McDonalds Corporation in Kazakhstan - Case Study Example

McDonald’s in Kazakhstan As a global company that has become the icon of all-American business, McDonald's Corporation operates fast food restaurants all over the world. The company is the world’s largest food service retailing chain, preparing and serving a range of foods. All McDonald's restaurants offer a standard menu, which comprise food items such as hamburgers, cheeseburgers, chicken sandwiches, French fries, salads, milk shakes, desserts and ice cream sundaes. Some McDonald's restaurants may offer additional food items to suit local taste and preferences. The company also operates restaurants under the brand names: 'Boston Market' and 'Chipotle Mexican Grill' (McDonald’s Website). Scattered all over the world, the company operates 31,000 fast food restaurants in over 119 countries in the following geographic segments: United States; Europe; Asia Pacific, Middle East and Africa (APMEA); Latin America and Canada. McDonald’s generates revenues through company operated restaurants and franchisee restaurants. Of a total of over 31,000 restaurants, over 8000 are operated by the company and over 18,000 are operated by franchisees. The remaining restaurants are operated by affiliates. The company's revenue comprises sales from company operated restaurants and fees as well as rent from franchisees and affiliates. Under the franchise arrangement, the franchisees invest in the equipment, signage, seating and décor, while the company owns or leases the land and building. Franchisees pay the company service fees and rent for premises. Service fees are set as a percentage of sales, while rent and other terms of occupancy are stipulated in the franchise agreement, which is drawn for a period of 20 years. The company and its franchisees as well as affiliates purchase food, packaging, equipment and other goods from approved suppliers. The company maintains quality standards through assurance labs around the world. A quality assurance board, including the company’s technical, safety and supply chain specialists, provides guidance on all aspects of food quality and safety. The McDonald's business model is slightly different from that of most other fast food chains. In addition to ordinary franchise fees, supplies and percentage of sales, McDonald's also collects rent. As a condition of the franchise agreement, McDonald's owns most properties. Since rent is a fee that is not linked to sales, this practice allows McDonald’s more control over its franchisees (Rumbelow, 1 February 2001). As the world's largest fast food company, McDonald's was the target of criticism on many grounds over the review period. It has been accused of the exploitation of entry-level workers and ecological damage caused by agricultural production and industrial processing of its products with high levels of packaging waste. Critics claim it sells unhealthy or non-nutritious food with exploitative advertising targeted at children and contributes to the suffering and exploitation of livestock. McDonald's has also been criticised for its litigious and heavy-handed approach to preserving its image and copyrights. Consequently, McDonald's recorded its first ever global loss in the last quarter of 2002 and in Europe sales plunged 3.8% in January 2003. To combat this, McDonald's underwent a fundamental revolution in its approach to menus, marketing and consumers in 2003. In the UK, McDonald's is improving its standards and continued to work with government and health officials to investigate improvements (Euromonitor, 29 November 2005). On the other hand, Kazakhstan is a relatively new nation as it gained independence from Soviet Union in 1991. McDonald’s has is one of the countries it has to conquer. Kazakstan's 1,052,100 square miles (2,724,900 square kilometres) make it by far the largest state in Central Asia and the ninth largest in the world. Between its most distant points Kazakstan measures about 1,820 miles (2,930 kilometres) east to west and 960 miles north to south. While Kazakstan was not considered by authorities in the former Soviet Union to be a part of Central Asia, it does have physical and cultural geographic characteristics similar to those of the other Central Asian countries. The capital is Astana (formerly Tselinograd) in the north-central part of the country (Encyclopædia Britannica, 2006). Current issues in Kazakhstan include: developing a cohesive national identity; expanding the development of the country's vast energy resources and exporting them to world markets; achieving a sustainable economic growth outside the oil, gas, and mining sectors; and strengthening relations with neighboring states and other foreign powers. To know the feasibility of establishing McDonald’s in Kazakhstan, we will use the PESTEL analysis. This is because PESTEL characterizes the Kazakhstan’s external environment in terms of six factors: political (e.g., the threat of terrorism), economic (e.g., unemployment levels), social (e.g., demographic changes), technological (e.g., development of new/substitute products), environmental (e.g., antipollution policies), and legal (e.g., antitrust law). Although this is a very broad-ranging framework, it can be a useful starting point for an organization like McDonald’s that has not given much attention to the broad trends that might impact on the future operation of the business in Kazakhstan. Political – Political conditions in Kazakhstan have remained turbulent. This is because there is no clear mechanism for the transfer of power as Kazakhstan has been ruled by one man, Nursultan Nazarbayev, since before independence. He has changed the constitution several times in order to remain in office, and his overwhelming victory in the flawed presidential election held in December 2005 gives little indication that he might be willing to relinquish power when his new term--constitutionally his last--expires in 2012. Instead, the next seven years are likely to see further political tightening, designed to either allow him to remain in office indefinitely or install a member of his family as his successor. According to the Economist Intelligence Unit (26 July 2006), one of the political risks in Kazakhstan is the political ambitions evinced by the president's eldest daughter, Dariga Nazarbayeva, and her husband, the very unpopular Rakhat Aliyev, have been a source of persistent political tension since at least 2001. The couple has considerable business interests, which they use as a power base for their political objectives. Moves to neutralize them could therefore affect foreign businesses not fully cognizant with the web of connections underpinning the various political factions in Kazakhstan. Investors should keep a close eye on the political moves of the ruling family, and seek to make independent local contacts in order to keep abreast of Kazakhstan's behind-the-scenes political life. With huge amounts of foreign investment flowing into the country, there are widespread accusations of cronyism and corruption in Kazakhstan. A new elite and middle class has emerged and demands political reform. Opposition to the government is growing. Foreign businessmen voice concerns about requiring close connections with those in power in order to do business. In the past, experts estimated that 85% of Central Asia’s drugs passed through the country. Economists are worried about the country's vulnerability to large swings in the price of oil on world markets. Economic - Kazakhstan is the largest country in Central Asia and one of the world’s most sparsely populated. The nation is endowed with considerable mineral resources, including significant oil and natural gas reserves, as well as vast areas of arable land. Kazakhstan has made significant progress in transforming its economy since its independence in 1991. With the breakup of the Soviet Union, the centrally-planned economic system collapsed, and the sharp decline of demand for Kazakhstan’s traditional heavy industry products caused a steep drop in output. With successful implementation of economic reforms, the country’s economic performance has been impressive since the late 1990s. In recent years Kazakhstan has enjoyed buoyant growth led by the booming energy sector. Prudent management of the oil wealth has also contributed to the macroeconomic stability. Despite a favorable economic outlook, Kazakhstan is faced with the challenges of effectiveness and efficiency in the use of public and other resources to rehabilitate and expand its infrastructure base, as well as curbing inflation. In addition, further efforts are needed in enhancing competitiveness and improving the business environment to attract more investment in non-oil sectors (Euromonitor International. Kazakhstan: Country Profile. 1 October 2006). Social - According to the Economist Intelligence Unit (26 July 2006), there is seemingly no armed conflict in Kazakhstan, but there is the risk of isolated skirmishes on the border with Uzbekistan. The opposition is peaceful and democratic, but is subject to harassment by the increasingly authoritarian regime of the president, Nursultan Nazarbayev. There is also a potential for labor unrest in the event of an economic downturn. Industrial disputes are generally peaceful, although at times the policing of them tends to be heavy handed. Despite some tensions in the north of the country between Russians and the ethnic Kazakh majority, inter-ethnic conflict has largely been contained. Crime against foreigners in major cities appears to be subsiding as the urban population grows wealthier. Nevertheless, it is advisable for foreign firms to take security precautions, since organized crime is still a risk. Professional security advice should be taken. Firms should have clear security procedures in place, and ensure that expatriates are easily contacted and accounted for. Of greater concern, however, is the fact that corruption in the Kazakh police is widespread, making the local law enforcement agencies often unhelpful if an emergency occurs. Police corruption is especially evident in the force’s practice of regularly stopping cars for arbitrary inspections, which are invariably followed by a fine. Technological - Kazakhstan’s fixed-line telecommunications system is in poor shape, with around 17 subscribers per 100 inhabitants in 2004. Low incomes, high prices and a dispersed population are major barriers to the technological development. However, the Kazakh government acknowledges that telecommunications is a strategic industry, and has a long-term plan of modernization and liberalization of the country’s networks. The national operator, Kazakhtelecom, is implementing a program to modernize the telecommunications system, and is deploying a fiber-optic network to improve international connectivity. In addition, by the end of 2004 over 60% of exchanges had been digitized. Mobile services are booming; although mobile telephony penetration is still low at 18%, mobile subscriptions had reached 2.7 million by the end of 2004 and 3 million by May 2005 (Euromonitor International. Kazakhstan: Country Profile. 1 October 2006). Environmental – Most of Kazakhstan’s environmental problems stem from the Soviet era. The current environmental issues that hound Kazakhstan at present are: 1) high levels of air pollution due to low octane fuel usage, 2) poor disposal of hazardous wastes (more than 17 billion tons of hazardous materials are stored in landfills), 3) land and soil degradation, 4) heavy metal contamination of surface water, 5) pollution in the Caspian Sea, 6) soil pollution from overuse of agricultural chemicals such as toxic pesticides, 7) soil salinization from faulty irrigation practices, 8) high levels of radioactivity and associated high incidences of oncology as a result of its position as the site of defense industries and test ranges of the former Soviet Union. Legal - Although the Kazakhstani government has made great strides in improving foreign investment legislation, key concerns remain, including the vagueness of laws, contradictory legal provisions and poor implementation, especially at the local level of government. For instance, the lack of clarity in tax laws allows for creative interpretations by the Tax Police and other government agencies. Customs always presents challenges to foreign firms. Customs officials often interpret Customs regulations arbitrarily. Government downsizing and the move to the new capital, Astana, have seriously compounded problems surrounding implementation of legislation. The State Agency on Investments, established in late 1996 and advertised as a "one-stop shop" for foreign investors, has had a mixed record in its attempts to resolve investment issues. According to the U.S. Department of State Country Commercial Guide (2000), there has been a trend to grant preference to domestic investors over foreigners in most state contracts. September 1999 amendments to the oil and gas law requiring oil companies to use local goods and services represent an extension of this trend. The current administration has complained publicly that previous privatizations were executed too quickly and did not allow for the involvement of domestic investors. Also expressed is the need to "protect" domestic producers from outside competition. However, it is unclear whether domestic investors have the medium-to-long term financial capacity to support major projects and whether domestic investors have the strong management and technical skills to rejuvenate largely bankrupt Kazakhstani industries. To help develop local industry, the government enacted changes to legislation, published Sept. 1, 1999, requiring all oil and minerals companies to use domestically produced goods and services when available. In recent years, the Kazakhstani government has enacted four major pieces of legislation affecting foreign investment. These are: • The Law on Foreign Investment, 1994 (amended in July 1997); • The Tax Code of 1995; • The Law on State Support for Direct Investment, 1997; • The Law on Government Procurement, 1997. Poor implementation of these laws and reforms remains the key obstacle to business in Kazakhstan. This means McDonald’s investing in Kazakhstan will be filled with difficulties. Important concerns remain, for example, in the area of government tenders, despite new legislation and government promises that tendering will be conducted in an open and fair manner. Tenders are sometimes issued just a week ahead of the application deadline, thereby limiting competition. Kazakhstan’s generally liberal investment regime means that no sectors of the economy are closed to investors. The government of Kazakhstan remains both an implicit and explicit player in attracting foreign investment. Government officials, sometimes at the highest level screen foreign investment proposals. Major projects, such as the Caspian offshore production sharing agreement (PSA) and the Karachaganak PSA, bear the President's personal imprimatur. The screening process itself is not a significant impediment to investment in terms of limiting competition or protecting domestic interests. However, the process is often non-transparent and can slow investment decisions (U.S. Department of State Country Commercial Guide, 2000). Works Cited About McDonald’s. McDonald’s Corporate Website. Retrieved online 4 December 2006 at http://www.mcdonalds.com/corp/about.html Economist Intelligence Unit. Kazakhstan Risk Briefing, 26 July 2006. Retrieved online 4 December 2006 at http://www.viewswire.com. Euromonitor International. Consumer Foodservice in the UK. 29 December 2005. UK: Global Market Information Database. Euromonitor International. Kazakhstan: Country Profile. 1 October 2006. UK: Global Market Information Database. Kazakstan. Encyclopædia Britannica. 2006. Encyclopædia Britannica Online. 4 Dec. 2006 . Rumbelow, H. McDonald's is Ready to Eat Its Healthy Rival, Times, 1 February 2001. U.S. Department of State. Country Commercial Guide: Kazakhstan, 2000. Retrieved online 4 December 2006 at http://www.state.gov/www/about_state/business/com_guides/2000/europe/kazakh_CCG2000.pdf Read More