10 Secrets of McDonald’s success

Investors can take lessons from the McDonald’s story to help select stocks with superior attributes

McDonald’s Corporation (NYSE: MCD), the world’s most successful chain of fast-food restaurants, last week unveiled its 2011 results. As investors have come to expect from the ever-expanding group, McDonald’s numbers hit new heights.

Last year, McDonald’s worldwide revenue rose 12% to an all-time high of US$27 billion, capping nine consecutive years of sales growth.

Despite consumers tightening their belts, McDonald’s managed to increase its operating margin by 0.6 percentage points to 31.6%. As a result, its net income for the year climbed 11% to US$5.5 billion, and earnings per share grew by an impressive 15%. That’s brand power at work.

At a share price just under US$99, McDonald’s is valued at over US$100 billion, making it one of the world’s largest corporations.

Fast-food facts
Brothers Dick and Mac McDonald opened their first restaurant in 1940, but the business really started to grow under Chicago salesman Ray Kroc. In 1961, Kroc bought out the McDonald brothers and began a truly impressive US and global expansion drive.

Today, McDonald’s has more than 33,000 restaurants across the world, employing 1.7 million people in 119 countries. What’s more, 80% of its restaurants are franchises, run by entrepreneurs keen to jump aboard the McDonald’s bandwagon.

The company known to Australians as Maccas opened its first restaurant here in 1971 in Yagoona, Sydney. Today, it has over 780 outlets across the country, employing around 85,000 people.

10 ingredients of McDonald’s ‘secret sauce’
Of course, the big question is what makes McDonald’s such an incredible corporate success story? What’s behind the eightfold increase in the company’s share price from its 2003 low of $12? Here are my thoughts:

1. Franchising

Worldwide, 80% of McDonald’s restaurants are franchised; in Australia, this proportion is two-thirds. Franchising enables McDonald’s to harness individual talent and effort, while still retaining control of its brand, menu and pricing.

2. International expansion

McDonald’s is simply huge in the US, but it also has a presence in 118 other countries. In Australia, McDonald’s has been an established brand for 41 years and is as much a part of our suburbs and shopping strips as well-known brands such as Woolworths Limited (ASX: WOW) and Commonwealth Bank of Australia (ASX: CBA).

3. Global, but local

While McDonald’s is a multi-national giant, it adapts its business and menu to suit local markets. This ‘global, but local’ approach enables it to tailor its offerings to suit the local palate. For example, in some countries, McDonald’s sells beer and, in India, where Hindus don’t eat beef, McDonald’s menus have vegetarian and non-beef options. Australia was the birthplace of the McCafe concept and, perhaps not surprisingly, the McOz burger.

4. The brand is the business

The McDonald’s brand is one of the most valuable in the world, being easily and universally recognised. Everywhere you go, McDonald’s restaurants have an instant ‘recognisability factor’ — the familiar red-and-gold livery, plus the ‘Golden Arches’ and the world’s favourite clown, Ronald McDonald.

5. ‘Old and new’ menu

The McDonald’s menu sticks rigidly to old-fashioned favourites such as the Big Mac and Chicken McNuggets. However, the group is also willing to experiment, adding or deleting items from its menu according to their popularity and local tastes. For example, its new healthier menus and inexpensive all-day coffee have helped the business snare a whole new group of customers.

6. Low prices

Gourmets will sneer at McDonald’s menu, arguing that its products are low on taste and high on fat and sugar. Nevertheless, its low prices bring tens of millions of people through its doors every day.

7. Meal sizes

As well as catering to all budgets, McDonald’s menu offers meals of all shapes and sizes. While its ‘super sized’ range has been blasted by anti-obesity campaigners, McDonald’s also offers bite-sized meals for those with smaller appetites.

8. Film tie-ups and sponsorship

To keep its regular promotions fresh, McDonald’s teams up with media partners, especially film companies. When the likes of Disney (NYSE: DIS) or DreamWorks (Nasdaq: DWA) release a new movie, you’re almost certain to see the theme in your local McDonald’s.

9. Recruiting young workers

Millions of young adults got their first job with McDonald’s. While this helps to keep wage bills down, McDonald’s also provides industry-leading, on-the-job training for young workers. Last year, the company ranked eighth on a list of the ’25 Best Multinational Companies to Work for in the World’. Most senior McDonald’s managers started out serving on the shop floor and worked their way up to the boardroom.

10. Free Wi-Fi

The vast majority of Australian McDonald’s stores now offer free Wi-Fi. It’s not unusual to see people using laptops or tablet computers while eating or having coffee. McDonald’s now boasts that it serves up more emails each day (data-wise, the equivalent of six million messages) than it does big Macs.

Foolish take-away
McDonald’s isn’t everyone’s restaurant of choice – although the company continues to work hard to change that – but it’s hard to argue with the level of success it has achieved. By building a truly valuable brand and making sure the company delivers on consumer expectations, McDonald’s has risen to the top of its industry, and continues to strive for greater success.

It’s always easy to see success with the benefit of hindsight, but investors can take some lessons from the McDonald’s story to help select companies with superior attributes – those that drive growth, give the company pricing power and harness the best efforts of its partners and staff.

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Scott Phillips is The Motley Fool’s feature columnist. You can follow Scott on Twitter @TMFGilla. The Motley Fool’s purpose is to educate, amuse and enrich investors. Scott owns shares in McDonald’s and Woolworths. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

A version of this article, written by Cliff D’Arcy was originally published on fool.co.uk.

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