Two mornings of every week, I pull into my local McDonald’s and order the same thing: an Egg White Delight McMuffin meal with an iced tea and a Fruit ‘N Yogurt Parfait. Not a bad breakfast healthwise – the whole thing is 550 calories including a hashbrown (the worst offender) – and it clocks in at $5.79 for a tasty, mostly health-conscious breakfast a couple times a week. But for the past few weeks, I’ve been getting a bonus with my meal. Along with my balanced breakfast, I’ve been racking up a lot of – you guessed it – McDonald’s Monopoly pieces.
On the breakfast bags, McDonald’s claims there are “100 million food and cash prizes!” Note that according to what they’ve posted on their rules website including odds of winning, they’ve actually undersold it quite a bit. According to their posted rules, there are actually 131,907,433 winners (132 million vs. 100 million), with a total prize value of a staggering $353,480,757.77. Yes, three-hundred and fifty-three MILLION dollars. See the results spread below:
Aha, now you see why this is relevant to corporate finance. McDonald’s is a big company, but $350M is a significant amount of money for most businesses, even ones of good size. In these lessons, part of my goal is to emphasize that finance and accounting can be both useful for answering questions about what businesses do and interesting in the kinds of things you can uncover with it. Let’s see what else we can learn about McDonald’s longest running and best-known promotion.
Monopoly, like the infamous McRib, seems to be deployed when needed or convenient throughout the year rather than consistently on a set schedule. In 2013, it ran in July, in 2014, October, and in 2016, April. In 2015 Monopoly wasn’t run at all in favor of a November cross-promotion with the NFL called Game Time Gold, which for convenience I assumed utilized a similar payout structure. This makes it a little bit hard to see in the financials exactly how the major promotions affect earnings, but we’ll do our best to try. Side note: if you happen to know where I can find historical Monopoly runtimes, hit me up, I’d like to expand the range of my data and apparently my Google Fu isn’t strong enough.
The chart below shows revenues, operating income, and operating margin for quarters before, after, and including these promotions (yellow). Let’s check out the results and discuss them below.
Alright so, McDonald’s was having a tough time in 2014 and 2015. What we see in 2014 is pretty dire – the trend across these three quarters is almost linearly downward. But how does the Monopoly promotion affect its quarter? Well… it doesn’t look like it does. Yeah, it’s down from the previous quarter, but it’s right between that one and the next one on all three parameters – sales, earnings, and margin. In other words, at worst, it did nothing, but at best, it arrested a trending loss of revenue and earnings that was realized in the following quarter. Big promotions weren’t a major enough factor to overcome other trends, positively or negatively.
2013, however, was an absolutely beautiful comparison. The quarters before and after Monopoly ran were practically identical on all three components. The quarter that Monopoly ran in showed over 3% gains in revenue and a 10% upside in earnings, making for a 2% boon to operating margin.
Now, for any of these quarters, how much impact would $350M of free food have? I took the simple average of these 8 quarters for revenue and operating income, calculated a margin, and then hacked $350M off of operating income to represent giving away that amount of free food with no additional revenue. The results:
If there wasn’t some positive impact to the numbers, the Monopoly prizes would absolutely hammer earnings, with operating margin diving nearly 20%. It’s probably not surprising to anyone, but McDonald’s is not losing money on its promotions. At the very least, it’s not losing as much as it should be without secondary positive effects. You’d also expect them to not run it for 20 years unless there was a benefit. Case in point, how does the company view the game? The 2013-Q3 report mentions Monopoly specifically. Well, for a sentence anyway. All we get from the company in the quarterly report is, “Sales results for the quarter were also positively impacted by the popular Monopoly promotion.” If there wasn’t some level of offset against the free stuff they gave away, you’d expect some statement like, “Operating income is down this quarter as we gave away $350M worth of free food during our Monopoly promotion in order to… I dunno, build brand value or inspire return customers or something.”
So why does a promotion that puts $353M worth of prizes in circulation (99% of it in free food) appear to make the company money, or at least, not lose as much as it should? Several factors may be at play here:
- Not all of the winning tickets are actually bought, or looked at, or recognized. Boardwalk is famous, but what are the other rare pieces? Would you know them if you got them? (Helpful hint: it’s the last piece of each set alphabetically, except for Boardwalk)
- A small percentage of the food prizes are actually claimed.
- The food prizes, even when claimed, are an excuse to spend even more money.
Unclaimed Monopoly winners is a non-factor; the total amount of available cash prizes from collecting pieces is less than $2M, which for McDonald’s really is a drop in the bucket. The last two are probably significant, but I suspect the last one is the real cause of the difference between claimed prize cost and actual financial results. If you win a Quarter Pounder, you’re not going to just go in and get one. You’re going to go in and spend the same amount of money that you usually do, plus a “free” Quarter Pounder. You’re not going to eat that Quarter Pounder without a Coke right? And of course you wouldn’t go to McD’s without getting some hot, salty fries. And since you saved money on the burger, why not top it off with a McFlurry? Most of the loss of the “free” items is probably entirely compensated by additional purchases when people cash in winning food tickets, resulting in straight upside for the company. After all, look how abysmal the odds and total amounts of the cash prizes are, and how prevalent the food prizes are. The tiny chance of winning cold hard cash brings you in the doors, but then if you win food, you’ll come back and buy more. To borrow Monopoly parlance, by giving free food away, McDonald’s rolled doubles and gets to take another turn. This is why in the more ideal 2013 comparison, and in the Q3 results, the benefit of Monopoly is seen: increased revenue, without impacting margins.
Now, make what you will of this. Just because a company is making more money doesn’t mean they’re doing something evil. In the sometimes idealistic world of MBA-land, “marketing” isn’t akin to “manipulation,” it’s responding to markets and giving people what they want, often in what we might call mutually beneficial ways. After all, it’s not like McDonald’s is selling lottery tickets here; you’re not getting vague, conceptual “hope” and nothing else for your money. You still get your food for the same price as before, plus the added fun of peeling off and collecting game pieces. An economic description might say that you give McDonald’s more of your money during promotions like Monopoly because you get added value for the same price, shifting the value proposition in favor of the customer, or generating additional consumer surplus. I could throw more terms at you but you get the picture. Of course this works in McDonald’s favor too, since they enjoy added revenues and profits.
Let’s quickly look at another great example of this mutually beneficial marketing from the fast food realm. First, let’s think about the busy-ness level (volume) of a typical fast food restaurant. Well, there’s probably a breakfast crowd, peaking maybe 7:00-9:00 a.m., a lunch crowd between, say, 11:00 a.m. – 1:00 p.m., and a dinner crowd between 5:00-7:00 p.m. This is rough guesswork, but it’s reasonably accurate for general purposes.
It’s easy to spot the downtimes. Downtimes are problems, especially for a low-margin, high-volume business like fast food. There are lots of financial reasons for this. For one, fixed assets like buildings and utilities are sitting underutilized when they could be making money. Inventory isn’t turning over (insert burger flipping joke) and making money, it’s just sitting. And even though you can maybe staff less during downtimes, if you’re open for business you’ve likely got someone being paid to twiddle their thumbs. All told, it would be better to be able to fill those gaps. But we’re not really going to inspire people to eat a fourth meal… what could we do?
Cue Sonic’s Happy Hour promotion. From 2:00-4:00 p.m., customers get half-price drinks. To sample the efficacy of this idea, drive down the street and look at how busy the fast food places are at 2:00 p.m. Then pull into Sonic. With a little creativity, Sonic has filled a huge gap in their daily productivity. And by doing it with drinks, which are probably 90% profit to begin with, they’re bringing in material additional revenue and earnings, not just utilizing fixed assets to keep them moving. Add in the fact that people coming to Sonic for drinks will be tempted to get a snack, and you’ve effectively created that elusive 4th meal (sorry, Taco Bell, we didn’t buy your midnight 4th meal). Sonic made this temptation even more palpable in 2013 when they added $0.99 snacks to Happy Hour. And they didn’t stop there… Sonic has another promotion so customers get half-price shakes after 8:00 p.m. What a coincidence that this time also corresponds with a slowdown between dinner and closing. It usually only runs in the summer too, when more people are likely to be out later due to nice weather, daylight savings time, and school breaks, and are more likely to want a cold milkshake to battle the heat or finish off a summer date night. I’m not getting kickback from Sonic on this, it’s just freaking brilliant how seamlessly they implemented these business catalysts. And they did it in a way that people love!
What’s the takeaway from this? Well shoot, I just wanted to learn how McDonald’s fares on Monopoly. But maybe I can drum up something…
There’s a lot of negativity in the modern zeitgeist regarding corporate profits, sales, marketing, and business in general. Yes, there are sleazy or cheap methods of selling. Overhyping, fearmongering, clickbait headlines, sexual content, proprietary ecosystems (critique of Apple), and fine-print restrictions are all ways for companies to manipulate consumers by legally getting away with outright lying or by artfully deceiving the careless. BUT – there are also perfectly honorable and noble ways of selling that benefit the customer and the company. Innovation, beautiful design (praise of Apple), superior value, superior quality, superior support, cool factor, unique utility, and yes, even fun are ways to increase sales and customer participation while simultaneously increasing customer satisfaction.
So, yeah, be skeptical and look out for sleaze. It does exist. You owe it to yourself to learn the bottom-feeder sales and marketing tactics in order to avoid being taken advantage of. But you also should recognize and reward the good side, and if you’re creating a product yourself, implement some of the positive approaches to marketing in order to ethically increase your value.
Alright that’s all I can shoehorn in. Hopefully this has been an interesting look at a couple of things and has given you some things to think about. In the meantime, I’m off to go cash in a free Quarter Pounder piece… and maybe buy a McFlurry to go with it.