COMPARATIVE ADVANTAGE Winter 2014 ADVANCED TOPICS Creating the McUniverse: McDonald’s Sources of Power in Foreign Markets Sarah Scharf Stanford University ‘10 [email protected] Abstract This paper explores McDonald’s transformation from a small town burger joint to the poster child for globalization and economic development abroad. To gain its position as one of the few truly global companies, McDonald’s has exploited vari- ous sources of power and competitive advantage. Due to its massive size, McDonald’s enjoys economies of scale in purchasing and expansion, both on a macro level and within individual regions. In addition to purchasing power, McDonald’s has lever- aged economies of scale in brand recognition to expand more easily into emerging marketplaces. Finally, McDonald’s has established a unique source of process power thanks to its franchising practices, which allow the Golden Arches to adapt to local tastes while maintaining a strong brand identity. This paper examines these sources of power as well as the challenges McDonald’s may face as it continues to create the McUniverse. 72 COMPARATIVE ADVANTAGE Winter 2014 ADVANCED TOPICS I. Introduction in Des Plaines, Illinois, opened come the difficulties of enter- McDonald’s Corporation in 1955 by Ray Kroc. Its core ing a foreign market, including operates in 119 countries, serv- menu of burgers and fries was franchising in less developed ing 68 million customers a day. distinctly tied to the Ameri- capital markets and integrat- The brand has become a sym- can tradition of cuisine, and its ing into dissimilar cultures. bol to many of globalization, branding was simple, classic, McDonald’s size on a its prevalence throughout the and All-American. How did global scale has become an in- world representing the conver- this Midwestern chain become creasingly relevant factor of its gence of social norms and the the international presence it is branding as well. The ubiqui- homogenizing impact of Amer- today? How has such an Amer- ty of McDonald’s around the ican culture. Whether or not ican concept become a fixture globe has raised brand aware- McDonald’s universal presence in a diverse range of cultures? ness to nearly 100 percent and is viewed in a positive light, one McDonald’s ability to de- gives the firm credibility and thing is certain: McDonald’s is velop and maintain such a suc- allure in foreign marketplaces. one of the few truly global com- cessful international brand lies Because McDonald’s is able to panies, and the only one of its in several power sources. Due to operate at a lower cost within kind among food chains. An its massive size, McDonald’s en- these marketplaces, it is able to example, or consequence, of this joys economies of scale in pur- differentiate its product mix in pervasiveness and international chasing and expansion. These order to assimilate more fully penetration is The Big Mac In- economies of scale operate both into foreign cultures. This prod- dex, developed by The Econ- on a macro level and within in- uct differentiation is crucial to omist as an informal metric of dividual regions. McDonald’s McDonald’s branding in foreign Purchasing Power Parity. The ability to negotiate with local countries; it allows the firm to Big Mac Index compares the retailers allows it to lower costs maintain its iconic and glob- price of McDonald’s signature across the region that particular al brand image associated with burger across nations as a proxy retailer serves. This is especially value, quality, and reliability, for purchasing power (the most relevant in foreign marketplaces while becoming locally relevant. expensive Big Mac is in Norway, such as Asia Pacific where Mc- Finally, McDonald’s com- selling for $7.51 USD; the cheap- Donald’s competitors have been plex franchising process in for- est in India for $1.50 USD.) 1 unable to achieve the critical eign nations represents a form It is no small irony that mass needed to drive down cost. of process power. McDonald’s one of the most culturally per- On a macro scale, McDonald’s offers franchisees a great deal of vasive, international corpora- is able to keep costs low because freedom with regards to menu tions is so inherently All-Amer- of synergies between region- and store appearance because ican in origin and product. al operations. These synergies these franchisees are more in McDonald’s Corporation trac- include learning advantages touch with local culture, and es its history to the first fran- associated with international thus can better increase the chised McDonald’s restaurant expansion, which allow Mc- store’s local relevance. Howev- Donald’s to more easily over- er, due to this freedom, selecting 1The Big Mac index. (2013, Jan. 31). The Economist. Retrieved from http://www.economist.com/content/big-mac-index 73 COMPARATIVE ADVANTAGE Winter 2014 ADVANCED TOPICS the correct franchisees is cru- McDonald’s exerts power over tuted a two-pronged strategy cial. McDonald’s is able to de- the international marketplace, reform. In the United States, vote more time and resources to it is important to establish the the company sought to rebuild the franchisee selection process significance of a large inter- its brand image by renovat- than its competitors because national presence to the firm. ing stores, expanding menu of its scale and the high profit While McDonald’s has worked offerings, and extending store margin of its company-owned hard to develop a large global hours. The second strategy fo- stores. Since McDonald’s com- footprint, these efforts would cused on growth driven by in- pany-owned stores operate on be misguided if its internation- ternational franchising, which comparatively higher margins, al operations were unprofitable offered immediate returns with the firm does not feel pressure or diluted its domestic sources little overhead cost. In partic- to franchise aggressively when of power. McDonald’s first ex- ular, this strategy targeted the entering a new territory for the panded abroad in 1967, when emerging markets of China and sake of adding to its bottom line. store locations opened in Puer- India where a growing middle Instead, the rate of franchising to Rico and Canada. Since then, class offered a lucrative custom- is driven by the rate at which ap- expansion abroad has been a er base for the fast food chain.3 propriate franchisees are found. crucial driver of McDonald’s In 2008, McDonald’s opened McDonald’s ability to franchise revenue. Today, almost 70% of its 1,000th store in China, and effectively in foreign countries, its sales are generated outside of the firm has continued to ex- particularly those with less es- the U.S., as shown in Figure 1. pand rapidly, opening 250 new tablished franchising practices, McDonald’s success Chinese restaurants in 2012. has given the firm a huge ad- abroad is crucial to the compa- The significance of for- vantage when expanding into ny and has become even more eign markets to McDonald’s lucrative overseas markets. important in recent years. In core strategy cannot be over- II. McDonald’s and the World: 2003, prodded by slumping do- stated. Figure 2 shows the sys- Significance on a Global Scale mestic sales and negative media tem-wide sales increases for Before determining how attention, McDonald’s insti- McDonald’s stores in 2010- McDonald’s 2012 Revenues by Segment Geographic Segment $ Millions Percent U.S. 8,814 32% Europe 10,827 39% APMEA 6,391 23% Other Countries & Corporate 1,535 6% Total 27,567 100% Figure 12 2McDonald’s. 2012 Annual Report. (2012). Retrieved from http://www.aboutmcdonalds.com/mcd/investors/annual_reports. html 3 Adamy, Janet. (2009, March 10). McDonald’s Seeks Way to Keep Sizzling. The Wall Street Journal. Retrieved from 74 http://online.wsj.com/news/articles/SB123664077802177333 COMPARATIVE ADVANTAGE Winter 2014 ADVANCED TOPICS -2012. While same-store sales in est burger chain in the world, McDonald’s ability to enter and the United States grew by 5% in Burger King, operates in 79 establish market share in new 2011, sales in Europe increased countries to McDonald’s 119, countries. McDonald’s oper- by an astounding 14% and sales 66% of which are in the U.S. In ates restaurants at a lower cost in Asia Pacific/Middle East/ contrast to McDonald’s, Burg- than competitors due to rela- Africa (APMEA) increased er King derives about 36% of tionships with distributors, effi- 16%, driven largely by growth revenue from overseas sales.4 cient and well-managed supply in the Chinese marketplace. Its expansion has been marked chains, and scale economies in 2012, however, was a dif- by several failures; Burger King purchasing. Because of its su- ferent story. In October, Mc- experienced quality control is- perior ability to negotiate con- Donald’s experienced its first sues in the early stages of its tracts with distributors, Mc- global monthly sales decline in international expansion, and Donald’s is able to drive down 9 years, sending some inves- its most notable failure abroad commodity prices. In 2012, tors into panic. While most came in 1998 when Burger King worldwide company restaurant analysts affirmed the dip was shut down all of its French out- expenses for McDonald’s to- structural rather than perma- lets.5 McDonald’s significance taled 82% of revenue, meaning nent, 2012’s slagging sales high- abroad is unique among its company-owned stores operat- light the risk of McDonald’s competition, and it is this siz- ed on an 18% margin. Burger reliance on global expansion able market presence within King’s restaurant expenditures, in a year where Europe floun- foreign countries and on a glob- including product costs, labor dered in the throes of recession al scale that forms the basis of costs, and occupancy costs, to- and growth stagnated in China.