Factors Influencing Demand in the Fast Food Industry

This article discusses the factors that influence demand in the fast food industry, with a focus on McDonald's. It covers the business description, range of products & services, and factors such as price, substitutes, consumer income, taste & preferences, and demographics that impact demand. The article also evaluates the price elasticity of demand and provides insights into price strategies followed by organizations.

MANAGEMENT ECONOMICS Assessment 1

INTRODUCTION...........................................................................................................................1
MAIN BODY..................................................................................................................................1
1. Describe the business and its range of products & services....................................................1
2. Identify each factor which influence demand market equilibrium..........................................3
3. Evaluate the factor which influence the price elasticity of demand........................................5
CONCLUSION................................................................................................................................7
REFERENCES................................................................................................................................8

INTRODUCTION
Managerial economics has been one of key principles that characterize the convergence of
specific economic ideas with market strategies in order to make rational decisions (Adekoya and
Jimoh, 2019). These arguments are based on reducing cost and productivity maximization by
efficient activities and production. This report is based to analyze how economic concepts
that can be implemented to business policies for several purpose. McDonald's is recommended to
perform this research that also deals with food industry and operates business in even more than
100 countries. To assess its competitive situation as well as the framework within it conducts
their operations; it compares total statistical data for that firm's financial status. In addition,
several recommendations for greater or lesser government interventions on its development are
also made beneficial for society or not.
MAIN BODY
1. Describe the business and its range of products & services
One of major service industries is the fast food& beverages industry, which performs well
in all aspects of the business conditions. It has been measured that, food sector of UK has
increased its growth because it has only doubled over the last couple of years. Taking into
consideration its global rise and globalization of business, it is expected that this sector’s
valuation will hit £ 9.8 billion by 2021. Via the National Statistics Agency, it was estimated that
UK's population spend nearly 22 percent on takeaway delivery, and it indicates high projected
growth of fast-food businesses in the future as well. McDonald's, founded in 1940, is among the
fastest - growing business (Ferguson, 2019). Initially, Richard and Maurice McDonald's who are
the co-founders have only opened single restaurant in San Bernardino, USA.
After that, they began to expand the operations at other destinations, both domestically and
internationally, that it first extended to Canada in 1967. After that, it reached ten thousand
restaurants in total until 1988. Preceding this growth by the 21st century thru the franchising as
well as other possibilities, it has decided to expand business with near to 35,000 stores in far
more than 100 countries. While development in the 90's was so fast in the 1990's that McDonalds
opened new stores globally throughout every 5 hours. That will make that company the biggest
fast food franchise company as being the most famous family restaurant, focusing its consumers
with affordable price food, delicious cheeseburgers and flavours as per their demand.
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At present, it has greater than 37,855 outlets and 69 million clients all around the world.
Nevertheless, this fast-food chain is primarily known for its hamburgers, French fries and
cheeseburgers, but it also serves a wide variety of savoury and tasty foods to raise consumer
satisfaction. This contains things such as chicken burger, soft drinks, snack foods, milkshakes,
sweets and more (Garcia-Garcia, Stone and Rahimifard, 2019). The key aspect that shows
McDonald's strong contribution to economic growth is their business, where they have provided
millions of employment. .Today, this fast-foot business is affiliated with more than 1.7 million
workers, some of whom are part time as well as full time workers. McDonald’s workforce
typically targeting young people who choose to work as part-time employee, becoming self-
independent, and make money in the course of their academics.
Below mention provide better understanding that why it is selected and how McDonald is
one of market leading fast food company and they still exist in number one position among their
competitors.
Figure 1Brand Value of Top Restaurants, 2020.
The figures display the market value of McDonald in the world's ten most successful
restaurant fast service brands in 2020. During that year, Starbucks' market equity contributed to
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roughly USD 47.8 billion. McDonald's becomes the world's most popular fast food company
with an annual market valuation of approximately US$ 129.3 billion. Analyzing leading fast
service restaurants by age reveals that for almost multiple centuries, McDonald's, Starbuck and
KFC are the biggest fast service restaurants. Throughout centuries, McDonald's was compared to
Starbuck with enough margins. Cancel
2. Identify each factor which influence demand market equilibrium
There are several factors which influence the demand of goods & services and it further
impact the profit margin of the company as well (Govindan, 2018). Some of them are as follow:
Figure 2 Factor affecting demands, 2019.
Price of substitute: Demand of products affected due to the nearest substitute goods which
provided by the competitors. When price of existing product increases then demand will be
reduces because people purchase substitute products which has lower price for the almost same
features. In context of McDonald, price of their competitor’s goods is decreases than demand of
McDonald will automatically decreases because of high price of food. In order to boost demand,
managers of the company should focus on their goods or make sure to offer more unique
products in the market.
Price of complements: If product price of complements good decreases, then it raises the
amount demanded of the first and demand for other. If a replacement good’s price declines, the
amount demanded for other good increases, thus reduces the demand for the better it is also
being replaced for. Consumer can replace McDonald’s food with Burger Kind who offers similar
range of products with almost same price level. Increase in price of complement goods decrease
the demand of McDonald and vice versa.
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Consumer income: The market for the goods always relies on people's incomes. The
larger the people's wages, the bigger their demand for commodities would be. The higher wage
means the more buying power. And as people's wages increase, they can afford to spend more.
That is why wage rises have a favourable impact on demand for a product. Similarly, when
household income increases then demand of McDonald also increases and vice versa.
Taste & preferences: The tastes and expectations of the customers for it are a significant
factor in determining the demand for a product (Gray and Hinch, 2019). A good in which the
tastes and preferences of consumers are high, its demand would've been great and hence its
demand curve would've been higher. People's tastes and desires for different products frequently
shift and demand for them varies as a result. In context of McDonald, if business offer products
according to the consumer taste & desires then demand will increases, otherwise it decreases.
Consumer expectation of price: One of the shifters in demand is aspirations from
consumers. When a customer expects a good’s price to go lower in the future, they are holding
back from buying it now, because today's market for that good is dropping (English and
Fleischman, 2019). On the other hand, if a buyer anticipates that the price will go up throughout
the future, today's demand for the good is increasing. Basically, when price of goods in future is
expected to increase then current demand of goods also increases and vice versa.
Demographic: More consumers generate more demand for the products and low buyers
reduce the demand as well. In relation of McDonald, company should target their audience
according to the demographic area which has high pollution, so they can maximise their sales.
More number of buyers generates more demand and lower consumers generate low demand.
This factor also affects the demand of McDonald or in order to boost their overall demand they
need to consider such determinants and make strategies accordingly.
Above mention factors affect the overall demand of the organization and it further also
influence the profit margin (Hong, Zhang and Ding, 2018). In order to maximise demand of their
food products, they should consider above discussed factors and evaluate that how it will helps in
maximising overall efficiency as well as effectiveness.
The retail price of McDonald's delivered was always appealing to customers. It has
allowed consumers to buy their goods while retaining the strong buying power for a prolonged
period of time. The business was trying to expand their goods in a similar way. They were able
to start a new form of burger-like chicken myth, a move which made outshine their rivals. Other
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huge range of healthy products company introduced includes vegan burgers, in relation to salads,
organic milk. Their loyal customers got a better chance from which to choose the wide range the
most required results. Consumers often feel privileged by the reality that their preferred
organization will purchase a range of items. Product diversification has, over moment, enhanced
the burger demand. Price change of the commodity and its diversification contribute to a shift in
the quality of the mix. If the sales price decreases the hamburger’s competition increases; this
allows the product’s value to rise, with a net change in the equilibrium price. Because when price
raises hamburger demand declines and the effect on the optimum price falls.
3. Evaluate the factor which influence the price elasticity of demand
Price elasticity is being used by policymakers to explain how supply or demand shifts,
despite price changes, in order to understand the dynamics of the real economy. For example,
some products are very inelastic; their price levels do not change far due to changes in supply or
demand of goods.
By nature, luxury products are costly and unnecessary, so it suggests that consumers tend to
be more likely to purchase them because they have a lot of cash or have high income (Lemaire
and Limbourg, 2019). Financial experts get a term for the concept "Income elasticity demand."
In other words, this implies how often the salary impacts their chances of purchasing other kinds
of goods. Luxurious goods also recognized as Veblen items, and these products may be used for
people to show off their status in society, such as initial artworks, expensive clothes, or luxury
automobiles. These could also be "positional commodities" products that are rare, that make
them highly profitable. Tuition at an elite university, like Princeton or Yale, is one example. This
encourages people to show their place in society by investing more money on this stuff – when at
the same time it allows them to hang on to it.
On the other side, necessary goods are those without individual can’t survive such as food,
water and shelter. Individuals require food to survive, however that doesn't suggest that within a
four-star restaurant they need a fine dining dinner! So cover the feet, they need sneakers but that
shouldn't mean people need a $400 pairs of European leather boots. Demand of necessary goods
is affected by several factors such as increase or decrease of household income, substitute
product, price of products, taste and preferences etc. These factors affect the price elasticity of
demand.
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Market is guided by personal income and customer preferences. Business productivity relies
on productive processes and aggressive marketing. Large corporations have benefits in sourcing,
investing, and selling while small enterprises can compete successfully by providing better
product or service (Sagheb, Ghasemi and Nourbakhsh, 2020). Despite the crisis of 2008 and the
resulting fall in consumer sentiment across the world, overall fast-food supermarket consumption
has risen due to easy and low cost. Consumers often prefer the ease of dining out, but are
attracted to the lower price for service restaurants. To comparison to their very low-priced
offerings, other fast-food stores have focused on the decline by launching new offers.
McDonald's is the largest US fast-service restaurant (QSR) chain. The organization produced
approximately US$ 40.5 billion in 2019; around US$ 19 billion more than its nearest competitor
like Starbucks, KFC etc.
There is elastic demand for McDonald's goods. Price adjustments, triggered by the
corporation's decision or regulatory pressures such as taxation and rebate policies, will contribute
to short-term volatility in demand. Clients do not need to spend long in the company so they can
gain interest. In fact, they don't develop substantial loyalty to the goods and drinks sold, and they
can't cut their sales or move to the alternative items. The existence of several alternatives directly
adds to the elasticity of the firm's market.
There are some specific factors which influence the price elasticity of demand in context of
McDonald's products. These are as follow:
Availability of substitute: The market for a product would be more dynamic, with a broad
number of alternatives. The explanation for this is that only a modest rise in the costs will cause
consumers to go for their alternates. For example: increase in McDonalds’s price will leads to
force consumer to shift their nearest alternative such as Burger Kind, KFC, Starbuck etc. and
vice versa. Therefore, the emergence of similar replacements makes demand prone to price
changes. On the other hand, goods such as wheat and salt with little to no alternatives have less
market elasticity in size.
Income level: For high level income group people, elasticity of demand for a product will
be low and vice versa (Silva and et. al., 2019). Rich people are not affected by the product price
but low group people have to reduce their demand when product price increases. In context of
McDonald, change in food prices only affects the low income level group where demand is
elastic.
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There are various price strategies which can be followed by the organizations to set their
product prices. Some of them are as follow:
Skimming pricing strategy: It is a tactic where marketers sell a new product at a reasonable
possible price, but lower the price over time as the goods becomes fewer and fewer famous.
Skimming is distinct from high-low inflation, since costs are slowly reduced over time.
Premium pricing strategy: It is often known as luxury pricing, as businesses price their
goods high, a prestige pricing policy is to give the impression that their goods are of high value,
luxurious or premium. Pricing method concentrates on a product's perceived value, instead of its
true worth or production costs.
Psychological Pricing Strategy: It is a pricing approach that uses different strategies to
give customers a psychological or cognitive effect (Zhu and et. al., 2018). This combines
advertising with promotional strategies. It could also be defined as price setting below a thought
the entire number. The theory behind it was that consumers are reading the price marginally
lower and viewing that better than even the price really is.
McDonald implements the psychological pricing strategy which helps the management to
set their price according to the expected price of goods in the market. This pricing strategy helps
the organization to attract more and more people at the same time and make sure that product
will be as per the requirement of consumers which helps in maiming customer satisfaction.
CONCLUSION
From the above discussion, it has been observed that management economics help the
organization to understand the market situation in terms of demand of goods and services.
Demand of particular product can be changed due to several factors such as availability of
substitute, price of substitute goods, consumer taste & preferences, income of consumers,
number of buyers etc. These determinate affect the overall demand of company’s products and
also influence the demand price elasticity. In addition, consumer demand also differs because of
substitute impact such as luxury and necessary goods which affect the individual demand. Along
with it, there is numerous price strategies which can be adopted by the organization to target
more people to maximise overall demand and profit margin.
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REFERENCES
Books & Journals
Adekoya, O. D. and Jimoh, I., 2019. Scholars Journal of Economics, Business and Management.
English, P. and Fleischman, D., 2019. Food for Thought in Restaurant Reviews: Lifestyle
journalism or an extension of marketing in UK and Australian newspapers. Journalism
Practice, 13(1), pp.90-104.
Ferguson, M., 2019. The rise of management consulting in Britain. Routledge.
Garcia-Garcia, G., Stone, J. and Rahimifard, S., 2019. Opportunities for waste valorisation in the
food industry–A case study with four UK food manufacturers. Journal of cleaner
production. 211. pp.1339-1356.
Govindan, K., 2018. Sustainable consumption and production in the food supply chain: A
conceptual framework. International Journal of Production Economics. 195. pp.419-
431.
Gray, A. and Hinch, R. eds., 2019. A handbook of food crime: Immoral and illegal practices in
the food industry and what to do about them. Policy Press.
Hong, J., Zhang, Y. and Ding, M., 2018. Sustainable supply chain management practices, supply
chain dynamic capabilities, and enterprise performance. Journal of Cleaner Production.
172. pp.3508-3519.
Lemaire, A. and Limbourg, S., 2019. How can food loss and waste management achieve
sustainable development goals?. Journal of Cleaner Production.
Sagheb, M. Z., Ghasemi, B. and Nourbakhsh, S. K., 2020. Factors affecting purchase intention of
foreign food products. British Food Journal.
Silva, D. S. and et. al., 2019. Lean Startup, Agile Methodologies and Customer Development for
business model innovation. International Journal of Entrepreneurial Behavior &
Research.
Zhu, Z. and et. al., 2018. Recent advances and opportunities in sustainable food supply chain: a
model-oriented review. International Journal of Production Research. 56(17). pp.5700-
5722.
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