16.67% (2010075429)
LEUNG CHIN CHING - 16.67% (2010002094)