Using McDonald’s to Define Frontier Markets

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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.

Methodology:

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.

CountryPopulation
Afghanistan25,500,100
Albania2,821,977
Algeria37,900,000
Angola20,609,294
Bangladesh152,518,015
Benin10,323,000
Bolivia10,389,913
Botswana2,024,904
Burkina Faso15,730,977
Burundi10,163,000
Cambodia15,135,000
Cameroon19,406,100
Central African Republic4,616,000
Chad12,825,000
Democratic Republic of the Congo67,514,000
Equatorial Guinea1,622,000
Eritrea6,333,000
Ethiopia86,613,986
Gabon1,672,000
Gambia1,849,000
Ghana24,658,823
Guinea10,824,200
Guinea-Bissau1,704,000
Haiti10,413,211
Iran76,753,000
Ivory Coast23,202,000
Jamaica2,711,476
Kazakhstan16,990,000
Kenya44,354,000
Kyrgyzstan5,551,900
Laos6,580,800
Lesotho2,074,000
Liberia4,294,000
Libya6,202,000
Madagascar20,696,070
Malawi14,388,600
Mali15,302,000
Mauritania3,461,041
Mongolia2,754,685
Mozambique23,700,715
Myanmar53,259,000
Namibia2,113,077
Nepal26,494,504
Niger17,129,076
Nigeria173,615,000
North Korea24,895,000
Palestine4,420,549
Papua New Guinea7,059,653
Republic of the Congo4,448,000
Rwanda10,537,222
Senegal13,567,338
Sierra Leone6,092,000
Somalia10,496,000
South Sudan11,296,000
Sudan37,964,000
Swaziland1,250,000
Syria21,377,000
Tajikistan8,000,000
Tanzania44,928,923
Timor-Leste1,066,409
Togo6,191,155
Tunisia10,777,500
Turkmenistan5,240,000
Uganda34,131,400
Uzbekistan29,559,100
Yemen24,527,000
Zambia13,092,666
Zimbabwe12,973,808

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:

CountryNo. of Outlets
Vietnam1
Iraq1
Cuba1
Armenia1
Mauritius2
Moldova4
Sri Lanka5
Georgia5
Bosnia & Herzegovina5

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:

CountryPopulationNo. of OutletsRatio
Vietnam88,780,000188,780,000
Iraq33,330,000133,330,000
Cuba11,163,934111,163,934
Pakistan183,711,000276,804,111
India1,210,569,5731926,305,050
Sri Lanka20,277,59754,055,519
Armenia3,031,20013,031,200
Indonesia237,641,3261102,160,376
Peru30,475,144221,385,234
Egypt83,661,000631,327,952
Belarus9,458,70081,182,338
Morocco32,967,400301,098,913
Azerbaijan9,235,10091,026,122
Nicaragua6,071,04561,011,841

Conclusion

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:

  1. If McDonald’s is not in that country at all
  2. If McDonald’s has 5 or less outlets in that country
  3. 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!

 

 

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