Background of the study
The restaurant industry, both domestic and multinationals, were faced with extremely tough challenges through the end of 2009 due to the economic hardship that lead to weak labor and tight credit markets. The result was a decline in discretionary spending by consumers. With the US economy slowly reviving, the industry posted improved results during the first half of 2010.
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As a result, the restaurants are expanding and management teams are increasingly considering the most effective strategy to integrate in order to exploit opportunities presented in the market. The resultant effect is that these firms will be able to remain competitive (Cummings et al, 2010, pp.5). Multinational firms refer to those firms in the industry which operate both locally and internationally. Domestic firms only operate within the US.
Research indicates that restaurants are opening up branches worldwide and are hence facing numerous challenges. Firm seeking to venture into the international market must assess various factors. Some of these factors include inflation rates, interest rates, politics, cultural differences, government regulations among other factors. The study entails a report comparing the differences between multinational firms’ and domestic firms in the restaurant industry.
The aim of the report is to analyze the performance of domestic and multinational restaurants in the US.
Scope of this report focuses on comparison of performance of domestic and multinational restaurant in US.
Percentage change in sales, operating Income and growth of assets will be discussed in this section.
Change in sales
Restaurant firms grew larger in size and generated higher sales during the first period (1981-1990) and the second period (1991-2000). Sales from food service grew by at least 49 percent from $228 billion in 1990 to $339 billion in 1999. The huge growth was in sales by commercial food service establishments that prepare, serve and sell food to the consumers.
Their sales more than doubled from $178 billion in 1990 to $275 billion in 1999 (Price, 2000, pp.23).As for the multinational restaurants such as Burger King, Pizza hut, KFC and McDonalds, saturated US food market forced them to go abroad.
Operating income of the domestic restaurants is lower than the operating income of the multinationals. This is results from the fact that multinational firms have an effective diversification opportunity thus reducing the degree of risk they face. Reasons for diversification include benefiting the firm’s owners through increasing the efficiency of operation in the firm.
Diversification decisions may reflect the preferences of the restaurant managers. The motivation for diversification is to minimize risk of relying on only one or few income source, avoid cyclical or seasonal fluctuation by producing foods with different demand and achieving a higher growth rate in the hotel business. Bankruptcy costs are lower when firms incorporate the concept of internationalization.
Multinationals may attain competitive advantage by venturing into the foreign markets since they have sophisticated skills and new technologies (Porter, 1991, pp.538) .This enables them to outperform local corporations in foreign markets. The advantage is reflected by rapid expansion and value of future growth opportunities of the multinationals.
It is important to also note that domestic firms have relatively lower growth in operating income and higher pre-tax earnings loss compared to multinational firms (Markle & Shackelford, 2009, pp.5). Causes of profitability for some multinationals cannot be determined. However, one of the factors which result into this is existence of different tax policies (Clausing, 2009, pp.1) and tax avoidance.
Growth in domestic earnings
Economic growth of multinationals is associated with higher levels of foreign activity by American firms since economic growth increases the value of the foreign output of U.S. companies. Alternatively this arises from the fact that foreign economic improvement coincides with reduced real costs due to productivity gains.
Collaborations with other local firms promoted growth in earnings of some domestic firms. Burger King, for example, had a successful long-term deal with Disney Corporation for motion picture tie-ins signed in 1992. This increased their revenues to over 12, 000,000 dollars during that year.
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It can be concluded that performance of multinational restaurants outshine that of domestic firms in the same industry growth in profits, earnings and sales. It can also be concluded that multinationals have many assets as compared to local firms.
It is highly recommended that domestic restaurants should incorporate the concept of internationalization. This will enable firms to expand to other countries so as to tap the unexploited market opportunities. The resultant effect is that the firms will be able to improve their revenues and profits. Venturing into other countries outside America can result into the firm attaining a high competitive advantage.
Clausing, K. (2009). Multinational firm tax avoidance and tax policy. Retrieved from https://www.allbusiness.com/
Cummings, J., Manyaka, J., Mendonca, L., Greenberg, E., Aronowitz, S., Chopra, R. etal. (2010). Growth and competitiveness in the United States: The role of its multinational companies. Washington DC: McKinsey Global Institute.
Markle, K. & Shackelford, D.(2009). Do Multinationals or domestic firms face higher Effective tax rates? Cambridge, Massachusetts: National Bureau of Economics.
Porter, M. (1991). The competitive advantage of nations. Massachusetts: John Wiley And Sons.
Price, C. (2000). Food service sales reflect the prosperous time-pressed 1990s.Food Review. Volume 23, Issue 3.pp.23-26.Economic research service: Washington DC.