Report for McDonalds
Italy and Russia
Figure 1: GDP per Capita at Constant Prices
Figure 2: GDP Growth (Annual %)
Figure 3: Inflation Rate CPI
Figure 4: Unemployment Rates
Figure 5: Policy Interest Rate (%)
Figure 6: Russia Interest Rate (%)
Figure 7: Current Account Balance in Italy (% of GDP)
Figure 8: Current Account Balance in Russia (% of GDP)
Figure 9: Russia Interest Rate
List of Tables
BUSINESS OVERVIEW
McDonald’s Corporation is the world's largest chain of hamburger fast food restaurants, serving around 68 million customers daily in 119 countries across 36,538 outlets. Founded in 1955 by Ray Kroc in Des Plaines, Illinois, 80% of the restaurants are franchised. The company offers a variety of food items including, hamburgers, French fries, salads, wraps, milkshakes, soft drinks, chicken nuggets, fish and chicken sandwiches, deserts, coffee and breakfast value meals.
PURPOSE OF THE REPORT
This report will focus on the operations of the McDonald’s Corporation in Italy and Russia and will seek to examine how the macroeconomic environment in these two countries might affect the company’s economic activity.
Introduction
McDonalds has come to create a network in both Italy and Russia. Italy seems to have better balance of payment and government balance indices, interest rate, trade policy instruments and not needing to lose over currency rates while dealing with Eurozone importers, and even unemployment and GDP growth rates. However, unemployment and the lack of growth indicating poor economic performance and social welfare situation may advantage the brand in Russia through better low-cost labor availability and consumer reorientation on less expensive restaurant offerings. Overall, neither of the country is the ideal market for the brand, yet both have their own advantage securing high sales and popularity among consumers.
Product Nature and Macroeconomic Indices
Products and Brand Operation in Italy and Russia. Market Aspects
According to Moscow Russia Insider’s Guide (2016), Russian McDonalds has such offerings as vegetable salads and even Caesar salad apart from the traditional line of fast food like all manners of burgers, fries, cold and hot drinks, and desserts. Zomato (n.d.) suggested that an Italian brand menu offered Insalata Mista and Insalata Nizzarda, besides traditional offerings. As follow from the inclusion of the salads representing a traditional Italian cuisine, the brand in Italy seeks to connect with the target consumer segment through by going local in terms of menu to cater to their the food preferences of Italians. The local food culture seems resistant to foreign influence and the penetration of the fast-food culture. Weyers (2012, p.9) praised the success of Italian McDonalds in the way of integration in the cuisine landscape of Italy and diversification of people’s dining options. Kiselyova (2016) cited brand executives in Russia pointing to high sales despite poor economic indices like inflation, which may reveals the brand as popular in the country too, with 60 news outlets due in 2016 in addition to the 543 of the currently run. As for market aspects, Fast Food in Russia (2016) mentioned the increase of fast food value share from 47% to 54%, one of the best competitive ability of the fast-food category, the rising popularity of the brand in the period of crisis, and the leading position of McDonalds. Fast Food in Italy (2016) also mentioned the lead position of the brand and the positive influence of hot weather on ice-cream sales.
GDP per Capita at Constant Prices. GDP Growth
Figure 1: GDP per Capita at Constant Prices. Source: http://data.worldbank.org/indicator/NY.GDP.PCAP.KD
Figure 2: GDP Growth (Annual %). Source: http://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG
According to the World Bank (2016), the rate runs up to 28.707.2 in Italy in 2014 after reaching a high of 30.788.5, as against 6.843.9 dollars Russia reached before recording the 6.365.2-dollar mark (see fig.1). Such are figures of the variable indicating the GDP split by midyear population. The bottom line is that the rate in Italy is well-nigh 5 times as big as it is in Russia where the population seems less prosperous, which can bring more consumers to McDonalds in lieu of expensive restaurants. When it comes to the level of GDP growth, the World Bank Group (2016) estimated the rate at -0.4% and 0.6% for Italy and Russia respectively. Back in 2000, the level was 3.7% and 10% for the countries in the same succession (see fig.2). The index may point to Russian economy having become somewhat healthier than Italian as of 2014. As such, it may be a better investment destination for foreign brands like McDonalds, as income, jobs, and business all are on the increase; but then again, the rate contracted by 10 times in Russia and 4 times in Italy being rather smooth in the Apennines. Mody and Riley (2014) cited a miserable productivity performance, innovation, education gap, and youth unemployment as the reasons for Italy’s poor growth. Gavrilenkov, Welfens, and Wiegert (2013, p.123) explained that rather a positive index in Russia was due to the rise of import goods and investment and consumer demand expansion.
Inflation Rate CPI
Figure 3: Inflation Rate CPI. Source: https://data.oecd.org/price/inflation-cpi.htm
OECD (2016) placed the consumer price index of inflation in Italy at 0.25 in the January of 2016, as compared with the January of 2011 when it was 2.15%. In Russia, the index went up from 9.56% to 9.81% over the comparable period (see fig.3). If the data is to be trusted, Italy has started to experience deflation or the elevation of the real value of the currency in recent years, so has Russia with the difference that the latter is in the way to reach the deflation point below zero. If so, the Italian unit of currency may buy more burgers than that of Russia can, which makes product more affordable in the Apennines. US Inflation Calculator (2015) stated that the CPI was a measure of the median change over time in prices, which urban customers pay for a market basket of services and goods. Obviously, Russian consumers will pay more than they would in 2011. Moreover, the affordability advantage accompanies the currency with a stronger real money value, which is Italy. As for causes, Manasse, Nanncini, and Saia (2014) believed the introduction of euro as a stabilizing factor in Italy. Lossan (2015) noted that ruble weakening resultant from oil price reduction expedited inflation growth in Russia.
Unemployment Rates
Figure 4: Unemployment Rates. Source: http://www.ilo.org/wcmsp5/groups/public/---dgreports/---dcomm/---publ/documents/publication/wcms_443480.pdf
International Labor Office (2016, p.13) estimated unemployment rate in Italy at 12% in 2016 projecting that it is set to fall by 0.5% in the coming year. The index contracted rather slightly since 2014 when it was around 12.7%. The rate in Russia reached 6.2% in 2016, and it bids fair to fall to 6.1%. The rate increased from 5.2% in 2014 (see fig.4). Weissmann (2011) explained that youth’s short-term contracts and the arising necessity of job-hopping, the protection of the elderly through employment laws, and job market split aggravate the index in Italy. The cumulative outcomes of the global economic and financial crisis and the still-uncompleted structural reformation of plenty of enterprises and industries perpetuates the problem in Russia (Sputnik 2010).
As for implications, the bigger the index is, the more increasingly it implies that the fast-food brand will have a larger talent pool or low-cost labor force willing to get the job done in the service sector. On the flipside, the bigger unemployment rate in indicative of lower social welfare. Despite McDonalds falling under the low-income category due to its flexible price policy oriented on the lower socio-economic consumer segment, the unemployed are poor restaurant goers. Thus understood, Russia has more to offer with regard to low-cost labor, yet it has a larger share of people who may prove unable to purchase the food line of McDonalds no matter how affordable. However, the economic downturn may reorient customers in Russia to less expensive restaurants like McDonalds boosting sales.
The Fiscal Policy
Researching the fiscal policy of Russia in the post-independence period, Barkhatov and Belova (n.d.) viewed GDP growth and tax revenue growth of the consolidated national budget as interrelated. Tax revenues wax and wane, which they do during recovery and rise spells and crisis and depression periods respectively. Therefore, the fiscal policy suggests that the period of depression now the case in Russia brings down tax budgetary arrivals. Since taxes go into public expenditure funding maintaining social welfare. Now that oil price fluctuations and drop coupled with sanctions have struck, the Russian fiscal policy makes the country a poor consumer market for McDonalds. Worse, Korkunskaya (2014) warned that the president of Russia decided to bring a sales tax on consumers of up to 3% in a desire to compensate budget shortage. As for Italy, The Economist (2008) stated that the government of Italy enhances tax burden much as it copes with tax evasion. However, the country does provide relief for business by decreasing corporation tax, as it did in 2007. Floyd (2004, p.18) noted that lowering this tax category increased the amount of business profit. Thus, Italy is a proper country of operation in tax terms; however, since relief may be granted in the early operational phase, and that tax burden may ensue, do not add optimism.
Interest Rate. Monetary Policy Rate
Figure 5: Policy Interest Rate (%). Source: http://www.focus-economics.com/countries/italy
Figure 6: Russia Interest Rate. Source: http://www.dailymail.co.uk/news/article-2875313/Bank-Russia-hikes-rate-aid-sinking-currency.html
Focus Economics (2016) noted that policy interest rate in the country was equal to 0.05% in 2015, as was it the year before. In 2011, it was 1% before losing in amount to 0.75% in the year to come after. In 2013, it lost two thirds of its percentage amount dipping to a low of 0.25%. The interest rate has been declining for at least 5 years on end, for which data is available (see fig.5). Bank of Russia (2016) suggested that the Bank of Russia made the decision of reducing the interest rate from 11.00% to 10.50%. In 2014, it hit the 17%-mark (see figures 6, 9). Bank of England (n.d.) explained that a decrease in the rate cuts back interest return payments on loan and savings-generated income. Floyd (2004, p.18) stated that, under the lower interest regime, companies try to expand through investment. Consumers stimulate demand by enjoying better purchasing capacity. When made higher, the rate will send the cost of loans rising affecting the cash flow of companies. Customers facing higher bills will hit the volume of sales. With this in view, the lower interest rate in Italy creates better investment openings. The return on loan is lower and in inverse proportion to the purchase desire of the consumer base. Economic conditions created by interest rate in Italy are 10 times as favorable as they are in Russia. A loan taken on opening a franchise McDonald’s outlet in Italy takes much less time to repay while consumers’ spending ability also contributes to a venture reaching breakeven point much earlier than it would in Russia.
General Government Structural Balances in Terms of GDP
Economy Watch (2014) placed the percentage of the balance in Italy at -0.843 % while that of Russia it did at -2.371 % in 2015 (see table 1). On the list, Italy languishes at 20 on the list of countries, regions, and formations, and Russia sits uncomfortably at number 45 spot. Boije (2004, p.7-8) explained that structural balance, when negative, pointed to there being a deficit in the government finances. Under stable circumstances, the deficit does not go beyond 3% of GDP for it to be considered acceptable. Following this logic and given the fact that the rate does in none of the two states, both countries have tolerable government balance levels, as the deficit on the average is 10 times smaller than the upper acceptable bar of deficit in Italy, yet in Russia, the deficit is almost one fourth of the permissible limit. Thus, Italy seems to be in a better position than Russia is. Obviously, the countries target the sources of poor index by taking respective tax-related and other measures. IMF (2001, p.17) revealed that Italy implemented fiscal consolidation coupled with relief in tax burden. Russia implemented the federal fiscal rule and reduced VAT refunds in an effort to improve the general government non-oil structural balance (IMF 2014, p.24). Sanctions and oil price drop could have made Russia charge higher taxes, which affected the deficit index. While tax pressure has negative implications for the brand in both countries, which may force McDonalds to build it into the prices of offerings and adjust workforce salaries accordingly, the situation seems better in Italy.
Balance of Payments
Figure 7: Current Account Balance in Italy (% of GDP). Source: http://www.tradingeconomics.com/italy/current-account-balance-percent-of-gdp-wb-data.html
Figure 8: Current Account Balance in Russia (% of GDP). Source: http://www.tradingeconomics.com/russia/current-account-balance-percent-of-gdp-wb-data.html
According to Current Account Balance (% of GDP) in Italy (2016), the balance of payments percentage for the country is 2% in 2016. It is 5.8% up on 2010 when it was a negative 3.8% (see fig.7). Current Account Balance (% of GDP) in Russia (2016) suggested that the index was close to 4% in the comparable year. It is 1% down from 2011, yet it seems to have doubled since 2014 (see fig.8). Arize (2000, p.19) explained that the balance of payments was contingent on quotas and import tariffs enhancing the domestic income. Russia may have better situation with quotas. If so, the index points to the higher McDonalds sales potential of Russia. Indeed, the variable in Russia is twice as big as the one in Italy, which may testify to better performance based on indices, such as service imports, imports of services and goods, and trade in services highlighted by both sources in their numerical breakdown of BoP in GDP percentage.
However, according to the CIA (n.d.), the territory of Italy is equal to 0.3 million square kilometers in rough figures, as compared with that of Russia is north of 17 million. It means that Russia is 56-plus times the size of Italy. As such, Russian BoP variable should have been more than 200 times the index of Italy for the BoP status quo to be more business conducive. Since it is not, Russia cannot be said to have better conditions for business ventures, such as fast-food restaurants. The size of the country needs factoring in when comparing the BoP situation in the countries. According to Current Account Balance (% of GDP) in Italy (2016) and Current Account Balance (% of GDP) in Russia, even trade in services in Italy made up 10.9% of GDP in Italy, as against 10% in Russia despite a much smaller size. The comparable index relates directly to McDonalds since, as explained by, World Trade Organization (2015, p.4), trade in services may happen when a foreign venture launches branches or subsidiaries to provide services in another country.
Trade Policy Instruments and Exchange Rates
The annual revenue of the company in Europe dropped in 2011 due to the weakening Euro despite sales being high (Euro Investor 2012). On April 27, 2011, the value of euro vs. dollar reached a high of 1.4668 dollars (see table 2). By contrast, on December 22, 2011, a thousand euros could buy 1.3047 dollars (Euro Central Bank 2016). The figures prove the currency did lose its solid position in the course of 2011. While in Europe currency weakening did not affect the sales, in Russia, the weakening ruble may be affecting the performance indicator through the purchasing power and confidence of the population. FT Reporters (2015) noted that consumer confidence was the issue seriously telling upon McDonalds in Russia. Ye (2010, p.100) used the concepts of consumer sentiment and confidence interchangeably. Business Monitor International Ltd. (2004) stated that a decrease in consumer sentiment demonstrated the uninterrupted fall in real purchasing power. In Russia, it could well be by the currency exchange issue and the ruble downfall that the confidence waned.
As suggested by Obadare (2016, p.50), when the national currency goes weak, such development may send the purchasing power of the population falling. According to US Forex (2016), a thousand dollars is a 65.250 rubles’ worth amount of money as of now (see table 3). Rankin (2014) suggested that the central bank governor of Russia shifted the blame for currency devaluation on dropping oil prices and western sanctions. ExchangeRates.org.uk (2016) placed the rate on June 5, 2016 at 65.6752 rubles for just 1 dollar, as against 36.0011 rubles on March 1, 2014. Indeed, the pre-sanction period reveals the currency as much stronger than now. Hence, there is no surprising now that the purchasing power of the currency has dropped, so has the buying capacity of the consumer segment determining the volume of sales and the eventual revenue. Worse, besides the dropping individual purchasing capacity, the brand proves currency-sensitive. Khrennikov (2014) suggested that McDonald’s had risen the price for Big Mac by 2.2% in late 2014 due to ruble having dipped further.
In the case of the EU, McDonald’s outlets in Italy do not seem to need to sustain any losses associated with currency rate fluctuations when importing goods from the Eurozone due to Euro currency common usage in the economic zone, unlike those in Russia. Besides, European Commission (n.d.) noted that commodities could circulate throughout the EU unrestricted in terms of tariffs, with the Common Customs Tariff applied for imports coming from beyond the EU. As for the other market, Schmitz and Meyers (2015, p.61) stated that Russia had joined the WTO in 2012 after being in talks for close to two decades. World Trade Organization (2016) noted that the organization facilitated trade liberalization through tariff reduction. While it may enjoy better trade conditions positively influencing importing brands like McDonalds, it does not seem to respect the membership by taxing some products not as moderately as agreed, according to Fox (2015). There are some trade ties for McDonalds to respect. Sputnik (2015) noted that McDonalds received 85% of raw materials in Russia. Thus, it imports a remaining 15%, which may be hard to bring in the light of sanction regimes and tax abuse.
Conclusions
McDonalds enjoys a lead position in both states, and market structure allows it to stay competitive. Italy tries to localize the offerings to gain a larger market segment. Russia has worse GDP per capita index, yet it may benefit the low-price food brand. Larger unemployment rate too advantages Russia McDonalds by making workforce more affordable. Italy has better interest rate policy allowing quicker loan repayment. There is no need for the brand to lose in currency operations in Italy when importing from the Euro zone. Besides, it participates in no trade restrictions. Overall, one country has its unique benefits for the brand the other does not, which does not affect their performance.
Appendices
Figure 9: Russia Interest Rate. Source: http://www.dailymail.co.uk/news/article-2875313/Bank-Russia-hikes-rate-aid-sinking-currency.html
Source: http://www.economywatch.com/economic-statistics/economic-indicators/General_Government_Structural_Balance_Percentage_Potential_GDP/
Source: http://www.usforex.com/forex-tools/historical-rate-tools/yearly-average-rates
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