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|Stumbling with words| Recommendation N.04

Recently, I earned new habit of listening to podcasts. From the last recommendation, I listened few new episodes, watch few new movies, and learn few new things.

Two podcasts

The duo Vi Anh & Quyen Nguyen create a platform sharing stories of young Vietnamese professionals about works, life philosophy, and habits. Most guests spent extended periods of their youth abroad and found early success in their careers. As a lecturer, I found this could be extremely helpful for my students who struggle to find career guidance. Every episode is helpful for youngsters to build good habits: Pomodoro Timer, listening to podcast, and writing journal. I also listened to Unlock FM to stay updated with the startup scene and customer trends in Vietnam.

This is another podcast by Vietnamese youngsters on general social issues. My favorite episode is Way to Mars (Đường đến sao Hoả). Universe 25, which mentioned in the episode, inspired me to write my recent post dubbed as Universe 25 & The first death. Oddly Normal concern on diverse social issues on racism, urban planning, educations, v.v in the interdisciplinary lens. Very great stuff for evening listen!

One movie

I came across The Founder (2016) in the quest of enriching my teaching resources. I found beyond the scope of economics.

1. People first!

Before starting any project, choosing the right partner-in-crime is essential. It holds relevant to my personal experience. My startup businesses ended early because of lackluster or incompatible cofounders. Ray Kroc also made mistakes when choosing rich franchisees who considered McDonald's as passive investment. Latter, he got rid of those the rich and replaced them with hard-working middle-class. Then his business prospered.

2. The producer theory

In neoclassical economics, Producer theory relies on following assumptions:

1. Firms are price takers.

2. Technology is exogenously given.

3. The firm maximizes profits.

4. The Marshallian approach of separating the household, where consumption takes place, from the firm, in which all production takes place. (Levin & Milgrom, 2004)

Given Profit = Total revenue - Total cost, profit-maximizing firms try to sell as many products as possible and minimize production cost. McDonald brothers's Speedee systems can be considered as Henry Ford's assemble line of food industry.

Our whole concept was based on speed, lower prices and volume. We were going after big, big volumes by lowering prices and having the customer serve himself. My god, the carhops were slow. We’d say to ourselves that there had to be a faster way. The cars were jamming up the lot. Customers weren’t demanding it, but our intuition told us that they would like speed. Everything was moving faster. The supermarkets and dime stores had already converted to self-service, and it was obvious the future of drive-ins was self-service. (McDonald’s: Behind The Arches, John F. Love)

McDonald's reduced cost by introducing self-service. The brothers can save costs associated with parking lots, waiter/waitress salaries, serving dishes and cutlery. The restaurant then can offer lower price with higher profit margin. You can find many occasions Ray Kroc and the Donald brothers argued over cost reduction and quality assurance. (Do morality and efficiency come together? Is wealth accumulation the destination of life? We might further discuss in latter post.)

3. The 80/20 principle

When it comes to focus on the core, Italian economist Vilfredo Federico Damaso Pareto introduce 80/20 principle or Pareto Principle.

Legend has it that one day he noticed that 20% of the pea plants in his garden generated 80% of the healthy pea pods. This observation caused him to think about uneven distribution. He thought about wealth and discovered that 80% of the land in Italy was owned by just 20% of the population. He investigated different industries and found that 80% of production typically came from just 20% of the companies. The generalization became: 80% of results will come from just 20% of the action (Kevin Kruse, 2016)

The application of 80/20 rule can be seen in McDonald's menu. Donald brothers only sell three things in their restaurant: hamburgers, fries, and soft drinks. Why only three? Because 87% orders the three and it is easier to build a Speedie system.

I was amazed. They were serving hamburgers for 15 cents, french fries for 10 cents and milkshakes for 20 cents. And basically that was the menu, and I said, "that's for me" - Ray Kroc

The revolution of menu McDonald's menu



3. Franchise

More than 93% McDonald's restaurants are franchises. To better control franchises and widen profit margin, Ray Kroc introduced the conventional franchise and turned McDonald's into real-estate firm.There are three franchise structures:

Source: McDonald Annual Report (2019)

  • Conventional franchise (56,4% total restaurants)

Under a conventional franchise arrangement, the Company generally owns or secures a long-term lease on the land and building for the restaurant location and the franchisee pays for equipment, signs, seating and décor. The Company believes that ownership of real estate, combined with the co-investment by franchisees, enables us to achieve restaurant performance levels that are among the highest in the industry. (McDonald's, 2019)
  • Developmental license (19.76% total restaurants)

Under a developmental license or affiliate arrangement, licensees are responsible for operating and managing the business, providing capital (including the real estate interest) and developing and opening new restaurants. The Company generally does not invest any capital under a developmental license or affiliate arrangement, and it receives a royalty based on a percent of sales, and generally receives initial fees upon the opening of a new restaurant or grant of a new license. (McDonald's, 2019)
  • Affiliate (16,9% of total restaurants)

Affiliate arrangements are used in a limited number of foreign markets (primarily China and Japan) where the Company also has an equity investment and records its share of net results in Equity in earnings of unconsolidated affiliates. (McDonald's, 2019)

In which, revenue comes from are as follows:

Source: McDonald Annual Report (2019)

Since McDonald's owns properties, the fast food chain has more weight on its quality assurance over conventional franchisees. The franchise model intrigue me to further research on other franchise models. Hope I can find time to sit down and write soon.

P.S: Another movie can be analyzed in economic lens is Charlie and the chocolate factory.

Zero time wasted

Reference & further readings

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