McDonalds withdraws from Iceland

McDonald's backs out of Iceland amidst a global economic crisis that has left the company vulnerable to soaring costs.

The closure, this month, of the fast-food chain's three restaurants, means Iceland will become one of the few European countries with no Big Macs to sell.

The company opened in Reykjavik in 1993 as a franchise operation run by a firm called Lyst. Owner Jon Gardar Ogmundsson said it made no sense to continue the business. Despite growing demand, profits have plummeted.
McDonald's sources ingredients from Germany and importation costs have almost doubled in the last 18 months as a result of a severe depreciation of the Icelandic krona and high import taxes.

Geographically isolated, Iceland is a difficult market to operate in and its economy is still suffering from the banking collapse at the height of the global credit crisis.

And the unique conditions of Iceland, a small and isolated country of just 300,000 people makes it hard for the company to justify a continued presence at a time when import costs are prohibitively expensive.

The closure of its restaurants casts a wider shadow over the ability of a multinational food retailer to quickly adapt to economic fluctuations, and particularly in its flexibility to reorganise its supply chain to buy local produce at low cost.

The globalisation trend has allowed companies like McDonald's to exploit economies of scale but this model doesn't always fit as in this case with Iceland. Fast-food joints operating in Reykjavik can operate at lower cost, and with relatively stable production costs, the smaller firms can considerably undercut McDonald's prices.

Retracting from the Icelandic market represents a watershed moment for the McDonald's empire and a portent to the world at large of the fallibility of even our most powerful brands.

Although McDonald's has adapted its product lines to suit cultural differences and taste, its brand remains faithful across continents thanks to consistently high standards of production and service. A switch of supplier could inhibit McDonald's from delivering a guaranteed level of quality, and at this juncture, might be too risky a venture to contemplate.