Iceland to go

Much has been made of the US-based fast food chain McDonald's apparent decision to leave the Icelandic market. The media have seized on this as a cheap example of how the once proud Icelandic economy has deflated further due to the collapse of its banking system in 2008. What is often forgotten is that Iceland is a very small country in population terms, with a national population of just 300,000, roughly the size of one of the larger UK provincial cities. Just as the effects of economic growth per capita in such a small economy are very pronounced because the earnings per head are higher, then a crash will also be felt more acutely, and the country is presently attracting far more attention from the international media than it typically has done because of this.

In reality this situation will not affect the McDonald's Corporation or indeed Iceland to any great extent. For a start McDonald's only had three branches in Iceland, a number that might be considered sufficient to serve a population of 300,000. However, the company was not even exposed to much of the risk related to these three branches. As with most McDonald's restaurants, McDonald's did not own and operate them directly, instead franchising its format to a local operator, in this case a company called Lyst. The franchising system is an important part of the fast food business, often ignored by campaigners against it, who fail to realise the opportunities it allows for local entrepreneurs to establish a business creating local growth while supported by national or, in this case international marketing generated by the parent company. Companies such as McDonald's have used franchising to establish large brand name based business networks rapidly, requiring less start-up capital and sharing risk with local operators. The benefit of having a widely known business name is obvious for the franchisee; goodwill can be shared with the other members of the network, meaning that people not familiar with the locality will patronise the business expecting certain service standards. Additionally product innovation is often carried out by the franchisor.

Lyst has decided to discard the McDonald's franchise and to start trading under its own identity instead. Patronage has increased due to recession suffering Icelanders seeking cheap fast food but the cost of supplies from McDonald's approved suppliers in Germany has doubled due to the collapse of Iceland's currency. Lyst will no doubt be able to operate its three restaurants more cheaply while McDonald's are unlikely to notice the loss of franchise fees from the outlets. Indeed, they are now free to re-enter Iceland on more favourable terms at a later date. The beauty of franchising is that the deal can be flexible enough to be operated by both parties to be operated for as long as necessary, but discarded if no longer viable, often with fewer ill effects than if the franchisor had owned the franchisee directly.