Industry AnalysisIndustry AnalysisFast Food IndustryFast Food Industry

Anna SterlingAnna SterlingJohnnie DavisJohnnie DavisZane BarnesZane Barnes

Kimberly SmithKimberly SmithNolan BosworthNolan BosworthShaina WeaverShaina Weaver

Clay JonesClay Jones

History of Industry CompetitorsHistory of Industry Competitors

McDonaldsMcDonalds First store opened in 1940 by the McDonald brothersFirst store opened in 1940 by the McDonald brothers Headquarters- Oak Brook, ILHeadquarters- Oak Brook, IL

SonicSonic First store opened in 1945First store opened in 1945 Headquarters- Oklahoma CityHeadquarters- Oklahoma City

Jack-In-The-BoxJack-In-The-Box Founded in 1951 Founded in 1951 Headquarters in San Diego, CAHeadquarters in San Diego, CA

Burger KingBurger King Founded in 1954Founded in 1954 Headquarters in Miami, FloridaHeadquarters in Miami, Florida

Industry OverviewIndustry Overview

Fast-food industry includes about 200,000 Fast-food industry includes about 200,000 restaurantsrestaurants

Combined annual revenue of about $120 Combined annual revenue of about $120 billionbillion

Industry is highly fragmented: the top 50 Industry is highly fragmented: the top 50 companies hold 25% of salescompanies hold 25% of sales

Industry DetailsIndustry Details

The industry is highly labor-intensive: the average The industry is highly labor-intensive: the average annual revenue per worker is just under $40,000annual revenue per worker is just under $40,000

Most fast-food restaurants specialize in a few main Most fast-food restaurants specialize in a few main dishesdishes

Restaurants include national and regional chains, Restaurants include national and regional chains, franchises, and independent operatorsfranchises, and independent operators

Most fast-food restaurants use a POS (point of sale) Most fast-food restaurants use a POS (point of sale) system to take orders from drive-thrus and the system to take orders from drive-thrus and the registerregister

The Fast Food Industry’s Dominant Economic, Political, and Social

Features Industry break downIndustry break down Restaurant IndustryRestaurant Industry

• Full-serviceFull-service• Limited-serviceLimited-service (NAICS 722211)(NAICS 722211)

• Burger SegmentBurger Segment• SandwichesSandwiches• Pizza/pastaPizza/pasta• ChickenChicken• MexicanMexican• Etc.Etc.

2008 Burger segment Annual Sales(http://www.qsrmagazine.com/reports/qsr50/2008/burgers.phtml)

Rank Rank QSR 50 QSR 50 Chain Chain Sales ($MilSales ($Mil))

1 1 1 1 McDonald’s McDonald’s $28,666 $28,666

2 2 2 2 Burger King (U.S. & Canada) Burger King (U.S. & Canada) $8,781.0 $8,781.0

3 3 4 4 Wendy’sWendy’s11 $7,956.0 $7,956.0

4 4 10 10 Sonic Drive-In Sonic Drive-In $3,608.8 $3,608.8

5 5 13 13 Jack in the BoxJack in the Box11 $2,975.0 $2,975.0

Economic Factors

How does a How does a RecessionRecession affect the limited- affect the limited-service restaurant industry?service restaurant industry? As a general rule, when disposable personal As a general rule, when disposable personal

income is tight, fast food restaurants fare income is tight, fast food restaurants fare better than their casual and high end cousins better than their casual and high end cousins because people will shift their purchases because people will shift their purchases downward.downward.

The best recession survival plan is having a The best recession survival plan is having a well advertized $Dollar menu and tight cost well advertized $Dollar menu and tight cost controls in place . controls in place .

Political Factors

Economic Economic Stabilization Act of 2008 Stabilization Act of 2008 gives gives restaurants two helpful benefits during restaurants two helpful benefits during recession.recession.

Banks have an injection of capital and are being Banks have an injection of capital and are being urged by the government to make loans. urged by the government to make loans. Restaurants must acquire loans form banks to make much Restaurants must acquire loans form banks to make much

need expansions or updates. need expansions or updates.

Accelerated 15 year depreciation schedule for new Accelerated 15 year depreciation schedule for new construction on restaurants saves money.construction on restaurants saves money. Old depreciation schedule was 39 ½ years.Old depreciation schedule was 39 ½ years. Ex: on a $700,000 project it would save $7,000 a year Ex: on a $700,000 project it would save $7,000 a year

versus the 39 ½ year schedule. versus the 39 ½ year schedule.

Social Factors

The fast food industry pays close attention to The fast food industry pays close attention to what the American society wants and needs.what the American society wants and needs.

Must add value by being Must add value by being affordableaffordable and of and of consistent quality. consistent quality.

Menus with a vast Menus with a vast varietyvariety of products of products HealthierHealthier options and brand Image needs to be options and brand Image needs to be

providedprovided Must be Must be convenientconvenient and fast to accommodate and fast to accommodate

the fast pace of American lifestyles.the fast pace of American lifestyles.

The Five Forces ModelThe Five Forces Model Threat of New EntrantsThreat of New Entrants

Economies of Scale:Economies of Scale: The firms in the limited-service restaurant class do see some advantages to economies The firms in the limited-service restaurant class do see some advantages to economies

of scale, but these advantages are undermined by the ease of creating a quick service of scale, but these advantages are undermined by the ease of creating a quick service restaurant. The saturation of the industry is also a huge limiter of how much an restaurant. The saturation of the industry is also a huge limiter of how much an advantage can be attained by economies of scale.advantage can be attained by economies of scale.

Product Differentiation:Product Differentiation: While differentiation is a large and necessary expense for the large fast food chains in While differentiation is a large and necessary expense for the large fast food chains in

the industry, it is not difficult for private startups to overcome and thus not a significant the industry, it is not difficult for private startups to overcome and thus not a significant barrier to market entry.barrier to market entry.

Capital Requirements:Capital Requirements: Capital requirements will quell the formation of new, national competitors, but is not a Capital requirements will quell the formation of new, national competitors, but is not a

significant barrier to private startups.significant barrier to private startups.

Cost Disadvantages:Cost Disadvantages: These disadvantages stem form the fact that “established companies already have These disadvantages stem form the fact that “established companies already have

product technology, access to raw materials, favorable sites, advantages in the form of product technology, access to raw materials, favorable sites, advantages in the form of government subsidies, and experience” (referenceforbusiness.com). The extreme government subsidies, and experience” (referenceforbusiness.com). The extreme saturation and similarity in product offering make convenient locations essential for saturation and similarity in product offering make convenient locations essential for quick service restaurants large and small. This is a significant barrier to entry.quick service restaurants large and small. This is a significant barrier to entry.

The Five Forces Model Cont.The Five Forces Model Cont.

Threat of New Entrants Cont.Threat of New Entrants Cont. Distribution Channels:Distribution Channels:

Speedy and reliable channels are essential among all firms in the industry, they are not Speedy and reliable channels are essential among all firms in the industry, they are not necessarily difficult for new comers to attain, however. Also the economies of scale necessarily difficult for new comers to attain, however. Also the economies of scale enjoyed by large firms are not so great as to shut out smaller competitors. enjoyed by large firms are not so great as to shut out smaller competitors.

Government Regulation:Government Regulation: Government regulation is more intense for the larger firms which have to deal with Government regulation is more intense for the larger firms which have to deal with

franchising regulations. Smaller establishments are subject to the standard array of franchising regulations. Smaller establishments are subject to the standard array of government regulations including: zoning, health, safety, sanitation, and building. government regulations including: zoning, health, safety, sanitation, and building. These are standard for almost any new business and thus do not pose large threat to These are standard for almost any new business and thus do not pose large threat to new comers.new comers.

Conclusion:Conclusion: Due to the lack of any of the barriers to entry being so significant as to thwart the Due to the lack of any of the barriers to entry being so significant as to thwart the

majority of private startups, we feel the threat of new entrants is high.majority of private startups, we feel the threat of new entrants is high.

The Five Forces Model Cont.The Five Forces Model Cont.

Bargaining Power of CustomersBargaining Power of Customers Even though customer switching costs are nearly zero, the fast food Even though customer switching costs are nearly zero, the fast food

industry does not worry about loyalty because “On average, one-fifth of industry does not worry about loyalty because “On average, one-fifth of the population of the USA eats in a fast-food restaurant each day” the population of the USA eats in a fast-food restaurant each day” (Oxford University Press). It is this volume that keeps customer (Oxford University Press). It is this volume that keeps customer bargaining power low by diluting the effect of a few picky customers.bargaining power low by diluting the effect of a few picky customers.

Bargaining Power of SuppliersBargaining Power of Suppliers Large fast food chains thousands of suppliers to choose from and select Large fast food chains thousands of suppliers to choose from and select

theirs through a competitive bid process. They can switch suppliers theirs through a competitive bid process. They can switch suppliers easily and tend to make up a large portion of the supplier’s revenue. easily and tend to make up a large portion of the supplier’s revenue. This severely limits the bargaining power of suppliers.This severely limits the bargaining power of suppliers.

The Five Forces Model Cont.The Five Forces Model Cont.

Threat of SubstitutesThreat of Substitutes With so many firms in the quick With so many firms in the quick

service/burger industry, low service/burger industry, low switching costs, similar products, switching costs, similar products, and healthier options, the threat of and healthier options, the threat of substitutes is very high.substitutes is very high.

Rivalry Among Existing FirmsRivalry Among Existing Firms The limited-service industry The limited-service industry

defines a red ocean industry. defines a red ocean industry. Firms compete for market share in Firms compete for market share in a saturated market. Growth, a saturated market. Growth, particularly in hamburger chains, particularly in hamburger chains, is very slow so the customer base is very slow so the customer base is not growing as fast as the is not growing as fast as the industry. This leads to high rivalry industry. This leads to high rivalry among firms.among firms.

ConclusionConclusion

Threat of New Threat of New EntrantsEntrants

HighHigh

Bargaining Power of Bargaining Power of CustomersCustomers

LowLow

Bargaining Power of Bargaining Power of SuppliersSuppliers

LowLow

Threat of SubstitutesThreat of Substitutes HighHigh

Rivalry Among Rivalry Among FirmsFirms

HighHigh

Price PerformancePrice Performance

Price PerformancePrice Performance

Changes in Social NormsChanges in Social Norms

Changing American attitudes toward food.Changing American attitudes toward food.

Companies AnswersCompanies Answers

New CompetitionNew Competition

Industry Risks FactorsIndustry Risks Factors

Events Reported by MediaEvents Reported by Media

Competition of IndustryCompetition of Industry

Changes in Economic and Market Changes in Economic and Market ConditionsConditions

Industry Risks FactorsIndustry Risks Factors

Earnings Dependant on FranchiseEarnings Dependant on Franchise

Litigation Affects all Members of ChainLitigation Affects all Members of Chain

Positions Within the IndustryPositions Within the Industry

Jack in the Box- Jack in the Box- The first mover.The first mover.

McDonalds- McDonalds- Universally accepted name.Universally accepted name.

Burger King- Burger King- Competing with McDonalds.Competing with McDonalds.

Sonic- Sonic- American values.American values.

StrategiesStrategies• Jack in the Box- “We don’t make it ‘till you order it.”Jack in the Box- “We don’t make it ‘till you order it.”

• McDonalds- Global.McDonalds- Global.

• Burger King- “Have it your way.”Burger King- “Have it your way.”

• Sonic- “America’s Drive-In” and “Your ultimate drink Sonic- “America’s Drive-In” and “Your ultimate drink stop!”stop!”

Financial Performance: Last 12 Financial Performance: Last 12 MonthsMonths

Jack in the Box- sales were 2.54 billion, income Jack in the Box- sales were 2.54 billion, income was 118.21 million, sales growth was up 1%, and was 118.21 million, sales growth was up 1%, and income growth was down 23%. income growth was down 23%.

McDonald- sales were 23.52 billion, income was McDonald- sales were 23.52 billion, income was 4.31 billion, sales growth was up 3.2%, and 4.31 billion, sales growth was up 3.2%, and income growth was down 22.6%. income growth was down 22.6%.

Burger King- sales were 2.55 billion, income was Burger King- sales were 2.55 billion, income was 186 million, sales growth was up 9.9%, and 186 million, sales growth was up 9.9%, and income growth was down 10.2%. income growth was down 10.2%.

Sonic- sales were 798.6 million, income was 53.87 Sonic- sales were 798.6 million, income was 53.87 million, sales growth was up 4.4%, and income million, sales growth was up 4.4%, and income growth was down 47.5%.growth was down 47.5%.

Stock Price HistoryStock Price History

Key Success FactorsKey Success Factors

What are key success factors?What are key success factors?-Things that a company must do to -Things that a company must do to

be be successful in an industrysuccessful in an industry

MisconceptionMisconception

Key success factors are often looked at as Key success factors are often looked at as core-competencies, which are sets of core-competencies, which are sets of skills or systems that create a uniquely skills or systems that create a uniquely high value for customers high value for customers

Key Success FactorsKey Success Factors

DifferentiationDifferentiation-The fast-food burger industry is difficult to -The fast-food burger industry is difficult to differentiate on a single product, such as the differentiate on a single product, such as the burgerburger-Differentiation in this industry can be focused -Differentiation in this industry can be focused more towards your atmosphere and unique more towards your atmosphere and unique menu itemsmenu items-Brand and product advertisement can also be -Brand and product advertisement can also be major players in becoming a household name major players in becoming a household name and bringing customers in to your industry and bringing customers in to your industry

Key Success FactorsKey Success Factors

AnswerAnswer Total Total PercentagePercentage

AgreeAgree 41%41%

Neither Neither Agree/DisagreeAgree/Disagree

29%29%

DisagreeDisagree 18%18%

Strongly AgreeStrongly Agree 10%10%

Strongly Strongly DisagreeDisagree

3%3%

Key Success FactorsKey Success Factors

Competing on Low CostCompeting on Low Cost-In a synonymous industry, consumers -In a synonymous industry, consumers can find a good burger at a comparable can find a good burger at a comparable price from just about any of the price from just about any of the competitors competitors -It is important to cut down on overhead -It is important to cut down on overhead cost of your firm in order to make the most cost of your firm in order to make the most off of your sales off of your sales

Quick-Service Restaurant Segment Quick-Service Restaurant Segment (QSR)(QSR)

In the United States QSR is the largest segment In the United States QSR is the largest segment of the restaurant industryof the restaurant industry

Growth in sales include…Growth in sales include…-Rising population-Rising population-increases in real disposable income-increases in real disposable income-busier lifestyles-busier lifestyles

Fast food chains provide consumers with food at Fast food chains provide consumers with food at reasonable prices which offers an alternative to reasonable prices which offers an alternative to cooking at homecooking at home

Industry AttractivenessIndustry Attractiveness

The restaurant industry is highly competitive in terms of The restaurant industry is highly competitive in terms of price, service, location, and food quality and is often price, service, location, and food quality and is often affected by changes in consumer trends, economic affected by changes in consumer trends, economic conditions, demographics, traffic patterns, and concerns conditions, demographics, traffic patterns, and concerns about the nutritional content of quick-service foods.  about the nutritional content of quick-service foods.  

Factors that could affect the quick-Factors that could affect the quick-service restaurant industryservice restaurant industry

Changing dietary preferences among Changing dietary preferences among consumers in favor of alternative foodsconsumers in favor of alternative foods

Changes in economic conditions, consumer Changes in economic conditions, consumer tastes and preferences, and the type and tastes and preferences, and the type and location of competing restaurantslocation of competing restaurants

Sales promotions by competitors, changes in Sales promotions by competitors, changes in customer visits, and changes in things such as customer visits, and changes in things such as energy costs energy costs

GrowthGrowth

According to Dun and Bradstreet According to Dun and Bradstreet subsidiary First Research, the output of subsidiary First Research, the output of US food and drinking places, which US food and drinking places, which includes fast food restaurants, is forecast includes fast food restaurants, is forecast to grow at an annual compounded rate of to grow at an annual compounded rate of 4.3% between 2007 and 2012. Quick-4.3% between 2007 and 2012. Quick-service restaurants are projected to post service restaurants are projected to post sales of $163.8 billion in 2009.sales of $163.8 billion in 2009.

GrowthGrowth

According to a leading marketing research company, the NPD According to a leading marketing research company, the NPD Group, the restaurant industry remained stable for most of 2008, Group, the restaurant industry remained stable for most of 2008, although traffic dipped in the fourth quarter, leading to the industry’s although traffic dipped in the fourth quarter, leading to the industry’s slowest traffic and dollar growth since the recession of 2002-2003…slowest traffic and dollar growth since the recession of 2002-2003…

The graph shows the total restaurant industry traffic from November The graph shows the total restaurant industry traffic from November 2003 up until November 2008. 2003 up until November 2008.

Prospects for long-term profitabilityProspects for long-term profitability

The QSR segment is generally less vulnerable to The QSR segment is generally less vulnerable to economic downturns and increases in energy prices than economic downturns and increases in energy prices than the casual dining segment is, although the economy may the casual dining segment is, although the economy may adversely impact QSR chains.adversely impact QSR chains.

The following information in the graph is done by First The following information in the graph is done by First Research and forecasts the estimated growth of the food Research and forecasts the estimated growth of the food industry in relation to the economy…industry in relation to the economy…

National Restaurant AssociationNational Restaurant Association

According to QSR Magazine, “Nearly 7 in 10 According to QSR Magazine, “Nearly 7 in 10 adults agreed in a recent National Restaurant adults agreed in a recent National Restaurant Association survey that purchasing meals from Association survey that purchasing meals from restaurants, take-out and delivery places makes restaurants, take-out and delivery places makes it easier for families with children to manage it easier for families with children to manage their day-to-day lives, and nearly eight in ten their day-to-day lives, and nearly eight in ten agreed that it is a better way for them to make agreed that it is a better way for them to make use of their leisure time rather than cooking at use of their leisure time rather than cooking at home.” home.”

ConclusionConclusion

Despite the downturn in the economy, the QSR industry Despite the downturn in the economy, the QSR industry will remain a cornerstone of the economy, representing will remain a cornerstone of the economy, representing 4% of the U.S. gross domestic product and employing 4% of the U.S. gross domestic product and employing 9% of the U.S. workforce.9% of the U.S. workforce.

Future growth in the fast-food restaurant industry Future growth in the fast-food restaurant industry depends on how well retailers are able to innovate, depends on how well retailers are able to innovate, provide value for money, and keep up and surpass provide value for money, and keep up and surpass competitors. competitors.

ConclusionConclusion

The fast-food industry is becoming more The fast-food industry is becoming more global and it seems that will continueglobal and it seems that will continue

Fast-food restaurants mostly compete on Fast-food restaurants mostly compete on price, location, and food qualityprice, location, and food quality

The growth of the fast-food industry is The growth of the fast-food industry is expected to generally stay the same over expected to generally stay the same over the next few yearsthe next few years