McDonalds Hamburger - Product Analysis - Case Study Example

Product Analysis: McDonald’s Hamburger Name Institution Introduction The world population is increasingly on fast foods. This is largely due to the time saving that go with it and the trendy fashion that people want to subscribe to. The producers of these products are intensifying their efforts to develop more and more brands to keep up with the pace of demand. According to scholars, people consume fast foods due to the availability of tasty brands to choose from; the lower cost of fast food and the level of advertising that fast food companies have staged. McDonalds has been on the fore front in the fast-food industry in leading the wave of change. But remaining at the top is a new challenge for any business executive. The wave of transformation in the food industry cannot be slighted. The level of competition has gone levels higher and marketers of modern times are devising sophisticated means of survival. McDonalds has done massively well with its hamburger. Largely the company’s mission has been instrumental to the success and the market influence that the product has achieved. McDonalds has branded itself as a customer focused institution by dedicating to providing them with high quality products (McDonald’s Australia Limited 2012) Pricing power and policies The pricing decisions are based on the target market. This means that the pricing strategy is discriminative due to the economic differences of consumers in geographical areas of focus (Emden, Calantone & Droge, 2006). For instance, the Australian market is made of well endowed customers who have vast knowledge of processed food. The same case applies for the other developed countries. Here, the product is marketed as an improved hybrid of the existing processed food items and hence price skimming is applied. This approach entails quoting a price that is reasonably higher than that of similar existing products. The higher margin helps to recover the initial costs of product development. The prices are reduced gradually over time and finally get rationalized with the industry index (Goldenberg, Lehmann & Mazursky, 2001). The strategy for the regions where the fast foods have not gained widespread acceptance is different. Due to uncommonness of the processed food among the population, a lot of consumer awareness is still required backed by reasonable persuasion. This market consequently requires friendlier prices for entry purposes, at least to entice consumers to the new idea. In light of this, penetration pricing approach is applied. This means that entry prices are kept as low as possible, and the same hiked gradually and over time as the product attains consumer acceptance (Goldenberg, Lehmann & Mazursky, 2001). Factors Affecting Price Just like any other industry the fast food industry is confronted by numerous market and economic pressures that affect prices in the commodity market. The major determinants of price are the demand levels subsisting in the market, global economic status, world prices of fuel among others. Peak seasons like the Christmas season is marred by many customers visiting McDonalds’ restaurants and making online orders. This behavior pushes the prices up; in line with the law of demand which holds that when demand goes up then prices are going to hike as suppliers seek to hire more factors of production to increase their production capacity so as to meet the demand levels (LaFrance 1985). The status of the economy has also been influential in determining the prices. Uniquely, fast food industry was reported to have significantly resisted the global economic meltdown of 2008. As households were put under more pressure by rising prices of commodities, the industry continued with its growth pattern undisturbed. The explanation that experts gave was the fact that as households strived to cut their spending they sought to rely more on fast food since they are relatively cheaper and do not require much travelling. The effects of fuel prices put a strain on the production costs incurred by suppliers. The effects spill over to the fast food industry and are reflected by increase in prices. Even though the burden is borne by the consumer, McDonald’s revenue projections have been suffering as a result since consumers respond to such increases in price by cutting their spending. The per capita income of people remaining constant, and prices of basic commodities like food, going up, the consumers are going to cut down their quantity of basket for their families. This behavior comes almost automatically because the purchasing power of the consumers is reduced. In such a case they can respond by doing two things – either reduce their savings if they had any or they cut down their consumption budget. Factors Affecting Demand Demand for hamburger has a unique relationship with world economic status, food prices for unprocessed and semi-processed food, as well as its own price. Other minor contributors of demand include customer service, ease of access of the product and the efficiency of the product promotion undertaken by the entity. As stated earlier, consumers buy more of fast food items in times of global crisis. This was witnessed in the 2008 global economic meltdown. The perception from the consumers’ point of view is that fast food items are cheaper alternatives in a worsening economic situation. The other category of the food market is the unprocessed food items. Their availability and prices affect the demand for fast food items. When such are in plenty the demand for the later is low. This scenario is created by the groups of consumers who are generally rational and base their buying decisions in the light of the prevailing market conditions (H¨ardle, Hildenbrand & Jerison 1991). The price of hamburger is relatively stable in many markets. The sensitivity of the demand curve varies from country to country and hence the response to changes in prices will be dependent upon this. The other attributes that affect demand of hamburger are market oriented rather than economic tools. Ease of access of the product, for example, is a new aspect in the market. In the recent past fast food companies have extensively adopted the emarketing system where customers can make orders online. McDonald’s hamburger has not been one of the beneficiaries of the new development thanks to company’s reluctance to adopting the system. The choice of the advertising media has had an effect on the quantity demanded. Competitors of the industry have included the social media in their e-promotional campaigns and this has borne fruits especially by enticing the youthful population. McDonalds is still playing the chasing game in this dimension but great results could be expected from the same campaign should it be implemented. Factors Affecting Supply The supply of the product has been dependent on some other factors. One such factor is the notorious mad cow disease. This pandemic has been recurrent in many parts of the world but more so in Europe. This instills fears in the customers making them shy away from buying the beef products. Whenever this happen sales drop rapidly and this is a big threat for business. Another prevalent factor that frustrates supply of the product is the supply shock in the agricultural sector. McDonald’s production is largely dependent on the produce of farmers. The trends of agricultural production are highly unpredictable and hence it is difficult to forecast changes in supply. In many third world countries agriculture is still dependent on rainfall. This scenario leads to great frustrations in periods of drought. Substitutes The big size of the global fast food industry provides many substitutes most of which are not differentiated and the war in the market is based on brand names alone. KFC’s burger is seen as a close substitute to hamburger and hence poses the greatest threat. Besides the similarities in features the competition is made much stiffer due to the establishment of the company itself particularly in the recent past. Other substitutes include Aussie burger served by BenBry, NBBD Cheeseburger with chips offered by Neutral Bay Bar & Dining, Works burger, from Paul's Famous among others (Durack 2012). Complement products Complement products for McDonalds’ Hamburger are basically the soft drinks and hot drinks. These are usually served together with the burger depending with specific consumer’s preference. It is worth noting that there is a reasonable group of consumers who carry hamburger to their homes and hence the trends in the drinks do not necessarily influence its price or demand significantly (Mellentin 2005). Price, Cross and Income elasticity McDonald’s burger is generally price insensitive. This state of affairs can be attributed to two factors. One is the major target groups of the product who are majorly middle class citizens. This group of people is composed of consumers who are not likely to revise their budget on food items so keenly. They will try to maintain their food basket combination at least in the short-run, even with persistent increase in prices. The second aspect is the brand name recognition. McDonalds has already established brand name recognition meaning that it is a step ahead of the competitors though that does not mean that business is complete. Their loyal customers would therefore choose to continue doing business with them even when the prices of their commodities are rising. What needs to be done is to devise ways and means to use this extra arsenal to outshine the competitors. There is also an added duty of ensuring that as the company continues with its expansionist goals using franchising strategy the recognition should not be diluted. The procedures, values, principles and practices should continue being embedded in the operations of all its business lines to keep up the faith with the customers. Prices of products that compete with hamburger also affect its price in the growing economies. A reduction in price of for example, KFC’s burger reduces the quantity demanded for McDonald’s hamburger in the short-run, as price sensitive consumers strive to make a saving. The case is different for the wealthy consumers since they like to be identified with the product even with increased prices and will not be so keen on monitoring the prices of close substitutes. The prices of unprocessed products such as beef and wheat also directly affect the price of hamburger (Durack 2012). The analysis for the income elasticity of demand can be split into two market destinations. One is the developed world where increase in income of an individual will not affect the consumption budget, hence demand will be insensitive. The case is opposite for the low income earners who will buy more food items or higher quantities of them with slight increase in their income. Market competitors, size and growth Being one of the fastest rising corporations in the versatile industry comes with its inherent challenges. One of the tricky aspects is that the entity becomes the point of interest of all competitors. Each player knows that being number one entails beating the best. This means that all competitors take keen interest in the day to day operations of McDonald including insider information. They devise ways and means of countering its initiatives. The situation is made worse by use of e-business where information in shared electronically and transactions closed by the internet. Competitors are likely to hack vital information regarding the entity they regard the strongest competitor. They may also disclose to customers who are charged higher than normal prices of the price discriminatory practices of the company and this may not auger well for the public image of the company. On the global front, food industry is expected to benefit from population growth and rise in per capita income. According to United Nation’s projections, the world population will continue on the rise going forward with an anticipated increase of 2.3 billion people before the year 2050. Population represents market and hence its growth cannot be slighted by marketers (Robert, Andrew & John, 2005). According to the same report the income of households will continue to be on the rise, with the world economy having successfully negotiated the crisis of 2008. Income levels of persons living in developing countries are expected to rise by 7% while that of residents in developed nations will rise by 2%. What this implies to the food industry is that as people’s income stabilizes, they run for quality food items (Robert, Andrew & John, 2005). Costs of factors of production The major inputs in the production process involve the unprocessed food items. Such include chicken, cows and wheat. The prices of these products depend on natural conditions and hence there are frequent changes in prices. During drought spells food prices go up. The animal market prices are relatively stable compared to their crop counterparts. However, some calamities still hit the products frustrating their supply. Europe is known for frequent emergence of mad cow disease. Whenever these happens prices of cows in unaffected regions hike, while demand levels for beef products drop as consumers take precautionary health measures. Crop production is hampered either by drought mostly in East Asia and Sub-Saharan Africa. These scenarios make the cost of production for the company to go up significantly. In places where the price of hamburger is inelastic the burden is shifted significantly to the final consumer (LaFrance 1985). The same cannot be said of the price sensitive consumers particularly in the developing countries. The company adjusts by reducing the profit margin to cater for the additional costs. Another major contributor is the international fuel prices. The distribution costs are directly related to the fuel prices. The effect is brought about by the delivery of the inputs as well as the distribution of the processed foods. Position of McDonalds in the industry Currently McDonald’s is able to serve less than one percent of the world population There are many competitors in the food industry mostly the multinational companies. The competitive threat can only be tested against the strength of the existing products and market players. The industry has been defined as highly fragmented with top three players Nestle, Kraft Foods Unilever and Cargill accounting for a minority less than 5% market share (Robert, Andrew & John, 2005). The wider engagement with franchisees is a strong marketing complement for the company. The company’s move to engage all these entities in its e-promotional scheme will see it go a notch ahead of competition. A good move can involve allowing local operators in different countries to use McDonald’s logo and colours in their promotional campaigns (McDonald’s Australia Limited, 2012). Massive agent engagement creates massive awareness that converts buyer desires to buy, into a more realist need. With the age of emarketing, the blog spots and accounts of the franchisees in social media is a huge resource to reach out to the marginalized consumer groups. The position of McDonald’s enables it to negotiate good business deals many of which close competitors cannot afford. The extensive geographical coverage will enable it to have people with diverse needs, making them to be part of the operational team of the capacity. For example the company has wide range of choice of the suppliers to do business with. This provides an option to choose the one who offers the most competitive prices. The company has also been able to incorporate cultural alignments in its package. It has been able to recognize and serve the varying needs of customers living in different parts of the world. For example the Australian population is served with their preferred beef hamburger. The size of McDonald’s gives it huge economies of scale. This implies that it is able to offer the most competitive prices in the market. Furthermore, it has the opportunity to source the right partners. Formidable contracts are a big complement in cost management. References Durack, T 2012, ‘10 top burgers.’ The Sydney Morning Herald June 29. www.smh.com.au/entertainment/restaurants-and-bars/10-top-burgers-20120625-20y4b.html. Retrieved on 12th October 2012. Emden Z, Calantone RJ & Droge C 2006, ‘Collaborating for New Product Development: Selecting the Partner with Maximum Potential to Create Value,’ Journal of Product Innovation Management, Vol.23, pp. 330-341. Goldenberg, J, Lehmann, DR & Mazursky, D 2001, ‘The Idea Itself and the Circumstances of Its Emergence as Predictors of New Product Success,’ Management Science Vol. 47, pp. 69-84. H¨ardle, W., Hildenbrand, W. & Jerison, M. (1991). Empirical evidence on the law of demand. Econometrica 59, 1525–1549. LaFrance, JT 1985, ‘Linear Demand Functions in Theory and Practice.’ J. Econ. Theory, Vol. 37, no. 1, pp.147-66. McDonald’s Australia Limited, 2012, ‘Australian Packaging Covenant Action Plan 2011 to 2012,’ ABN: 008 496 928 21 – 21 CENTRAL AVENUE THORNLEIGH NSW 2120 http://www.packagingcovenant.org.au/documents/File/McDonalds%20Australia%20Limited%20AP_11_12.pdf . Retrieved 12th October 2012. Mellentin J. 2005, ‘A Tipping Point for Health and a Turning Point for Functional Foods: Ten Key Trends for 2005,’ London, New Nutrition Business Robert, D, Andrew, D & John, H 2005, Australia’s Food Industry: Recent changes and challenges. Journal of Australian commodities, Vol.12, no.2, pp. 2-11. 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