McDonald’s Cash Flows
The factors that could contribute to McDonald’s cash flows include inventory, accounts payable, sunk costs, low profits, and over-investment. The McDonald’s menu consists of more than 200 food items, and introducing the “Create Your Taste” burgers implies that all the ingredients necessary to produce the burgers must be available. McDonald’s risks accumulating excessive inventory since some of the elements may remain unused or expire, thus resulting in losses.
McDonald’s also must increase the amount it spends on paying its suppliers for various raw materials, and this increases the company’s accounts payable. Installing the new ordering system could result in sunk costs if the customers consider them ineffective or irrelevant. The sunk costs would arise because McDonald’s would find it difficult to install the redundant systems in its future programs or projects. McDonald’s is facing stiff competition from other businesses, and introducing the new system could further reduce the company’s profit if the system does not appeal to customers. McDonald’s also risks over-investing by introducing its new system into 2,000 restaurants simultaneously.
The impact of introducing the “Create Your Taste” burgers to 2,000 restaurants will increase the competitiveness of the company as it competes with companies such as Starbucks and Burger King. The company’s management acknowledges the need to attract younger consumers, and its new IT system will improve McDonald’s image among its consumers of different age groups. However, the new system also increases the risk of the company to make more losses if the targeted consumers have negative feelings about the system. McDonald’s can increase its cash flows by advertising the new system to create awareness among the consumers since this will reduce consumers’ rejection or apathy to “Create Your Taste” burgers. The McDonald’s should also reduce the number of outlets where it will introduce the “Create Your Taste” burgers because this will reduce losses due to overstocking various ingredients.
McDonald’s Positive Growth Expectations
McDonald’s continues to lead in the fast-food industry due to the company’s response to the demands of its consumers and franchisees. Previously, consumers required a high diversity of meals offered by fast-food restaurants, and McDonald’s responded by increasing the available foods in its menu to 200. McDonald’s also realized that most of its consumers needed affordable, fast foods, and the company responded by introducing a wide variety of cheap meals. However, the company’s management realized that many complications arose from so many foods on the menu, and McDonald’s sought to respond by reducing its menu without compromising on quality. McDonald’s has also succeeded in developing positive growth expectations by incorporating various innovations within its operations. For instance, the new ordering system promises to revolutionize the fast-food industry and increase McDonald’s competitiveness.
The positive growth rate expectations on McDonald’s have helped improve the company’s value for many decades. The company enjoys strong investor confidence, although it has endured some turbulent periods in the past. The strong investor confidence arises due to McDonald’s impressive cash flow, and this has assisted the company in withstanding turbulent times due to economic challenges and competition from other businesses. The company also engages in aggressive refranchising of restaurants, and this has allowed McDonald’s to grow rapidly. However, McDonald’s can reverse the factors that have improved the value of its business if it does not institute a proper marketing plan that would ensure its new ordering system becomes effective. Poor implementation of the new system could result in losses to the company and damage its reputation further due to declining sales. Inaccurate records on the impact of the new system may result in bad judgments by McDonald’s management.
McDonald’s Cost of Capital
The cost of capital for McDonald’s could increase due to various factors such as the prevailing economic conditions, the company’s dividend policy, an increase in tax rates, and the amount of financing needed for the new ordering system. Worsening economic conditions due to recessions or increased competition will reduce the returns on McDonald’s investment and increase the cost of capital incurred. McDonald’s has consistently increased the dividend it offers its shareholders, and if the new system does not increase the company’s profit margins, the cost of capital for McDonald’s will increase. The increase in tax rates would reduce the company’s profits.
Since McDonald’s will invest in installing the new ordering system, the company’s cost of profit will be high. The cost of capital will also increase if the amount of financing needed to install the new ordering system is high.
The possible factors that would decrease the cost of capital for McDonald’s include advertisement, a reduction in tax rates, and improvement of economic conditions. An advertisement will increase consumer awareness of the company’s system and encourage them to visit McDonald’s outlets to try the system. A reduction in tax rates will enable the company to realize higher profit margins, thus reducing the cost of capital. An improvement in the economic conditions would allow McDonald’s customers have more disposable income, and this will result in an increase in the consumption rates of McDonald’s products. The factors affecting the company’s cost of capital have a direct impact on the value of McDonald’s since the company is valuable if it realizes greater profit margins. An increase in the cost of capital reduces the value of the company, while a reduction in the cost of capital increases McDonald’s value.
Enhancing McDonald’s Value
McDonald’s has several options to improve its value. For instance, ensuring that the new ordering system operates flawlessly will encourage more consumers to use it, and this will improve the company’s competitiveness. McDonald’s can adopt vigorous advertising to ensure that its consumers are aware of its new products and services. Lack of awareness may make the consumers less appreciative of McDonald’s efforts to improve its operations. A Proper advertisement will help increase McDonald’s sales volumes, reduce the company’s cost of capital, and make McDonald’s valuable. The company should also invest in improving its brand name by responding to the criticisms leveled against it. McDonald’s currently faces an arduous test in redeeming its image after damning shows such as “Super Size Me” and “Food, Inc.” that criticized the company.
Such shows have made McDonald’s products less attractive to young and health-conscious consumers. McDonald’s also faces criticisms from other sources such as health activists who argue that the company uses dangerous preservatives in its products. Labour unions also point out that McDonald’s exploits its employees in different ways, such as offering low minimum salaries and threatening the employees. Addressing such concerns will enable the company to restore its image among its consumers. One of the methods McDonald’s can use to minimize the risk of shareholders as investors are ensuring that the company’s strategic decisions maximize its value. McDonald’s should ensure that the new ordering system improves the company’s service provision.
Investment Decisions
As an analyst, I would encourage investors to hold their shares in McDonald’s because the company has consistently offered high dividends to its shareholders for many years. McDonald’s is a resilient company that has managed to withstand several challenges to remain the leading fast-food restaurant in the United States. McDonald’s is a global brand, and this guarantees its investors of improved performance in the future. McDonald’s rebounded from poor performance during the 2002-2003 financial year, and the company has an opportunity to experience similar improvements despite the current poor performance.