Largest Global Fast Food Companies

Running head: BUSINESS ECONOMICS
Business Economics
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1
BUSINESS ECONOMICS Table of Contents
TASK 1............................................................................................................................................2
Answer a).....................................................................................................................................2
Answer b).....................................................................................................................................5
TASK 2............................................................................................................................................7
Answer a).....................................................................................................................................7
Answer b).....................................................................................................................................9
TASK 3..........................................................................................................................................11
Answer a)...................................................................................................................................11
Answer b)...................................................................................................................................13
TASK 4..........................................................................................................................................15
Answer a)...................................................................................................................................15
Answer b)...................................................................................................................................17
References......................................................................................................................................19

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BUSINESS ECONOMICS
TASK 1
Answer a)
McDonald’s is one of the largest global fast food companies. This American company
was founded in 1940 in California, with signature food item, hamburger, and in the past few
decades McDonald’s has established itself as the dominant market player across the globe. It
operates in the global fast food retail industry. This industry has a structure of oligopoly. As
defined by Johan (2017), oligopoly market structure consists of moderate number of sellers,
among which there are few large sellers, and a huge number of buyers. The sellers in this
structure are the price makers and not price takers. There are some large firms that dominate the
entire market. It is quite competitive and there are both price and non-price competitions among
the suppliers. The sellers sell similar but differentiated products, which are not perfect but close
substitutes of each other. These sellers in the oligopoly structure act as a group, therefore, a
decision taken by one firm is responded by others to retain their market share. Along with these,
there is another striking characteristic of this market structure of the global fast food industry.
Madsen and Gosliner (2020) explained that the major firms in this industry has a monopoly
power on their signature product, which gives market power to them, such as, McDonald’s is
preferred for its hamburgers, KFC is preferred for its fried chickens and Starbucks is preferred
for its coffee over other products they offer. Thereby, it can be said that McDonald’s is one of
the largest fast food sellers that exploits its market power from the customers’ preference for
hamburger. It is the price maker and any price decision by McDonald’s is matched by other
competitors in the market.

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BUSINESS ECONOMICS
The competition within this market structure for McDonald’s can be evaluated using
Porter’s five forces model. This is a very useful analytical framework to understand the forces
that create competition with an industry and highlight the potential areas for decision making,
and strategy development for future growth. The five forces of this model are threat of new
entrants, threat of substitutions, bargaining power of suppliers, bargaining power of buyers and
competitive rivalry (Moreno-Izquierdo, Ramón-Rodríguez and Perles-Ribes 2016).
Figure 1: Porter's five forces framework
(Source: Moreno-Izquierdo, Ramón-Rodríguez and Perles-Ribes 2016)
Threat of new entrants indicates the level of entry barriers or difficulties for the potential
entrants in the industry. The less are the entry barriers, higher is the chance for new entrants and
higher is the risk of competition for the established businesses. In the fast food industry, the entry
barriers are quite low and threat for new entrants is high. The startup cost and switching cost
are low in this industry, with highly variable capital cost and that create scope for market entry
for the new entrants. The smaller businesses can involve low capital while entering the market
and they may be successful in capturing the local customer base (Gerard 2018).

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BUSINESS ECONOMICS
Threat of substitution is high in this industry. The sellers sell similar fast food and
hence, availability of substitutes is high and low switching cost for the consumers. Moreover, the
competition in terms of product quality and customer satisfaction is high, implying high
performance-to-cost ratio. The bargaining power of suppliers is comparatively low in this
industry as there are large number of suppliers for raw ingredients and these suppliers are not
vertically integrated and therefore they cannot influence the supply and distribution of the
products to the companies. On the other hand, bargaining power of consumers is very high in
the fast food industry. As there are many food joints providing similar food at almost similar
price range, and the switching cost is low, consumers can easily change their brand preference.
Lastly, the competitive rivalry is very high in the fast food industry. Various large competitors
with global presence and also smaller regional firms provide tough competition, with large
number of substitutes and the marketing is done aggressively (Baburaj and Narayanan 2016).
It can be concluded from the above analysis of fast food industry that, McDonald’s faces
tough competition from four forces, like, industry rivals, bargaining power of the consumers,
threat of new entrants and threat of substitutes. Since, the number of substitutes is quite large,
and consumers have very low switching cost, hence, the competitiveness for McDonald’s is very
high. The product and customer service quality must be focused and high for all time in all its
location (Hamzeh and Bataineh 2019).

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BUSINESS ECONOMICS
Answer b)
McDonald’s has a strong presence in China. It has plans to expand its business through
4500 restaurants across the country. The business expansion was announced after a joint venture
with CITIC Capital, CITIC Ltd., and Carlyle Capital. The government owned investment group
acquired 52% stake of McDonald’s for a payment of $2 billion in 2017 and it would have full
ownership rights of the existing restaurants of McDonald’s as well as the new outlets also for the
coming 20 years (China Briefing 2017). This was aimed for securing the better business
locations for McDonald’s and enabled the fast food company to transfer almost all company-
owned outlets to the franchises. This move was beneficial for McDonald’s for reducing business
risks that could arise from competition in the industry (Zhu, Anagondahalli and Zhang 2017).
The joint venture with the Chinese company, CITIC group, is beneficial for the American
fast food giant for running its business in China. The Chinese government is implementing
harder policies and regulations against the American companies as a retaliation to the trade war
with the USA. The joint venture of McDonald’s with the Chinese firm would protect the fast
food company from the new policies unfavorable to American business (Cahill 2018). Hence, if
the Chinese government would plan to impede the growth of the American company, that would
have hurt the investment and growth of Citic also, and that would not be beneficial for the
Chinese economy.
There are a few benefits of nationalization of businesses. Feng, Johansson and Wang
(2018) highlighted that nationalization of businesses can ensure a coordinated approach towards
production and supply of goods and services for achieving a stability in the market. Secondly,
nationalized businesses often create natural monopoly in the infrastructural sector, which could