Fast-Food Restaurant Industry Analysis. Management 182 Lindsey Hicks Joshua Price Eva Ho Suren Divanyan May 16, 2002. Fast-Food Restaurant Industry. Dominant Economic Characteristics Competition Analysis Driving Forces Competitive Position of Major Companies Competitor Analysis
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Fast-Food Restaurant Industry Analysis Management 182 Lindsey Hicks Joshua Price Eva Ho Suren Divanyan May 16, 2002
Fast-Food Restaurant Industry • Dominant Economic Characteristics • Competition Analysis • Driving Forces • Competitive Position of Major Companies • Competitor Analysis • Key Success Factors • Industry Prospects and Overall Attractiveness
Dominant Economic Characteristics • Market Size (2002) • Projected Sales ($Billion ) 407.8 • Sales increase of 3.9 % • Locations: 858,000 • industry employs 11.6 million people • Revenues ($billion) 131.7
Dominant Economic Characteristics Scope of Competitive rivalry • International : Most companies of the industry operate stores in many countries and compete with each other in specific country markets.
Dominant Economic Characteristics • Market Growth Rate • McDonald's: Revenue 2.1 %, Earnings Per Share $1.47, Operating Income 4% • Burger King: Revenue (1)%, Earnings Per Share N/A Operating Income N/A • Taco Bell: Revenue 6%, Earnings Per Share 41%, Operating Income 25%
Dominant Economic Characteristics Stage in life cycle: • Mature • Growth opportunity still exists in new countries and markets • Diversification into related businesses attractive for sustained growth • Introduction of new line of products and services to differentiate from rivals is practiced
Dominant Economic Characteristics Companies in Industry • There are 8 main companies that captures 89% of fast-food Market • McDonald's 34.7 % • Burger King 15.8% • Taco Bell 9.6% • Wendy's International 9.5% • Subway 5.9% • Hardee's 4.6% • Arby's 3.9% • Dairy Queen 3.8% • Other 11.7%
Dominant Economic Characteristics Ease of Entry Globally: • Relatively hard to enter, because of strong competition and high capital requirements: • In order to franchise the entrepreneur should be at least $1 million worth • Efficient operations is the key to faster product delivery and lower costs • Requires diverse supply materials, which complicates entry • Customers are price sensitive and promotion driven
Dominant Economic Characteristics Exit of Industry: • Mergers and Acquisitions are common ways of exit strategies (Ex. McDonald’s acquired Boston Market restaurant chain) • Companies like Taco Bell and KFC were parts of a diversified company, which in 97 were spun off as publicly traded companies
Dominant Economic Characteristics Technology and Innovation: • Automated Inventory Ordering System • Just in Time operations • Fast order taking systems • More efficient operations • Reduces operating costs • Increases profit margin
Dominant Economic Characteristics Processes and Innovation • Introduction of new order-to-make burger or sandwich assembly process • Reduces waists • Increases food freshness • Increases customer satisfaction • Custom orders
Dominant Economic Characteristics Product Innovation • New products are introduced to meet changing customer needs or to serve new market niches • Introduction of new sauces and burger innovation • Burger King’s introduction of Vegetarian Burgers • Taco Bell’s new gorditas
Dominant Economic Characteristics Distribution Channels • Supply distribution is managed by the centralized corporate headquarters because it enforces standardization of supply materials and gives the companies greater bargaining power • The product and services are distributed to customers by individual stores
Dominant Economic Characteristics Products and Services • Products and Services are differentiated among the rivals • Taco Bell is the most differentiated • McDonald’s and Burger King are weakly differentiated. They each have their own special ingredients but offer the same satisfaction • Speed of delivery and freshness are the main characteristics of product
Dominant Economic Characteristics Economies of Scale • Big companies have economies of scale in purchasing, manufacturing, transportation, and advertising • Bargaining power in supply purchasing • Lower per unit cost in mass manufacturing of pre-made supplies • Transportation costs are distributed among several restaurants in the same geographic area • Advertising aides many restaurants
Dominant Economic Characteristics Industry Location • Fast-food restaurants are strategically located in most geographic areas with a population that could sustain business • The big companies are also growing into other national markets • For example, McDonald’s operates in 121 countries
Dominant Economic Characteristics Capacity Utilization • Effective and efficient operations results in lower burger or sandwich assembly costs, which in turn results in higher profits margins • Capacity Utilization is important to spread high fixed costs over greater number of products and services produced
Dominant Economic Characteristics Profit Margin (1998-2002) • Moderate profit margins, 8.0 - 8.4% • Intense competition and price wars reduce profit margins • Efficiency and cost reduction is key in sustained profit margin
Competitive Analysis • Forces of Competitive Analysis • Rivalry among competing sellers • Potential of new entry into market • Pressures from substitute products • Supplier bargaining power and competitive pressures • Pressures from buyer bargaining power • Other Factors which affect Fast Food Sellers
Competitive Analysis • Rivalry among competing sellers • In the fast food industry Competition is high • Many options for customers • Low prices/price wars • Many substitute products easily available • Customer decisions based on what is available at time • Advertising • Promotional incentives • Products differentiated
Competitive Analysis • Rivalry among competing sellers • Companies striving to better market share • Continuous growth into new markets, with new products offerings and growth into new geographic markets. • Diverse menus and competitors willing to make exactly what customers want. • Demand for fast food growing with the fast pace of life around the world • Fast food restaurants are worldwide and have relatively equal resources for growth
Competitive Analysis • Potential of new entry into market • Competitors well established • Brands well known around world • Customers like restaurants they know • Economies of Scale, with many world wide companies entrants can enter small although difficult to establish name in an already saturated market
Competitive Analysis • Potential of new entry into market • Advantages of large food chains • Lower costs due to buying volume • Already established name • Learning curve (they know what customers want and have perfected speed at which to serve customers) • Established suppliers for specialized products • Established in most major metropolitan markets, in prime locations
Competitive Analysis • Pressures from substitute products • In the food market there are many substitutes to any one restaurant • Customers who desire more well rounded meals threaten fast food • The traditional sit down restaurant is a threat to fast food as customers are not in a rush • Then the grocery store with so many meals which can be prepared in minutes poses threats for the fast food industry
Competitive Analysis • Pressures from substitute products • The food and grocery market currently is saturated with many buyer and sellers making it difficult for any one vendor to take over all head of market. The health of vendors in the food industry depend heavily on the preferences of the consumers in the market. Currently more and more people are eating out, giving the fast food industry many chances for advance. With so many substitutes available sellers must continue to set themselves apart from the rest to keep ahead of the changing market conditions.
Competitive Analysis • Supplier bargaining power and competitive pressures • Highly competitive • Suppliers who support rivals puts them in charge of prices for commodities which rivals must have to perform and compete well • As companies and suppliers work together, they can benefit both as far as consistent revenue for the supplier and on time deliveries for companies to cut inventory costs
Competitive Analysis • Pressures from buyer bargaining power • With many fast food restaurants buyers switching costs are low, which causes companies to lower prices and increase incentives to keep customers coming back, giving the customer power in price and product control • Prices: fast food restaurants are open books to customers along with products prices so price changes affect local competitors • Example the Whopper and Big Mac which are very comparable hamburgers if the price of one was to go up the sales of the other can benefit
Competitive Analysis • Other Forces which affect Fast Food Sellers • Many fast food chains are operating in many diverse countries where customs and norms are very different from one another. Because markets are so diversified many chains must operate differently depending on the particular market. For example in China many fast food restaurants are rethinking the packaging used in service because many people are beginning to drive and eat at the same time while still in other markets this is not seen. There are numerous other forces affecting the market in particular areas but relatively few which effect the fast food market as a whole.
Competitive Analysis • Key findings • The fast food industry is very strong with many sellers and customers. Many competitive forces effect the already established companies, which keep the prices down and the quality of food up. All of this will keep the big players in the game and will make it very difficult for the new entrants to come in and take over.
Driving Forces • Factors that effect Driving Forces • Globalization of the Fast Food industry • Opportunity for long term growth • Fast Food and differentiation of product • Forces with minor effect • Changing Societal Concerns and lifestyles • Uncertainty and business risk
Driving Forces • Globalization of the Fast Food industry • The fast food industry is a labor intensive market requiring employees at all locations of business, this does not give them the opportunity to cut costs with cheap labor in other countries • Although the large scale of operations gives the restaurants economies of scale in their purchase of disposable items made for the particular chain such as cups and boxes for food prepared
Driving Forces • Opportunity for long term growth • The fast food industry is already well established in many countries across the the world. McDonald's is in 121, while Burger King is only in 57, with many other sellers competing in varying markets across the world, majority of sellers only compete locally • Although many that are already global look for the industry to continue to expand into new markets as well as with countries as the population of the world grows and the demand for fast food increases
Driving Forces • Fast Food and differentiation of product • Many fast food restaurants are diversifying their menus example: Jack in the Box with tacos and rice bowls and also the traditional hamburger. By differentiating in this way it give customers more options which will keep them coming back instead of going to a different place • This can be very important with many food restaurants located close together the buyer preference of differentiation is what keeps buyers coming back and not changing restaurants • Other than different offering the food industry is very standard
Driving Forces • Forces with minor effects • Technological Change • New technology can increase productivity and reduce costs • Customer base • Broad base of customers although some more than others • Product innovation • Changes in offerings and extras are very common in the market, but innovation in food is rare
Driving Forces • Changing Societal Concerns and lifestyles • With many American's becoming more aware of their health the traditional greasy and fatty food of the fast food industry are changing their offering, with many places offering veggie burgers and low fat products • The health conscious customers are also opting to eat at home • There is also the opposite of this with many people’s lifestyles getting so busy they do not have time to eat or even prepare meals for their children and many fast food restaurants benefit from this
Driving Forces • Uncertainty and business risk • With no agreements with customers this makes for no predictable revenue • Although the health of the food industry has been very strong over the past years • McDonald's revenue has gone up every year for the past 10 years and they have no foreseeable reason for it not to continue
Fast Food Industry’s Major Players • McDonald’s • Burger King (Diageo) • Taco Bell (Tricon Global) • Wendy’s International • Subway • Hardee’s • Arby’s • Dairy Queen
Chairman and CEO Jack M. Greenberg Ticker MCD 2001 Sales $20,051,000,000 Major Industry Food Service Sub Industry Fast Food Country United States Currency U.S. Dollars Fiscal Year End December 31st Top Three AnalysisMcDonald’s
Top Three Analysis McDonald’s (cont.) • Number of Restaurants 13,099 • Number of Employees 1,500,000 • Exchange NYSE, CSE • Market Capitalization 37,918,000,000
Chairman, CEO and President John Dasburg Ticker DEO 2001 Sales $8,500,000,000 Major Industry Food and Beverages Sub Industry Fast Food Country United States Currency U.S. Dollars Fiscal Year End December 31st Top Three AnalysisBurger King(Part of Diageo Company)
Top Three AnalysisBurger King (cont.) • Number of Restaurants 8,248 • Number of Employees 360,000 • Exchange NYSE • Market Capitalization 43,789,000,000
Chairman and CEO David Novak Ticker YUM 2001 Sales $4,800,000,000 Major Industry Fast Food Country United States Currency U.S. Dollars Fiscal Year End Last Saturday in December Top Three AnalysisTaco Bell(Part of Tricon Global Restaurants)
Top Three AnalysisTaco Bell (cont.) • Number of Restaurants 6,444 • Number of Employees 320,000 • Exchange NYSE • Market Capitalization 9,370,000,000
Competitor Analysis • Which companies are in the strongest/ weakest position? Strategic Group Mapping • A technique for revealing the competitive positions of industry participants.
McDonald's Burger King Growth Rate Taco Bell Local - Regional - National - Global Geographic Coverage Competitor AnalysisStrategic Group Mapping