Tuesday, January 11, 2011

Research Paper on McDonalds

Research Paper on McDonalds

Key Issues
The most important issue is to examine the possibilities for McDonalds to extend in to the hotel business. As pointed out by the industry observer the key issues in relation to the extension are:
• Identification of target market
• Identification of segments to compete in
• Decision on which features the hotel should have
• Recommendation of possible location
• Price level of rooms

A number of strategies can be pursued to establish a category extension. The strategy McDonalds is recommended to choose is to introduce a product that capitalizes on the firm’s perceived expertise. This expertise is closely related to servicing families and creating a good and fun atmosphere for children. It is recommended that McDonald’s introduce the hotel product building on the parent brand but with its own identity. A hotel is more than a fast-food restaurant and should be perceived as such. The recommendations for each key issue are based on the analysis and are shown in the table below:

Key Issue Recommendation
Target Market Travel vacationers and lodging guests. Age 30-50 with children. Prefers to travel by car and enjoys various kind of entertainment Segments The Midprice and Economy segments. Focusing much on families, building on the parent brand attracting consumers from both segments.


Hotel Features In-room appliances, Internet, Newspapers, breakfast/lunch restaurant with recognizable McDonaldґs products.

Location Located near highways, in vicinity of theme parks, golf cources, and shopping malls.

Price Level $72 person/per day

The category
The hotel industry is a very attractive category in terms of market potential measured in sales. The industry is closely related to the tourism industry which contributes considerably to the volume and being a globally recognized brand McDonalds could benefit even more from the tourism if they engaged in the hotel business. The category is expected to pick up positive growth ratio in the short term. As mentioned, the hotel industry is related to the tourism which makes seasonality a topic to consider when evaluating the attractiveness of the category. Even though the amount of tourists is not distributed evenly over the months of the year it is assumed that the amount of tourists in any given month is substantial making a potential business profitable.

Looking at the category attractiveness in relation to the product life cycle the hotel industry is mature. At this point the last stages of the cycle can shift from time to time between low growth and slight decline. Due to the size of the category a slight decline do not result in category unattractiveness. The overall attractiveness is summed up below:

Category attractiveness Analysis
Factor Attractiveness
Aggregate Market Factors:
Market size $108.5 billion +
Market growth Slight decline 0
Product Life Cycle Maturing +
Profits Good +
Seasonality Some + /0

Category Factors:
Power of buyers High, low switching costs 0
Category rivalry Dependent on segment, intense 0
Category capacity Future growth makes space for new players +

Brand Extension
McDonalds is faced with a serious issue in the fact that the McDonald brand is closely tied to a product class which limit it’s potential to extend . The extension of the brand must be credible to the consumers and have ties to the parent brand. It is therefore important that a new product set forth by McDonald is perceived by the consumers in much the same way as the McDonald restaurants are perceived.

The difficulty arises from the nature of the extension which is a category extension and not a line extension where McDonalds have a large amount of expertise in adding new products. In this case McDonalds must use the parent brand to enter a new category where the customers are not used to the presence of McDonalds. For the extension to be successful it must build off one or more of the following positioning components and communicate it successfully:

Positioning Component Communication Challenge
It extends McDonalds target market By moving in to the hotel business McDonalds must serve a new group of consumers whose needs differ from the traditional restaurants guests.

It extends McDonalds business definition The extension will move McDonalds from a family oriented fast-food chain to a business that must be able to satisfy other needs of families i.e. accommodations for weekend trips, short vacations.

It extends McDonalds point of difference By extending in to the hotel business McDonalds is increasing it points of difference compared to both businesses in the fast food category and established hotels.

It extends the entire positioning The extension will make it very visual that McDonalds is now a business not only focusing on fast meals but other areas as well.

In regarding to how McDonald’s is going to manage its new product they must use the parent brand – the master brand – and through that create the value proposition. With a different product in a new category McDonaldґs can be considered to be a Branded house.

There are some advantages in a future brand extension. The McDonald brand is very recognized and that could facilitate an acceptance of McDonald’s hotels. Even though McDonald’s has struggled with health issues it is still recognized as a family friendly place and this recognition could be helpful. In addition, the risk perceived by the customers could be reduced by the fact that McDonald’s is very oriented towards families. In terms of marketing McDonald’s can use their experience from the parent brand when planning for the new category. The extension in to hotels is a way of achieving multiple customer contact points which can lead to a stronger tie between McDonald’s and their customers.

The extension could also be used as a platform for revitalizing the McDonald’s brand in times where consumer’s preferences have changed. As mentioned the target market must be extended and this could be beneficial for the McDonald’s restaurants leading them to an increase in market coverage. If the brand extension is successful the experience gained could open the door for future extensions.

The disadvantages are to be taken seriously because they can hurt the traditional business model. Consumers could get confused by McDonald’s entry into a new category. This would probably foremost hurt the hotel business and not so much the restaurants. If the extension fails due to bad service, lack of management, intense competition the parent brand could suffer from this and ultimately dilute the brand identity.

Target Consumer
The travel market in Illinois is divided in to leisure and business consumers served by all seven kinds of hotels. The most significant difference between the two types of consumers is their level of income and their subsequent spending on lodging. This difference must be taken in to consideration because of the gap between what is spend by the two types of consumers on lodging. The profiles of the two types of consumers are summed up below:
Spending/day Spending/lodging Primary activity Size of party
Leisure $83 $29 Dinning out 2.3
Business $155.20 $127 Dinning out 2.2

The amount available for lodging differs greatly but the leisure market is twice as big as the business market and based on the figures above the profitability is also higher here. Prices have been increasing in every class of hotels but the average price in Economy and Budget is still compatible with the amount spend by leisure travelers. This kind of customer is important to be aware of because Illinois is the point of entry for McDonald’s hotels.

There is a great potential in reaching the foreign vacationer market and this segment is considered to be price sensitive which makes it possible to couple it with the local leisure traveler. The average price paid by vacationers are higher than that of the local leisure traveler but the price structure is very much affected by the premium prices paid in the top segment. The lower end vacationer is therefore considered to match the local leisure traveler.

For McDonald’s to be a success in the hotel business they have to leverage their business strengths and focus on which kind of customers they want to serve. In identifying the target consumer McDonald’s must look at the experience they have in serving families. McDonald’s stronghold in the fast food market as a family friendly restaurant should be used in the extension in to the hotel business. McDonald can make use of the advantage that it is recognized as a family restaurants and attracting this kind of consumers to the hotels.

Target consumer profile
The target consumer is aged 30-50, married and with children living at home. The yearly household income is approximately $60.000. The target consumer prefers to travel by car, be in the vicinity of various kinds of entertainment, and dinning out.

The segments given all live up the key criteria that defines segment which is; sizeable, identifiable, reachable, different responds, coherency and stable.

The segments chosen to be targeted by McDonald’s must comply with the target consumer and the parent brand identity. From a price perspective McDonald’s could match the segments of Midprice, Economy and Budget. The most important factor is that it must be affordable for families with children and offer a range of services similar to those offered by the Economy and Budget segments. The segment chosen has a high impact on the price charged it is therefore very important that the hotels do not over match the needs of the consumers. If that is the case the consumers will think of it as paying a premium without wanting that level of comfort.

Even though the target consumers are families the McDonald’s hotels should also serve business travellers who often has a family and can use the experience with McDonald’s hotels as a reference when deciding how to spend the family vacation. Of course the business segment is a substantial source of potential revenue which is the main reason for serving this consumer.

When deciding which features to offer at the hotels McDonald’s must look what is demanded by consumers in the similar segments and as important identify points of differentiation where McDonalds’s hotels can distinguish itself from the competition and add value to the consumer.

It is paramount that the features live up to the needs and expectations of a family such as different in-room appliances. In addition, there must be different sources of information available required by both families and business travellers.

One way to establish a point of differentiation is to use some of the traditional McDonald’s products that are familiar to most consumers. This is however, a difficult decision to make because the hotel must foremost be perceived as a hotel otherwise the brand extension becomes a disadvantage that confuses the consumer.

When focusing on families an obvious product to offer is the Happy Meal for children and foods to go for excursions.

Extending the range of offerings makes the hotels capable of competing at other competitive levels i.e. the generic and budget level.

The choice of location is an integrated part of developing the new product. For McDonald’s to be able to best meet the needs of the consumers the hotels must be located near highways making the access to entertainment centres easy. The target consumer uses the car as the primary means of transportation and a hotel located outside the major cities can act as a base for the consumer. Given these criteria the primary locations should be outside the major cities but still close enough to make them an option for travellers that want to experience Chicago.

Both Illinois and Chicago have a high level of tourism which makes this an ideal entry point for McDonald’s. Taking the risk associated with the extension into consideration, a one-state entry could provide McDonald’s with experience and results that allows them to evaluate if the business and brand extension is successful. On the basis of these results the hotels could be introduced in other states starting with those that resemble Illinois the most.

The level of pricing is in someway a function of the all of the above mentioned factors. Those factors are perceived by the consumer as an entity and shape the value of the hotel in the mind of the consumer. McDonald’s can use the existing price structure of the industry to help them understand how much the consumer is willing to pay. To help decide the price level it is necessary to establish some objectives that must be accomplished and construct a scenario based on the objectives. The price can then be derived from this scenario combined with what the consumer is willing to pay for a substitute product in the category.

It is assumed that McDonald’s can capture 1% of the sales of the total sales worth $108,5 billion making McDonald’s sales worth $1,085 billion. In order to reach this goal various assumptions must be made. In order to penetrate the market McDonald’s must set up 60 hotels in Illinois each with 75 rooms running 350 days a year. With room occupancy of 60% 49 rooms are available and the average party of guests will be 2 persons staying for 4 days. The price derived from this scenario is as follows:
Rooms occupied*(Open Days/Days staying) *Party size*Days staying*Hotels =
54*(350/4) *2*4*50 = 1.890.000 consumers paying an average price of $72 per person/day.

This price corresponds with the average price paid in the Midprice segment even though it is slightly higher. The hotel can differentiate the prices according to the season and charging higher prices when the level of vacationer is highest and lower in the off-season to better fit the local lodging guests.

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