The demand of products In this Industry Is driven by consumer taste and personal income. The profitability of the companies depends on efficient operation and product marketing. The Fishbowls, a statistics portal, that collects data and conducts research for over 1 ,OHO industries presented facts and statistics regarding united States fast food industry. As we can see from the exhibit 1, the fast food industry in the united States generated 1 91. 03 billion U. S dollars in 2013; this figure was forecasted to exceed 210 billion by 201 8 (Fishbowls, 2014).
Fishbowls also put forward that in 2013, there were ore than 232,000 fast food establishments in the United States, employing over three and a half million people (Fishbowls, 2014). According to the Intelligence Report on fast food restaurants by Ideological Branding Agency, this fast food industry in the United States is highly fragmented: the 50 largest companies account for only 20% of the revenue (Ideological Branding Agency, 2013). Today, the United States market has one of the largest fast food industries in the world, and more than 100 countries around the world would have franchised American-owned fast food restaurants.
The sat food industry in United States is highly disintegrated and therefore, for any Investor to enter this industry a thorough analysis of the industry is required. This report briefly conducts comprehensive analysis of the fast food industry of the united States using Porters Five Forces framework. In addition, the report emphasizes how fast food industry leaders such as McDonald’s, and Yum! Brands Identified their competitive advantages and took actions to sustain their above average profitability. Finally, this report concludes with the challenges theses firms are currently facing ND their potential outlook for these In next five years.
Industry Analysis: Porter’s Five Forces Model The “Porter’s Five Forces” model assisted In analyzing the competitive forces affecting the united States fast food industry. Within this framework each force is rated by its strong competitive force can be considered as a threat because it depress profits, whereas a weak competitive force can be regarded as an opportunity because it allows the company to earn greater profit” (Hill & Jones, 2012). The following are the briefly analyzed competitive forces of the fast food industry.
Threat of New Entrants: A) Brand Equity (High): The industry is dominated by number of Quick Service Restaurants (USSR) or fast food chains such as McDonald’s Corporations and Yum! Brand Inc. That includes KEF, Pizza hut and Taco Bell. According to Fishbowls, McDonald’s lead the market with total market shares of 21 . 7% followed by Yum! Brands with the total market shares of 8. 1% (Fishbowls, 2014). Exhibit 3 demonstrates the market share of leading brands in the fast food industry in 2013. Reputation capital is extremely vital in this highly fragmented market to enhance the consumer perceived value.
These brands have established strong recognition and customer loyalty. The new players will struggle to establish same degree of brand equity due to lack of brand awareness and reputation capital to utilize. B) High Differentiation of Products with Existing Products (Moderate): One of the key factors in achieving above average profitability in this industry is to differentiate their products from those that already exist. This can be done by having wide range of attractive items that will appeal to a broad range of consumers. The new entrant should be able to differentiate it’s product in order compete in this industry.
In addition, they also need to maintain the taste quality, efficiency and customer service consistent throughout their franchises. C) Economies of Scale (Moderate): The existing chained USSR benefits from economies of scale due to their well-established networks with suppliers, distributors and advertisements. The advantage enables the chained USSR to offer their products at a lower cost. New players will lack this advantage unless they become connected with these networks. Bargaining Power of Suppliers (Low- Moderate): A) Low Food Supplier’s Switching Costs (Low): The fast food industry in the United
States is saturated with supplier’s offering similar or identical products. Therefore, the bargaining power of individual suppliers is diminished. The buyer has the advantage of putting pressure on suppliers to lower costs, reduce delivery time and offer better products. B) Beverage Supplies (High): A beverage is a complementary product that goes well with fast food. Pepsi and Coca-Cola are the two giants in the Beverage Industry. The Sir’s normally enter in a contract with a specific beverage supplier and are obligated to sell only their beverages. For example, McDonald’s only offers Coca-Cola products whereas Yum!
Brands strictly sell Pepsi products. We can conclude that beverage suppliers have a high bargaining power. C) Labor Force (Low): Since the USSR in the fast food industries focus on providing food services at an affordable price, the employees working in their chains are subjected to lower wages. The labor force in the fast food industry is not protected by any labor union, which reduces their collective bargaining power. Bargaining Power of Buyers (High): The consumers of the fast food industry are cost dine-in restaurants, buyers have high power to affect the sales of the fast food industry.
If the companies in this industry increase their prices, buyers will be willing to pay little extra to enjoy a meal in a dine-in restaurant and enjoy a varieties of classic meals. Threat of Substitutes (Very High): The items available at USSR are discretionary and easily substitutable with the other types of meals. The following is a list of substitutable items for fast food: meals prepared at home, ready-made meals, low cost dine-in restaurants and ready to eat food available at convenience stores. Due to rising health concerns amongst the consumers, healthy substitutes are becoming more and more attractive.
Therefore, the threat of substitutes in the United States fast food industry is very high. Rivalry Amongst Existing Competitors (High): The United States fast food industry is highly fragmented with a large number of competitors in the market. McDonald’s Corporations, Yum! Brands, Doctor’s Associates Inc. , Wendy International Corp.. , Burger King Corporations and many other small to medium size Sirs. All of the existing players in the industry compete on high brand power, low margin and high turnover, and advertisement campaigns such as “Happy Meals” from McDonald’s and “Two Tuesday’ deals from Pizza Hurts.
In edition they also compete on prices, winning contracts from the beverage suppliers such as Pepsi and Coke, location, maintaining high quality of food and consistency through out their restaurant franchises. Therefore, the competition amongst the existing players in the industry is very intense and high. Top Two Competitors in the United States Fast Food Industry McDonald’s Corporation McDonald’s is the leading fast food chained restaurant in the United States fast food industry with a market share of 21 . 7% and 14,267 franchised restaurants that serve 40 million customers everyday (McDonald’s Corporations , 2014).
A McDonald’s store s operated either by a franchisee, an affiliate or the corporation itself. The corporation revenue is generated through the rent, royalties and the fees paid by the franchisees, as well as sales by the company-operated restaurants. In 2013, McDonald’s annual sales revenue in the United States alone was 8. 1 billion dollars with 2% increase over 2012 (McGrath, 2014). It started in the year 1955 and from then, McDonald’s success was centered in a simple formula: give consumer value for money, good quick service and a consistent quality in a clean environment, and they will come back time and time again (Hill & Jones, 2012).
The process of order taking, preparing food and delivering service was standardized throughout all theirs franchises and corporation operated stores in order to provide value for money and consistent quality. In addition, McDonald’s close relationship with wholesalers and food producers combined with an efficient supply chain enabled them to reduce costs. As McDonald’s grew bigger, the buying power enabled it to realize economies of scale and pass on cost savings to customers in the form of low-priced meals, which that, wherever people went, they could find one.
This coupled with the consistent experience and low prices, drove brand loyalty (Hill & Jones, 2012). Therefore, standardized and quick service, close ties with its suppliers, efficient supply chain management, low priced meals, availability of restaurant and customer brand loyalty are some of the McDonald’s distinctive competencies. As the United States becomes more health cautious, McDonald’s annual sales are being affected significantly. McDonald’s has been a target of much criticism in recent years for serving food high in saturated facts, salt, sugar and calories (Marketing, 2012).
The company responded to this challenges by introducing a wide range of leather options and reducing the salt and sugar content of their food. They added grilled chicken sandwiches, wraps, and varieties of salads to their menus. McDonald’s has highly visible and innovative marketing campaigns such as TV, and Youth commercials, ads on bus tickets, and sponsoring major events such as the Olympic Games and the FIFE World Cup to create product awareness amongst consumers. McDonald’s strategically decided to go global to boost it sales revenue.
They adopted the marketing mix called “think global, act local” to grab international market share in he global fast food industry and in the beverage industry with the introduction of MacAfee. McDonald’s strategically franchised its brand to local people internationally, so that they could get a good sense of the market they wanted to operate and introduce a menu that is altered to the local culture. For example, McDonald’s does not serve beef in India and introduced Chicken Maharaja.
By doing this, the delivery and the interpretation of what might be seems as a US brand culture are automatically translated by the local people in terms of both product and services (Vaginal, 2001). The Fishbowls market research report on global fast food restaurants highlighted that the global fast food industry experienced a growth of 3. 5% in annual revenue between 2010 and 2013 (Fishbowls, 2014); referring to exhibit 3, McDonald’s outstripped the industry standard with an annual revenue growth of 16. 74% between 2010 and 2013 (MAC company Financial).
Even though McDonald’s have demonstrated their ability to expand scale and scope of the operations globally, the company is facing weak growth in European market certainly because of the weak economy in the Europe. However, the even bigger halogen is growing competition and saturation in McDonald’s market that is highly globalizes segment of the world economy where consumers have uniform preferences (Moratoriums, 2013). For example, McDonald’s is facing strong competition in China against KEF, Pizza Hut and local start-ups. Yum! Brands Yum!
Brands is the second leading fast food chain restaurant in the United States fast food industry with a market share of 8. 1% and 18,106 franchised restaurants in the United States (YON! Financial Data: Restaurant Counts). Yum! Brand is a portfolio of brands consisting Taco Bell, KEF, and Pizza Hut. Even though Yum! Brand is a United States based fast food company, 70% of its total profits in 2013 is came from 2013, Yum! Brands company annual sales revenue in the United States alone was 2. 1 billion dollars and franchisee sales of 15. 6 billion dollars (Yum Financial Data). Once a part of Pepsi, Yum!
Brands became an independent firm when Pepsi decided to step out of aggressively competitive fast food business. All of the three units of Yum! Brands have been fiercely competing with McDonald’s for market share in the United States fast food industry since decades. Yum! Brands goal is to be the best in he world at providing branded restaurant choices. They have a diversified portfolio of category-leading brands that are highly successful in a stand-alone basis. With the combination of KEF/Taco Bell and Taco Bell/Pizza Hut Express, Yum! Brands is able to add significant incremental average sales per unit (Knows).
With the acquisition of Long John Silver’s and A&W in 2002, Yum! Brands tripled their multi-branding potentials in United States. With the “Fish First” strategy Yum! Brands have created a combination of Long John Silver’s/A&W that enabled them to expand in the areas of gig demand, and where KEF and Taco Bell already existed. They took over Pasta Bravo, a California based chain restaurants with a mouthwatering menu of pasta, to partner with Pizza Hut dine-in restaurant. This enabled them to serve Pizza and Pasta at a same time (Knows). Yum! Brand’s main focus is on a global expansion in emerging markets like China, India and Russia.
Pizza Hut and KEF already have 1000 and 20 restaurants in China respectively (Knows). They have the unique advantage of owning their own supply chain network that covers major Chinese provinces. “The China Division system sales increased 1%, driven by 7% unit growth and 9% same-store sales growth. Restaurants margin increased 6. 8% to 23. 4% along with increase in operating profit to 80%” (Investors Release). Referring to exhibit 4 and exhibit 5: quarterly sales report of 2014 for the China division and India division respectively, all the units of Yum! Brands have experienced significant growth. The Yum!
Brand in the United States and China, specifically KEF is struggling with sales namely due to the negative publicity of the poultry farming and the subsequent news of avian flu. This is the biggest challenge Yum! Brand is currently facing. Outlook for Next Five Years The global fast food industry is expected to reach 617. 6 billion in 2019 with an annual growth rate of 4. 4% (Transparency Market Research Pat. Ltd. , 2014) and with a growth rate of 3. 6% in the United States (Fishbowls, 2014) between 2014-2019. Therefore, both McDonald’s and Yum! Brands have potential to grow even bigger in this market.
McDonald’s has planned to reinvest in their operations, restaurants, and technology to capitalize on the uprising long-term opportunity. They are putting pressure on their suppliers for the ethical supply of poultry meat. McDonald’s is continuously trying to innovate new line of healthier products, serving baked goods, and beverages that will enable to diversify their portfolio. Analysts forecasted that the company’s earning to grow at an average annual rate of 7. 58% (McDonald’s Corporation: globally with their multi-branding combinations. They are implementing re-imaging plan and focusing on a food centric approach.
