The Fast Food Industry

Amyn Bandali Meghan Holleran Stephanie Menke Philip Nachbar

AEM 4550 April 14, 2010

Agenda

 Introduction

 Industry Analysis

 Advertising Strategies

 Investment Recommendations

Why the Fast Food Industry?

“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, 2001

Industry Analysis

Industry Definition

• Companies that own, operate, and/or franchise eating places that provide a casual dining experience in a compressed time frame

•  Primary activities: ▫  Quick-service restaurants (QSR) ▫  Fast-food services ▫  Drive-thru and take-out facilities

Industry Structure   HHI = 3,208   Slightly skewed by

“other” representing 53.1% of small other firms

  Four-Firm Concentration Ratio: 35%

  Within regions and cities the industry tends to have a higher concentration in areas where households have an annual income of at least $50,000 per annum.

13%

10%

6%

6%

5% 5%

2%

53%

McDonald's Corporation

Yum! Brands, Incorporated

Wendy's/Arby's Group, Inc.

Starbucks Corporation

Burger King Corporation

Doctor's Associates Inc

Domino's Inc

Other

Industry Structure •  Industry itself is an

oligopolistic market, but operates under monopolistic competitive market of restaurants

•  Franchises account for about 10% all establishments, 65% of total revenue

Industry Analysis • Customer buying power: Moderate ▫  Negotiable switching costs

•  Supplier buying power: Strong ▫  Consolidated market—Sysco, US Foodservice Inc

• Barriers to Entry: Low ▫  Operators can lease premises and equipment,

furniture and fittings   lowers the initial capital costs, outlays and

borrowings ▫  Franchise agreements include equipment and

training systems

Internal Competition Location

Food Quality & Consistency

Style & Presentation

Food Range with New Products

Variety & Service

Health & Nutrition Value &

Information

Price

Finances 2006 2007 2008 2009 2010 Scale

Industry Revenue *173,255 *175,334 *170,074 *162,081 *164,025 $Mil

Industry Gross Product

*46,538 *46,910 *45,034 *42,872 *43,172 $Mil

Number of Establishments

*292,583 *295,801 *291,364 *284,663 *281,532 Units

Number of Enterprises

*228,102 *229,014 *226,037 *221,742 *219,525 Units Employment

*3,754,109 *3,784,142 *3,700,891 *3,597,266 *3,561,293 Units

Costs

31%

27%

7%

4%

3% 2%

21%

5%

Purchases

Wages

Rent

Depreciation

Advertising and Promotions Utilities

Other

Profit

Industry Trends: Slowed Growth Slowed Growth Positive Signs

•  High prices of commodities ▫  Energy, oil, food

•  US economic downturn ▫  Suffering job market ▫  Weak US dollar

•  Growing health and wellness concerns

•  Competition from “gourmet” restuarants ▫  Chipotle, Cosi, Panera

•  Changing customer base ▫  Fast food is an inferior good

•  Increased pace of life ▫  On-the-go food

Employment 2006 2007 2008 2009 2010 Scale

Total Wages *45,629 *46,085 *45,578 *44,530 *44,530 $Mil

Imports and Exports •  In recent years exports have been accounting for an

increasing share of total revenue of major operators

•  2005: Yum Brands opened 409 new restaurants in China to make a total of 2,291. ▫  By mid-2009, store numbers increased to 3,208, or by a

further 40%, with 2,670 KFC, 435 Pizza Hut Casual Dining and 81 Pizza Hut Home Service stores in China.

•  June 2009: Domino's Inc. had 489 domestic company-owned stores, 4,498 domestic franchise stores , and 3,742 international stores (42.9% of total stores).

“There are no reliable estimates of import and export flows for this industry over time” (IBISWorld).

Regional Population Compared with Industry

Region Population (%) Establishments (%) Employment (%) Revenue (%)

Far West 17 17.6 16 17.7

Great Lakes 15.8 16.6 17.5 16.8

Mid East 16.2 16.7 11.8 13.4

New England 4.9 5.8 4.4 4.9

Plains 6.7 7.1 7.7 6.6

Rocky Mountains 3.3 3.4 3.5 3.2

South East 24.7 22.4 27.5 25.5

South West 11.4 10.4 11.6 11.9

Total 100 100 100 100

Ad-Sales Ratios Across Industries

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

McDonald's Corp

Yum! Brands, Inc.

Wireless Telephone Industry

Automobile Industry

Softdrink Industry

Alcoholic Industry

Advertising Strategies

Primary Advertising Methods

• Persuasive • Comedy • Celebrities • Sex • Specific Promotions & Giveaways

Advertising Mediums

•  Television • Corporate Sp0nsorship •  Product Placement •  Paid Search • Online Display Advertising •  Print Advertising • Brand-Interactions

Television Advertising

Total Ad Spending By Brand

KFC $179,377,200

Burger King $188,483,700

Taco Bell $212,286,900

Subway $245,505,700

Wendy’s $249,962,500

McDonald’s $472,219,000

Total Ad Spending Cont.

11%

11%

10%

28%

14%

12%

14% Other

Burger King

KFC

McDonalds

Subway

Taco Bell

Wendys

Most Expensive Ad Spots in 2008 and 2009

•  $1,500,000 - $3,000,000 Super Bowl

•  $1,111,000 – $2,222,000 AFC Championship Game

•  $1,940,000 Baseball All-Star Game

•  $1,307,000 – $1,689,000 Academy Awards

•  $1,389,000 – $1,424,000 American Idol Finale

•  $1,195,000 – $1,241,000 NCAA Basketball Championship Game

•  $1,207,000 Summer Olympics Opening Ceremony

Average Ad Expenditures

0

20000

40000

60000

80000

100000

120000

140000

Burger King KFC McDonalds Subway Taco Bell Wendys

Most Popular Day Parts for Advertising

• Prime

• Late Fringe (BK & Wendy’s)

• Sunday Afternoon (KFC & Taco Bell)

• Saturday Morning (McDonalds)

• Overnight (BK & Subway)

Average Costs of Top Day Parts • Most Expensive: ▫  Prime Access 2 ($208,000) ▫  Late News ($184,000) ▫  Prime Access 1($183,000)

•  Least Expensive: ▫  Saturday Morning ($5,000) ▫  Overnight ($6,300) ▫  Morning Daytime 2 ($17,000)

Average Cost/Ad by Day of Week

0

20000

40000

60000

80000

100000

120000

140000

SUN TUE THU MON WED FRI SAT

Avg

Cos

t/A

d (

Dol

lars

)

Most Common Types of Products Advertised

20%

15%

13% 11%

10%

8%

5%

3% 3%

10% General Promotion - QSR Count

Burger Product Count

Sandwich Product Count

Chicken Product Count

Value Product Count

Kids Meal Count

Sponsored Event Count

Breakfast Product Count

Coffee Product Count

Other

Number of Ads by Program Type

0

500

1000

1500

2000

2500

3000

Burger King KFC McDonalds Subway Taco Bell Wendys

Fre

qu

ency

of

Ad

s

Childrens (Childrens/family & animation) DRAMA/ADVENTURE

FEATURE FILM

GAME SHOW

News

POLICE/SUSPENSE/MYSTERY

SITUATION COMEDY

SLICE-OF-LIFE

SOAP OPERA

Sports

TALK

VARIETY - GENERAL

Products Advertised by TV Program

•  Findings: ▫  Coffee & Breakfast products highly concentrated to

News Programs ▫  Desserts concentrated on Children’s Programs and Talk

Shows ▫  80% of Kids Meals targeted to Children’s Programs ▫  70% of burrito ads, 80% of taco ads, and 68% of

Mexican-style products are targeted to sports (Taco Bell)

Products Advertised by TV Program Cont. •  Findings: ▫  Chicken highly targeted to Slice of Life Programs ▫  38% of Fish Product Ads concentrated on Soap

Operas ▫ ¼ of Salads targeted to Slice of Life, another ¼ of

Salads targeted to Soap Operas ▫  Value Meal Products concentrated on Sports

Programs (36% of Value Meal products targeted towards Sports)

Company Overview: McDonalds • Highest total ad expenditure •  Lowest average ad expenditures (of top

competitors) • Advertises primarily during primetime, Saturday

mornings •  Targets primarily children (and sports shows • Only top brand which targets

primarily children’s programs

Company Overview: Burger King

•  4th highest total ad expenditure •  2nd lowest average expenditure per ad (of top

competitors) • Advertises primarily during

primetime, late fringe, overnight •  Targets talk shows and

sports programs

Company Overview: Wendy’s •  2nd highest total ad expenditures •  2nd highest average expenditure per ad • Advertises primarily during primetime and late

fringe •  Targets slice of life,

sports programs, drama/adventure programs

Company Overview: KFC •  Lowest total ad expenditures among top 6

competitors •  3rd highest average expenditure per ad •  Primarily advertises during primetime and

Sunday afternoons •  Targets sports programs

and drama adventure programs

Company Overview: Taco Bell •  4th highest total ad expenditures • Highest average expenditure per ad (purchases

mostly expensive ads) •  Primarily advertises during

primetime and Sunday afternoons (sports)

•  Targets almost entirely sports (men)

Company Overview: Subway

•  3rd highest total ad expenditures •  4th highest average ad expenditure •  Primarily advertises during primetime and

Saturday morning •  Targets sports, talk, and children’s programs

Other Advertising Mediums

Corporate Sponsorship Expenditures 2008 & 2009

• Burger King: $11,944,300 • Chick-Fil-A: $352,800 • KFC: $153,000 • McDonalds: $49,294,900 •  Subway: $22,673,800

•  Total Industry: $84,418,800

Corporate Sponsorships Cont.

0

20

40

60

80

100

120

140

160

Burger King Sponsorship McDonalds Sponsorship Subway Sponsorship

DRAMA/ADVENTURE

FEATURE FILM

GAME SHOW

News

POLICE/SUSPENSE/MYSTERY

SITUATION COMEDY

SLICE-OF-LIFE

SOAP OPERA

Sports

TALK

VARIETY - GENERAL

Product Placement •  Increasing in occurrence ▫  Tivo, DVR ▫  Viewers Tune Out Ads

•  Television Shows, Films •  Primarily McDonalds, Burger King, Taco Bell

Online Advertising

• Display Advertising ▫  Relatively Common ▫  Often Floating & Expanding Ads

•  Paid Search ▫  Burger King: Google & Bing ▫  Subway: Google & Yahoo! ▫  KFC: Google

Print Advertising •  Shift from Print to online •  Typically Persuasive Advertising •  Slogans prominent ▫  “I’m Lovin It” ▫  “We Love to See You Smile” ▫  “Have It Your Way” ▫  “Think Outside the Bun” ▫  “Do What Tastes Right”

Brand Interactions

Brand Interaction

• Advertising Age: Brand Interactions Are the Future ▫  Micro-Interactions: “Micro-interactions are the everyday exchanges

that we have with a product, brand and service. Each one, in and of itself, seems insignificant. But combined they define how we feel about a product, brand or service at a gut emotional level. In the case of Google, each time it helps us find what we are looking for, view a map, send an e-mail or connect with a friend, it deposits a positive impression in our memory banks. “

Brand Interaction

Brand Interaction

Brand Interaction

Brand Interaction

Demographic Analysis

Most Advertising: Per Capita

St Louis; 29.63

Little Rock; 24.32

Minneapolis ; 21.76

Springfield Mo; 18.29 Knoxville ; 17.01

Denver ; 15.28

Shreveport ; 15.14

Birmingham ; 14.56

Salt Lake City ; 13.17

Cedar Rapids; 12.85

Least Advertising: Per Capita

San Francisco, 2.16

Cincinnati, 1.73

Philadelphia, 1.64

Chicago, 1.57

Boston, 1.53

Norfolk, 1.41

New York, 1.01

Cleveland, 0.87

South Bend, 0.80

Milwaukee, 0.39

Lexington, 0.05

Fast Food Restaurant Density

Median Income vs. Advertising

0

10,000

20,000

30,000

40,000

50,000

60,000

0 5 10 15 20 25 30 35

Inco

me

Advertising

Median Income vs. Advertising Per Capita

R: .23

Latino Population vs. Advertising

0

5

10

15

20

25

30

35

40

45

0 5 10 15 20 25 30 35

Lati

o p

op

Advertising

Advertising Per Capita vs. Latino Population

R: -.12

Black Population vs. Advertising

R: .37

White Population vs. Advertising

0

10

20

30

40

50

60

70

80

90

100

0 5 10 15 20 25 30 35

Wh

ite P

op

Advertising

Advertising Per Capita vs. White Population

White

R: .32

Advertising Vs. Obesity

• Midwest: 8.07 • Northeast: 2.33 • Northwest: 8.01 •  Southeast: 9.16 •  Southwest: 8.52 • West: 6.94

African Americans and Advertising •  Obesity is higher among African Americans

▫  Women: 77% Overweight 49% obese

▫  Men: 63% overweight 28% obese

•  Ads for African American television is typically for

less healthful foods

•  An individual watching 2 hrs of television 52 weeks

per year would be exposed to 4888 food ads

•  Twice as likely to contain low-fat claims

Ad Clip http://www.youtube.com/watch?v=7YRcBTq6T4A

Recommended Ad Strategies

Demographic Targeting

• Mixed Demographic Programs: General Promos, Neutral Products

• Morning Programs (News) Breakfast/Coffee Products

•  Predominantly Women’s Programs (Soap Operas, Slice of Life) Chicken, Fish, Salad Products

•  Predominantly Men’s Programs (Sports) Value Meal Products

Demographic Targeting Cont.

• African American Programming •  Southeast Region • High fast food density regions and obesity rates •  35,000-40,000 income level

Cost Analysis

•  Saturday Morning Children’s Programs Cheap Kid’s Meal Products/Promotions

•  Talk shows cheap Promote products based on the specific program’s demographic

•  Soap Operas Cheap Products which you want to target to women

•  Sports Programs Expensive Use only if you obtain a high return, Men-targeted products

Investment Strategy

Venture Capitalists

• Monopolistic competitive structure indicates there is opportunity for profit

• Entering market as franchiser is proven model ▫  However, corporations are closing

under-performing sites • Highly saturated market ▫  Competing against market leaders at national level

will lively prove to be unsuccessful

Personal Investment: Industry Outlook

•  4.7% slip in industry revenues since 2008 ▫  Likely a response to the

economy as well as rising costs for the industry

• Expected to remain under significant operational pressure until economy begins to recover

YearRevenue(millions)

Growth%

2009 $162,081

2010 $164,025 1.2

2011 $169,602 3.4

2012 $174,012 2.6

2013 $177,840 2.2

2014 $181,575 2.1

2015 $185,570 2.2

Forecasted Revenue Growth (IBISWolrd)

McDonalds (MCD): $68.92

Yum! Brands Inc.: $41.16

Burger King Holdings (BKC): $21.82

Wendy’s (WEN): $5.31

Questions?