fast-food restaurant industry analysis

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


Scope of Competitive rivalry– International : Most companies of the industry

operate stores in many countries and compete with each other in specific country markets.


• 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%


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


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%


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


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


Technology and Innovation:– Automated Inventory Ordering System– Just in Time operations– Fast order taking systems

• More efficient operations

• Reduces operating costs

• Increases profit margin


Processes and Innovation– Introduction of new order-to-make burger or

sandwich assembly process• Reduces waists

• Increases food freshness

• Increases customer satisfaction

• Custom orders


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


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


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


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


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


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


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

Competition Analysis

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


• 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


• 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


• 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


• 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


• 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


• 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.


• 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


• 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.


• 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

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

Competitive Position of Major Companies

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

Top Three AnalysisMcDonald’s

• Chairman and CEOJack M. Greenberg

• TickerMCD

• 2001 Sales $20,051,000,000

• Major IndustryFood Service

• Sub IndustryFast Food

• CountryUnited States

• CurrencyU.S. Dollars

• Fiscal Year EndDecember 31st

Top Three Analysis McDonald’s (cont.)

• Number of Restaurants13,099

• Number of Employees1,500,000

• ExchangeNYSE, CSE

• Market Capitalization37,918,000,000

Top Three AnalysisBurger King

(Part of Diageo Company)

• Chairman, CEO and PresidentJohn Dasburg

• TickerDEO

• 2001 Sales$8,500,000,000

• Major IndustryFood and Beverages

• Sub IndustryFast Food



• Fiscal Year EndDecember 31st

Top Three AnalysisBurger King (cont.)


• Number of Employees360,000

• ExchangeNYSE


Top Three AnalysisTaco Bell

(Part of Tricon Global Restaurants)

• Chairman and CEODavid Novak

• TickerYUM

• 2001 Sales$4,800,000,000

• Major IndustryFast Food



• Fiscal Year EndLast Saturday in December

Top Three AnalysisTaco Bell (cont.)


• Number of Employees320,000

• ExchangeNYSE


Competitor Analysis

Competitor Analysis

• Which companies are in the strongest/ weakest position?Strategic Group Mapping

• A technique for revealing the competitive positions of industry participants.

Competitor AnalysisStrategic Group Mapping


• The positions of each company are represented by the circles in the strategic group map.

• The size of the circles represents each company’s respective share of total industry sales.


McDonald’s• Growth

– In 2001, McDonald’s took actions to streamline operations in an effort to realize sales growth through improved operations and customer service.

– McDonald’s plans to add up to 1,400 restaurants in 2002.

• Geographic coverage– McDonald's serves 46 million people every day in about 30,000

restaurants in 121 countries.

• Share of industry revenues– Market share: 34.7%

– 2001 Sales revenues: $14.87 billion


Burger King• Growth

– In 2001, Burger King announced it is launching 14 new and improved menu items.

• Geographic coverage– Burger King currently operates 11,435 restaurants in 57 countries and

territories worldwide.

• Share of industry revenues– Market share: 15.8%

– 2001 Sales revenues: $8.5 billion


Taco Bell• Growth

– Taco Bell reported an increase in sales of 12% from the previous year in December 2001.

– Taco Bell dominated the Mexican QSR Sales with a 64% share as of year end 2001.

• Geographic coverage– Taco Bell operates 239 of its total 6,683 restaurants in 14 countries

worldwide.

• Share of industry revenues– Market share: 9.6%– 2001 Sales revenues: $4.8 billion

Competitor AnalysisConclusions

• The three circles on the strategic map are very close together, which suggests strong competitive rivalry among the companies.

• McDonald’s is clearly the industry leader.– They have over one-third of the total market share.

– They have advanced the furthest into the global market.

• Taco Bell has the most growth potential.– Although they currently have a smaller market share, they have a

lot of potential if they increase their expansion globally.

Competitor AnalysisConclusions (cont.)

• Although Burger King has over 15% of the market share, they do not have much potential for growth.

• Burger King’s parent company, Diageo, is planning to spin off the company in order to focus more on beverages.

• Burger King is quickly losing market share to both McDonald’s and Wendy’s International.

Competitor AnalysisCompetitors’ Next Moves

McDonald’s• Currently, McDonald’s strategy is working well for them.

• Being the market leader, they are under no pressure to change the path they are currently on.

Burger King• Burger King has recently made some changes in

management and marketing that have hurt their operating results.


Burger King (cont.)• In order to improve their position, Burger King

has moved its focus from its current franchises to seeking potential new franchisees.

• Burger King’s new management is focusing on strengthening the brand name through improved marketing, product pipeline, cooking platform and emphasis on service and friendliness.


Taco Bell• In order to boost sales, Taco Bell’s parent company,

Tricon Global Restaurants, has been aggressively co-branding its products.

• Tricon Global consists of Taco Bell, KFC, Pizza Hut, and has recently acquired Long John Silver’s and A&W Restaurants.

• With the combined strength of the 5 companies, Tricon is focusing its growth on international expansion.

Key Success Factors

Key Success Factors

The Key Success Factors of Fast-Food Restaurant Industry are:

• Convenient Locations• Clever Advertisement• Consistency• Food Quality• Food Innovation• Cost Control• Favorable Image & Good Reputation• Fast Services

Key Success Factors

Convenient Locations• Fast-food restaurants must be easily visible and

accessible for quick entry by the customers. An establishment which is on the wrong side of the street and does not take advantage of traffic flow could be doomed to failure unless the unit is a well established chain.

• As competition gets tougher, the fast-food restaurants strive to make their outlets more convenient.

Key Success Factors

Convenient Locations• There are fast-food restaurants in shopping malls,

in hospitals, on military bases, and on college campus, airports etc.

• Some fast-food restaurants are operated in convenience stores; therefore, they can be accessed for quick entry by customers. For example, McDonald’s are operated in Wal-Mart.

Key Success Factors

Clever Advertisement• Advertising is an important element of the success

of fast-food restaurant industry. It can induce customers to patronize the fast-food restaurant in order to increase sales. For example:

• The 1990 Super Bowl was a key advertisement year for McDonald's. McDonald’s promised to cut prices of its bacon, lettuce, and tomato sandwiches if the 49ers won or cut the price of the BigMac if the Denver Bronco's won.

Key Success Factors

Clever Advertisement• Wendy's earned national recognition with their

"Where's the Beef?" campaign.

• Burger King has used memorable campaign such as “Have it your way” and “We do it like you’d do it.”

Key Success Factors

Consistency• Consistency of food is particularly important to fast-

food patrons. It is a quality that attracts many customers.

• According to National Restaurant Association, 92.2 % of the respondents strongly agreed or agreed that they expect consistency from one visit to the next when they patronize fast-food restaurants. Therefore, the one of the key to a successful franchise of fast-food restaurant chains is to offer exactly the same product or service at numerous locations.

Key Success Factors

Food Quality• Many fast-food restaurants enact stricter quality

control guidelines for their food. It is because stricter quality control can ensure food safety.

• For example, McDonald’s keeps tight control over its suppliers shipping frozen prepattied beef to its restaurants and drawing strict specifications for its potatoes.

Key Success Factors

Food Innovation• The fast-food restaurant industry requires a product

innovation capability because of the changing tastes of consumers. In order to succeed today, fast-food restaurants must cater the tastes of consumers.

• Many fast-food restaurants offers signature items, and diversified menus in order to meet customers’ needs. Many new products are always under development in food lab kitchen for evaluation in selected markets.

Key Success Factors

Food Innovation• For example, McDonald’s menu is often enhanced

with promotional products to add variety on limited time basis. The menus are constantly examined around the world in the light of changing customer’s taste, as well as local customs. In U.S., customers now have more choices in McDonald’s, including Fruit ‘N Yogurt Parfaits, McSalad Shakers, and Breakfast Bagel sandwiches.

Key Success Factors

Cost Control• Cost control is important to the success of fast-food

restaurants because their revenues are based on smaller average checks compared to the cafeterias, theme restaurants, and fine-dining restaurants.

• Low cost enables fast-food restaurants to make higher profits and compete with rivals. For example, minimum wage labor which has been traditional routes this phase of fast-food restaurant industry has taken to build up profit margins.

Key Success Factors

Favorable Image & Good Reputation• Fast-food restaurant which has a favorable image and

good reputation can bring confidence to the customers.• For example, McDonald’s is one of the most powerful

brands in the world. It has earned the trust and confidence of people the world over because of its favorable image and good reputation. McDonald’s is known as a great place for kids and families; for convenient, hand-held meals; for World Famous Fries and Big Macs; and for outstanding value.

Key Success Factors

Fast Services• Accurate filling customer orders, and short

delivery times are important to satisfy customer’s immediate needs of the “fresh” food.

• Many fast-food restaurants have drive-thru service because many people tend to be pressed for time. Therefore, fast-food restaurants should continue focus on improving the speed of drive-thru service.

Key Success Factors

Fast Services• For example, McDonald’s enhance the drive-thru

experience by serving two cars at a time. In some locations, McDonald’s are using double-lane drive-thrus. In other locations, the employees of McDonald’s use remote order-taking devices to take order for the drive-thru customers during busy periods.

Industry Prospects and Overall Attractiveness


• Factors Making Fast-Food Restaurant Industry Attractive

• Factors Making Fast-Food Restaurant industry Unattractive

• Special Fast-Food Restaurant Industry Issues

• Profit Outlook


Factors Making the Fast-Food Restaurant Industry Attractive

• Consumer Trend

• Growth Potential

• Healthy Profitability


Consumer Trend• Nowadays, people are eating out more than ever

before. More people are cooking fewer meals at home. According to National Restaurant Association, more than 40 % of consumers say that they are cooking fewer meals at home. In 1955, 25 % of household food expenditures was spent at restaurants. In 2001, this figure grew to 46 %. In 2010, this figure is projected to increase to 53 %.


Growth Potential• Although fast-food restaurant industry is a mature

industry in U.S, there is room for it to grow locally and globally.

• Therefore, as long as the participants of the fast-food restaurants put the efforts into strategic plans, marketing, product innovation etc., there are great opportunities for growth in the fast-food restaurant industry.


Growth Potential• According to National Restaurant Association

(NRA), in 2002, the sales of fast-food restaurants are expected to grow at a slower 3.7 percent rate, adjusted for inflation to 1.3 percent and resulting in sales of $115.2 billion, a $4.1 billion increase.


Growth Potential• Even though the projected growth rate in 2002

will be low, a number of factors will combine to generate additional sales this year. The factors include an expected economic upturn later in the year, the growing strength of major fast-food restaurant brands and the continuing impact of industry-favorable demographic changes.


Growth Potential• Fast-food restaurant industry has tremendous

potential growth in other countries.• For example, the number and diversity of fast-

food restaurants across east China has mushroomed in the past several years with no end in sight. In China, there is enormous short-term and long-term growth opportunities of the fast-food restaurant industry.


Healthy Profitability• Fast-food restaurant industry has a healthy profit

margin. The 2001 net profit margins of the market leaders in fast-food restaurant industry are listed as follows:

Net Profit MarginMcDonald’s 11.0% Wendy’s 8.1%


Factors Making the Fast-Food Restaurant Industry Unattractive

• Rivals from Other Markets

• Fierce Product/Price Competition


Rivals from Other Markets• The competitive force will become stronger. The

fast-food restaurant industry has begun to suffer increasing loss of market share to convenience stores, prepared food offerings at grocery stores, microwave preparation at home. Although not large in absolute sense, these competitors are capturing a large portion of growth experienced in food service.


Fierce Product/Price Competition• Competitions among rivals drive the prices

of fast-food items down; as a result, industry profitability will be affected.

• For example, McDonald’s, Burger King, Wendy’s always use “99 cents” of burger promotion campaigns to induce customers to patronize them.


Fast-Food Restaurant Industry Issues

• Food Safety Issue

• Health Issue

• Toys Issue

• Staffing Shortage Issue


Food Safety Issue• Hamburger has become U.S. national food. U.S.

people eat more meat than any other people in the world. The mad cow disease abroad (in Europe and Japan) made people fear and concerned about the food safety. As a result, the “beef” problem brought some decline of the sales of fast-food restaurants.


Food Safety Issue• In U.S, since 1998 due to suspected bacterial

contamination, more than 100 million pounds of meat has been recalled.

• High-volume meat production makes it easy for virulent strains of bacteria to travel far and wide. Therefore, fast-food restaurant operators have to ensure food safety control in order to give sufficient confidence to customers.


Health Issue• Nowadays, a growing number of people deeply

concern about the quality of their own diets and their kid diets. Nutrition experts point out that fast food is often high in calories, sodium, fat and cholesterol. On the other hand, people with food allergies or other health concerns often ask specific questions about preservatives, artificial colorings, and other additives.


Health Issue• As people are concerned about their health, they

prefer to eat healthy food. As a result, some fast-food restaurants provide healthful offerings, for example, vegetarian, and non-fried food. Therefore, fast-food restaurants have to adjust their menus and offer new products in order to cater the changing tastes of consumers.


Toys Issue• Many fast-food restaurants distributed toys with

the purchase of Happy/Kid Meals to induce purchases. However, reports showed that some toys have potential choking hazard to young children. As a result, the fast-food restaurants had to recall the toys that have problems. Customers can return the toys for for free fries or drinks.


Toys Issue• The largest fast-food toy recall came in December

1999 when Burger King recalled more than 25 million Pokemon balls that had been distributed with kids meals. The U.S. Consumer Products Safety Commission (CPSC) and Burger King said the balls posed a suffocation risk to small children. A 13-month-old girl suffocated on the toy and a 4-month-old boy died when the ball-shaped container lodged over his mouth and nose.


Toys Issue• Problems with the safety of fast-food toy

promotions have affected the sales of fast-food restaurant chains. Therefore, fast-food restaurants should ensure high-quality and safety standards of toys from the toy suppliers.


Staffing Shortage Issue

• Fast-food restaurants had a high employee turnover rate because the compensation is usually paid at minimum-labor wage. According to the 1998 survey by the National Restaurant Association, fast-food restaurants had the highest employee turnover on average with 117 %.


Staffing Shortage Issue• Costs to find, fill, and train employee

replacements can bring high costs to businesses.• Therefore, fast-food restaurant operators have to

respond this problem. They should offer rewards and incentives, e.g., health insurance, to retain qualified and motivated employees.


Profit Outlook• Much of the success of the fast-food restaurant

industry is dependent on the state of the overall economy. Because of the current economic downturn, fast-food restaurant industry has slow growth rate.

• An improving economy and continued growth in disposable personal income will be the catalysts to propel the fast-food restaurant industry into another year of real growth.


Profit Outlook• The fast-food restaurant industry’s overall profit

prospects are above average; therefore, it can be considered attractive/favorable even though fast-food restaurant industry is highly competitive business.

• If the industry participants continue to strengthen their long-term competitiveness positions in the fast-food restaurant industry, expand sales effort, and look for ways to protect their competitiveness, they can earn good profits.

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