In the complex and interconnected world of global commerce, pricing parity remains one of the most perplexing challenges for organizations, particularly within the foodservice industry. The Big Mac Index, developed by The Economist in 1986, offers a unique and practical solution to this problem.
By leveraging this Pricing Power Parity (PPP) Index, foodservice leaders can utilize this to understand price comparisons across various levels of their portfolios – at global, national, regional, and metro level.
Understanding the Big Mac Index
The Big Mac Index is a straightforward yet powerful tool that compares the price of a McDonald's Big Mac burger in different countries. It operates on the principle of Purchasing Power Parity (PPP), which suggests that in the long term, exchange rates should move towards equalizing the price of an identical basket of goods and services in any two countries.
The Big Mac, being a standardized product sold worldwide, serves as an ideal benchmark for this comparison including considerations such as cost of food, transportation, labor, property, and local market economic indicators including cost of living and affordability.
The Pricing Parity Challenge
Traditionally, establishing pricing parity has been a daunting task for foodservice organizations. Prices are often influenced by a myriad of factors, including local economic conditions, historic pricing practices, and competitive dynamics. Managers with clipboards surveying local establishments to set prices often end up comparing apples to oranges, leading to significant inconsistencies. This fragmented approach can result in a distorted pricing structure, impacting customer satisfaction and profitability.
Unit managers wondering around with clip boards once a year, visiting the local restaurants to get pricing lacks logic, consistency of data, and is mostly a waste of time and resources – a more data science approach solves this issue.
Leveraging the Big Mac Index for Consistency
The Big Mac Index provides a common global benchmark that can simplify the pricing process. By aligning local prices with the Big Mac's price in their headquarters' country, organizations can achieve more consistent and rational pricing structures. Here's how this can be effectively applied:
Global Pricing Strategy: At a global level, organizations can use the Big Mac Index to set a baseline price for their core menu items. This ensures that no matter where the product is sold, there is a level of pricing parity that reflects the local purchasing power. National and Regional Adjustments: From country to country, economic disparities can be addressed. Prices in high-cost countries like Switzerland (+43.5%) or Norway (+25.5%) can be adjusted relative to a national baseline, ensuring that pricing is reflective of local purchasing power while maintaining overall parity with less expensive countries such as Indonesia (-57.3%) and Taiwan (-58.0%). GLOBAL: The Top 10 (Countries):
Here is the top 10 countries globally in terms of the Big Mac Pricing Index.
1 | Switzerland | $8.17 | +43.5% |
2 | Norway | $7.14 | +25.5% |
3 | Uruguay | $7.04 | +23.7% |
4 | Euro area | $5.87 | +3.1% |
5 | Sweden | $5.87 | +3.1% |
6 | Costa Rica | $5.71 | +0.4% |
7 | Britain | $5.71 | +0.4% |
8 | Denmark | $5.69 | =0.0% |
9 | U.S.A. (New York State) | $5.69 | = |
10 | Sri Lanka | $5.69 | =0.0% |
NOTE: Taken from the baseline of New York (State).
GLOBAL: The Bottom 10 (Countries):
And the lowest 10 priced countries in the world:
Vietnam | $3.01 | -47.1% |
Hong Kong | $2.94 | -48.3% |
Ukraine | $2.94 | -48.4% |
Philippines | $2.86 | -49.7% |
Malaysia | $2.78 | -51.1% |
Egypt | $2.75 | -51.7% |
South Africa | $2.71 | -52.5% |
India | $2.59 | -54.5% |
Indonesia | $2.43 | -57.3% |
Taiwan | $2.39 | -58.0% |
NOTE: Taken from the baseline of New York (State).
State-Level Benchmarking: For most countries, capital cities and major metros are more expensive than regional averages. This is the same in the United States but also there exist big swings from State to State.
UNITED STATES: Top 5 States:
1 | Massachusetts | $7.09 | +24.6% |
2 | Alaska | $6.50 | +14.2% |
3 | Maine | $6.29 | +10.5% |
4 | New Hampshire | $6.29 | +10.5% |
5 | Vermont | $6.29 | +10.5% |
11 | New York | $5.69 | = |
UNITED STATES: Bottom 5 States:
Nebraska | $4.29 | -24.6% |
Ohio | $4.29 | -24.6% |
Pennsylvania | $4.29 | -24.6% |
North Carolina | $4.19 | -26.4% |
Wyoming | $4.19 | -26.4% |
NOTE: The Economist Big Mac Index aggregates data across countries. We added data from Zippia and UBER Eats to focus on the U.S. by state.
In the extreme, this represents a 51% swing between the top priced State (Massachusetts, +24.6%) and the bottom priced State (Wyoming, -26.4%), a potentially massive risk/opportunity for foodservice organizations who don’t have a full grip on their pricing strategy, parity, and execution through defined data points. The Big Mac Pricing Index is not about the product itself, it's about measuring the pricing differential of a standardized product from market to market and how it relates to your tariff and pricing structure.
Metro-Level Fine-Tuning: At the metro level, the Big Mac Index can help fine-tune pricing further. For example, pricing in downtown areas versus suburban regions can be aligned more closely by examining local economic indicators in relation to the Big Mac Index.
For instance: if a Big Mac cost $7.91 (as at 01/01/2024) in New York and is set against a range of core menu items such as a breakfast sandwich ($9.54, Starbucks, New York), then using the same pricing differential, a breakfast sandwich in San Francisco should be $9.88 (+3.5%), and in Glasgow, Scotland, $7.55 (-20.9%). These pricing adjustments can be made systematically across your portfolio with ease, and rational and logic easily explained to clients as a set of recognized and fixed data points.
At one account in San Francisco, the unit manager was asked why a grilled cheese sandwich was just $4.00. After a few attempts to get the real answer, it turned out that it was $3.50 years previously and they had (in some years) applied a inflationary increase.
Historical Price Corrections: For organizations dealing with legacy pricing structures influenced by historic increases, the Big Mac Index offers a way to reset and rationalize prices. By benchmarking current prices against the Big Mac's local price, organizations can correct discrepancies and bring uniformity to their pricing strategy.
Benefits of a Consistent Pricing Strategy
Enhanced Customer Experience: Customers benefit from fair and predictable pricing, improving their overall experience and trust in the brand. An associate in New York should feel confident that they are getting comparable value when purchasing the same product in San Francisco, Singapore, or Sydney.
Improved Profitability: A standardized approach to pricing helps organizations optimize their revenue by aligning prices with local economic conditions, reducing the risk of underpricing or overpricing.
Operational Efficiency: Using a common benchmark like the Big Mac Index simplifies the pricing process, reducing the administrative burden on managers and allowing for more strategic focus on growth and innovation.
For foodservice operators, operating margins are thin, and pricing parity is a big opportunity not only to attain consumer parity across portfolios but also offer a pathway to significantly improved profitability.
Conclusion
The Big Mac Index, with its roots in the concept of Purchasing Power Parity, offers a pragmatic and effective solution to the age-old conundrum of pricing parity in the foodservice industry.
By adopting this index, organizations can ensure that their pricing decisions are consistent, fair, and reflective of local economic conditions. This not only enhances the customer experience but also drives profitability and operational efficiency, making it a valuable tool for foodservice leaders worldwide.
Want to learn more about how our Pricing Power Parity (PPP) Index and how we can help you with your pricing and tariff strategy, reach out today.
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