Comparison of Burger King and Mc Donald s Accountancy December 13, 2014

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1 Comparison of Burger King and Mc Donald s Accountancy December 13, 2014

2 TABLE OF CONTENTS Introduction 3 Situational Analysis 5 SWOT Analysis Competitor Analysis Consumer Analysis Segmentation, Targeting, and Positioning 9 Segmentation Targeting Positioning Proposal 10 Recommendation Rationale Marketing Mix 11 Price Product Promotion Public Relations Place Implementation Financial Analysis 15 Sales Trends Forecasts Profitability Conclusion 18 Exhibits 19 Reference List 22 2

3 INTRODUCTION PROFITABILITY ANALYSIS ASSET ANALYSIS Both McDonald s and Burger King have different accounts that they have stated in their balance sheets 1. In order to get further details about each, further information was extracted from the notes. Below we will compare some current assets such as inventory and receivables; and other assets such as Property & Equipement and Goodwill. Inventory Burger King includes its inventory in prepaids and other current assets line on the balance sheet. For it, inventories are stated at the lower of cost (first-in, first-out) or net realizable value, and consists primarily of food items and paper supplies. McDonald s on the other hand has a line for inventory on its balance sheet which are recorded at cost and not excess of market. But other than that, McDonald s does not disclose any other information about their inventories. Because of this, it is very difficult to compare their inventories as they may price their inventories differently which leads to a different total 1 McDonald s and Burger King s balance sheets are shown in Exhibit 1 at the end of this section 3

4 asset number. At the end of December 31, 2013, McD s and BK s inventory balances were $123.7 MM and $1.2 MM respectively. 4

5 Inventory Turnover The Inventory Turnover ratio will provide details as to how many times a year a company needs to order new inventory. The number of times a store replenishes its inventory demonstrates how quickly a company is making a sale and profit from its inventory. Inventory Turnover = cost of goods sold average inventory McDonald s = [( )/2] = Burger King = 70.6 [( )/2] = As evident from the ratio above, McDonald s has much higher inventory turnover than Burger King which demonstrates that McD is selling its food items at a faster rate than BK. However it is important to note that both companies do not have the same number of restaurants or the same type of information disclosed. Receivables Another account that can affect the total assets of a company is receivables. Both the companies show one line of receivables on the balance sheet but they include different accounts. McDonald s report Accounts and Notes Receivable together but does not disclose what makes up the number to what it is. Similarly, Burger King reports Trade and Notes Receivables, Net but unlike McD, it provides the different accounts separately in the notes along with Allowance for doubtful accounts information. For both companies notes receivable represents loans made to franchises, sales of property and other trade receivables activities with franchises. 5

6 Property and Equipment Another asset account to focus on is property and equipment because it not only affects the total assets, but also affects total liabilities because of depreciation expenses. McDonald s and Burger King, both report property and equipment at the cost it took them to purchase it less accumulated depreciation and amortization. Furthermore, each company utilizes straight-line method based on useful lives of the assets to record depreciation. The Property and Equipment, net of accumulated depreciation for McDonald s and Burger King was $25,747.3MM and $801.5MM respectively at the end of December 31, A difference between McDonald s and Burger King s reporting styles for property and equipment is the length of time estimated for useful life. They both estimate the useful lives of building till up to 40 years. McD estimates machinery and equipment lives to be 3-12 years while BK estimates it to be up to 18 years. The useful life chosen will affect the amount the company records as depreciation expense. One other similarity between the two companies is that they both list out the different components that make up their Property and Equipment along with their value and estimated useful life, if applicable, in the notes. Goodwill Goodwill represents the excess of cost over the net tangible assets and identifiable intangible assets of acquired restaurant businesses. McDonald s goodwill primarily results from purchases of its restaurants from franchisees and ownership increases in subsidiaries or affiliates, and it is generally assigned to the reporting unit expected to benefit from the synergies of the combination. McDonald s goodwill is recorded at 6

7 $2872.7MM at the end of December 31, 2013; whereas Burger King was only at$630mm. Both companies write-off their goodwill when the restaurant they purchased is sold based on the relative fair value of the business sold to the reporting unit after a certain period. The period is 24 months for McDonald s and 6 months for Burger King. Furthermore, both the companies conduct goodwill impairment testing in the fourth quarter of each year. Now that the assets of both the companies have been analyzed for their similarities and differences in how they report them on the balance sheet and what is counted towards each asset, several ratios can be computed. Operating Ratio Asset Turnover Ratio In analyzing the utilization and age of long-term assets, it is important to consider the Asset Turnover Rate. Asset Turnover Rate = Net Sales averge total assets McDonald s = ( )/ = ( )/ 2 = Burger King = These results would imply that McDonald s is more efficient in managing its total assets. 7

8 Return on Assets (ROA) Return on Assets (ROA) is a fair calculation of the profitability of a company, relative to its assets. ROA = Net Income Total Assets McDonald s = = 15.25% Burger King = = 4.01% This is the rate at which these companies can generate profit on $1 in assets. As seen from the numbers above, McDonald s generate a higher return on its assets. This is also not surprising as McDonald s is significantly larger in size than Burger King. LIABILITIES ANALYSIS OVERALL ANALYSIS OF COMPANY CONCLUSION EXHIBIT 1: CONSOLIDATED BALANCE SHEET McDonald s Balance Sheet as of December 31, 2013 Burger King s Balance Sheet as of December 31, 2013 Operating Profit Rate is based on Nestlé s Nestle s global profit rate of the prepared dishes in 2013 annual report Non-Operating Expenses are not considered. 8

9 EXHIBIT 2: CONSOLIDATED STATEMENT OF INCOME Company 1 Company 2 9

10 EXHIBIT 3: CONSOLIDATED STATEMENT OF CASH FLOWS Company 1 Company 2 10

11 REFERENCES 11