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Fast food industry has transformed over years and has embraced a large number of players due to growing demand for a variety of food items. This industry is one of the most engaging topics to evaluate demand function and elasticity due to multiple factors affecting managerial decisions using economic models. McDonald's is an American company that serves burgers, beverages, and other food items to its customers and has also leveraged take-away services to increase customer base. The business model became imitable and therefore many fast food companies joined the competition (Panwar and Patra, 2017). The company was established in 1940 and is headquartered at Chicago, USA. It serves around 68 million customers each day through its franchises in 120 countries. The company is listed on NYSE as MCD and is a component of S&P 100. The main reason for choosing the company was to determine how heterogeneous services by different companies of an industry are affected by environmental factors when put in an economic model such as demand function. However, it is still unlikely to holistically determine how all the factors work together to ascertain the demand.
Business model
Mcdonald's business model has multiple revenue streams such as payment of rent from franchises, sales from owned operators of the fast food chains, and royalties. The revenue from franchises rose 26% in the span of 2010-15. But the total revenue has not shown any substantial increase in the past few years. Still, it holds the largest share in the fast food industry. With increased competition from international companies and local players, the company has witnessed stagnant growth which is a threatening sign for the sustenance of the company as the market leader (Wilkinson, 2021).
Demand
Demand refers to the quantity of the good that is demanded at a particular price over a certain period of time. For demand to exist, three things are necessary, willingness to purchase the good, ability of the consumer to purchase that product or service, and availability of the good in the marketplace. Besides the price of own goods, the demand is affected by many environmental factors such as the price of substitute goods, complementary goods, income of the consumer, and taste and preferences of consumers. Mcdonalds has a good brand reputation but is facing intense competition from new businesses such as Burger King, Burger Farm, Subway, and other local outlets in the international as well as national market (Panwar and Patra, 2017). Simultaneously, there is a shift in eating preferences of customers who have become more health conscious.
Demand curve
Demand curve is downward sloping because price and quantity demanded of a product have a negative relationship which means that if the prices rises, quantity demanded is lower and vice versa.
Market equilibrium
Market equilibrium can be discerned as the point of interaction of demand and supply of a particular good. This point is achieved when consumers are ready to buy a product at the price at which the producer is ready to supply the quantity demanded by customers. In perfect competition, this point is decided by the industry rather than consumers and suppliers but in different market structures, this point is manipulated by the decision of the supplier as well (Wilkinson, 2021). This point is also affected by different factors that we are going to discuss in the next section.
It must be noted that when the price of the good changes, there is a movement along the demand curve but when there are changes in other factors (discussed below) there is shift of demand curve either rightwards or leftwards as the price of the good remains intact (Bilas, Sopta, and Kos, 2021).
Shift in demand curve
Righwards- When the quantity demanded at a particular price increases due to favorable changes in factors (other than price of own good).
Leftwards- When the quantity demanded at a particular price decreases due to unfavorable changes in factors (other than price of own good)
Factors affecting demand
? Price of Substitution goods
Price of substitution goods affects the demand of the goods (here, Mcdonald’s food items) positively. If the prices of substitution goods rises, the demand for our own goods rises. This is because their customers shift towards our businesses. However, it is seen that Mcdonald’s has been charging economical prices from its customers and is preferred over other businesses due to the same pricing strategy (Naidoo et al., 2017). The main threat is from the local outlets in international markets which provide regional food at cheaper rates.
? Price of Complementary goods
Prices of complementary goods affect the demand for our own goods negatively, that is, if the price of complementary goods rises, the demand for our own goods falls. This is because complementary goods are used with the goods whose demand is being evaluated. This is imperative while studying the goods which are used with complementary goods such as coffee and milk, petrol and car, and shoes and socks (Panwar and Patra, 2017). However, it is insignificant to determine the demand for products offered by Mcdonald’s on the basis of price of complementary items because each item is independent and the customer has the choice to demand only for a single product.
? Consumer income
Consumer income has a positive relation with the demand for goods. If the income of a customer rises, his purchasing power rises and therefore, he is in the position to demand for the item sold by the business. In this case, if the household income in a country increases, it will raise the demand for the product as well (Naidoo et al., 2017). But it is seen that the demand for Mcdonald’s products remains the same even with the rise of income level of households as the prices of its products also rise modestly to streamline with inflation. Therefore, the company has had stagnant revenue growth in the past few years (Niebylski et al., 2015).
? Consumer taste and preferences
Consumer taste and preferences is quite complex to comprehend holistically. People make choices based on their past experience, their innate feelings, availability and distance of the outlet from their location and like. So it is quite challenging to determine how it affects the demand for Mcdonald’s business. In general cases, consumer taste and preferences have a positive relationship with the demand of the product (Tangkuman, Massie, and Mangantar, 2020). If consumer taste favors a business, then the demand will rise and vice versa. If the customers' choices have shifted from fast food to healthy food, it will negatively impact the demand of the product. There are many innovative healthy dishes available in restaurants and other outlets and it is observed that with the rise of income of the middle and upper class, the customer prefers healthier choices, even for eating out (Niebylski et al., 2015).
Source- Statista
This chart shows that the peak of revenue was in 2013 and since then, due to evolution of new businesses in the industry, the trend has been downward sloping. This shows changes in taste and preferences of customers, more likely to be termed as fragmentation of the market (Togan, 2021).
? Future expectation of Price
Future expectations of prices refer to the predictions of prices by the customer about the future prices of the product and it significantly affects their buying decision. In the fast food industry, this factor is not prevalent as the good is perishable. But in other cases, if customers find out that the prices are going to fall, they start purchasing in the present time and stocking the product and if they predict that the prices are going to fall, they decide to wait till the prices go down and therefore the present demand of the product falls (Togan, 2021).
? Demographics
Demographics refers to the population size of the market that affects the demand. Millennials and Generation Z are the major constituents of the business demand and their concentration in different countries affect the demand to move either rightwards or leftwards. Population is denser in South Asian countries in comparison of Western andEuropean countries due to which sales are higher in that particular region. Dense population implies a rightward shift of the demand curve and vice versa (Tangkuman, Massie, and Mangantar, 2020).
This map shows the number of restaurants in each nation. It highlights that it has the highest number of stores in America, Japan, and China followed by Germany, France, Italy, Canada, and Russia. The source also provides information about the number of outlets in a nation per 100 thousands people in a country. In America the ratio is 4.13 with 14,146 outlets and 0.17 with 2,391 outlets in China. Here, we can comprehend that China's population is the highest in the whole world but the major chunk of this population is senior citizens due to which it has a lesser number of outlets in comparison to America from a relative point of view (Panwar and Patra, 2017).
Demand elasticity
Demand elasticity tells us about how much the quantity demanded varies in context of change in its price. This function is denoted by % change in quantity demanded/% change in price. If the ratio is more than 1, it is elastic and if it is less than 1, it is inelastic.
Source- LearnBusinessConcepts.com
The figure showcases graphical representation of 5 types of demand elasticity which will be elaborately discussed below with the help of examples.
Nature of commodity
Necessary goods have inelastic demand as these are basic consumption goods required by humans such as foodgrains, petrol, and like. Luxury goods also have inelastic demand because these goods are meant for a specific segment of the market, the elite class and therefore price changes do not change much of their buying decision. But, in the case of comfort goods, such as Mcdonald’s food items, quantity demanded is elastic to price changes (Baghestany, Rahimi, and Sherafatmand, 2020)(Refer the 4th graph in above figure).
Number of substitutes in the market
Quantity demanded will be highly elastic to price changes in case of a large number of substitutes available in the market. If the number of players are less in the market in the context of a specific industry, the demand will be inelastic to price change such as Automobile industry. Mcdonald’s demand is highly elastic to price changes as it has many substitutes in the fast-food industry (refer to 4th graph in the above figure). This is the deciding factor of pricing policy of its products (Rebello, 2017).
Income Level
Demand elasticity is more in the context of low income groups and vice versa. The reason is small price changes make a big difference in the budget of the middle and low income group but don't affect the elasticity of the high-income group of the society. This must be studied with the fraction of the product that will constitute the average income that a household earns. If the fraction of what the consumer is paying for a product is insignificant to the income of the consumer, the demand will remain inelastic and vice versa (Rebello, 2017). For example, Starbucks is accessible by people who earn considerably well but Mcdonald’s products are accessible even by the average earning people. So we will take the average earning group to be our customers. The demand elasticity will be 1 (refer to graph 3 in the above diagram).
Time period
Time period refers to the duration of the consumption of the product. If the time period is short, the demand remains inelastic as it takes time to change one’s habit or switch to some other substitute who offers the same satisfaction level. It took time for burger king to compete with Mcdonald's in the same industry because the satisfaction that customers got from Mcdonald’s products was not to be found anywhere else (Naidoo et al., 2017). Even today, even after offering similar products, Mcdonald’s have more market share than Burger King because people perceive it as a more satisfactory product. But, in the coming years, if any company is able to sweep the market with its marketing strategy, quality, pricing strategy, products, this will affect the demand elasticity to become more elastic (Basker and Khan, 2016).
Habits
If people are habitual of something, the price elasticity will remain inelastic as their buying decision is highly influenced by their habits. Mcdonald’s doesn’t offer products which are habitual in nature but if people become more outgoing and they are habitual of eating fast food more often or once in a day, their elasticity will be less than 1 but for other segment for whom the product does not constitute for habitual consumption, price elasticity will be more. However, it is unlikely for people to get habitual of burgers so the demand in this case will be inelastic (Baghestany, Rahimi, and Sherafatmand, 2020) (refer to graph 4 in the above diagram)
From the above discussion we can discern that the business model and its products are sensitive to prices. Most of the factors that determine demand elasticity for a price states that for Mcdonald’s products, the demand is elastic and it needs to be very conscious about deciding on the price hikes. There is intense competition in this industry and we have also seen the revenue graph that suggests that Mcdonald’s is slowly and gradually losing its luster in the international market (Basker and Khan, 2016). In the next segment, we will discuss what the pricing strategy should be based on the above analysis.
Pricing policy analysis and recommendation
Firstly, the company needs to ascertain the intensity of competition in the global as well as home marketplaces. There are new businesses mushrooming in this industry and not only in the form of companies but local businesses such as sole proprietorship, partnerships, and other forms. So there is gradual fragmentation of the market (Bilas, Sopta, and Kos, 2021). The next step is to discern their pricing policy in the local market. Most of these businesses have adopted a competitive pricing strategy that is to lower their prices to meet the industry price range. One thing that gives the company an edge over these businesses is its brand value for which it can charge higher value but slightly (Raduzzi and Massey, 2019).
So it is recommended that the company keeps the prices a little higher than the industry’s average price for products but keeps it in the acceptable range. It can charge 2% higher as it won’t affect the demand much and also it will be leveraged by brand’s value.
Conclusion
In this report, the discussion embedded the managerial concept of demand and its elasticity to determine market equilibrium and factors acting upon it. The case study of Mcdonald's enabled the report to become more explorative and engaging. It was easy to ascertain the changes and demand elasticity as we see the brand presence in our everyday life. It is easy to understand the concept of substitute goods and its price acting upon sales and revenue of McDonalds. When the competition becomes intense and each business in the industry is equally capable to flourish in the market, adopting competitive pricing strategy is highly recommended.
References
Baghestany, A., Rahimi, R. and Sherafatmand, H., 2020. Estimation of Demand Function for Rice An application of the threshold regression model. Agricultural Economics Research, 12(45), pp.91-101.
Basker, E. and Khan, M.T., 2016. Does the minimum wage bite into fast-food prices?. Journal of Labor Research, 37(2), pp.129-148.
Bilas, V., Sopta, M. and Kos, M., 2021. CHARACTERISTICS OF OIL INDUSTRY WITHIN THE MANAGERIAL ECONOMIC. Economic and Social Development: Book of Proceedings, pp.254-271.
Naidoo, N., van Dam, R.M., Ng, S., Tan, C.S., Chen, S., Lim, J.Y., Chan, M.F., Chew, L. and Rebello, S.A., 2017. Determinants of eating at local and western fast-food venues in an urban Asian population: a mixed methods approach. International Journal of Behavioral Nutrition and Physical Activity, 14(1), pp.1-12.
Niebylski, M.L., Redburn, K.A., Duhaney, T. and Campbell, N.R., 2015. Healthy food subsidies and unhealthy food taxation: A systematic review of the evidence. Nutrition, 31(6), pp.787-795.
Panwar, D. and Patra, S., 2017. Localization in Fast Food industry: A case study on McDonald’s strategy in India. Journal of Arts, Science & Commerce, 8(1), pp.70-74.
Raduzzi, A. and Massey, J.E., 2019. Customers satisfaction and brand loyalty at McDonalds Maroc. African Journal of Marketing Management, 11(3), pp.21-34.
Tangkuman, M.J., Massie, J.D. and Mangantar, M.M., 2020. The Effect of Experiential Marketing And Customer Satisfaction on Customer Loyalty at Mcdonald’s Manado. Jurnal EMBA: Jurnal Riset Ekonomi, Manajemen, Bisnis dan Akuntansi, 8(4).
Togan, I.O., 2021. 13 McDonalds. Business Management Case Studies: Pran-RFL, Netflix, Mc Donalds, Google, Tesco, Apple, COCA COLA, PSA Group, Mercedes, Tesla, Toyota, Beximco, KFC, LBC Lao Brewery Company, p.205.
Wilkinson, N., 2021. Managerial Economics: Problem-Solving in a Digital World. Cambridge University Press.
