Microeconomics and McDonald’s

You can learn a surprising amount from the price of a Big Mac, fries, and a Coke.

Big Mac Value Meal

According to the developer’s theory, one could tell a great deal about the cost of doing business—any business—in a particular neighborhood by the cost of a Big Mac, fries, and a Coke at the local McDonald’s.

Photo by Flickr/David Holt

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Back in the early 1990s, as preparations were being made for the formation of the European Union, I was approached by an international developer looking for assistance in compiling data depicting the microeconomic landscape impacting potential development projects across Europe. He had an interesting theory, and needed help putting his theory into practice.

With unification imminent, developers came out of the woodwork, sensing a windfall of potential projects in anticipation of Europe’s changing centers of gravity—political centers, cultural centers, financial centers, and urban centers. The deck was about to be reshuffled, and the importance (and development potential) of towns from Maastricht to Madrid was being reconsidered, not just as regional centers, but as centers of continental, and global, significance. Selected as the location of the future European Central Bank, Frankfurt would no longer be just a financial center in Germany; it would become the financial center of all of Europe. Chosen as the location of the future European Parliament, Strasbourg would no longer simply be the seventh largest city in France; it would soon become the political capital of an entire continent. Speculation was rampant, and developers love speculation. If Luxembourg were to be named the destination of the future European Court of Justice, its potential for future development, its real estate prices, and the marketability of future projects would all grow dramatically. If, however, those courts were to be located in Copenhagen, or the Hague, or Prague, different development patterns would emerge across the entire continent.

But these types of speculation are macro in scale. Our concerns here are micro: specifically, the cost of a Big Mac, fries, and a Coke (a No. 1 Extra Value Meal) at a local McDonald’s restaurant. In essence, I was asked to travel around Europe recording the cost of a Big Mac, fries, and a Coke at every McDonald’s I could find. I didn’t have to eat there; I only had to ascertain its cost, adjust for currency conversions, map its location, and
report back my findings.

According to the developer’s theory, one could tell a great deal about the cost of doing business—any business—in a particular neighborhood by the cost of a Big Mac, fries, and a Coke at the local McDonald’s. If a No. 1 meal cost $5 near the center of town (the average price in the U.S. at the time was about $4.50) and $6 out by the airport, the cost of running any business out by the airport would be proportionally higher, as compared to running that exact same business in town. Similarly, if the cost of a No. 1 meal were only $4 near the university, other types of businesses could be opened in that same vicinity for much less than they could be elsewhere in town. The model was rough, he admitted, but he had met with much success employing this model in development projects across Asia, and with the onset of the EU, he was now eager to replicate his success across Europe.

There are hundreds of factors to consider in the calculus of such speculative equations, but his premise was simple: that McDonald’s provided a well-suited benchmark for comparisons of this nature. Their corporate goal of ubiquity provided a wide sample of locations, even within the same city, while their insistence on, and success at, delivering a consistent product, regardless of the locale, took many variables out of the equation: the menu was the same, the burgers were the same (for better or worse), the fries were the same, the furniture was the same, the uniforms, the signage, the kitchen equipment were all the same, store after store after store. Consequently, any variation in purchase price had to stem from other, local variables—local construction costs, the presence of trade unions or labor unions, local taxes and tariffs, development fees, the costs of permits and procedures, local rents and utilities, and other factors impacting the delivery of the exact same product in the exact same environment, only at a different address. A lot of variables, yes, but, as the theory suggests, the sum of these variables tracks consistently with the McDonald’s index.

I asked him why he was trolling London architecture schools looking for help, rather than going across the street to the LSE to hire future economists rather than future architects. He said he liked hanging out with architects more than he liked hanging out with economists, plus he figured an architect’s eye might spot some other potential (or other problems) for development in these neighborhoods that might elude the economist’s eye.

In the short term, over the next year I surveyed the cost of a No. 1 meal at McDonald’s in hundreds of towns across a dozen different European countries. Highest price: $9.80 (Geneva). Lowest price: $2.80 (Barcelona). London was somewhat higher than the mean, at £4.50. With an exchange rate of £1=$1.50, that’s the equivalent of $6.75. Though you could spend as little as £4.10 in some neighborhoods and as high as £5.20 in others.

In the long term, to this day every time I walk by a McDonald’s, no matter where I happen to be in the world, I stop in and survey the first item on the menu. Sadly, the average price of a No. 1 in the U.S. has risen from $4.50 to $6.50 over the past 20 years, and the range has widened—you might spend anywhere from $5 to $8. Worldwide, this price remains remarkably consistent.

Over the years, in addition to observing some fascinating microeconomic fluctuations, I’ve also been able to observe some of the subtle cultural and culinary differences that occur in McDonald’s restaurants from region to region: In Fargo, North Dakota, for example, a No. 3 meal includes a bratwurst, fries, and a Coke. In Hawaii, your meal comes with a side of fresh pineapple. In China, your meal may include a bowl of rice, or fries, your choice. In Mexico, you can substitute your Coke for a cerveza.

Most recently, the emergence of McCafe coffee shops sprouting up throughout Europe and Asia have begun offering both a different menu and a different ambiance—more simpatico with Starbucks than Burger King—in a move that seems to be resonating with the local clientele. From Beijing to Hong Kong, every single McDonald’s I visited in China was packed—nary an empty seat to be found. And, somewhat surprisingly (for someone who has visited a lot of McDonald’s worldwide), I was the only non-Asian customer in any of these establishments. In China, McDonald’s has been adopted by locals as a convenient, if somewhat quirky, community gathering hub, inhabited by the types of activities you might find in any neighborhood coffee shop or cafe: business meetings being held, students absorbed in study sessions, couples on dates just before or just after seeing a movie, families stopping to recharge during a day out shopping, bookworms alone reading, while others connect with the rest of the world via Wi-Fi.

All of this painted a somewhat surprising, albeit encouraging, picture for me, especially given a story one of my classmates told me back in London some 20 years ago.

His family was from Bangkok, and when their first McDonald’s opened his entire extended family gathered to go out to dinner and see what all the fuss was about. Their Big Mac, fries, and a Coke cost them $4 each (I remember that part of the story vividly!), they carried their own trays to their seats, and they sat on brightly colored plastic furniture just like at a McDonald’s anywhere else in the world. The difference, though, was not what was in the restaurant, but what was outside. In Thailand back then, my friend related, $4 would buy you a five-course meal at one of the city’s finest dining establishments. Dining-out was not part of their culture, he said; dining-in with family was the preferred practice. Families only went out to eat on special occasions, and then everyone dressed up in their finest suits and evening gowns. At the restaurant they dined on the city’s finest foods, while their every need was briskly attended to by a team of smartly dressed, professional staff. The excess and indulgence (also not part of their culture) could be overlooked only rarely, on special occasions. Why then, his father had asked after their McDonald’s outing, had they spent the same $4 for a one-course meal, of fairly plain food, been asked to carry their own food to the table, asked to dispose of their own trash, while sitting in their finest clothes on hard plastic furniture under overly bright fluorescent lights? He really couldn’t see what all the fuss was about. And they never went back.

Robert Dorgan is the director of the Institute of Small Town Studies (ISTS), a non-profit that provides community design assistance and small town planning services, pursues historic preservation, and develops educational programs based on small town themes. Reprinted from Fishwrap (Spring 2015), the quarterly publication of the ISTS.