Fast Food Industry Analysis
Content
Fast Food Industry By: Nichole Bell, Samuel Curby, Tony Chan, Jared Carchedi
1. Introduction "Over the last three decades, fast food has infiltrated every nook and cranny of American society. An industry that began with a handful of modest hot dog and hamburger stands in southern California has spread to every corner of the nation, selling a broad range of foods wherever paying customers may be found. Fast food is now served at restaurants and drive-thru's, at stadiums, airports, zoos, high schools, elementary schools, and universities, on cruise ships, trains, and airplanes, at K- Marts, Wal-Marts, gas stations, and even at hospital cafeterias. In 1970, Americans spent about $6 billion on fast food; in 2000, they spent more than $110 billion. Americans now spend more money on fast food than on higher education, personal computers, computer software, or new cars. They spend more on fast food than on movies, books, magazines, newspapers, videos, and recorded music -- combined." (Fast Food Nation) If there was an industry with demand and plenty of options to enter the market, the fast food industry is an optimal choice as we will show in this report. 2. History and Economic features of industry This industry is nothing new to our economy. The fast food phenomenon evolved from drive-in restaurants built in southern California in the early 1940s. With the rising popularity of cars, entrepreneurs designed restaurants that let people order and eat without leaving their vehicles. "Then, in 1948, they decided to try something new: they simplified the menu so that there was nothing that required a knife, spoon or fork; they replaced all the crockery and glassware with disposable cups, plates and bags; they dispensed with waitresses, bus boys and carhops, leaving customers to come to the counter to order and collect their food; and, most importantly (so far as the concept of fast food is concerned), they divided the food preparation tasks into a production line." In the post-World War II period in the United States, McDonald's and other fast food restaurant chains rapidly gained a
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Fast Food Industry By: Nichole Bell, Samuel Curby, Tony Chan, Jared Carchedi
reputation for their cleanliness, fast service, and a kid friendly atmosphere where families on the go could grab a quick meal and avoid hassle of cooking. "Prior to the rise of the fast food chain restaurant, people generally had a choice between greasy spoon diners where the quality of the food was often questionable and service lacking, or high-end restaurants that were expensive and impractical for families with children." Fast food restaurants rapidly became the eatery "everyone could agree on", with many featuring child-size menu combos, play areas, and whimsical branding campaigns, like the iconic Ronald McDonald, designed to appeal to younger customers. The fast food industry gave parents a chance to enjoy some time alone while the kids played with their toys or in the play areas provided in the restaurants. The fast food industry has witnessed tremendous growth over the last few decades. The US fast food industry now employs two million workers in the United States, and is considered to be a major asset to the US economy. In 1970, Americans spent $6 billion on fast food - and this amount increased to $110 billion by 2000. If the estimated figures for the last 10 years are added, the future of this industry becomes even more promising. According to the fast food industry statistics, "this industry experienced an overall growth of 4.8 percent in 2006 alone." US fast food industry has reported remarkable growth despite being severely affected by the economic turmoil. "In the US, consumers consume more than half of their food in restaurants. Fast food is an important segment of the restaurant industry and the growth of this segment is outpacing the growth of overall restaurant industry", says US Fast Food Market Outlook 2010. The fast food market is forecast to maintain its current growth expectations, which means it is expected to drive the market to a value of $57.6 billion by the end of 2010, an increase of 12.1% since 2005. "Drivers of growth include increasing numbers of Americans in the workplace, which reduces the amount of time spent on preparing meals
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Fast Food Industry By: Nichole Bell, Samuel Curby, Tony Chan, Jared Carchedi
at home. In 2010, the United States fast food market is forecast to have a volume of 37 billion transactions. This represents an increase of 5.3% since 2005." The key players in the global fast food industry are McDonalds, Burger King, Yum! Brand, Wendy's, and Subway. Each is briefly listed below with comparable revenues in industry in Exhibit A:
1. McDonalds: Located in 126 countries and on 6 continents, the largest in the industry,
and operates over 31,000 restaurants worldwide consisting 60% of sales overseas. In 2010, they had a revenue increase of 5.86%. Part of this increase is from the 541 new restaurants opened in 2010, and 5% global comparable sales growth in 2010 marks the 8th straight year of such increases.
2. Burger King: Has more than 11,100 restaurants in more than 70 countries and is the
second largest fast food hamburger restaurant chain in the world. The company generated $2.5 billion in revenue in 2009. 38% of operating income is in international sales.
3. Yum! Brand: Collects 50% of sales from overseas and also owns A&W, KFC, Long
John Silver's, and Taco Bell and Pizza Hut. “The world’s largest restaurant company in terms of units with approximately 33,000 restaurants in more than 100 countries and territories.”
4. Wendy's: Has 6,576 restaurants, of which 1,394 were owned and operated by the
company and others are franchised and located in 21 countries. $2.4 billion in sales in 2010, with a 0.6% decrease in North American same store sales. They are also looking to expand its presence in the international space. The company seems to be behind its competitors with only 814 international units total.
5. Subway: One of the fastest growing franchises in the world with approximately
34,447 restaurants in 97 countries as of 2011 and earns $15.2 billion in revenues each year.
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Fast Food Industry By: Nichole Bell, Samuel Curby, Tony Chan, Jared Carchedi
Exhibit A
Company McDonald's (MCD) Yum! Brands (YUM) Starbuck’s (SBUX) Darden Restaurants (DRI) Brinker International (EAT) Wendy's International (WEN) Burger King Holdings (BKC) Jack in the Box (JACK) CKE Restaurants (CKR) Domino's Pizza (DPZ) Revenues (M) Net Income (M) Net Margin Restaurants Franchised % $22,745 $10,836 $9,775 $7,218 $3,621 $3,581 $2,537 $2,471 $1,419 $1,404 $4,551 $1,083 $391 $372 $79 $4 $200 $131 $48 $80 $87 20.0% 10.0% 4.0% 5.2% 2.2% 0.1% 7.9% 5.3% 3.4% 5.7% 6.4% 32,478 37,000 16,635 1,773 1,689 6,451 11,925 2,212 3,141 9,339 1,380 47% 0% 40% 80% 88% 46% 71% 91% 58% 81%
Panera Bread Company (PNRA) $1,353
Data from company FY 2009 annual reports (CKE data from FY annual, ended January 31, 2010).
3. The competitive forces affecting industry members: Porter's five forces model analysis: • Rivalry Amongst Sellers While the fast food sector has long been regarded as competitive, the level of rivalry only intensifies. Multi-unit development deals are being inked left and right. Brands like Subway, Krispy Kreme, Camille's Sidewalk Café, Cosi Inc, Whataburger, Papa Murphy's, Moes Southwest Grills and Bob's Big Boy are all on the expansion trail. "The quick-service
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Fast Food Industry By: Nichole Bell, Samuel Curby, Tony Chan, Jared Carchedi
restaurant industry is intensely competitive, marked by a history of price wars," said R.J. Hottovy, an analyst at Morningstar. "With minimal switching costs, customers can be fickle." He added that rivalry "appears to be on the rise, with chains increasingly competing with one another on the basis of price and product differentiation," while "a proliferation of new menu items could slow down the speed of service." Further, "tighter credit markets could impair franchisees' ability to add new restaurants, perform renovations, or purchase equipment," Hottovy said. "Some competitive trends include more price-driven elements in fast-casual outlets, and full-service restaurants offering call-ahead and online ordering, home delivery and curbside pickup," Technomic said. In the bigger picture, Technomic reports that 49% percent of consumers say they eat at fast-food restaurants at least once a week with one in four having increased their visits over the last year, higher than in any other industry segment. International players such as McDonald's (MCD) and Yum! Brands (YUM) have had the most success as explosive growth in emerging markets has offset rising costs and a U.S. slowdown. Other companies like Sonic and Domino's have turned to new marketing campaigns and product innovation to boost growth and profitability and intense competition limits the ability of fast food operators to pass along rising costs to customers. Overall competition "is expected to remain fierce with respect to price, service, location, and concept in order to drive traffic, which may adversely affect restaurant operating margins and profits. "One thing that has been hurting the top and bottom lines is an combination of deep discounting and couponing. "There is almost a 'how low can you go' kind of contest going on when it comes to items like double cheeseburgers and snack wraps." McDonald's and other chains, like Starbucks and Schlotzky's have also sought to differentiate themselves by rolling out Wifi access (wireless Internet service) in many
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Fast Food Industry By: Nichole Bell, Samuel Curby, Tony Chan, Jared Carchedi
restaurants. A technology-based differentiation example include Papa John's "Pizza and Entertainment" promotion giving customers a perishable DVD movie (DVD's become inactive 48 hours after removal from packaging) free with pizza. "However, even with the new challenges outlined by Technomic, the chains' worst enemies are -- and will likely continue to be -- each other." Ray Kroc, the man who franchised McDonald's, once stated, "If you see a competitor drowning, you stick a hose down their throat." • The Threat of New Entrants "The fast food sector is a dynamic industry featuring a high density of franchising. It is also one of the most challenging sectors to operate in, due to an ever-increasing number of operations competing for the same dollar." (See Exhibit B) Franchisers capture a portion of revenue rather than profits so smaller fast food chains that have a lower portion of their restaurants franchised are most vulnerable to cost increases. "Jack In The Box, Wendy's, and Sonic have particularly low franchised to owned restaurant ratios." Fast casual restaurants are a growing source of competition for the fast food industry. 'Fast casual' restaurants like Chipotle, Cosi and Panera combine the convenience of fast food restaurants with the quality of casual dining. This new alternative threatens to steal market share from both fast food and fine dining restaurants. The fast food industry can still benefit from consumers as they trade down from more costly fast casual restaurants. Exhibit B Franchising Costs: (**Yum! Brand owned) SUBWAY® restaurants
Franchise fee: $12,000 Start-up cost: $69,300 to $191,000 Basic royalty: 8% Advertising royalty: 3.5%
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Fast Food Industry By: Nichole Bell, Samuel Curby, Tony Chan, Jared Carchedi
BURGER KING
Franchise fee: $50,000 Start-up cost: $240,000 to $2.5 million Basic royalty: 4.5% Advertising fund: 4%
KFC**
Franchise fee: $25,000 Start-up cost: $200,000 to $250,000, with $500,000 in liquid assets and $1 million net worth Basic royalty: 7.90% including advertising
McDONALD’S
Franchise fee: $45,000 Start-up cost: $432,800 to $715,150 Basic royalty: 12.5% includes advertising Service fee: 4.90%
PIZZA HUT**
Franchise fee: $25,000 Start-up cost: $218,500 to $1.3 million Basic royalty: 6.5% Advertising royalty: n/a
TACO BELL**
Franchise fee: $45,000 Start-up cost: $191,400 to $470,200 Basic royalty: 5.5% Advertising royalty: n/a
WENDY’S
Franchise fee: $25,000 Start-up cost: $830,000 to $1.485 million Basic royalty: 4% Advertising royalty: 2%
• Pressure from Sellers of Substitute Products "Chick-fil-A just announced it will roll out a new spicy chicken biscuit on Jan. 10. McDonald's, purveyor of the Big Mac, plans to sell oatmeal -- yes, oatmeal. And Wendy's is testing a new breakfast menu, including a warm oatmeal bar and a Panini sandwich, in Phoenix, Pittsburgh, Kansas City, Shreveport and Louisville. More test markets will be added in 2011." Much is at stake as the morning meal remains an opportune spot in the restaurant industry, which has had two years of visit declines and is now leveling out. Breakfast sales
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Fast Food Industry By: Nichole Bell, Samuel Curby, Tony Chan, Jared Carchedi
accounted for 60% of growth in restaurant traffic over the past five years. Over that span, traffic into restaurants for breakfast grew an average of two percent per year, with four of five breakfasts purchased at fast-food restaurants. One example is in a response to the McDonald's McCafe coffee products, mostly sold in the morning with breakfast, "Burger King has announced that by September 2010 it would begin selling Starbucks' Seattle's Best Coffee in about 7,250 U.S. outlets. The new drinks will sell for $1 to $2.79 and will replace Burger King's BK Joe brew." Options for substitute choices include convenience food options that are outside the fast food industry that could take away sales, such as microwave meals, ready to go meals (whole foods), sit down informal dining and even home cooking (which can be an even lower cost than fast food sometimes). These are all things that customers can buy and still save time and money and so could be more appealing to the customer when they think of healthy choices and cost. • Pressure from Supplier Bargaining Power During the 1980s, large multinational supply companies such as Cargill, ConAgra, and IBP, were allowed to dominate one commodity market after another. "Farmers and cattle ranchers are losing their independence, essentially becoming hired hands for the agribusiness giants or being forced off the land. Family farms are now being replaced by gigantic corporate farms with absentee owners." The fast food chains' vast purchasing power and their demand for a uniform product have encouraged fundamental changes in how cattle are raised, slaughtered, and processed into ground beef to keep some sort of cost control. Wheat and corn prices continue to increase causing more costs to the companies (See charts below). The market for soft drinks, which is a major commodity at fast food joints, is dominated by few companies: mainly Coca Cola and Pepsi. "These soft drinks suppliers are
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Fast Food Industry By: Nichole Bell, Samuel Curby, Tony Chan, Jared Carchedi
the only ones who have the capacity to match the needs of the global fast food chains. The domination of a few suppliers in an industry with more customers sets a high bargaining power for the suppliers." A few of the larger fast food companies "have realized the importance of these suppliers, and entered strategic alliances with the suppliers to make the dependence mutual. The largest fast food companies do deliver a large proportion of the revenues at the suppliers and thereby there exist a mutual interest of keeping each other as suppliers/customers."
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Fast Food Industry By: Nichole Bell, Samuel Curby, Tony Chan, Jared Carchedi
• Pressure from Buyer Bargaining Power Bargaining power of buyers comes in their decision of which restaurant to visit and purchase from. According to Research, the "industry remains under pressure in the current economic downturn, which has badly affected consumers disposable income," affecting consumers abilities to continue eating out. According to a new study from consulting and research firm Technomic, "consumer perception of fast food has expanded beyond the traditional burger joint to locations that serve up the chow quickly but put more emphasis on flavor, quality and ambiance. Indeed, 41% of the eating public apparently now consider places offering 'fast food' to include fast-casual restaurants like Panera and even full-service restaurants that offer carryout or curbside service." 4. Factors Driving Industry Changes and Their Impacts The biggest factor driving the fast food industry Health and Nutrition. Fast Food products are generally high in trans fat, high in calories, and low in fiber, which leads to higher than normal trans fat and calorie intake. A regular meal at McDonald's consists of a Big Mac, large fries, and a large Coca-Cola drink amounting to 1,430 calories. A diet of
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Fast Food Industry By: Nichole Bell, Samuel Curby, Tony Chan, Jared Carchedi
approximately 2,000 calories is considered a healthy amount of calories for an entire day. So each meal is equivalent to almost three quarters of a person’s calorie intake for the day. Most people don’t know this or don’t care to know this information. The increased calorie intake leads to more obesity. Obesity is one of the biggest problems facing Americans. According to the Center for Disease Control and Prevention in 2003 obesity was the leading health threat for American’s and it was the second leading cause of preventable deaths in the United States. Many of the big fast food chains realized that something needed to be done. Over the last few years several chains have introduced lighter menu items with less fanfare: Dunkin’ Donuts sells egg-white sandwiches. Quizno's offers a 500-calorie-and-under menu. Starbucks has Panini sandwiches with 400 calories or less. In 2004, McDonald’s briefly offered Go Active! Happy Meals for Adults (complete with pedometer), but these days sells items, like a grilled chicken sandwich, without promoting their low-fat attributes. Then there’s Subway, which, besides its 230-to-380-calorie Fresh Fit subs, claims that most of its sandwiches are low calorie, provided consumers don’t add high-fat condiments. The chain shot to diet fame 10 years ago when Jared Fogle said that he lost 245 pounds by eating Subway fare for lunch and dinner. These fast food restaurants have had to offer lower fat healthier options because Americans started realizing that they were becoming increasingly obese and started eating healthier. This caused a decline in the customers going to fast food restaurants because customers wanted to eat healthier and live longer. This was one of the major reasons these fast food restaurants started offering more nutrient rich food. The healthy alternative foods have changed the face of the fast food industry. Fast Food restaurants are now required to post nutritional information about their products. A surprising and alarming side effect of this is that sometimes the information is not completely accurate. According to a study published this month in The Journal of the American Dietetic Association found that the caloric content of food from 29 Boston chain
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Fast Food Industry By: Nichole Bell, Samuel Curby, Tony Chan, Jared Carchedi
restaurants and 10 frozen meals sold in supermarkets. If customers were using the charts to count their calories they would be mistaken and accidentally take in more calories than they thought. It is sad and immoral for a company to knowingly be fraudulent in its nutritional information. Since 29 chains were found to have these discrepancies in Boston alone, this could be a signal of a much larger issue. Companies need to be correct with the nutritional information and even if a mistake is made, it must be recognized and it must be fixed to keep customer loyalty and trust. 5. Market Positions of Industry Rivals The Fast food restaurant business is a very competitive business with the corporate titans often switching positions. Here is the Top 10 Ranking based on total sales (all according to Quick Service Restaurant Magazine) : 1.) McDonald’s $30 Billion- Of course McDonald’s is at the top of the list. They have been a staple in the fast. They are a giant in the Fast Food industry and have global reach. Their sales were nearly three times that of its nearest competitor. McDonald’s recently unveiled its new idea $1 sodas. This should increase their sales as well. 2.) Subway $10 Billion- This is a testament that Americans and worldwide customers are moving towards healthier dining choices. So far this year, the chain has opened more than 1,000 new stores worldwide. This brings their total to around 33,000 stores worldwide. Subway started its upward climb to the top of the list 10 yrs ago when Jared Fogle lost weight on the “subway diet”. This catapulted Subways sales. 3.) Burger King $9Billion-Burger King has slid a little over the last year they were #2 in the ranking last year. In an effort to revitalize sales they have revamped their
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Fast Food Industry By: Nichole Bell, Samuel Curby, Tony Chan, Jared Carchedi
charbroiling process to include ribs and stuffed burgers. They are trying to focus more on quality of their produce as opposed to the deeply discounted burgers. 4.) Wendy’s $8.4 Billion- This chain in order to improve its competitive position will be focusing on improving its breakfast menu with new breakfast offerings. Also they will be improving the look of the stores to acquire higher quality clientele that will spend more money.
5.) Starbucks-$8.3 Billion-Starbucks is a giant in the coffee industry. They are starting to
offer more products to compete with the Burger Kings and McDonalds offerings of breakfast food. They are starting to offer Cibata bread breakfast sandwiches. 6.) Taco Bell $6.8 Billion- The best of the Yum! Brand. They started to offer a drivethru diet food menu. It also expanded into the breakfast food menu as well which has increased their sales. 7.) Dunkin Donuts $5.7 Billion- They have revitalized their brand. They have gone from simply a donut joint to offering more products. The past year brought the sort of new products you might expect from a burger or sub specialist, like chicken and tuna wraps, a value menu, and a new snack called bagel twists. These new product offerings have increased the customer base. 8.) Pizza Hut $5 Billion- With the addition of the $10 any pizza deal and the wings and pasta offerings this Pizza hut has grown. 9.) KFC $4.9 Billion- KFC has its work cut out for them. They are trying to improve their process to improve net profit as well as improve their menu offerings to appeal to a wider range of customers.
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Fast Food Industry By: Nichole Bell, Samuel Curby, Tony Chan, Jared Carchedi
10. ) Sonic $3.8 Billion-Sonic hopes to rebound by playing up its quick-service quirks. Marketing has focused on points of difference like the use of roller skaters to serve meals car-side. One of the few major chains to feature hot dogs, Sonic bulked up its Coney to four ounces and made it a true foot-long. Also they are trying to come up with new beverages to compliment their “Limade”. From the looks of it the Yum! Brand is sitting Pretty it has 3 of its brands in the top 10. That bodes very well for them in the future. 6. Strategic moves rivals are likely to make The continual growth of the fast food industry will attract new entrants into the market that aims to take market share away from the big players. Major fast food franchisees must continue to evaluate its business model in order to retain and attract customers. Based on the historical trends mentioned earlier, the companies in the fast food industry are likely to pursue these business strategies. • Strategy 1 - Adding healthier items to its menu
Americans are becoming more health conscious eaters and are increasing associating fast food as unhealthy eating due to its high-fat and calories item choices. Subway has capitalized on this current trend and its now one of the fastest growing fast-food chain in the world. Rivals are likely to take on the defensive by adding lighter and healthier food on its own menus. Even KFC, known for its greasy fried chicken, are serving grilled chicken and an expended selection of salad that caters to health conscious eaters. (kfc.com) Panera Bread was named by Health.com as the most healthy fast food restaurant in America. The restaurant offers whole grain bread, health section of vegetables and sides, and hormone and
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antibiotic free chicken. (health.com) Most fast-food restaurant would likely add some type of healthy items to broaden its reach of customers. • Strategy 2 - Higher quality foods In the past, almost all Fast food chains use a low cost competitive strategy. The chains believed lowering overall cost than competitors would attract more revenue generating customers. Fast food chains strived to increase profit margin by lowering food cost and maximizing efficiency along the food production chain. Hamburger chains, such as McDonalds and Jack in the Box, were known to use low-quality burger meat that is high in sodium and low in nutritional value. Food preparations were standardized so workers require little culinary training; ingredients were not fresh since it’s precooked or pre-cut in the processing facility outside the restaurant. However, a handful on fast food restaurant, such as the California chain In-N-Out, start serving fresh, made to order food to its customers. Its competitive strategy is considered a best cost approach since it gives customers more value for the money. According to its website, In-N-Out uses 100% pure beef free of additives, fillers and preservatives. The chain doesn’t use microwave, heat lamp, or even a freezer. Also, every burger is cook one at a time and customers can customize it any way they want. In-N-Out competitiveness is serving high or even gourmet quality burgers at an affordable cost. Customer flock to its restaurants to get a burger that is much higher quality than other fast food restaurants. (In-N-Out) Other fast food restaurants are realizing the trend of customers demanding high quality food at fast food restaurants. Even McDonalds is putting an effort into making its food more nutritious. The chain boosts its Chicken McNuggets are made with white meat and is relatively low in fat, sodium, and calories. McDonalds is also creating an extensive website trying to educate its potential customers about nutrition and its food quality. In
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addition, the chain is continually expanding its salad selection to cater to those looking for a fresher meal. An upstart chain, Five Guys Burgers, is using the Best Cost strategy straight from In-N-Out, serving sit down or steakhouse restaurant quality burger at a fraction of the price. The chain is now one of the fastest growing fast –food franchise in the US. (usatoday.com) In-N-Out and Five Guys would surely make other fast-food chains rethink its competitive strategies, it is likely some would abandon the low cost and adapt the best cost strategy. • Strategy 3 - Going Global American fast food chains are increasing becoming more focus on expanding its business aboard. In a resent Fox business report, “the owner of the KFC, Pizza Hut and Taco Bell fast-food chains has been reinventing itself as an internationally focused company to the extent that, by 2015, 75% of its profits are projected to come from its international business.” China’s economic growth and an expending middle class have created a hotbed for fast food business in the past decade. In cities like Shanghai and Beijing, American fast food restaurants are seen in every major street intersections and shopping centers. Yum brands, the owner of KFC, recorded a 9.5% rise in 1st quarter profit in China, an increase that is almost impossible in the matured US fast food market. (foxbusiness.com) 7.
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1. Introduction "Over the last three decades, fast food has infiltrated every nook and cranny of American society. An industry that began with a handful of modest hot dog and hamburger stands in southern California has spread to every corner of the nation, selling a broad range of foods wherever paying customers may be found. Fast food is now served at restaurants and drive-thru's, at stadiums, airports, zoos, high schools, elementary schools, and universities, on cruise ships, trains, and airplanes, at K- Marts, Wal-Marts, gas stations, and even at hospital cafeterias. In 1970, Americans spent about $6 billion on fast food; in 2000, they spent more than $110 billion. Americans now spend more money on fast food than on higher education, personal computers, computer software, or new cars. They spend more on fast food than on movies, books, magazines, newspapers, videos, and recorded music -- combined." (Fast Food Nation) If there was an industry with demand and plenty of options to enter the market, the fast food industry is an optimal choice as we will show in this report. 2. History and Economic features of industry This industry is nothing new to our economy. The fast food phenomenon evolved from drive-in restaurants built in southern California in the early 1940s. With the rising popularity of cars, entrepreneurs designed restaurants that let people order and eat without leaving their vehicles. "Then, in 1948, they decided to try something new: they simplified the menu so that there was nothing that required a knife, spoon or fork; they replaced all the crockery and glassware with disposable cups, plates and bags; they dispensed with waitresses, bus boys and carhops, leaving customers to come to the counter to order and collect their food; and, most importantly (so far as the concept of fast food is concerned), they divided the food preparation tasks into a production line." In the post-World War II period in the United States, McDonald's and other fast food restaurant chains rapidly gained a
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Fast Food Industry By: Nichole Bell, Samuel Curby, Tony Chan, Jared Carchedi
reputation for their cleanliness, fast service, and a kid friendly atmosphere where families on the go could grab a quick meal and avoid hassle of cooking. "Prior to the rise of the fast food chain restaurant, people generally had a choice between greasy spoon diners where the quality of the food was often questionable and service lacking, or high-end restaurants that were expensive and impractical for families with children." Fast food restaurants rapidly became the eatery "everyone could agree on", with many featuring child-size menu combos, play areas, and whimsical branding campaigns, like the iconic Ronald McDonald, designed to appeal to younger customers. The fast food industry gave parents a chance to enjoy some time alone while the kids played with their toys or in the play areas provided in the restaurants. The fast food industry has witnessed tremendous growth over the last few decades. The US fast food industry now employs two million workers in the United States, and is considered to be a major asset to the US economy. In 1970, Americans spent $6 billion on fast food - and this amount increased to $110 billion by 2000. If the estimated figures for the last 10 years are added, the future of this industry becomes even more promising. According to the fast food industry statistics, "this industry experienced an overall growth of 4.8 percent in 2006 alone." US fast food industry has reported remarkable growth despite being severely affected by the economic turmoil. "In the US, consumers consume more than half of their food in restaurants. Fast food is an important segment of the restaurant industry and the growth of this segment is outpacing the growth of overall restaurant industry", says US Fast Food Market Outlook 2010. The fast food market is forecast to maintain its current growth expectations, which means it is expected to drive the market to a value of $57.6 billion by the end of 2010, an increase of 12.1% since 2005. "Drivers of growth include increasing numbers of Americans in the workplace, which reduces the amount of time spent on preparing meals
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Fast Food Industry By: Nichole Bell, Samuel Curby, Tony Chan, Jared Carchedi
at home. In 2010, the United States fast food market is forecast to have a volume of 37 billion transactions. This represents an increase of 5.3% since 2005." The key players in the global fast food industry are McDonalds, Burger King, Yum! Brand, Wendy's, and Subway. Each is briefly listed below with comparable revenues in industry in Exhibit A:
1. McDonalds: Located in 126 countries and on 6 continents, the largest in the industry,
and operates over 31,000 restaurants worldwide consisting 60% of sales overseas. In 2010, they had a revenue increase of 5.86%. Part of this increase is from the 541 new restaurants opened in 2010, and 5% global comparable sales growth in 2010 marks the 8th straight year of such increases.
2. Burger King: Has more than 11,100 restaurants in more than 70 countries and is the
second largest fast food hamburger restaurant chain in the world. The company generated $2.5 billion in revenue in 2009. 38% of operating income is in international sales.
3. Yum! Brand: Collects 50% of sales from overseas and also owns A&W, KFC, Long
John Silver's, and Taco Bell and Pizza Hut. “The world’s largest restaurant company in terms of units with approximately 33,000 restaurants in more than 100 countries and territories.”
4. Wendy's: Has 6,576 restaurants, of which 1,394 were owned and operated by the
company and others are franchised and located in 21 countries. $2.4 billion in sales in 2010, with a 0.6% decrease in North American same store sales. They are also looking to expand its presence in the international space. The company seems to be behind its competitors with only 814 international units total.
5. Subway: One of the fastest growing franchises in the world with approximately
34,447 restaurants in 97 countries as of 2011 and earns $15.2 billion in revenues each year.
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Fast Food Industry By: Nichole Bell, Samuel Curby, Tony Chan, Jared Carchedi
Exhibit A
Company McDonald's (MCD) Yum! Brands (YUM) Starbuck’s (SBUX) Darden Restaurants (DRI) Brinker International (EAT) Wendy's International (WEN) Burger King Holdings (BKC) Jack in the Box (JACK) CKE Restaurants (CKR) Domino's Pizza (DPZ) Revenues (M) Net Income (M) Net Margin Restaurants Franchised % $22,745 $10,836 $9,775 $7,218 $3,621 $3,581 $2,537 $2,471 $1,419 $1,404 $4,551 $1,083 $391 $372 $79 $4 $200 $131 $48 $80 $87 20.0% 10.0% 4.0% 5.2% 2.2% 0.1% 7.9% 5.3% 3.4% 5.7% 6.4% 32,478 37,000 16,635 1,773 1,689 6,451 11,925 2,212 3,141 9,339 1,380 47% 0% 40% 80% 88% 46% 71% 91% 58% 81%
Panera Bread Company (PNRA) $1,353
Data from company FY 2009 annual reports (CKE data from FY annual, ended January 31, 2010).
3. The competitive forces affecting industry members: Porter's five forces model analysis: • Rivalry Amongst Sellers While the fast food sector has long been regarded as competitive, the level of rivalry only intensifies. Multi-unit development deals are being inked left and right. Brands like Subway, Krispy Kreme, Camille's Sidewalk Café, Cosi Inc, Whataburger, Papa Murphy's, Moes Southwest Grills and Bob's Big Boy are all on the expansion trail. "The quick-service
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restaurant industry is intensely competitive, marked by a history of price wars," said R.J. Hottovy, an analyst at Morningstar. "With minimal switching costs, customers can be fickle." He added that rivalry "appears to be on the rise, with chains increasingly competing with one another on the basis of price and product differentiation," while "a proliferation of new menu items could slow down the speed of service." Further, "tighter credit markets could impair franchisees' ability to add new restaurants, perform renovations, or purchase equipment," Hottovy said. "Some competitive trends include more price-driven elements in fast-casual outlets, and full-service restaurants offering call-ahead and online ordering, home delivery and curbside pickup," Technomic said. In the bigger picture, Technomic reports that 49% percent of consumers say they eat at fast-food restaurants at least once a week with one in four having increased their visits over the last year, higher than in any other industry segment. International players such as McDonald's (MCD) and Yum! Brands (YUM) have had the most success as explosive growth in emerging markets has offset rising costs and a U.S. slowdown. Other companies like Sonic and Domino's have turned to new marketing campaigns and product innovation to boost growth and profitability and intense competition limits the ability of fast food operators to pass along rising costs to customers. Overall competition "is expected to remain fierce with respect to price, service, location, and concept in order to drive traffic, which may adversely affect restaurant operating margins and profits. "One thing that has been hurting the top and bottom lines is an combination of deep discounting and couponing. "There is almost a 'how low can you go' kind of contest going on when it comes to items like double cheeseburgers and snack wraps." McDonald's and other chains, like Starbucks and Schlotzky's have also sought to differentiate themselves by rolling out Wifi access (wireless Internet service) in many
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restaurants. A technology-based differentiation example include Papa John's "Pizza and Entertainment" promotion giving customers a perishable DVD movie (DVD's become inactive 48 hours after removal from packaging) free with pizza. "However, even with the new challenges outlined by Technomic, the chains' worst enemies are -- and will likely continue to be -- each other." Ray Kroc, the man who franchised McDonald's, once stated, "If you see a competitor drowning, you stick a hose down their throat." • The Threat of New Entrants "The fast food sector is a dynamic industry featuring a high density of franchising. It is also one of the most challenging sectors to operate in, due to an ever-increasing number of operations competing for the same dollar." (See Exhibit B) Franchisers capture a portion of revenue rather than profits so smaller fast food chains that have a lower portion of their restaurants franchised are most vulnerable to cost increases. "Jack In The Box, Wendy's, and Sonic have particularly low franchised to owned restaurant ratios." Fast casual restaurants are a growing source of competition for the fast food industry. 'Fast casual' restaurants like Chipotle, Cosi and Panera combine the convenience of fast food restaurants with the quality of casual dining. This new alternative threatens to steal market share from both fast food and fine dining restaurants. The fast food industry can still benefit from consumers as they trade down from more costly fast casual restaurants. Exhibit B Franchising Costs: (**Yum! Brand owned) SUBWAY® restaurants
Franchise fee: $12,000 Start-up cost: $69,300 to $191,000 Basic royalty: 8% Advertising royalty: 3.5%
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BURGER KING
Franchise fee: $50,000 Start-up cost: $240,000 to $2.5 million Basic royalty: 4.5% Advertising fund: 4%
KFC**
Franchise fee: $25,000 Start-up cost: $200,000 to $250,000, with $500,000 in liquid assets and $1 million net worth Basic royalty: 7.90% including advertising
McDONALD’S
Franchise fee: $45,000 Start-up cost: $432,800 to $715,150 Basic royalty: 12.5% includes advertising Service fee: 4.90%
PIZZA HUT**
Franchise fee: $25,000 Start-up cost: $218,500 to $1.3 million Basic royalty: 6.5% Advertising royalty: n/a
TACO BELL**
Franchise fee: $45,000 Start-up cost: $191,400 to $470,200 Basic royalty: 5.5% Advertising royalty: n/a
WENDY’S
Franchise fee: $25,000 Start-up cost: $830,000 to $1.485 million Basic royalty: 4% Advertising royalty: 2%
• Pressure from Sellers of Substitute Products "Chick-fil-A just announced it will roll out a new spicy chicken biscuit on Jan. 10. McDonald's, purveyor of the Big Mac, plans to sell oatmeal -- yes, oatmeal. And Wendy's is testing a new breakfast menu, including a warm oatmeal bar and a Panini sandwich, in Phoenix, Pittsburgh, Kansas City, Shreveport and Louisville. More test markets will be added in 2011." Much is at stake as the morning meal remains an opportune spot in the restaurant industry, which has had two years of visit declines and is now leveling out. Breakfast sales
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accounted for 60% of growth in restaurant traffic over the past five years. Over that span, traffic into restaurants for breakfast grew an average of two percent per year, with four of five breakfasts purchased at fast-food restaurants. One example is in a response to the McDonald's McCafe coffee products, mostly sold in the morning with breakfast, "Burger King has announced that by September 2010 it would begin selling Starbucks' Seattle's Best Coffee in about 7,250 U.S. outlets. The new drinks will sell for $1 to $2.79 and will replace Burger King's BK Joe brew." Options for substitute choices include convenience food options that are outside the fast food industry that could take away sales, such as microwave meals, ready to go meals (whole foods), sit down informal dining and even home cooking (which can be an even lower cost than fast food sometimes). These are all things that customers can buy and still save time and money and so could be more appealing to the customer when they think of healthy choices and cost. • Pressure from Supplier Bargaining Power During the 1980s, large multinational supply companies such as Cargill, ConAgra, and IBP, were allowed to dominate one commodity market after another. "Farmers and cattle ranchers are losing their independence, essentially becoming hired hands for the agribusiness giants or being forced off the land. Family farms are now being replaced by gigantic corporate farms with absentee owners." The fast food chains' vast purchasing power and their demand for a uniform product have encouraged fundamental changes in how cattle are raised, slaughtered, and processed into ground beef to keep some sort of cost control. Wheat and corn prices continue to increase causing more costs to the companies (See charts below). The market for soft drinks, which is a major commodity at fast food joints, is dominated by few companies: mainly Coca Cola and Pepsi. "These soft drinks suppliers are
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the only ones who have the capacity to match the needs of the global fast food chains. The domination of a few suppliers in an industry with more customers sets a high bargaining power for the suppliers." A few of the larger fast food companies "have realized the importance of these suppliers, and entered strategic alliances with the suppliers to make the dependence mutual. The largest fast food companies do deliver a large proportion of the revenues at the suppliers and thereby there exist a mutual interest of keeping each other as suppliers/customers."
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• Pressure from Buyer Bargaining Power Bargaining power of buyers comes in their decision of which restaurant to visit and purchase from. According to Research, the "industry remains under pressure in the current economic downturn, which has badly affected consumers disposable income," affecting consumers abilities to continue eating out. According to a new study from consulting and research firm Technomic, "consumer perception of fast food has expanded beyond the traditional burger joint to locations that serve up the chow quickly but put more emphasis on flavor, quality and ambiance. Indeed, 41% of the eating public apparently now consider places offering 'fast food' to include fast-casual restaurants like Panera and even full-service restaurants that offer carryout or curbside service." 4. Factors Driving Industry Changes and Their Impacts The biggest factor driving the fast food industry Health and Nutrition. Fast Food products are generally high in trans fat, high in calories, and low in fiber, which leads to higher than normal trans fat and calorie intake. A regular meal at McDonald's consists of a Big Mac, large fries, and a large Coca-Cola drink amounting to 1,430 calories. A diet of
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approximately 2,000 calories is considered a healthy amount of calories for an entire day. So each meal is equivalent to almost three quarters of a person’s calorie intake for the day. Most people don’t know this or don’t care to know this information. The increased calorie intake leads to more obesity. Obesity is one of the biggest problems facing Americans. According to the Center for Disease Control and Prevention in 2003 obesity was the leading health threat for American’s and it was the second leading cause of preventable deaths in the United States. Many of the big fast food chains realized that something needed to be done. Over the last few years several chains have introduced lighter menu items with less fanfare: Dunkin’ Donuts sells egg-white sandwiches. Quizno's offers a 500-calorie-and-under menu. Starbucks has Panini sandwiches with 400 calories or less. In 2004, McDonald’s briefly offered Go Active! Happy Meals for Adults (complete with pedometer), but these days sells items, like a grilled chicken sandwich, without promoting their low-fat attributes. Then there’s Subway, which, besides its 230-to-380-calorie Fresh Fit subs, claims that most of its sandwiches are low calorie, provided consumers don’t add high-fat condiments. The chain shot to diet fame 10 years ago when Jared Fogle said that he lost 245 pounds by eating Subway fare for lunch and dinner. These fast food restaurants have had to offer lower fat healthier options because Americans started realizing that they were becoming increasingly obese and started eating healthier. This caused a decline in the customers going to fast food restaurants because customers wanted to eat healthier and live longer. This was one of the major reasons these fast food restaurants started offering more nutrient rich food. The healthy alternative foods have changed the face of the fast food industry. Fast Food restaurants are now required to post nutritional information about their products. A surprising and alarming side effect of this is that sometimes the information is not completely accurate. According to a study published this month in The Journal of the American Dietetic Association found that the caloric content of food from 29 Boston chain
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restaurants and 10 frozen meals sold in supermarkets. If customers were using the charts to count their calories they would be mistaken and accidentally take in more calories than they thought. It is sad and immoral for a company to knowingly be fraudulent in its nutritional information. Since 29 chains were found to have these discrepancies in Boston alone, this could be a signal of a much larger issue. Companies need to be correct with the nutritional information and even if a mistake is made, it must be recognized and it must be fixed to keep customer loyalty and trust. 5. Market Positions of Industry Rivals The Fast food restaurant business is a very competitive business with the corporate titans often switching positions. Here is the Top 10 Ranking based on total sales (all according to Quick Service Restaurant Magazine) : 1.) McDonald’s $30 Billion- Of course McDonald’s is at the top of the list. They have been a staple in the fast. They are a giant in the Fast Food industry and have global reach. Their sales were nearly three times that of its nearest competitor. McDonald’s recently unveiled its new idea $1 sodas. This should increase their sales as well. 2.) Subway $10 Billion- This is a testament that Americans and worldwide customers are moving towards healthier dining choices. So far this year, the chain has opened more than 1,000 new stores worldwide. This brings their total to around 33,000 stores worldwide. Subway started its upward climb to the top of the list 10 yrs ago when Jared Fogle lost weight on the “subway diet”. This catapulted Subways sales. 3.) Burger King $9Billion-Burger King has slid a little over the last year they were #2 in the ranking last year. In an effort to revitalize sales they have revamped their
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charbroiling process to include ribs and stuffed burgers. They are trying to focus more on quality of their produce as opposed to the deeply discounted burgers. 4.) Wendy’s $8.4 Billion- This chain in order to improve its competitive position will be focusing on improving its breakfast menu with new breakfast offerings. Also they will be improving the look of the stores to acquire higher quality clientele that will spend more money.
5.) Starbucks-$8.3 Billion-Starbucks is a giant in the coffee industry. They are starting to
offer more products to compete with the Burger Kings and McDonalds offerings of breakfast food. They are starting to offer Cibata bread breakfast sandwiches. 6.) Taco Bell $6.8 Billion- The best of the Yum! Brand. They started to offer a drivethru diet food menu. It also expanded into the breakfast food menu as well which has increased their sales. 7.) Dunkin Donuts $5.7 Billion- They have revitalized their brand. They have gone from simply a donut joint to offering more products. The past year brought the sort of new products you might expect from a burger or sub specialist, like chicken and tuna wraps, a value menu, and a new snack called bagel twists. These new product offerings have increased the customer base. 8.) Pizza Hut $5 Billion- With the addition of the $10 any pizza deal and the wings and pasta offerings this Pizza hut has grown. 9.) KFC $4.9 Billion- KFC has its work cut out for them. They are trying to improve their process to improve net profit as well as improve their menu offerings to appeal to a wider range of customers.
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10. ) Sonic $3.8 Billion-Sonic hopes to rebound by playing up its quick-service quirks. Marketing has focused on points of difference like the use of roller skaters to serve meals car-side. One of the few major chains to feature hot dogs, Sonic bulked up its Coney to four ounces and made it a true foot-long. Also they are trying to come up with new beverages to compliment their “Limade”. From the looks of it the Yum! Brand is sitting Pretty it has 3 of its brands in the top 10. That bodes very well for them in the future. 6. Strategic moves rivals are likely to make The continual growth of the fast food industry will attract new entrants into the market that aims to take market share away from the big players. Major fast food franchisees must continue to evaluate its business model in order to retain and attract customers. Based on the historical trends mentioned earlier, the companies in the fast food industry are likely to pursue these business strategies. • Strategy 1 - Adding healthier items to its menu
Americans are becoming more health conscious eaters and are increasing associating fast food as unhealthy eating due to its high-fat and calories item choices. Subway has capitalized on this current trend and its now one of the fastest growing fast-food chain in the world. Rivals are likely to take on the defensive by adding lighter and healthier food on its own menus. Even KFC, known for its greasy fried chicken, are serving grilled chicken and an expended selection of salad that caters to health conscious eaters. (kfc.com) Panera Bread was named by Health.com as the most healthy fast food restaurant in America. The restaurant offers whole grain bread, health section of vegetables and sides, and hormone and
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antibiotic free chicken. (health.com) Most fast-food restaurant would likely add some type of healthy items to broaden its reach of customers. • Strategy 2 - Higher quality foods In the past, almost all Fast food chains use a low cost competitive strategy. The chains believed lowering overall cost than competitors would attract more revenue generating customers. Fast food chains strived to increase profit margin by lowering food cost and maximizing efficiency along the food production chain. Hamburger chains, such as McDonalds and Jack in the Box, were known to use low-quality burger meat that is high in sodium and low in nutritional value. Food preparations were standardized so workers require little culinary training; ingredients were not fresh since it’s precooked or pre-cut in the processing facility outside the restaurant. However, a handful on fast food restaurant, such as the California chain In-N-Out, start serving fresh, made to order food to its customers. Its competitive strategy is considered a best cost approach since it gives customers more value for the money. According to its website, In-N-Out uses 100% pure beef free of additives, fillers and preservatives. The chain doesn’t use microwave, heat lamp, or even a freezer. Also, every burger is cook one at a time and customers can customize it any way they want. In-N-Out competitiveness is serving high or even gourmet quality burgers at an affordable cost. Customer flock to its restaurants to get a burger that is much higher quality than other fast food restaurants. (In-N-Out) Other fast food restaurants are realizing the trend of customers demanding high quality food at fast food restaurants. Even McDonalds is putting an effort into making its food more nutritious. The chain boosts its Chicken McNuggets are made with white meat and is relatively low in fat, sodium, and calories. McDonalds is also creating an extensive website trying to educate its potential customers about nutrition and its food quality. In
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addition, the chain is continually expanding its salad selection to cater to those looking for a fresher meal. An upstart chain, Five Guys Burgers, is using the Best Cost strategy straight from In-N-Out, serving sit down or steakhouse restaurant quality burger at a fraction of the price. The chain is now one of the fastest growing fast –food franchise in the US. (usatoday.com) In-N-Out and Five Guys would surely make other fast-food chains rethink its competitive strategies, it is likely some would abandon the low cost and adapt the best cost strategy. • Strategy 3 - Going Global American fast food chains are increasing becoming more focus on expanding its business aboard. In a resent Fox business report, “the owner of the KFC, Pizza Hut and Taco Bell fast-food chains has been reinventing itself as an internationally focused company to the extent that, by 2015, 75% of its profits are projected to come from its international business.” China’s economic growth and an expending middle class have created a hotbed for fast food business in the past decade. In cities like Shanghai and Beijing, American fast food restaurants are seen in every major street intersections and shopping centers. Yum brands, the owner of KFC, recorded a 9.5% rise in 1st quarter profit in China, an increase that is almost impossible in the matured US fast food market. (foxbusiness.com) 7.
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