Strategic Analysis of McDonald’s in Kenya

McDonald’s is one of the largest fast food chains in the global market. The company operates in over 100 countries in the world. According to McDonald’s, 85% of the stores are franchises. The company plans to increase the number to 95%. Therefore, expanding business operations to new markets can help the company in achieving its strategic plan.

One of the countries that the multinational corporation can expand into is Kenya. The country is a growing economy with an expanding population. The unemployment and inflation rates in the country have been decreasing thus increasing the consumers’ disposable income. The tourism sector has also been growing. The high disposable income and the increasing number of tourists will increase McDonalds’ sales.

In terms of the political environment, McDonald’s will benefit from the strong relationship between Kenya and US. However, its performance will be affected by the policies that the Kenyan government can formulate such as the tax policies, interest rates policies, and public spending policies. Also, the political environment can lead to businesses uncertainties. For instance, the 2017 election led to a reduction of trade in the year. Also, if the terror attacks that Kenya experienced in the past were to reoccur, McDonalds’ operations would be affected.

Lastly, understanding the Kenyan culture and ethics will help McDonald’s in succeeding in the market. Kenya is a high power distance country with no preference for uncertainty. Similarly, the nation is a masculine nation that is also a collectivist. These cultural dimensions will guide McDonalds’ operations in the country.

Introduction

This report will analyze McDonalds’ ability to expand to new markets. The report will discuss what the company will achieve by expanding to a country like Kenya. The first part of the report will evaluate the company background. It will focus on the company history, its products, and the proposed expansion to Kenya. The second part of the report will analyze Kenya. The analysis will focus on the country’s demographic, economic, political, legal, cultural, and ethical factors that might affect McDonalds’ operations in the country. Additionally, the analysis will focus on the benefits and possible disadvantages associated with the factors. The last part of the report will be the conclusion of the report.

Company Background

McDonald’s is one of the world’s largest fast-food chain. The company was established in 1964 and has since grown to own stores and franchises across the world. McDonald’s has over 36000 outlets located in different parts of the world (Corporate McDonalds, 2018). With its operations in over 100 countries, McDonald’s customer base has grown making it the global leader in the fast food industry in terms of revenue (Corporate McDonalds, 2018). The restraint serves over 65 million customers across the world on a daily basis (Corporate McDonalds, 2018).

In addition to that, McDonald’s serves its customers a wide range of products such as hamburgers, French fries, chicken, and many more (Corporate McDonalds, 2018). However, in the past, the company had received criticism because people considered its food menu to be unhealthy. McDonald’s had not focused on the changing consumer taste hence the negative comments and attitude towards its menu. Therefore, in order to accommodate the consumers who had adopted a healthy lifestyle, McDonald’s added healthier foods to its menus such as fish, gluten-free hamburgers, salads and many more (Corporate McDonalds, 2018).

Additionally, McDonald’s has various sources of revenue. Firstly, the corporation generates revenue the company-owned outlets (Corporate McDonalds, 2018). McDonald’s has a large customer base thus its ability to create high revenue from daily sales. Secondly, McDonald’s receives payments from its franchise outlets. According to the McDonalds, 85% of its outlets are franchised (Corporate McDonalds, 2018). The franchise restaurants take care of all the operational expenses while McDonald’s provides them with a competitive brand name and a large pool of customers. As a result, the franchises pay the corporation. Increasing the number of company-owned outlets and franchises will lead to an increase in McDonalds’ revenue.

Overseas Expansion

By expanding operations to the countries that McDonald’s has not yet ventured into, will earn the company more revenue. The corporation has a strong brand name and reputation in the global market. As a result, McDonald’s has many potential customers in the nations that it does not operate in.

Similarly, it is important that McDonald’s expands to other countries in order to give its customers a chance to enjoy their favorite meal when traveling the world. All McDonald’s outlets prepare similar products and offer the same services (Corporate McDonalds, 2018). Therefore, tourists would be able to enjoy products that are familiar to what is offered in their home countries. As a result, customer loyalty will be increased thus increasing the company’s revenue. Additionally, McDonald’s can benefit from lower operating costs that may exist in the global market. Some countries are endowed with various resources which make production more efficient than in other countries (Cavusgil et al., 2014). For instance, the cost of labor in a certain country can be lower than in the U.S where McDonald’s has numerous outlets.

In order to achieve all those benefits, McDonald’s needs to identify a country that has a growing fast food industry. Some of the rapidly growing restaurant industries are in Africa (Cavusgil et al., 2014). However, McDonald’s only operates in a few African nations such as South Africa and Egypt services (Corporate McDonalds, 2018). The company has a large potential market in the other African states. One of the countries where international fast food chains seem to be interested in is Kenya (CNBC Africa, 2015). The country’s fast foods industry has been growing rapidly with many international food chains joining the market (CNBC Africa, 2015). Some of the multinational corporations that have joined the market are the Kentucky Fried Chicken (KFC), Subway, Pizza Hut, and many more (CNBC Africa, 2015). The international organizations are striving to grow their market share in the developing market.

Introduction to Kenya

Kenya is an African Nation that covers 224,445 square miles (UNDP in Kenya 2018). The country is one of the members of the East African Community. Kenya’s population is approximately higher than 45 million with an annual population growth rate of 2.6% (Trading Economic, 2018). The median age is 19.6 years while the nation’s life expectancy rate is 64.3 years (Trading Economic, 2018). The proportion of the population that resides in the urban areas is 26.5% with an annual rate of urbanization of 4.15% (Trading Economic, 2018).

Kenya’s capital city is Nairobi. The city has over 3 million residents thus making it the largest city in the African Great Lakes Nations (UNDP in Kenya, 2018). Additionally, the Nairobi metropolitan area has over 6 million residents (Trading Economic, 2018). Also, the city accommodates many local and international businesses.

In addition to that, Kenya has other cities which supports local, regional, and international businesses such as Mombasa and Kisumu (UNDP in Kenya, 2018). Kisumu has an approximate population of 1 million while Mombasa has more than 1 million (Trading Economic, 2018). The two cities are tourist destination sites. Kisumu borders the largest lake in Africa which is also the world’s largest tropical lake, the Lake Victoria. On the other hand, Mombasa is a coastal town with beautiful white beaches (UNDP in Kenya, 2018).

Management Point of View

The management of McDonald’s have a point of view on their plans to expand into the Kenyan market. Their point of view is based on Economic Analysis, Political and Legal Analysis, and Culture and Ethics of the economy.

Economic Analysis

Kenya is majorly a market-based economy with minimal restrictions on external trade (Miller, 2018). The nation is considered to be a leading trade and investment hub in the East Africa region (Miller, 2018). Kenya is considered to be the center for transport, communication, and finance in the region. Additionally, the state has a major port in the Indian Ocean that makes international trade easier (UNDP in Kenya, 2018).

In terms of GDP, Kenya had $70.53 billion in 2016 with a growth rate of 4.7% (Trading Economics, 2018). The growth rate was a decrease from the previous year’s rate. The decrease was caused by the harsh weather conditions that affected the agricultural sector and the political uncertainty (Miller, 2018). With now a calmer political environment, the economic growth rate and the GDP growth rates are expected to increase (Miller, 2018).

Similarly, Kenya’s unemployment rate has been decreasing over the years. In 2016, the nation had a rate of 11% which was a reduction from the previous year’s 11.29% (Trading Economics, 2018). A reduction in the unemployment rate means that more people in the country will have money to purchase products (Cavusgil et al., 2014). Therefore, McDonald’s benefit from the reducing unemployment rate as it will increase the number of potential customers. However, low unemployment rates can be disadvantageous for McDonald’s because it means that getting hardworking and skilled employees might be difficult (Cavusgil et al., 2014).

Additionally, Kenya’s inflation rate has decreased from 2017’s 11.8% to 4.18% in 2018 (Trading Economics, 2018). The high inflation rate was associated with the low agricultural production in 2017 and the political uncertainty that prevailed in the country (Miller, 2018). The inflation rate is expected to remain at a lower rate in future. A lower inflation rate means that consumers will have higher disposable incomes thus enabling them to purchase more commodities in the market (Cavusgil et al., 2014). Therefore, McDonald’s will benefit from the lower inflation rate in terms of higher sales.

Another economic factor that might influence McDonalds’ business expansion plans will be tourism. Kenya has many tourist attraction sites such as national parks, beautiful landscapes, historic sites and many more (UNDP in Kenya, 2018). The country largely depends on agriculture and tourism to generate foreign revenue. According to Reuters, Kenya earned $1.2 billion from agriculture and tourism in 2017 (Reuter, 2018). The revenue had increased by 20% compared to 2016’s revenue (Reuter, 2018). The major contributing factor for the higher revenue was the increase in the number of tourist in 2017. The number shot up from 1.34 million in 2016 to 1.47 million in 2017 (Reuter, 2018). Consequently, the increasing number of tourist will benefit McDonald’s because some of the tourists will prefer to eat what is familiar to them. Therefore, if they are from countries where McDonald’s operates in there is a higher chance that they will choose McDonald’s. Therefore, an increasing number of tourists can result in an increase in the number of sales.

Political and Legal Analysis

According to the Kenyan Constitution, the government should be led the president and the deputy president (UNDP in Kenya, 2018). The president then appoints cabinet secretaries who are in charge of the various sectors of the economy. The constitution requires the current leaders to hold office for 5 years (UNDP in Kenya, 2018). The president can only serve for two terms in Kenya (UNDP in Kenya, 2018). The government maintains a bilateral relationship with United States (Udogu, 2018).

The favorable relationship between Kenya and United States will make it easier for McDonald’s to enter the Kenyan market. The U.S has entered into multiple trade agreements with various regional organizations such as the Trade and Investment Framework Agreements (TIFA) (Udogu, 2018). Kenya is a part of such organizations thus enabling Kenya and US to trade (Udogu, 2018). The relationship has enabled multinational corporations from the United States to invest in the country.

Additionally, government policies in Kenya can affect McDonalds’ business operations in Kenya. The government is in charge of changing policies such as the tax policies, interest rates policies, and government spending policies (Dunn, 2015). Firstly, changes in tax policies can affect the disposable income of the consumers. In cases where the policy increases the tax burden of the consumers, the disposable income will be reduced (Dunn, 2015). On the other hand, tax policies that reduce the amount of tax paid lead to an increase in the consumers’ disposable income (Dunn, 2015). An increase or decrease in the disposable incomes increases or reduces the consumers’ ability to buy commodities thus affecting businesses (Dunn, 2015).

Similarly, the Kenyan government spending policies. It is also responsible for the formulation of the national budget. Increase in public spending affects how businesses operate (Dunn, 2015). For instance, if the national spending goes down, Kenya’s aggregate demand will decrease thus resulting in low economic growth rate. The lower growth rates will reduce consumer spending thus reducing the sales volumes in businesses (Dunn, 2015). McDonald’s will need to constantly analyze the trends in Kenya’s government spending in order to be able to make future predictions of the market.

In addition to that, interest rates policies can affect McDonalds’ operations in Kenya. In 2016, Kenya introduced a new regulation that required all banks to reduce their interest rates (UNDP in Kenya, 2018). Reduction of interest rates increases the amount of money in the economy because people are paying less to the creditors (Dunn, 2015). As a result, people have more money to spend on luxurious products. On the other hand, increasing the rates affects the amount of money in the market thus reducing sales (Dunn, 2015). Therefore, in the event that the interest rates are increased in Kenya, McDonalds’s sales can be affected.

Lastly, the political uncertainty in Kenya affects how businesses operate. For instance, prior and after the 2017 elections, people preferred holding their money as they were uncertain of the political outcome (Ngunjiri, 2017). Most people were afraid that the country will experience violence similar to the 2007 post-election violence (Ngunjiri, 2017). As a result, spending on luxurious goods reduced. McDonalds’ sales would be affected if such a scenario occurred in the next elections. Similarly, Kenya has experienced terrorist attacks which were triggered by the government’s intervention in Somalia (UNDP in Kenya, 2018). Terrorists have launched attacks in various parts of the country in the past. If the attacks were to happen again, McDonald’s would be at risk of losing its employees or assets. In the event that an attack was to happen in one of its outlets, consumers would not be willing to visit the outlet again. Therefore, it is important for McDonald’s to account for such risks before venturing into the market.

Culture and Ethics

Different countries hold different cultural practices and ethics. Multinational corporations that intend to expand their business operations to other nations should understand the cultural diversity and ethics that exists in such nations (Cavusgil et al., 2014). Having a clear picture of the two helps the organizations in making informed decisions regarding its employees, investors, suppliers, and customers. Therefore, McDonald will be able to create healthy relationships with the Kenyan consumers, workers and all the other member of the organization by understanding their culture and ethics.

Kenya is said to be a high power distance country according to the Hofstede dimensions (Hofstede-Insights, 2018). This means that the Kenyans easily accept inequalities in the society (Hofstede-Insights, 2018). As a result, the country is divided into classes; the high, middle, and lower classes. The high power distance in the country means that moving from one class to the other can be difficult as information is not widely shared across the classes. In businesses, high power nations tend to have a hierarchical organizational structure. Therefore, this structure will fit into McDonald’s existing structure.

Additionally, Kenya is a collectivist nation. The low individualism score in the Hofstede dimension shows that people prefer working as groups (Hofstede-Insights, 2018). A result, employees will be more comfortable working in groups that individually. The information will help McDonald’s in making the right decisions when assigning duties to employees. Similarly, Kenya is a highly masculine country which means that the citizens are highly driven by competition and success (Hofstede-Insights, 2018). Multinational corporations will need to understand such facts when dealing with investors, employees, suppliers, and consumers. The employees are performance driven and can be motivated using incentives such as bonuses. On the other hand, consumers and investors will prefer associating with high-performing organizations.

According to the Hofstede dimensions, Kenya scored 50 in uncertainty avoidance (Hofstede-Insights, 2018). The score means that the country has no preference. The situation makes it easier for multinational corporations such as McDonald’s as the members of the Kenyan organization will have no preference for uncertainty. Similarly, McDonald’s must adhere to the ethical conditions that prevail in Kenya in order to succeed. One of the ethical requirement is fair treatment of the members of the organization (Gichure, 2015). The company should treat its workers, clients, investors, and suppliers with dignity and respect. The same will be reciprocated thus increasing the company’s chances to succeed.

Similarly, multinational corporations in Kenya must act in an honest and trustworthy manner (Gichure, 2015). They are also required to adhere to the laws and regulations set to protect the people and the environment. For instance, McDonald’s should ensure that its operations do not pollute the environment.

Conclusion

McDonald’s has expanded its business operations into various countries across the world. However, the organization has not exhausted its growth potential. The company has the opportunity to expand to countries such as Kenya. Kenya is a fast growing economy whose fast food industry is also growing rapidly. The country is considered to be the financial and other logistics hub. With a reducing unemployment rate and decreasing inflation rates, the citizens have higher disposable income enabling them to purchase luxurious products. Kenya’s political, legal and cultural environment could also affect McDonalds’ operations in the country. In order to succeed, McDonald’s must observe the cultural and ethical practices in the country.

References

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