Looks like I’m right about McDonald’s
As I mentioned in the end of my previous article about McDonald’s, one way they can improve their sales by going for a brand extension; in this case by going extending their fast food brand into fast casual dining.
As predicted, McD is testing table service in 600 of its Southern California restaurants and 400 of its UK locations.
However, bringing food to your table isn’t all. They are embracing foodie-ism. Higher quality ingredients, an expanded menu including breakfast bowls, yogurt, premium burgers in their “signature collection” such as the Saucy Baker.
I haven’t looked into Burger King’s financials but looks like they are expanding their menu as well, by selling hot dogs. Will it go in the way of the McPizza or all day breakfast?
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I recently completed financial projections for Clear Wave Air. The Clear Wave Air Purifier is a revolutionary microbe killing system. Unlike other purifiers that depend on filtration to block out harmful microbes and molds, the Clear Wave Air destroys these harmful micro antagonist and it does it continuously, quietly, and efficiently.
Great info on CEO compensation
I like really Marketplace.org and Planet Money on NPR. Great podcast/radio segments that are interesting and pertinent. Business info that is fun and entertaining.
Heard this the other day about CEO compensation that was filed last week. If you ever wondered why CEO pay shot up several-100x increased in the 90s: http://www.npr.org/sections/money/2016/02/05/465747726/-682-when-ceo-pay-exploded
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Ben Franklin is a world-class intellect in both books and in life
The Importance of Bootstrapping
The importance of bootstrapping cannot be emphasized. Most businesses fail because of a lack of cash and bootstrapping’s main objective is to do the most with the least amount of cash.
Bootstrap – adjective
A situation in which an entrepreneur starts a company with little capital. An individual is said to be bootstrapping when he or she attempts to find and build a company from personal finances and/or from the operating revenues of the new company.
“The business was a bootstrap operation for the first ten years.”
Most startups do not have a bunch of cash lying around. The importance of bootstrapping is all the more critical for them. Businesses have to make do with what little they have. We often tell our clients that as the CEO/Founder, they are also the janitor. One potential client wanted to hire a marketing manager for her startup. Hiring a marketing manager was vastly beyond her revenue allowance. She should have allowed us to consult on how to manage her own marketing campaign. She then could’ve saved a fortune by being her own marketing manager.
The temptation to abandon bootstrapping is strong, especially when investors come knocking. One of my clients attracted large investors with a business plan I had prepared for him. Initially, I budgeted a modest salary for him in the financial projection. He saw that there was a good amount of retained earnings (something investors want to see) and had since budgeted a larger salary for himself. I had to tell him to reduce his salary. I am not alone in emphasizing this sentiment:
- A red flag goes up for Mark [Cuban] when a Shark Tank contestant says that he’d be comfortable with a six-figure salary. Ultimately, Mark and all the other sharks walk away from the deal.
- Serial entrepreneur Neil Patel, founder of Crazy Egg and KISSmetrics, reflects on how glad he was keeping a $5,000/mo. salary even after raising $4,000,000 in seed and series A rounds for KISSmetrics.
Your Startup Guru advised a client to pay himself less and take in dividend income instead because it is taxed at a lower rate. In business, cash is king, and the CEO doesn’t want to be the kingdom’s worst drain.
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Importance of a Financial Plan
LearnVest CEO Alexa von Tobel talks on HuffPost Live about the importance of having a financial plan with their business plan.
LearnVest, a financial planning service for women, was acquired by Northwestern Mutual for $250 million in 2015.
Luckily for you, all of my business plans come with a 3-5 year financial plan that includes income statement, balance sheet, and cash flow statement.
Product extension
When you think of McDonald’s food you think of burgers. Maybe other things too but mainly burgers. However, back in the late-80s/early-90s the Golden Arches tried to expand into pizzas.
This was ultimately an unsuccessful expansion for reasons beyond a confusing palate. They failed because they expanded beyond their core competency: making hamburgers.
Operations
From an operational stand point hamburgers are different than pizzas. Making pizzas require different equipment and ingredients. One reason for McDonald’s profitability at relatively inexpensive pricing is due to cost efficiencies from economies of scale; every inch of a McDonald’s kitchen is optimized. Fry pans have a designated size that fit with the size of the patty, that are heat up at a certain rate. Pizzas don’t need frying pans. They need ovens. Ovens that are expensive to put into existing restaurants and take up valuable kitchen space. Pizzas also took longer to prepare than the fast food burger. People had to wait longer; an unusual thing for a fast food company to ask of their customers. Lastly, pizzas not fit through the drive through window as easily as a bag of burgers and fries.
Marketing
They could’ve had success with pizzas if they approached it from a different angle. McDonald’s found success with a production expansion with the Egg McMuffin. Originally, skeptically received, breakfast is a McDonald’s staple now. Burgers are lunch thing, but they successfully introduced breakfast. Pizza is a dinner thing. Therefore, instead of pizzas, McDonald’s should have brought in pizza by the slice (a very well-known concept at pizzerias) or at least personal sized /small pizzas. A slice of pizza for lunch is not a foreign concept. An entire pizza for lunch is.
The difficulty in making and selling different types of food is probably why even large chain restaurants choose to differentiate different palates under different brands as Pizza Hut is doing with WingStreet and Carl’s Jr. with Green Burrito.
Now it will be harder to reintroduce pizzas because McDonald’s is busy rebranding itself to health with marginal success. Pizzas aren’t considered to be healthy. Nonetheless, it is not hitting their market value with a 5 year high at $118/share.
McDonald’s might set up for another go at extension but instead of a product extension (i.e. new product), they might go brand extension (i.e. new company). The popularity of fast casual dining such as Chipotle (before the e-coli debacle) and Blaze Pizza might be an attractive direction to expand McDonald’s.
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