Why McDonald's Failed In Iceland

Summary

McDonald's, a global fast-food giant, faced an unexpected challenge in Iceland, where it operated for 15 years before closing its last three stores in 2009. The initial enthusiasm for the American chain waned as the 2008 financial crisis hit, causing the Icelandic Krona to plummet and import costs to soar. Unable to maintain profit margins without significantly raising prices, McDonald's found itself at a disadvantage compared to local eateries sourcing ingredients domestically. Despite high operational costs and the exit of other international chains like Burger King and Pizza Hut, some businesses, like KFC, survived by using locally sourced materials. Today, with Iceland's economy recovering and tourism booming, there's a possibility McDonald's could make a comeback.

Takeaways

• 🍔 McDonald's entered the Icelandic market in 1993, symbolizing Iceland's shift towards globalization and a free market economy.
• 🏪 The initial response to McDonald's was overwhelmingly positive, with long lines and high sales, but this enthusiasm eventually waned.
• 📉 The 2008 global economic collapse severely impacted Iceland, leading to the collapse of its stock market and banks, and a significant devaluation of the Krona.
• 🚫 High import costs and tariffs made it difficult for foreign brands like McDonald's to maintain profitability without raising prices drastically.
• 📈 McDonald's Iceland was forced to consider a 20% price increase for a Big Mac to remain profitable, which would have made it the most expensive in the world at the time.
• 📍 In 2009, McDonald's closed its three remaining outlets in Iceland, citing high operational costs as the primary reason.
• 📉 The economic crisis led to the exit of several businesses from Iceland, including McDonald's rival Burger King and Pizza Hut.
• 🛒 Fast food chains that sourced ingredients locally, like KFC, were better positioned to weather the economic storm and survived.
• 💡 Successful businesses in Iceland post-crisis were those that managed finances conservatively and received better banking support.
• 💰 Iceland is known for its high cost of living and expensive food, ranking as the second most expensive country in the world in 2018.
• 🏠 After McDonald's exit, the franchise renamed to Metro and continued operations by sourcing food locally to keep costs down.
• 🌐 Iceland's economy has since recovered, and with a growing tourism sector, there may be potential for McDonald's to re-enter the market.

Q & A

Why did McDonald's fail to capture the national attention in Iceland?

McDonald's failed in Iceland due to a combination of factors, including the 2008 global economic collapse, high operational costs, and the difficulty of maintaining profit margins without drastically raising prices due to import dependency.

When did McDonald's first enter the Icelandic market?

McDonald's first entered the Icelandic market in 1993, during a time when Iceland was shifting towards a free market economy and becoming more globalized.

What was the significance of McDonald's opening in Iceland in 1993?

The opening of McDonald's in Iceland in 1993 was seen as a sign of the country entering the modern globalized world and moving away from isolation and nationalism.

How did the 2008 economic crisis impact McDonald's operations in Iceland?

The 2008 economic crisis led to the collapse of Iceland's stock market and banks, a significant devaluation of the Krona, and higher import prices, making it difficult for McDonald's to maintain profitability without raising prices.

What was the main reason for the high operational costs faced by McDonald's in Iceland?

The high operational costs were primarily due to the importation of raw ingredients from Germany, which became extremely expensive after the economic crisis, with prices spiraling out of control.

How did the economic crisis affect other fast-food chains in Iceland besides McDonald's?

The economic crisis led to the closure of other fast-food chains like Burger King and Pizza Hut, which also faced difficulties due to high import costs and the devaluation of the Krona.

What was the proposed solution for McDonald's to remain profitable in Iceland?

To remain profitable, McDonald's would have had to increase the price of its Big Mac by 20% to $6.36, which would have made it the most expensive Big Mac in the world at the time.

What was the outcome for McDonald's in Iceland after the economic crisis?

In 2009, McDonald's announced the closure of its three outlets in Iceland, blaming high operational costs, and the franchise was eventually renamed Metro, which now uses locally sourced food.

What is the current status of the fast-food industry in Iceland after the economic crisis?

The fast-food industry in Iceland has recovered, with some chains like KFC surviving the crisis by sourcing most of their raw materials locally, and the economy is now more inviting for businesses.

What factors contributed to the success of fast-food chains that remained in Iceland after the crisis?

The successful fast-food chains in Iceland after the crisis were those that managed their finances conservatively, received better assistance from banks, and sourced their ingredients locally to keep costs low.

What is the current economic situation in Iceland, and how does it affect the fast-food industry?

Iceland's economy has bounced back, ranking fifth among European countries in the Economic Freedom Index, and the country has become a popular tourism destination, which may provide opportunities for fast-food chains to thrive.

Outlines

00:00

🍔 McDonald's Struggles in Iceland

McDonald's, a global fast-food giant, faced an unexpected challenge in Iceland. Despite its worldwide presence and iconic status, the brand was unable to maintain its business in Iceland after a 15-year struggle. The Icelandic franchise, which started in 1993 during the country's shift toward a free-market economy, initially saw massive success. However, the 2008 global financial crisis severely impacted Iceland, leading to the collapse of its stock market and banks. The Icelandic Krona lost value, and import costs skyrocketed, affecting McDonald's, which relied on imported ingredients. The franchise owner mentioned the exorbitant prices, comparing the cost of a kilo of onions to a bottle of whiskey. The economic downturn forced McDonald's to consider a 20% price increase on its Big Mac, which would have made it the world's most expensive. Unable to compete with local restaurants that sourced ingredients domestically, and with operational costs too high, McDonald's closed its three remaining outlets in 2009, citing high operational costs as the reason.

05:01

🌐 Adaptation and Survival of Fast Food in Iceland

Iceland's high cost of living and expensive food have been longstanding issues, with the country ranking as the second most expensive in the world in 2018. Despite this, local fast-food owners emphasize the importance of maintaining reasonable prices and consistent quality as the key to survival in the Icelandic market. After McDonald's exit, the franchise renamed its stores to Metro and adapted by sourcing food locally to keep costs down, which allowed it to continue operating. Not all American fast-food chains fared poorly; KFC survived the economic crisis by using locally grown raw materials. The Icelandic economy has since recovered, ranking high on the Economic Freedom Index and attracting tourism. With young Icelanders consuming fast food frequently and spending significant amounts monthly, and the country's thriving tourism sector, there is potential for McDonald's to make a comeback in the region, should it adapt its business model to suit local conditions and preferences.

Keywords

💡Global Fast Food

Global fast food refers to food chains that have a worldwide presence and are recognized internationally. In the video, McDonald's is highlighted as a titan of the global fast food industry, with its presence in over a hundred countries and its iconic status in American culture since the 1950s. The script discusses how McDonald's, despite its global success, faced challenges in Iceland, which is central to the video's theme of global brands and local market dynamics.

💡McDonald's

McDonald's is a well-known American fast-food chain that serves a variety of hamburgers, fries, and other food items. The video script focuses on McDonald's attempt to establish its brand in Iceland, where it ultimately failed after 15 years. The brand's failure in Iceland is used to illustrate the complexities of adapting a global business model to a local market, especially in the face of economic challenges.

💡Iceland

Iceland is a European country and the main context of the video script. It is highlighted as a unique case where McDonald's was unable to maintain its business. The video discusses Iceland's economic situation, its transition to a free market economy, and the impact of the 2008 global financial crisis on the country, all of which contributed to the failure of McDonald's and other foreign fast-food chains.

💡Economic Collapse

The economic collapse refers to the severe financial downturn that affected Iceland in 2008, leading to the collapse of its stock market and banks. The video script uses this term to explain the backdrop against which McDonald's and other businesses faced insurmountable challenges, including the devaluation of the Icelandic Krona and increased import costs, which played a significant role in the decision to close McDonald's outlets.

💡Import Prices

Import prices are the costs associated with bringing goods into a country from abroad. The script mentions that the increase in import prices due to the economic collapse made it difficult for McDonald's, which relied on imported ingredients, to maintain profitability without raising prices significantly. This is a key factor in understanding why McDonald's could not sustain its operations in Iceland.

💡Operational Costs

Operational costs encompass all the expenses required to run a business, including labor, rent, utilities, and the cost of goods sold. The video script points out that high operational costs, particularly due to the importation of raw ingredients, were a major factor in McDonald's decision to close its Icelandic outlets.

💡Big Mac

The Big Mac is a signature hamburger product of McDonald's, often used as a benchmark for comparing prices and economic conditions across different countries. In the script, the potential need to increase the price of the Big Mac in Iceland by 20% to maintain profitability is mentioned, highlighting the financial challenges faced by McDonald's in the country.

💡Local Sourcing

Local sourcing refers to the practice of obtaining ingredients and materials from within the same region or country where the business operates. The video script contrasts the strategies of McDonald's, which imported its ingredients, with those of successful local businesses and other chains like KFC, which sourced materials locally and were able to withstand the economic crisis.

💡Consistency

Consistency in this context refers to maintaining a stable level of quality and pricing in a business. The script suggests that businesses that survived the economic downturn in Iceland, including fast-food chains, did so by keeping their prices and quality consistent, which was key to their success.

💡Metro

Metro is the new name of the fast-food chain that emerged after McDonald's exited Iceland. The script mentions that these outlets, which were formerly McDonald's stores, began sourcing their food locally to keep costs low and have continued to operate successfully, illustrating an adaptation to local market conditions.

💡Economic Freedom Index

The Economic Freedom Index is a measure of a country's economic freedom, which includes factors such as business and investment freedom. The script refers to Iceland's ranking in this index to suggest that the country's economic environment is improving, making it a more inviting place for businesses, including potentially for McDonald's to reconsider its presence.

Highlights

McDonald's failed to capture national attention in Iceland despite being a global fast food titan with restaurants in over a hundred countries.

McDonald's entered the Icelandic market in 1993 during the country's shift towards a free market economy and globalization.

The opening of McDonald's in Iceland was seen as a sign of the country entering the modern globalized world.

After the initial hype, locals began to view McDonald's as just another restaurant.

The 2008 global economic collapse severely impacted Iceland, causing the stock market and banks to collapse and businesses to go bankrupt.

The Icelandic Krona lost half its value, leading to higher import prices and making it difficult for foreign brands like McDonald's to maintain profit margins.

McDonald's Iceland imported raw ingredients from Germany, and the franchise owner claimed the prices became unmanageable.

McDonald's and Burger King, which also sourced materials from outside Iceland, closed their Icelandic restaurants in 2008/2009 following the economic crisis.

To remain profitable, McDonald's would have had to increase the price of a Big Mac by 20%, making it the most expensive in the world at the time.

McDonald's Icelandic franchise announced the closure of its three outlets in 2009, blaming high operational costs.

The managing director of McDonald's Iceland claimed the business had never been better in terms of customer traffic, but profits had never been lower.

Iceland has long been known for its high cost of living and overpriced food, ranking as the second most expensive country in the world in 2018.

Local fast-food owners in Iceland emphasize the importance of keeping prices reasonable and consistent for business survival.

After closing, McDonald's Iceland franchise renamed the stores Metro and switched to locally sourced food to keep costs low, still operating today.

Some American fast-food chains like KFC survived the economic crisis in Iceland by sourcing most of their raw materials locally.

Iceland's economy has bounced back, ranking high in the Economic Freedom Index, and has become an inviting place for businesses.

Iceland has also become a popular tourist destination, with the number of foreign visitors more than quadrupling since 2010.

With a recovering economy and growing tourism, there may be hope for McDonald's to make a comeback in Iceland.

Transcripts

When you think of global fast food, Titans you probably think of McDonald's.

The chain has restaurants in more than a hundred countries and has been a

household name in America since the 1950s.

But there is one European state where McDonald's failed to capture national

attention: Iceland. McDonald's tried for over 15 years to

make it in Iceland but in 2009 the local franchise closed its three remaining

stores with no plans in return. So what went so long for McDonald's in Iceland?

To answer that, let's go back to the McDonald's first entered the market in

1993. At a time when the isolated island nation was shifting toward a free market

economy and becoming more globalized, then Prime Minister David Adson took the

first bite of an Icelandic McDonald's hamburger at his grand opening. It was

seen as a sign of the country finally entering into the modern globalized

world. When McDonalds opened up [in] 1993, I have never ever in my life seen such an opening in one

restaurant. There were lines for days outside the restaurant and they were

selling thousands and thousands of burgers every day. But then you know

after honeymoon is over, the people it was just a usual thing. And locals, was

welcomed the American fast food chain because it symbolized the country

pulling away from isolation and nationalism. The opening of the franchise

kind of symbolized in Iceland and a hard time entering into a global community. As

some scholars have pointed out that in relation to marginal countries or

countries that feel themselves a little bit marginal, getting international

franchise can be important as a as kind of affirming that you are part of a

global community or a community of nations. But in 2008, the global economic

collapse hit the small country of roughly 300,000 people. The stock market

and its three biggest banks collapsed in almost every business in the country

nearly went bankrupt. Thousands of people lost their savings and Iceland erupted

in protests. The Krona lost roughly half its value and higher tariffs translated

in some much higher import prices. That made it difficult for foreign brands

that were dependent on imports to maintain its profit margins without

drastically raising its prices. According to the owner of the McDonald's Iceland

franchise, the chain imported its raw ingredients from Germany. The franchise

owner told the media that prices spiraled so out of control that for kilo

of onion in Germany he was paying the equivalent of a bottle of good whiskey.

In contrast with McDonald's and also Burger King which closed at a similar time as McDonald's closed.

Those were sourcing materials from outside Iceland and the two restaurants in question closed in 2008/2009 following the economic crisis.

So it simply wasn't cost effective to have such large share of materials for the fast food.

McDonald's Icelandic franchise owners said that in order to

remain business and make a profit McDonald's would have had to hike up

it's a Big Mac price by 20% to $6.36 that would have made it the most expensive Big Mac in the world at the time.

Switzerland currently holds that title with its $6.82 Big Mac.

In 2009, the franchise announced that it would be closing its three outlets with

only a weeks notice. Blaming high operational cost.

McDonald's local franchise partner in Iceland was a firm called "Lyst." The managing director

of the McDonald's franchise to mediate that business had actually never been

better at the time it pulled out of the country. He told media that the

restaurants had never been this busy before. But at the same time profits had

never been lower. Icelandic media reported that tens of 15,000 people

patronized McDonald's daily in its final days of operation. 2008 marked a time

when several businesses decided to exit Iceland, including McDonald's rival Burger King and Pizza Hut, which closed all but one outlet.

Just like McDonald's, Burger King's source their products from abroad.

The fast food giant's that did exit Iceland had trouble competing with

restaurants that sourced their ingredients locally. But other analysts

say high import costs affected everyone. Even the businesses that used homegrown ingredients.

And the difference between the chains that succeeded in Iceland after the crisis and the ones that failed all boils down to management.

Companies that survived were companies that had usually either finance

themselves in a more conservative manner and/or maybe simply got better

assistance from the banks and other companies. So in the case of, for example,

McDonald's that company was highly indebted with foreign currencies when

they went bankrupt. Iceland has long been.known for its overpriced food and its

high cost of living. In 2018, Iceland was ranked the second most expensive country

in the world. A typical sit-down meal will cost you around $20 to $40.

Local fast-food owners say keeping prices consistent is the key to

surviving in Iceland. Keep your reasonable and if you keep quality good. If you have consistency...

This is the key consistency. consistency, consistency, then you can survive in almost any business.

After closing, McDonald's Iceland franchise lost the McDonald's signage and renamed the stores Metro.

This new chain uses locally sourced food to keep costs low and is still operating today.

And not all American fast-food chains left Iceland during the financial crisis.

We've seen places like KFC. They did not close. They survived the economic crisis and

I mean main difference is that they had most of the raw materials for their

foods is grown in Iceland. So I guess they were back draws because of that. And things are getting better

in Iceland. Its economy is bouncing back and it's proving to be an inviting place

to do business. According to the Economic Freedom Index, which looks at a country's

business and investment freedom, Iceland ranks fifth among European countries and

Icelanders are opting to eat out. Young Icelanders eat fast food on average

every other day spending an average of $220 US a month Iceland. Has also

become a hot destination for tourism. As of 2017 the number of foreign visitors

to Iceland has more than quadrupled since 2010. With excellent economy

looking bright, tourism climbing and residents enjoying the most school fast

food options, there might be hope for McDonald's to make a come back in the Nordic region.