Mcdonald’S AND Franchising PDF

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MCDONALD’S AND FRANCHISING The franchise concept has been key to McDonald’s worldwide success. This has ensured consistency of quality and uniformity of product from location to location and country to country. As the arrangement developed over the years, the nature of the agreement between franchisor (McDonald’s) and the franchisee developed and changed. Through observing both successes and some failures, an agreement was eventually developed that involved McDonald’s itself having a large influence on store location, while the normal term for a franchisee was limited in the first instance to 20 years. The franchisees, in exchange, agreed to: . use McDonald’s recipes and specifications for menu items; . comply to specific standards of operations, including systems of inventory control, financial record keeping and marketing; . display and use of McDonald’s trademarks and other registered logos and marks; . meet McDonald’s standards for such things as restaurant and equipment layout and display signage. From the outset, McDonald’s made franchises expensive. This was partly not only to guarantee that each new store development would be of a quality and in a situation consistent with the company’s reputation but also to ensure that the amount risked by each franchisee was sufficient to guarantee a lot of effort to make the franchise a success. The costs included an initial fee paid to McDonald’s at the commencement of the franchise, a refundable deposit as security for faithful performance of the franchise, costs while the franchisee and staff underwent initial training and the costs of establishing the restaurant in terms of fixtures, fittings and landscaping. Such a cost was beyond the reach of the casual investor and required a detailed financing package to be drawn up and presented, possibly involving elements of both private and borrowed capital. In exchange, the franchisee would benefit from the parent company in terms of the provision of the fabric of the building (i.e., franchisees rarely owned the building itself), advice on the various aspects of the McDonald’s ‘way’ and a very high chance that the venture would be a success, drawing as it did on the proven McDonald’s business formula and marketing. Despite the reciprocal advantages of franchising, McDonald’s adopted a dual approach to its expansion. While the majority (about 70%) of stores were franchised, the company chose to operate some (the remainder) as directly controlled operations from its national centers. Entry Mode Chosen by McDonalds McDonald’s main mode of entry into the international market is the use of international franchises where over 80% of stores worldwide are owned and run by franchisees (McDonald's, 2013). In 2013 the number of McDonald’s franchises around the world reported to be 12,605 in the US and 15,365 internationally (Entrepreneur Media, 2013). The company also uses the mode of Foreign Direct Investment (FDI) to get its restaurants around the globe, as 6,500 restaurants worldwide are owned by the company (Entrepreneur Media, 2013). In some countries, McDonald’s only uses the international franchising method, as is the case of Saudi Arabia and India for example, where 100% of McDonald’s restaurants are owned by local Franchisees (McDonald's Jeddah, 2013); (McDonald's India, 2013). In other countries the corporation decides to use both the franchising method and FDI, as in Australia and Germany where over 80% of McDonald’s

restaurants are owned by local franchisees leaving under 20% of them being corporately owned (McDonald's Australia, 2013); (McDonald's Germany, 2013). Over recent years, McDonald’s has noticed that their franchises are much more profitable to them than their corporately owned restaurants. The marked differences in profit resulted in the company taking steps to turn some of their own restaurants into franchises, which is why there was a 24% decline in stores owned by McDonald’s between the years 2006 and 2009 for example (Treffis Team, 2010). In Saudi Arabia and India where no corporate ownership exists, the restaurants are not owned by local entrepreneurs as is the case in Australia and Germany, rather they are owned by one or more local corporations. In Saudi Arabia for example Reza Food Services Co. owns and operates the restaurants in the Western and Southern regions of the country (Saudi Gazette, 2013), whereas Riyadh International Catering Company serves the remaining Central, Eastern and Northern regions of the Kingdom (McDonald's Riyadh, 2013). Similarly, in India, all restaurants are managed by two business entities, namely Connaught Plaza Restaurants Private Limited for the northern and eastern parts of India and Hardcastle Restaurants Private Limited for the western and southern parts (McDonald's India, 2013). Why the Entry Mode Was Chosen and Its Success There are various reasons behind McDonald’s choice of using international franchising as their main market entry method in the global market, one of them is that international franchising minimizes the risks and related operating costs on the franchisor as a large proportion of these burdens are put on the franchisee. For example, to become a franchisee of McDonald’s in Australia the franchisee has to firstly commit to a nine-month unpaid training program, invest over $800,000 of unencumbered funds and make a minimum of a 20-year commitment (McDonald's Australia, 2013). Franchising also allows the franchisor more control over the franchisee than other methods of market entry such as licensing for example, hence using the franchising method McDonald’s is able to lay down the ground rules it wants its brand to be seen by (Griffin & Pustay, 2013) It has to be noted that franchising is a very profitable business that generates high returns in form of fees, especially for a successful global company such as McDonald’s where the profits received from franchises are four times higher than that of the company’s owned restaurants (Treffis Team, 2010). Yet another vital benefit that international franchising aids with, is that the franchisee is able to gather vital information about the local culture and market customs of the country, which would be very difficult for McDonald’s to obtain if it were to solely use FDI to enter a country (Griffin & Pustay, 2013). Given all the above mentioned benefits of international franchising and despite the fact that a few countries do not have any corporate owned stores, McDonald’s still uses the form of FDI. The corporation chooses to do this for reasons such as having company owned stores assists McDonald’s in setting its own operating standards, maintaining control over the product line and so that it can position itself strongly against its competitors (Treffis Team, 2010). It is important for a franchisor to be successful in their own country before franchising globally (Griffin & Pustay, 2013); something that McDonald’s has always been able to do, due to their low prices, consistent menu and speed of service (John Wiley & Sons, 1996). ‘American’ food was popular in other countries besides the US, and this was a factor that also helped McDonald’s succeed at the rate that it did (Griffin & Pustay, 2013). With reputable and well-known companies such as McDonald’s, it is generally not

difficult to find motivated entrepreneurs willing to be part of the company, by purchasing and running one of the corporations’ franchises, as they trust the company, particularly as McDonald’s also provides all the necessary tools and ongoing training and support to all its franchisees (McDonald's Australia, 2013)....