McDonalds’ Entry into Latin American Market

The Top Ten Companies

The franchise list features firms from different franchise categories. According to the Entrepreneur’s (2016a) ranking, the top ten companies that pursue franchising as a mode of international expansion include:

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  1. Jimmy John’s Sandwiches (Food).
  2. Hampton by Hilton (Mid-price hotel).
  3. Supercuts (Hair salon).
  4. Servpro (Insurance/disaster restoration and cleaning).
  5. Subway (Subs salads).
  6. McDonald’s (Burgers, chickens, and beverages).
  7. 7-Eleven Inc., (Convenience store).
  8. Dunkin’ Donuts (Baked food).
  9. Denny’s Inc., (Family restaurant).
  10. Anytime Fitness (Fitness Center).

The McDonald’s Restaurant Chain

McDonald’s operates more than 30,000 restaurants spread over 110 nations, making it the largest eatery worldwide (Entrepreneur, 2016b). Richard McDonald and Maurice McDonald established the firm’s first restaurant in 1940 in the US (Entrepreneur, 2016b). The McDonald’s began franchising in 1955 as a strategy to increase the return on capital. The restaurant chain sells burgers, chickens, salads, and soft drinks to millions of customers in different countries. Its revenue sources include direct sales, royalties, leases, and franchise fees.

Business Model

McDonald’s business model is central to the restaurant’s success. It uses a “three-legged stool” model that brings together suppliers, franchisees, and company staff (Nelson, 2013, para. 5). McDonald’s has a staff population of about 1.8 million working in company-owned outlets and operates 5,000 franchises (Nelson, 2013). The key to its success lies in the firm’s ability to cater for the interests of the stakeholders. It is responsive to the needs of its employees (wage increases), which helps avert strikes.

In addition, improved coordination of the three groups, i.e., staff, suppliers, and franchisees, has enabled McDonald’s to build core competencies and gain a competitive advantage in the fast food sector. The business model allows the firm to offer restaurant products that reflect local tastes and preferences. Furthermore, McDonald’s has the capacity to identify and nurture innovations tailored for unique local customer experiences. In this way, the franchises can retain the quality standards of McDonald, but give culturally sensitive products.

Under the franchise model, McDonald’s or its franchises run restaurants through “foreign license agreements, developmental licensees, and franchise arrangements” (Nelson, 2013, para. 11). Therefore, the firm earns its revenue from a mix of company-operated and franchised eateries. McDonald’s ensures consistency in its services and maintains superior quality in each of its franchises. It employs a competitive selection process in choosing franchisees and investors.

International Expansion Pattern

McDonald’s runs the largest restaurant chain (>30,000 outlets) globally, making it an industry leader. Up to 80% of the restaurants are operated through franchise agreements (Entrepreneur, 2016b). The firm’s global expansion strategy centers on quality customer service, competitive prices, and strategic location/geography. It entails a ‘decentralization’ approach (with regard to suppliers) coupled with a strict monitoring of quality standards. Outside the North American market, McDonald runs franchises in the United Kingdom, China, Japan, India, Saudi Arabia, and Egypt, among other locations.

The firm’s expansion pattern shows that it first launched branches in high-income countries, e.g., Canada and the UK, before venturing into the emerging markets, e.g., India. In addition, the mode of entry differs between the markets. In some countries, McDonald’s owns the restaurants, while in others it operates franchises with varying levels of investment. In both cases, the firm has a significant influence on the quality of services, number of branches, suppliers, and work force (Entrepreneur, 2016b). It sources its raw materials from local and regional suppliers that meet the set quality standards. The company’s evaluation of market characteristics, such as labor costs and practices, taxation rates, and customer size influences its entry decisions.

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Qualifications for its Franchisees

McDonald’s franchise system entails any of the three partnership modes, namely, the acquisition of a new outlet, the purchase of an existing MacDonald’s outlet, or the collaboration with a MacDonald’s operator (McDonald’s, 2016). The firm requires new operators to make a down payment equivalent to “40% of the total cost (for a new restaurant) and 25% for an existing outlet” (McDonald’s, 2016, para. 8). Furthermore, the source of the down payment must not be a loan or credit. The funds must come from non-borrowed capital sources such as bonds and securities (McDonald’s, 2016).

The franchise costs vary depending on the nature of the market. In view of this, McDonald’s requires operators to have a “minimum of $500,000” in capital to be considered for a franchise license (McDonald’s, 2016, para. 9). The financial obligations may be higher in cases where an operator intends to open multiple restaurants. In addition, ongoing fees are paid to McDonald throughout the franchise period. McDonald’s demands a service fee equivalent to “4% of the franchisee’s sales every month” (McDonald’s, 2016, para. 11). Franchisees that use company-owned premises also pay monthly rent.

The Support and Training Provided

McDonald’s provides franchisor support and training to its franchises. It offers one-week induction training to overseas staff joining its franchises. The essence of the training is to expose the employees to McDonald’s quality standards and customer service. Franchise managers are enrolled in the Restaurant Leadership Program offered by the firm’s Hamburger University (McDonald’s, 2016). Local franchises also benefit from ongoing support in the form of a newsletter, toll-free line, grand opening, internet, field operations, and national media marketing.

Research Task 2

Global competitiveness depends on the import/export practices of a country. Improved “tariffs, border administration, infrastructure, and security regimes” can improve market access (World Bank Group, 2016a, para. 2). The key considerations in setting up an assembly unit in Uruguay to serve Latin America include the customs clearance days, the security and safety of consignments, and the overall perception of the customs practices.

Time to Clear Exports/Imports

The duration it takes to deal with customs in clearing direct exports or imported goods can be constraint or favorable factor to a company (World Bank Group, 2016a). This period varies between countries. In Uruguay, it takes an average of 8.7 days to clear imports (globalEDGE, 2016). For small importers or firms (1-19 employees), it takes 7 days to clear imports while for medium enterprises (20-99 employees) it takes an average of 11.7 days (globalEDGE, 2016). Shipments imported by large firms (>100 employees) take approximately 6.9 days to clear through the Uruguayan customs (globalEDGE, 2016). The average clearance duration of 8.7 days is considerably lower than the region’s (Latin America and Caribbean) average of 13.0 days.

Exporter firms require speedy processing of direct exports through customs. According to the World Bank’s (2016a) Enterprise Survey, the average period it takes to process exports is 6.2 days in Uruguay. This value includes the average of 10.0 days for small firms, 3.8 days for medium exporters, and 3.7 days for larger exporters (World Bank Group, 2016a). The average duration (6.2 days) is significantly lower than the 9.4 days it takes to clear exports in other Latin American and Caribbean countries.

Delays in customs clearance cause additional costs to importers or exporters. Delays can also affect the production cycle and increase the duration it takes to liquidate the inventory. In this view, delays can reduce net sales due to damage or depreciation, especially for perishable merchandise. Uruguay has fewer operational constraints than its Latin American neighbors do, which makes it an attractive nation for the assembly unit.

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Losses Due to Theft and Breakage

The quantity of export goods lost due to pilferage or spoilage in the customs warehouses represent exportation risks. Firms would prefer a minimal loss of goods destined for export to reap maximum profits. In Uruguay, the average percentage of goods lost due to theft is zero. In addition, the rate of pilferage of goods belonging to small and medium exporters is nil. However, about 0.1% of the exports by larger firms are lost due to theft (World Bank Group, 2016b). In the Latin American region, losses due to pilferage account for 0.4% of exports (World Bank Group, 2016b). Therefore, the safety/security of freight is more stringent in Uruguay’s customs than in the other Latin American countries.

Breakage or damage to export goods can lead to a high return rate. In Uruguay, the proportion of goods lost due to breakage or damage constitute 0.1% of the total exports (World Bank Group, 2016a). Small exporters incur no losses due to damage or spoilage of transit goods in the customs warehouses. However, the percentage of goods lost by medium and larger exporters due to breakage accounts for 0.1% and 0.2% of exports, respectively (World Bank Group, 2016a).

At the regional level, up to 0.5% of goods meant for export becomes damaged or spoilt in the Latin American customs. In this respect, Uruguay has a better record in the handling and storage of consignments meant for export than the other nations in Latin America. Thus, an assembly unit established in Uruguay will incur fewer risks and losses than a similar factory in other Latin American countries.

Trade Constraints

Effective laws and guidelines on taxation and business permits and certification make a country a favorable place for doing business. In particular, permit processing and approval duration is a key consideration for international firms that want to invest in a country. In addition, the prevailing regulatory/legal environment indicates how well an entrant is protected from unscrupulous market practices.

The Enterprise Surveys give the percentage of companies that consider a country’s regulations a constraint to business growth. In Uruguay, about 2% of firms drawn from different sectors indicate that trade regulations are an impediment to business growth (World Bank Group, 2016b). In contrast, 5% of the firms operating in the whole of Latin America consider trade laws to be a constraint to investment. Therefore, Uruguay has a more favorable business environment than its neighbors in Latin America. This outcome implies that the country has efficient trade licensing processes that reduce delays and support new investments.

In conclusion, the analysis reveals that Uruguay has a friendlier investment climate than the other Latin American countries, such as Brazil and Argentina, in the three measures. The country’s customs department takes a shorter duration to clear imports (8.7 days) and exports (6.2 days) than the regional average period of 13.0 days and 9.4 days, respectively (World Bank Group, 2016a). In addition, losses due to pilferage and breakage are lower than the regional average. The perception of the country’s trade regulations is also better than that of other Latin American countries.

References

Entrepreneur. (2016a). 2016 Top Franchises from Entrepreneur’s Franchise 500 List. Web.

Entrepreneur. (2016b). McDonald’s. Web.

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McDonald’s. (2016). Requirements to Open a McDonald’s Franchise: McDonalds Franchise Costs. Web.

Nelson, S. (2013). McDonald’s Global Business Model, the “Three-legged Stool”. Web.

globalEDGE. (2016). Uruguay: Introduction. Web.

World Bank Group. (2016a). Enterprise Surveys: Uruguay Country Profile 2015. Web.

World Bank Group. (2016b). Enterprise Surveys: Uruguay. Web.

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StudyCorgi. (2020, November 14). McDonalds' Entry into Latin American Market. Retrieved from https://studycorgi.com/mcdonalds-entry-into-latin-american-market/

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