Assignment No 2

Module – MBA 4643

PART-B: Managing during recession Due Date – 24th April, 2011

Submitted by – Munazza Tanveer Sijo Jose Kavitha Prabhakaran Jithin Vijayan Sanaa Aizaz Ajesh

– M00338309 – M00339404 – M00334666 – M00341655 – M00339867 – M00334324

Assessor – Professor Ajit Karnik Word Count –

Cover Page

.................................................................................................................................................................................................. 16 Effect on the price competitiveness with respect to currency market.................................. 12 Cross price elasticity with respect to substitute products .................................................................................................................................................. 5 Costs of production ...................................................................................................................................... 14 Developments in demand ............................ 15 Effect of the recession on the demand for product .. 10 Market segments...Government policies in different markets ............................................................. Error! Bookmark not defined........................ .... 2 Target Market .......................... 10 Strategy with respect to competitors ............................ Error! Bookmark not defined.............................................Table of Contents Executive Summary ............................................................................................... 15 Affect on demand ................................................................. .................................................... 18 ................................. a good to a consumer declines with each additional unit acquired or consumed........ 8 Change in Variable costs ...................... A psychological generalization that the perceived value of............................................... 1 The product ................................................................................... 12 Price and income elasticity of product............ ........................ Error! Bookmark not defined................... 17 Bibliography ...................................................................... 4 Macroeconomic expectations 2nd half of 2011 . 7 Change in Fixed costs .............................................................. 8 Marginal Utility ............................................................... Market structure .................................................................... Pricing strategies............... or satisfaction gained from....... 9 Law Of Diminishing Marginal Utility by Alfred Marshall .....................................

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Executive Summary 1 .

We searched the globe for exactly the right blends of gourmet coffee beans.The product McDonald’s McCafé gives you an option to choose between several gourmet coffee choices: cappuccinos. bold espresso and made with real steamed milk. Generally. Guatemala and Costa Rica. size and price. the espresso is bolder. and iced and hot mochas. Consumers are reevaluating the value of the product they are purchasing and are looking for substitutes. The McCafé Espresso coffee beans come from Central and South America and the mountainous regions of Indonesia. real chocolate and whipped cream. below tables reflects the key ingredients and nutritional factor of one of its product in existing market. lattés. Apart from targeting existing customers who are looking for other options. with a rich. McCafé Caramel Mocha McCafé Latte McCafé Cappuccino McCafé Hot Chocolate McCafé Iced Mocha McCafé Iced Caramel Mocha McCafé Iced Latte 2 . Guatemala and Costa Rica. If you look at similar gourmet coffees. They’re brewed with rich. while the Premium Drip Coffee blend comes from the mountains of Columbia. roasted flavor and chocolaty notes. Costa Café etc. while the Premium blend is a little milder. McCafé has also tried to portray there drink as much healthier in comparison to its competitor. Guatemala and Costa Rica. we feel that McCafé specialty coffees offer convenience and wonderful quality at a great price!.i Economic downturn has led peoples to look from age old coffee houses like Starbucks. to other in expensive options. Our McCafé specialty coffee blend comes from Brazil and the mountains of Sumatra. McDonald’s entrance to this market reflects its intention to fill a price gap and in cashing on the fact that people are less willing to pay $4 for a drink at Starbucks than in previous years. Our Premium Roast coffee is a blend of Arabica coffee beans grown in Brazil and the mountains of Colombia. and compare taste.

3 .com Further to existing markets like USA. McCafé intends to enter much competitive market of Middle East.Source: http://nutrition. etc. UK.mcdonalds.

the local population is more inclined towards the traditional coffee brews. 4 . affluent areas. etc. which is still out of price range of many prospective consumers. but the restaurant may also benefit from a better reputation and increased popularity. either as a separate section or as a separate sales counter. McDonalds can easily reach to a wider customer base. even though the supply of coffee remains unchanged irrespective of the season. hot drinks are not preferred in summers. Not only can the sales of the original restaurants be increased. at the micro economic levels. This will definitely be true in the early stages of implementation of these stores. Considering the above factors. with specialized brew to cater local population at the widely available network of McDonalds will not only attract more customers. This is also when establishing McCafé as a worthy and cost-friendly substitute to current coffeehouses and dispelling a negative reputation as a low quality coffee brand will be important. but also help establishing the culture of having coffee more frequently. a cup of coffee. Availability & tradition: Existing cafes are serving in locations like. hotel. because people will get naturally curious. around the clock. roughly for US$ 4.50 and onwards. a similar concept will apply to the Middle East. such as Turkish coffee or Arabic coffee. if made available on an affordable price. discussed here under: Price: Coffee is normally served in specialized cafes. which sell coffee. by McDonalds. The idea behind McCafé is to essentially enter the luxury coffeehouse business most well exemplified by Starbucks. a general perception is that. after considering a gap analysis on socio-economic conditions prevailing in both markets.Target Market Keeping the marketing strategies applied in United States of America (USA). Weather: Weather plays another factor. as well. Further. McCafé can be paired up with existing stores. shopping malls. With its existing chain.

However 2011 has been promising now and a strong outlook is building towards to second half of 2011. The most recent survey shows BESI improving from its October value of 48.6%. Based on analysis of macroeconomic data and improved reading of BESI. resulting in mild appreciation against currencies of major trading partners. within one standard error interval of 2. The only constant throughout 2010 was a very high uncertainty. in Q1 2011 we forecast economic growth at an annual rate of 3. there seems to be little to celebrate.ii 5 . Unemployment will likely remain between 9 and 10%.7%. In response to additional expansionary monetary policy. reflecting a cautiously optimistic sentiment among executives. Decision-making has been challenging owing to high inflation and borderline deflation.S.4 to in January of 2011. We expect the consumer price inflation rate to remain between 0% and 2%. with much volatility due to changes in numbers of discouraged workers.7 to 4.Macroeconomic expectations 2nd half of 2011 Q3 2010 is considered as the first full year of recovery from the Great Recession in the United States. Yet despite the fact that the economy has clocked in six straight quarters of positive economic growth. The U. dollar will be subjected to opposing forces exerted by QE2 and accelerating growth. interest rates will remain low.3 to 50.

US Quarterly report Q1 2011. Above graphs depicts a positive outlook for the second half of 2011. 6 .com.Source: www.cebviews. A strengthen macroeconomic policies will certainly ensure the upward movement of graph in respect to economical growth.

AC & MC curve 7 6 5 4 3 2 1 0 0 50 100 150 200 250 300 350 400 450 500 Sum of AC Sum of MC 1200 1000 800 600 400 200 0 TC. AC falls if MC<AC.1). Average total cost continues to fall until output Q2 where the rise in average variable cost equates with the fall in average fixed cost. so the average cost rises (for example the marginal cost of each extra unit between 450 and 500 is 4.Costs of production Law of Diminishing returns as stated by Alfred Marshall The law of diminishing returns states that in all productive processes. while holding all others constant. When diminishing returns set in (beyond output Q1) the marginal cost curve starts to rise. will at some point yield lower per-unit returns. adding more of one factor of production. Short run costs of production-If a marginal cost is below average cost then the average must be falling. because the marginal cost of production exceeds the previous average. This is known as the output of productive efficiency. Thereafter.8 and this increase in output has the effect of raising the cost per unit from 1. TVC & TFC curve 0 50 100 150 200 250 300 350 400 450 500 Sum of TFC Sum of TVC Sum of TC Average cost per unit is minimized at a range of output between 350 and 400 units.For this reason MC curve intersect 7 .8 to 2. Output Q2 is the lowest point of the ATC curve for this business in the short run. Even if MC is rising.

Change in Fixed costs A rise in the variable costs of production leads to an upward shift both in marginal and average total cost. The effect is that of an inward shift in the supply curve of a business in a competitive market. The firm is not able to supply as much output at the same price. it simply causes an upward shift in the AC CURVE 8 . This means that only the average total cost curve shifts. Change in Variable costs An increase in fixed costs has no effect at all on variable costs of production. There is no change at all on the marginal A rise in fixed costs has no effect on marginal cost.

Marginal Utility Law Of Diminishing Marginal Utility-Marshal states the law The additional benefit which a person derives from a given increase of his stock of a thing diminishes with very increase in stock that he already has.” 1 2 3 4 5 6 7 8 9 10 140 120 100 80 60 40 20 0 -20 -40 Sum of Total Mc Café's utility Sum of Marginal Mc Café's Utility 9 .

McDonald’s vast network of restaurants. instead a culture of having a cup of coffee in morning on the way to office is also going strong. These restaurants situated in shopping malls. Caribou Coffee. though coffee shops are not only available at every other corner of a residential block. of confectionary items through their specialized items will be losing the edge to McDonalds on pricing and convenience of widely available locations. unlike USA. at an affordable price. The widely available coffee shops have provided equilibrium in supply and demand of coffee. The price of coffee cup in USA varies not because of coffee served. Costa. either on gas stations or in residential areas have a ‘Drive Through’ service window. but due to the services provided along with it and the standard of café where it’s being served. will serve as a perfect venue to offer coffee. Whereas. which is already serving a brand of coffee.50. such as Star Bucks. 10 . keep price for a cup of coffee at minimum USD $ 4. This will serve as an additional service to customer on the same lower price and will also save them from hassle of getting off from their vehicles and getting in queue at specialized shops to get one simple cup of coffee. all McDonalds. most of the established cafes providing good coffee are the specialized cafes and bistros. these cafes. there is huge gap in the market for supplier (having vast network of outlets) of coffee at affordable price. will serve as an outlet for the special blend of coffee for local population. etc. Other than this. almost all residential areas and even at gas stations. Serving coffee through drive through will be another break through concept. Due to their specialized nature. which will attract the customers on move. Hence. in Middle East. Strategy with respect to competitors Competitors who are selling only coffee with a selected and limited no.Market structure At present.

85 $3. Most profitable regions already have a plethora of Starbucks stores and other coffeehouses.39 $3 $2.55 $3. apart from its competitors in all areas.55 $3. increasing. Furthermore. CA) 11 . McDonald’s vs.89 $3.39 $2.39 Medium/Grande $3.89 Large/Venti $3.Because of the nature of McCafé.55 $2.29 $3. separate from its and existing consumer base which is McDonald’s restaurants.29 Table 2. McDonald’s vs.29 $3. lower overheads due to utilization of McCafé stores in the already available infrastructure/resources U. Price.. success is not guaranteed because the coffee market is fairly saturated. Starbucks Espresso Prices (prices taken in Anaheim.S.e. it is hard to separate it from its parent company because of the obvious similarities in name. day by day.25 $2. Although McCafé is its own brand. its target Our marketing strategy will focus on the pure market will ultimately price economics and convenience.70 $2.89 $3.70 $2. If McDonald’s is to open Profitability. its reputation as a low quality brand may discourage many coffee drinkers from trying McCafé. Starbucks Small/Tall Starbucks Latte McDonald’s Latte Starbucks Café Mocha McDonald’s Mocha Starbucks Cappuccino McDonald’s Cappuccino $2. these are the overlap significantly two important factors which will set McDonalds with Starbucks’ market.25 $2. i.

Market Segments The existing consumer base of McDonalds not only includes the affluent segment of market. There is no other cost in introducing new coffee drink. the coffee lovers will appreciate a good cup of coffee at an affordable price. where inflation is high due to which the purchase price index or in other word consumer purchasing power has either been declining or is stable. as infrastructure in terms of restaurants. Our primary target is the middle and lower who either due to higher middle class segment of the society. The lower prices will attract additional consumers as well. The prices of coffee at specialized secondary target is the affluent clientele which cafes or due to convenient of already have the taste for good coffee and will location were either not appreciate a good coffee at affordable price with inclined towards enjoying a convenience. of the day 12 . world over. locations and resources (employees). The pricing of new coffee drink at McDonalds will be low comparing with other competitors in the market. available at convenient locations. This is due to the economical prices and promotional pricing strategy which is based on most effective penetrating prices strategy in fast food industry. since at McDonalds the cost of service will be shared with the other line of products.. already exist. but it also includes the middle as well as lower middle class. Pricing strategies Considering the macro economic conditions of the Middle East region. which is not offered by the good cup of coffee or were competitor specialized during or start shying away from making it a habit to have cup of coffeecafes / bistros.

which not only survived. the higher the price.Price and Income elasticity of product. as an Inferior Good – one whose demand increases as incomes fall. but made profits during the past economic depression. Law of demand by Alfred Marshall: The law of demand states that. an increase in income will lead to a fall in the demand and may lead to changes to more luxurious substitutes 13 . As mentioned above. The case is different for McCafé and McDonalds. including the new Iced Mocha. McDonalds was the only food retailer in the history of economic times. In other words. if all other factors remain equal. the less people will demand that good. Though McDonalds remains to be a relatively elastic firm due to high competition and so much physical base all across the US and the globe. A negative income elasticity of demand is associated with inferior goods. we cannot study the specific elasticity of the Iced Mocha at Mc Donald’s yet. This is because as the American culture is greatly attached to ‘Coffee Drinking’. the public will always opt for something cheaper than their usual preference in times of an Income drop. the higher the price of a good. the lower the quantity demanded Effect of Income on the Elasticity of Demand Though the demand for any regular coffee is usually the same as that of a normal good. We classify McDonald’s products line up. This concept is further elaborated using the cross elasticity of demand by substitutes further on.

Such a strong elastic relationship can only reveal a strong rivalry between existing competitors. this kind of competition is healthy yet at the same time can be fatal for certain market players too 14 . When Starbucks added a new variety to its Iced Mocha array of drinks in 2009. these immediately saw an increase in demand for the Iced Mocha’s available at McDonalds. the new drinks cost almost $3 more.Cross price elasticity with respect to substitute products The above graph clearly depicts the effect any change in price of an Iced Mocha Frappacino at Starbucks. on the quantity demanded of the same drink at McDonalds’ Mc Café.

com/doc/24763400/UAE-Restaurent-Analysis http://www. the McDonalds and the Wal-Marts are likely increasing their market share in these recession-ridden times.cc/Classes/BEM106/Papers/2009/McDonalds. adding salads. with a large percentage of this segment being male bachelors (in fact.000 burgers per day Factors affecting the industry growth-The number of international tourists is expected to decline due to the global economy crisis 50% of the UAE population are low paid expatriate workers brought in to work in the booming hotel and real estate construction industry and are not relevant to the high value food service industry. currently averaging over 7% per annum Rising rates of private consumption expenditure which also have the effect of driving up Food-Service expenditures Three-quarters of the population are non-nationals. so doesn't it make sense to be eating at an affordable place like McDonald's when times are tough.mcafee. McDonald's is indeed a recession-resistant company. After all. or the modern retail supermarkets http://www.Developments in demand Population growth. this gigantic restaurant chain is reinventing itself. Some of the reasons that MCD is flourishing in a downturn economy worldwide are: 15 . healthier items and a coffee bar to many of its newly named 'Cafes'. Unfortunately. males outnumber females two-to-one)Given the prevalent working lifestyle. most people are compelled to eat at least one meal per day while at work The impact of tourists visiting the country annually One single Hardee’s outlet sells 20. people still need to eat. Due to what appears to be brilliant management. In conclusion. There is some truth to the thesis.pdf Effect of the recession on the demand for product Much has been written about McDonald's (MCD) being a recession-resistant stock. the strong dollar is depressing their financial results--due to exchange rates when results are reported in dollars--and they are feeling the pressure from their multinational business as many such corporations are experiencing today.scribd. They are continuing to show positive same-store growth and appear to be taking a bigger market share from its competitors.

With one failed ad campaign following another. 4. 3. Though their food may not be of as good quality as other fast food restaurants. Affect on demand . near malls. This is true in emerging market countries and also in some Eastern European countries. The company positions its stores in some of the most strategic places around tourist locations. where local food prices could be high in traditional eateries.1. consumers prefer to eat something that is cheap. about the same time both McDonald’s and Burger King began to turn themselves around. 16 . This is a huge draw among cash-strapped consumers. they can be found inside huge malls right next to high-end fashion or jewelry stores. In mid-January. In countries such as Canada. In many countries McDonald’s is a novelty and consumers want to give it a try. Some competitors haven’t fared as well. and none resonating with the clarity of McDonald’s “I’m lovin’ it.” Owens recalls. it is comparably cheaper. busy thoroughfares.Government policies in different markets On Wednesday April 6. 6:34 pm EDT A New York City councilman plans to introduce a bill that would ban toys and other giveaways for children from fast-food meals that don't meet certain nutritional guidelines. This is true in Europe as well. 2011. as well as low in fat and sodium. etc. Any single food would have to be less than 200 calories. Meals would be required to be less than 500 calories. McDonald’s brand is very popular all over the world and it continues to take advantage of that with effective marketing. 2. Atlanta-based Wendy’s/Arby’s Group pulled the plug on breakfast in more than half its 850 units after items such as the Buttermilk Frescuit and Grande Breakfast Burrito failed to win over franchisers and customers.” “Wendy’s seemed to lose its way after founder Dave Thomas died in 2002. As mentioned by the company.

was launched in November 2010.News). Slowly rising inflationary expectations are therefore good news. McDonald's (NYSE:MCD . With all standard measures of the money supply remaining essentially flat.and violators would initially be fined $200-$500. referred to as QE2.S. QE2 has. however. banking system.72. Its effect on the exchange rate of the U. inflation has been consistently below the Fed’s target. edged up 0. Macroeconomic policies Expansionary quantitative easing. Worries about an imminent threat of inflation have not materialized – the Fed’s growing balance sheet has so far translated into bloated excess reserves in the U. which is known for its Happy Meal toys. Dollar seems to be smaller than the much more volatile impact of the European sovereign debt crisis. but not the money supply. succeeded in stabilizing inflationary expectations. Effect on the price competitiveness with respect to currency market.2% to 76. 17 .S.

MCDONALDS CORP (MCD) Historical Prices Bibliography http://www.pdf 18 .mcafee.cc/Classes/BEM106/Papers/2009/McDonalds.

19 . Quarterly macroeconomic review. Available at: http://cebviews.mcdonalds. 2011.pdf [accessed on 19th April 2011]. [Online].com/us/en/food/food_quality/see_what_we_are_made_of/your_questions_answered/mccafe. See What We’re Made Of.i The McDonalds. ii CEB Views. Available at: http://www. 2011.html [accessed 22nd April 2011].com/uploads/2011/01/US-Quarterly-Report-Q1-2011.

2011. Available at: http://cebviews. 2 CEB Views. Available at: http://www. . 2011.1 The McDonalds.com/uploads/2011/01/U-SQuarterly-Report-Q1-2011. [Online].mcdonalds.html [accessed 22nd April 2011].pdf [accessed on 19th April 2011]. See What We’re Made Of.com/us/en/food/food_quality/see_what_we_are_made_of/your_questions_answered/mccafe. Quarterly macroeconomic review.

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