ECON 7109 Economics Research Project

Introduction

McDonald's is one of the biggest fast food chains in the world that was established in the year 1940 by Richard and Maurice McDonald. This company has a total outlet of 36900 spread all across 100 countries of the world. In terms of revenue, this company has topped the list beating all its competitors. One of the attracting things about the products and the service of this company is that it changes its menu based on the location of the stores. Although, McDonald is known for its hamburgers, it has successfully launched other chicken products as well. The objective of this paper is to analyse the business activity of McDonald in the context of the Australian market. Australia is a major market for this company and the existence of other similar companies has made its market framework unique from the other markets. McDonald is one of the most popular companies in the world and operates in a unique market structure. Therefore, McDonald has been chosen for the analysis of this paper.

Analysis of the firm

Type of market

McDonald is operating in an oligopolistic market structure where there exist a small number of other sellers in the market. Richards, Kjærnes and Vik, (2016) stated that, oligopoly is a type of market where the number of sellers is small in number. Australian fast-food chain market is equipped with other established players like Nando’s, KFC and many more. Apart from that, another feature of the market where McDonald operates has a homogenous product. According to the principle of market structure, players in the oligopoly can have either homogenous or heterogeneous product. All these companies meet almost the same kind of demand of the customers of the market (Janssen, Davies, Richardson and Stevenson, 2018). Although, the preparation and tastes are slightly different, they all fall into the category of junk food. In addition to that, similar to the oligopolistic market, innovative nature of the market players have also been seen in all the players including McDonald. McDonald, in the year 2011, in Australia came up with a menu that used healthy ingredients to keep the calorie count low to meet the growing demand of customers for healthy food. Boyland, Kavanagh-Safran and Halford (2015) noted that, in an oligopolistic setting the main aim of the players is to capture as big a share of the market as possible if they are not in a mutual curtail. Lastly, the feature of the following strategy of the other players has also been seen among the players in the Australian market. Currently, most of the players have a healthy menu segment to have a competitive edge in the fast food market. Therefore, the characteristic of Australian fast food industry in which McDonald operates has similarity with an oligopolistic market.  

Major competitors

The major competitor of McDonald includes, KFC, Nando’s, Subway, Hungry Jacks and many more. All the players of the market provide almost the same kinds of food products to the customers of the market. The burger is a common item present in a menu of almost all the players of the market. However, it is important to note that, the market share of McDonald is higher than all the companies. McDonald has a market share of 29.5% which is followed by KFC with 19.9% of the overall market share (Janssen, Davies, Richardson and Stevenson, 2018). In terms of revenue as well, McDonald dominates the rival companies of the market. The overall annual revenue of McDonald in the year 2017 was around 1.64 billion USD compared to $770.9 million of KFC.

However, the competitors of McDonald have shown fierce rivalry over the years through different new strategy to combat the popularity of McDonald. KFC Australia undertook a pre-emptive strategy to increase its stores in Australia in the year 2015. Its number of stores currently stands at 613, a 32% increase since the year 2015 (Thornton, Lamb and Ball, 2016). Apart from that, Subway also tried to improvise with the menu introducing more protein-rich items keeping the calorie low. However, as discussed above, both in terms of popularity and acceptance of the customers, McDonald still dominates the market with a good reputation and lion’s share of the fast food market of Australia.

Influence of competitors in the pricing decision

Since there is not curtail among the different players of the market in Australian fast food industry, pricing decision of one firm is highly influenced by the strategies of the other firms. However, according to the principle of price leadership model, McDonald enjoys the dominant role to set up the prices for few items in the market which is often followed by other firms of the market (Janssen et al. 2018). In addition to that, there are some food items where McDonald faces a different pricing behaviour of the rival players. For example, the burger is a common item in the menu of most of the sellers of the market and it is somewhat identical in both looks and taste. This is also the reason for similar and low prices for burgers in most of the firms of the market. Richards, Kjærnes and Vik (2016) highlighted that, different firms use different add on to their burgers in order to set it apart from the other burgers of the market. Therefore, price war set in occasionally in the market by other firms such as Subway and Nando’s in pursuit of enjoying a larger share of the market.

Overall industry

The overall fast food industry of Australia is quite a good opportunity for the firms. Thornton Lamb and Ball (2016) noted that, around 67% of the overall population of Australia has visited a leading fast food centre at least once in their lifetime. According to the figures for 2016, the total size of the market is 6.3 Billion USD. A segment of the Australian population also eats fast food as many as thrice a week which comes as a huge demand for the companies operating in the market. However, changes have also been experienced in the market in terms of preference of the customers and their tastes. Caloric intake is a great concern for the modern customers of the market and hence a great number of strategies and policies of the firms operating in this market is oriented towards healthy eating (Thornton et al. 2016). According to estimates, the leading firms of the market are likely to invest more in healthy food items in the coming years to further meet the changing demand of the customers of the market.

Change in market conditions

Sometimes the market conditions change owing to the increase in the number of firms in the market and the types of products being produced by the other sellers. This not only changes the overall structure of the fast food market of Australia, but it also changes the role of McDonald as an important player in the market. As the number of firm increases and the difference between the products offered by different firms becomes narrow, the demand curve becomes more linear and downward sloping compared to that of oligopoly (Cowell, 2018).

Although, the marginal cost and the average total cost remains the same, the marginal revenue curve becomes more continues and steeper as the market condition changes. Ibisworld.com.au. (2018) highlighted that, in the monopolistic completive market, the firm produces closer to the lowest point of ATC and hence earns only normal profit compared to a high supernormal profit in case of an oligopolistic market condition. Although, in reality, the profit margin of McDonald never falls so much with the changing condition so much so that they lose all the supernormal profit, their profit does change when new firms enter the market.

Conclusion

Therefore, McDonald dominates the fast food industry of Australia having a huge annual sale and an impressive market share. The structure of the market where the company operates is highly similar to a proper oligopolistic market. McDonald enjoys a dominating position and hence makes the most from the price leadership system. However, a homogenous food item such as burgers which is present in menus of most of the companies shows a fierce price war. Following the principles of oligopoly, the strategies of other firms of the market also influence the pricing policies and the decisions of McDonald. McDonald along with the other firms of the market also uses product add on to enhance the USP of their respective products further. The changing market conditions even lower the profit margin of the company in the short run. Despite that, McDonald has held an impressive market share and is looking to improve it even more in the future.

Reference 

Boyland, E.J., Kavanagh-Safran, M. and Halford, J.C., 2015. Exposure to ‘healthy’fast food meal bundles in television advertisements promotes liking for fast food but not healthier choices in children. British Journal of Nutrition, 113(6), pp.1012-1018.

Cowell, F., 2018. Microeconomics: principles and analysis. Oxford University Press.

Franchisebusiness.com.au. (2018). McDonald's: Australia's most popular fast food chain. [online] Franchise Business. Available at: https://www.franchisebusiness.com.au/news/mcdonald%E2%80%99s-australia%E2%80%99s-most-popular-fast-food-chain [Accessed 25 Oct. 2018].

Ibisworld.com.au. (2018). McDonald's Australia Holdings Pty Limited. [online] Available at: https://www.ibisworld.com.au/australian-company-research-reports/accommodation-food-services/mcdonalds-australia-holdings-pty-limited-company.html [Accessed 24 Oct. 2018].

Janssen, H.G., Davies, I.G., Richardson, L.D. and Stevenson, L., 2018. Determinants of takeaway and fast food consumption: a narrative review. Nutrition research reviews, 31(1), pp.16-34.

Richards, C., Kjærnes, U. and Vik, J., 2016. Food security in welfare capitalism: Comparing social entitlements to food in Australia and Norway. Journal of rural studies, 43, pp.61-70.

Thornton, L.E., Lamb, K.E. and Ball, K., 2016. Fast food restaurant locations according to socioeconomic disadvantage, urban–regional locality, and schools within Victoria, Australia. SSM-population health, 2, pp.1-9.