South-Western College Publishing - Economics  
McDonald's Hope That They See Shareholders Smile
Subject Characteristics and comparative statics
Topic Oligopoly
Key Words Advertising, employees, company, revenue, shareholders, stock, restructuring, sales, technology, customer service, net profit
News Story

McDonald's Corp. has unveiled a new advertising slogan: "We Love to See You Smile". It replaces the three-year-old "Did Somebody Say McDonald's?" slogan. The ad campaign will feature employees speaking of freshly painted restaurants and modern kitchens that make customers smile. It will cost $500 million. The company hopes that the ads will spark stronger domestic revenue growth and please shareholders who have deserted the company's stock. McDonald's has room for improvement especially in the breakfast and dinner hours.

The ad campaign follows closely on the heels of a corporate restructuring that decentralized decision-making power to division offices and allowed regional menu variations; consumer focus groups that suggested better service was critical; new menu items such as the McFlurry dessert and the McSalad Shaker; more efficient kitchens; and computerized ordering systems which give the cooks more accurate information. Observers believe that branding is not enough: the success of the advertising campaign and new technology depends on the standard of customer service.

Notwithstanding McDonald's stock price, the company dominates the market: of the top 100 restaurant chains, McDonald's accounts for $1.95 billion of the $5.95 billion net profit generated in 1999. Also, its overseas sales grew by approximately one-third over the 1995-99 period.

(Updated August 1, 2000)

Questions
1. Does the restaurant industry more closely approximate monopolistic competition or oligopoly? Explain your answer with reference to the distinguishing characteristics of each type of product market.
2. McDonald's new advertising campaign will stress freshly painted restaurants and modern kitchens.
  a) How is this intended to affect the demand curve for McDonald's food? State two ways.
  b) Given the $500 million cost of the campaign, how will it increase future profits?
3. How will the following affect the demand or average total cost curves of McDonald's? Why? What will happen to profits as a result?
  a) Regional menu variations
  b) Better customer service
  c) New menu items
  d) More efficient kitchens
  e) Computerized ordering systems
Source Greg Johnson, "Did Somebody Say Cheese?" Los Angeles Times, June 30, 2000.

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