The globalization of the Big Mac

International business has brought about a global reorientation of supply chain strategies. While a particular product may be sold here, its subcomponents may come from many different nations. The components of the Big Mac, for example, come from seven different countries. Sesame seeds are from Mexico, pickles from Germany, burger buns from Russia, beef patties from Hungary, onions from the U.S., cheese from Poland and lettuce from Ukraine.

The Big Mac Index that is published annually by the Economist shows the average price of the burger around the world and is a way to measure purchasing power parity (PPP) between countries. It is also an indicator of the individual purchasing power of an economy.

In this year’s index, Switzerland tops the list with a price of USD 7.54. The United States ranks sixth with a price of USD 4.79. In Russia and Ukraine, however, you can buy five to six more burgers than in Switzerland as the price of a Big Mac is USD 1.36 and USD 1.2 respectively.

The Big Mac, as a top-selling McDonald’s burger, is used for comparison because it is available in almost every country and manufactured in a standardized size, composition and quality. McDonald’s is a worldwide operating fast food restaurant chain with global revenue that amounted to about 28.11 billion U.S. dollars in 2013.

big mac index 2

Is this accurate? How much is the Big Mac in your country?

Sources:

The Economist. Global prices for a Big Mac in January 2015, by country (in U.S. dollars)*.

Michael R Czinkota, Ilkka A Ronkainen, and Michael H. Moffett. Fundamentals of International Business (New York: Wessex, 2015).

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McDonald’s & Wal-Mart Show Trouble In The Global Economy

Fast-food heavyweight McDonalds Corporation (NYSE:MCD), for instance, is struggling to find growth in the global economy, and that’s because spending from the other 99% is stalling.

The maker of the Big Mac announced that its comparable sales for its stores in the global economy fell 2.5% in July. The decline was highlighted by a 3.2% drop in the U.S., along with a massive 7.3% plummet in the Asia/Pacific, Middle East, and Africa (APMEA) regions. Only Europe edged slightly higher.

In its second quarter (ended June 30, 2014), McDonald’s reported a 1.5% contraction in its comparable sales in the U.S. The reality is that the numbers clearly suggest a continued struggle to lure customers into stores. This would translate into declines in these sectors across the global economy as well.

Another tell-tale indicator that things in the global economy may not be progressing as many expect—or to the degree many are hoping for—is Wal-Mart Stores Inc.’s (NYSE:WMT) continued struggles for sales.

The company has more than 2.2 million employees, so its difficulties are meaningful, as they could lead to mass lay-offs and, subsequently, less spending.

Wal-Mart operates in 27 countries, so it’s a decent barometer on how well the economy is faring globally. For the 13 weeks ended May 2, sales for Wal-Mart declined 0.1% in the U.S. and a more worrisome 0.8% in the global economy.

The bottom line is: perhaps the global economy is not as secure as many think.

This article is brought to you courtesy of George Leong from Profit Confidential.

Burgernomics and Lattenomics

World Bank classifies economies on the basis of their gross national income (GNI) per capita. The globalization of economies would necessarily lead to a perfect market situation where in the long run exchange rates should move towards the same price of a basket of goods and services in different countries; that is, a dollar should buy the same basket of goods and services everywhere in the world. This is called purchasing power parity (PPP).

The Economist newspaper has derived a couple of innovative ways to measure the shift towards a more globalized world. The Big Mac Index was introduced in 1988. The Big Mac is produced in more than 120 countries. The theory of PPP will suggest that hamburgers cost the same in Asia as in other continents. Comparing actual exchange rates with PPP will thus provide an indication of whether a currency is under- or overvalued.

The newspaper subsequently introduced the Starbucks Tall Latte Index, in order to further test the theory of PPP. By coincidence, the average price of a Starbucks tall latte in the U.S. was the same as the average price of a Big Mac — USD 2.80 — in 2004. It turns out that the Tall Latte Index tells broadly the same story as the Big Mac Index for most key currencies. The indices show that the euro is about 30 percent overvalued against the dollar. This is based on the average price of EUR 2.93 — USD 3.70 — in member countries where Starbucks operates. Sterling pound is also 17 percent overvalued. Both indices show that the Swiss franc is the world’s most overvalued currency. The Canadian, Australian, and New Zealand dollars are still undervalued against the dollar despite their recent climb.

The indices, however, show mixed results when it comes to Asian currencies. The Big Mac Index says the yen is 12 percent undervalued against the dollar while the Tall Latte Index suggests that it is 13 percent overvalued. More startling is the Chinese yuan. It is 56 percent undervalued according to the Big Mac Index, but spot on its dollar PPP according to the Tall Latte Index. The differences probably reflect the different nature of competition in the markets for the two products: Starbucks coffee is pitched as a lifestyle drink and hence commands a premium, especially in Asian economies.

For more information, refer to Fundamentals of International Business: 1st Asia-Pacific edition by Michael Czinkota et al. 

Change Agents

A person or institution who facilitates a change in a firm or in a host country is a change agent.  Products or brands can act as change agents, able to alter held values or behavioral patterns that eventually result in the blurring of cultural distinctions.

In China and Hong Kong, for instance, McDonald’s has altered some age-old eating habits and preferences, especially among the younger generation.  While there are many concessions to local cuisine, the most popular menu items are burgers and fries.  The fast-food chain has disciplined its Chinese customers to an entirely new dining routine – as in the United States, they wait in an orderly line, serve and seat themselves, and even clear away their trays afterward.