Deciding countries that qualify as frontier markets is difficult; ask a dozen investors to identify markets as frontier, and you’ll get a dozen different answers. Even the MSCI’s definition is loose with very subjective criteria. So when trying to define frontier markets, why not take a cue from McDonald’s, one of the most global companies in the world?
The McDonald’s Frontier Market Test
McDonald’s announced this week that it was finally entering Vietnam. With over 33,000 outlets in 124 countries, the company has a global reach and is even considered a luxury dining experience in most developing countries. While we take McDonald’s global reach for granted, they must perform a great amount of due diligence before they enter new markets. They must consider economic, market, and logistical factors when deciding whether a specific country is “ready” for the Golden Arches.
Fortunately, we can benefit from their hard work by using the presence of McDonald’s as a tool to define frontier markets. When considering that the Economist publishes a Big Mac Index as a proxy for PPP, the idea may not seem so far-fetched. Like McDonald’s corporate strategy team, many of the same issues are considered by investors when weighing the risks to enter new markets. Therefore, the presence of McDonald’s outlets can be used as a litmus test for identifying frontier markets: if McDonald’s has not entered that country yet, it qualifies as a frontier market.
Filtering for countries with a population over 1 million, this leaves us with 68 countries that do not serve Big Macs. The list is a who’s-who of consensus frontier market economies, with 57% of the countries we follow on our market dashboard qualifying. Africa is the most McDonald’s-free at the moment with only one (Mauritius) of the African countries we follow home to an outlet.
|Central African Republic||4,616,000|
|Democratic Republic of the Congo||67,514,000|
|Papua New Guinea||7,059,653|
|Republic of the Congo||4,448,000|
However, what about countries like Vietnam which have very few outlets? Since a frontier market is usually defined as either small or at the early stage of its development cycle, we filtered for countries with 5 or less McDonald’s outlets. Every single one could be considered a frontier market:
|Country||No. of Outlets|
|Bosnia & Herzegovina||5|
What about countries with more than 5 outlets but large populations, meaning that McDonald’s is just beginning to develop in that country? For that we looked at the country population to outlet ratio. America unsurprisingly leads the world with about 17,000 people per outlet, with the median ratio at about 200,000 per outlet. To find the frontier markets, we filtered for only countries with a ratio of over 1 million, a list of just 14 countries. Belarus is the outlier here, but all the rest qualify as frontier markets under the usual definition:
|Country||Population||No. of Outlets||Ratio|
Investors have yet to agree on a single standard for whether a country qualifies as a frontier market. The MSCI definition is flawed, but the usual way to define frontier markets by its stage in the development cycle or GDP per capita can sometimes be quite subjective.
We can use McDonald’s progression into new markets as a proxy for how developed those markets are. We’ve identified three different criteria for inclusion as a frontier market:
- If McDonald’s is not in that country at all
- If McDonald’s has 5 or less outlets in that country
- If the country’s population to number of outlets is over 1 million
Under these three rules, we can define 82 countries as potential frontier markets. Track how many of these markets are doing by subscribing to our blog or using our market dashboard!