McDonald’s Pulls Out of Iceland
Just when you thought the global financial crisis was subsiding, with returns to growth in most leading economies, including the US, Europe, China, etc., we have a counter-indicator. The Financial Times reports today that McDonald’s is closing its three outlets in Iceland, citing the difficult economic environment:
Iceland edged further towards the margins of the global economy on Monday whenMcDonald’s announced the closure of its three restaurants in the crisis-hit country and said that it had no plans to return.
The move will see Iceland, one of the world’s wealthiest nations per capita until the collapse of its banking sector last year, join Albania, Armenia and Bosnia and Herzegovina in a small band of European countries without a McDonald’s.
The FT gives some background on why the environment for selling Big Macs in Iceland is so difficult:
McDonald’s blamed the closures on the “very challenging economic climate” and the “unique operational complexity” of doing business in an island nation of just 300,000 people on the edge of the Arctic Circle. Most ingredients used by McDonald’s in Iceland are imported from Germany – leading to a doubling in costs as the krona has collapsed while the euro has strengthened.
The FT cites the Big Mac index, a purchasing power parity index for comparing the valuations of currencies based on the comparative price of a single, uniform basket of goods, in this case a Big Mac, drink, and fries (as I recall). The Economist dreamed it up as whimsy many years ago, but it has proved oddly robust at least for certain comparisons:
Magnus Ogmundsson, managing director of Lyst, the McDonald’s franchise holder in Iceland, said that price rises of at least 20 per cent were needed to produce an acceptable profit. That would have pushed the price of a Big Mac burger well above the $5.75 it costs to buy one in Switzerland, home to the world’s most expensive McDonald’s, according to the Big Mac index.
Luckily, the local franchise owner is taking over the stores and plans to retool the menu using locally produced meat and ingredients, and rebranding under the eco-cool concept of local food production.