McDonald’s Investment in Kenya.
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McDonald’s operations in Kenya and the competition they will face.
McDonalds is a fast-food company formed in 1940 and started as a single restaurant owned by Maurice and Richard McDonalds in California (Nuque-Joo et al., 2019). It is currently one of the world’s largest restaurants, located in about 120 countries worldwide and over 37000 branches in the world. McDonald’s is yet to set up one of its branches in Kenya and explore the Kenyan market. The company is well known for its production of delicious burgers that come in different varieties. They also make other foods like French fries that make them very popular as well. McDonald’s will be faced with competition in the Kenyan industry by other food production companies that offer the same services in the country, such as Urban Burgers, which is known for the production of a wide variety of burgers. Another company is KFC that produces the same types of food. Big Square is also another international company in the country. McDonald’s will need to compete stiffly with these international restaurants that are also very successful and popular.
The loan status of Kenya as well as the circumstances and changes implemented from the loan.
Kenya is classified as a developing third-world country and a middle-income country (Hawkridge et al., 2016). Thus the country has a record of being a beneficiary of the world banks development loans given to developing countries for infrastructure development. The recent loans were during the covid-19 pandemic. The country received one billion dollars from The World Bank to help fight the pandemic and boost its economy and strengthen its health emergency preparedness. The country also received fifty US dollars to help with their Kenya covid-19 emergency response project. The funds were used to improve and change some of the facilities in their health sectors. Enhance capacity building, build treatment centers and quarantine locations, purchase and manufacture protective gear and diagnostic equipment, and acquire medical waste disposal equipment. The project was successfully implemented in forty-seven counties all over the country. Kenya also has borrowed from the World Bank more times in the past to achieve its 2030 development goals, which includes acquiring advanced infrastructure and urban development and improving the living conditions of its citizens.
Major financial institutions in Kenya and the strength of their currency versus the US dollar.
Financial institutions are banking institutions that major in dealing with financial transactions such as withdrawals, deposits, investments, and loans. Kenya has many financial institutions, the major ones being The Standard Chartered Bank of Kenya, Equity Bank of Kenya, Kenya Commercial Bank. Diamond Trust Bank of Kenya, National Bank of Kenya, Stanbic Bank, and Commercial Bank of Africa (All are examples of banking institutions). The Kenyan shilling has been the most stable, especially among the East African countries but weak against the US dollar with one US dollar being equivalent to over 100 Kenya shillings. This has been the case since 2015; the Kenyan shilling has continued to plummet consistently over the years.
How McDonald’s will use hedging tools to mitigate foreign exchange exposure in Kenya.
Hedging tools are techniques to protect investors against the risks encountered while doing business with foreign countries (Taušer et al., 2016). McDonald’s will need to use some of these tools while operating in Kenya to protect themselves from encountering losses caused by fluctuating foreign exchange rates. One of the ways they can do this is by using forward contracts. This is an agreement between two companies or parties that enables them to buy and sell commodities at a specific price. Forwards can benefit both suppliers and buyers. For example, if farmers who supply at McDonald’s sign to sell a product at a particular price, then the commodity’s market price goes down, they still get to supply at the original high price. And if McDonald’s sign to receive products at a specific price from farmers and the price goes up, this will not affect them since they will still receive the products at the agreed price consistently. Forwards, however, are not standardized, and either party can bail out at any time. Another hedging tool they can use is to use future contracts that are standardized and not prone to the unpredictability of one party bailing out. Futures have a fixed price, fixed date, and fixed quality and quantity. They are agreements that are not affected by the fluctuating currency exchange rates. Another hedging tool they could use is money markets. This technique will help McDonald’s as investors protect themselves against different fluctuations of financial activities in their host country. This also allows them to lock the value of their host country’s currency before carrying out any transaction.
Leveraging capital markets for successful investment
Another term to describe leveraging is borrowed capital. The process of leveraging entails getting a loan to increase a company’s stock. Companies get loans to add on their equity to expand their businesses and investments and, in return, more profit (Narsa, 2019). Leverage can also be used by companies to increase their shareholder value. McDonald’s can use this concept to get loans from Kenya’s financial institutions like banks and other legal lenders in the country, to increase its operating and supply power in the country. Borrowing to raise their equity capital will help them invest in different areas of the country, thus creating more employment to reach out to more people and potential consumers of their products. Leveraging their company will significantly increase its returns and be a special tool for their success in Kenya.
Kenyan government policies and actions that affect investments
Kenya faces competition from its neighboring countries when it comes to foreign investment considerations. Kenya’s foreign direct investment board identified different governmental issues and policies that hinder successful investment in the country. Some of them include inferior infrastructure. Poor government policies and regulations have majorly contributed to the country’s neglected infrastructure. A world bank survey showed that investors rated the country’s infrastructure as extremely poor regarding roads and water. Good roads are a crucial factor to consider for a company like McDonald’s since they will require to get most of their raw materials straight from the farm and transport them to urban areas.
The same survey pointed out that telecommunication is also an issue in Kenya. Their technological advancement and accessibility to telecommunication are also very poor. It takes a lot of time before investor companies can fully establish an operational telecommunication line for themselves. The country’s tax policies make utilities like electricity and rental charges and cost of importation extremely expensive. This is another factor that contributes to investors shying away from investing in the country. Corruption is another major issue identified by most investors in the country. Corruption causes severe constraints on investments and healthy business operations in the country (Hope, 2017). Another significant issue is the rate of crime rates in the country. Kenya is considered to be among the world’s countries to be severely affected by high crime rates. This is due to laxity observed in their government policies and regulations.
How McDonald’s financial, organizational structure will be effectively used in the host country.
A company’s financial, organizational structure refers to a mix of overall debt and equity that the company uses to run its operations. McDonald’s has to analyze the best mix to be used to achieve success in Kenya. Understanding how to use this mix will help them determine the returns they will get from their investment and also help them prepare and strategize how to survive business recessions in their host countries. McDonald’s financial structure will help them decide how much debt they need to acquire and start identifying viable credit lenders in the country even before they start their investment; if or not, they will use only their original company equity to run their operations in the country. An excellent financial structure also helps them determine the total cost of operation in the host country and what products they should major in to achieve maximum benefits. They need to do an extreme and thorough market survey and make appropriate decisions before investment.
References
Hawkridge, D., Jaworski, J., & McMahon, H. (2016). Computers in third-world schools: Examples, experience and issues. Springer.
Hope, K. R. (2017). Corruption in Kenya. In Corruption and Governance in Africa (pp. 61-123). Palgrave Macmillan, Cham.
NARSA, I. (2020). The Effect of Company Size, Leverage and Return on Asset on Earnings Management: Case Study Indonesian. Revista ESPACIOS, 41(17).
Nuque-Joo, A., Kim, D., & Choi, S. (2019). Mcdonald’s in Germany: Germans, Still Lovin’It?. Academy of Strategic Management Journal, 18(2), 1-20.
Taušer, J., & Čajka, R. (2016). Hedging techniques in commodity risk management. Agricultural Economics, 60(4), 174-182.