TABLE OF CONTENTS



Fast Food Industry Overview Submitted by:Adam SenholziWilliam EnroughtyMichael BullockAlison Thomas October 23, 2012 TABLE OF CONTENTS FAST-FOOD INDUSTRY OVERVIEW……………………........................................3INTRTODUCTION……………………………………………………………………………………………….3SOCIO-ECONOMIC…………………………………………………………………………………….3RELEVANT GOVERNMENTAL OR ENVIRONMENTAL FACTORS……………………………3 ECONOMIC INDICATORS RELEVANT FOR THIS INDUSTRY………………………………….4TECHNOLOGICAL FACTORS……………………………………………………………………………….5PORTER’S FIVE FORCES…………………………………………………………………………….6 THREAT OF NEW ENTRANTS……………………………………………………………………..6ECONOMY OF SCALE……………………………………………………………………………………….…6WORKING CAPITAL REQUIREMENTS…………………………………………………………………7ABSOLUTE COST ADVANTAGES…………………………………………………………………………7BRAND IDENTITY……………………………………………………………………………………………….7ACCESS TO DISTRIBUTION…………………………………………………………………………………8EXPECTED RETALIATION……………………………………………………………………………………8SUPPLIERS……………………………………………………………………………………………….11SUPPLIER CONCENTRATION………………………………………………………………………………11ACCESS TO CAPITAL………………………………………………………………………………………….12ACCESS TO LABOR……………………………………………………………………………….………….13BUYERS………………………………………………………………………………………….………14Buyer Concentration……………………………………………………………………………………...14RIVALRY……………………………………………………………………………………………..…15DEGREE OF CONCENTRATION AND BALANCE AMONG COMPETITORS……………15DIVERSITY AMONG COMPETITORS………………………………………………………………...16INDUSTRY GROWTH RATE (PAST AND PROJECTED)……………………………………..…17FIXED COSTS TO VALUE ADDED………………………………………………………………………18INTERMITTENT OVERCAPACITY………………………………………………………………………18GROWTH OF FOREIGN COMPETITION…………………………………………………………….18CORPOATE STAKES………………………………………………………………………………………….18EXIT BARRIERS………………………………………………………………………………………………..18CONCLUSION………………………………………………………………………………………….19PRIOGNOSIS………………….……………………………………………………………….20BIBLIOGRAPHY……………………………………………………………………………………….22Fast-Food Industry OverviewIntroductionRestaurants in the fast-food industry provide quick service food and products to consumers all over the globe. The industry generated revenues of approximately 706.7 billion dollars in 2012 and accounted for 38% of the entire food sector. Mostly all fast-food restaurants offer take out and drive through facilities for the customer’s convenience. Products are generally paid for before given to the consumer.The dominant players in the industry are McDonald’s Corporation, Yum! Brands Inc., Burger King Corporation, & The Wendy’s Company which represents 24.9% of the market share. After a decrease in the recent recession, large corporations have seen significant improvements in the last 3 years. (IBIS)SegmentsThe fast food industry commonly consists of 2 segments: company owned restaurants, and franchised restaurants. McDonald’s however does not allocate any of the general administration, or operating expenses for company owned or franchise owned restaurants. McDonalds manages their business by geographic segments as well. (McDonald’s 10-K)Socio-EconomicRelevant Political FactorsAs many people might think, the majority of political influence on the fast food industry is related to obesity and excessive weight gain. But, that is not all of the governance that has affected the fast food industry. Animal rights activists have been protesting against fast food restaurants for years and now have started to gain political influence. McDonald’s launched a campaign to have slaughterhouses handle their work with the animals in a more humane way. McDonald’s has pressured the food industry to consider the “animal welfare” (americanradioworks.).One of the major laws passed that we all might remember was the ban on “super-sized” meals. When pulling through a restaurant such as McDonalds and knowing you could have almost twice as many fries and soft drink for only around twenty five cents more, you would have been a fool not to take that offer. What most consumers did not realize is in fact how many more calories and fat they were ingesting with the upgrade. In March 2004 McDonalds had completely done away with the “Supersized” meals due to heavy political pressure (msnbc.).Currently many states are trying to outlaw super-sized drinks. According to the New York Board of Health has approved the ban on drinks that have more than 25 calories per 8 ounces. It would not affect 100 percent juice or beverages with more than 50 percent milk or milk substitute. The ban will apply in fast food restaurants, movie concession stands, workplace cafeterias and most places that sell prepared food (). The ban was originally proposed by NYC mayor Michael Bloomberg.A heavy burden has been placed on the shoulders of the Food and Drug Administration these last couple of years with obesity rates sky rocketing. In 2010, no state in the country had an obesity rate of less than 20% (Fuller, ). The FDA began its discussions on requiring fast food restaurants to include calorie and fat labels on its products in the early parts of 2011(). Since then there has been many emergence as to what you are actually consuming when you eat fast food. Effective very soon, McDonald’s will now list the calorie count of all its items on the menu both inside and on the drive thru ().The fast food market is not only affected by political decisions made in regards to the presentation of their food, but also how they can treat their workers. With many fast food restaurants striving for high efficiency, fast turnover, and minimal expenses, employment can tend to take a back seat. The standard pay for a regular fast food employee is minimum wage. The annual salary of the average McDonalds employee is as follows: Cashier: $15,000; Fry Cook: $15,000; Shift Manger: $16,000; Manager: $28,000 (). While these rates are going up as minimum wage and the cost of living increase, this shows that the payment of fast food employees would be much worse if the government did not set work minimums. Economic FactorsAlthough economic times are rough, fast food restaurants have not taken the grunt that other businesses have. With times worsening and people not spending as much as they used to on a value menu, fast food restaurant began to attract more attention. If you needed to get something to eat but did not have much money to spend, why not get a $1 double cheeseburger from McDonalds. It is fast and cheap. In the heart of the recession in May 2008, McDonald’s sales rose 4.3%. Along with cheap process this was also aided by the launch of their Southern Style Chicken sandwich and biscuit (Associated Press, msnbc.). Another way to look at all of the success of fast food restaurants during this time period is that people need to eat. They are not just going to cut eating out of their budget to save some money. When you can offer a cheap meal you can attract a lot of customers, especially in the growing lower-middle class. However, for the majority of the fast food industry, over the five years to 2012, revenue is expected to have declined at an average rate of 0.7% per year (IBIS World Fast Food Restaurant).In the recent year to come not many changes are expected within the fast food restaurant industry, however, S& P expects sales to increase 3.5% to $174 billion. This increase can be attributed to a price increase of only 2.5% and with only a 1.0% increase in customer traffic (S & P, netadvantage.). While these statistics do not seem large at all you have to think of the industry as a whole. Think in any given town in the country how many fast food restaurants there are. Any restaurant that is inexpensive and fast can be considered fast food, with most of these restaurants not even requiring you to leave the confines of your vehicle. If you consider the mass number of restaurants like this across the country the amount of profit to be made on only a 3.5% increase in sales is exponential for these chains. Changes in household disposable income, including changes to tax and interest rates a shrinking labor market, can determine the industry’s success. During an economic recession, the spike in unemployment leads to more subdued growth in household incomes. High and increasing gas prices also adversely affect disposable income, decreasing consumer expenditure on take-out food. This driver is expected to increase slowly in 2012. (IBISWorld)Changes in consumer sentiment have a significant effect on household expenditure on discretionary items, including fast-food. When customers are optimistic about the economy, they spend more on these items. This driver is expected to increase in 2012. (IBISWorld)Social FactorsOne of the most major social factors that affect the fast food industry is personal appearance. With today’s society placing so much pressure on individuals to look like super models, it is hard for most to grasp a healthy lifestyle without going to the extremes. If society is demanding you to look perfect and thin, you most likely will not want to go grab a Big Mac from McDonalds or a taco from Taco Bell. With the industry beginning to display its health content it has been placed with a negative connotation. In 2004, Morgan Spurlock filmed an unprecedented documentary looking directly at the effects that fast food has on the human body. Supersize Me is a documentary in which Morgan Spurlock ate nothing but McDonalds for an entire month and the results were astonishing (). This played a major social role in how Americans viewed fast food from that point on. This was the first real hard evidence that proved fast food can cause some serious harm to your body and physical image. This did not scare people away from fast food but rather opened their eyes to the potential threats.While many fast food restaurants have begun to disclose the nutritional value of their foods, they have also taken other steps to try and maintain a steady customer base. While the actual food has taken a heavy social hit, the drinks they serve have not. One of the most profitable sections of the fast food industry is its café like drinks. McDonalds and others have opened up new divisions within their restaurants devoted only to drinks. They make anything from a standard coffee to fruit smoothies and cappuccinos. This has opened up a whole new market for these restaurants and has achieved a new customer base who is only interested in the drinks (). Technological FactorsThe main function of new technology systems within the fast food industry is to provide maximum efficiency and increase speed. Drive-thru restaurants have begun to use an advanced point of sale system in which as soon as your order is placed at the cash register, it is then transferred electronically to the kitchen where your food is made on the spot, known as the Till System and POS (computing.co.uk) This cuts out the time of running orders to the kitchen or communicating them through a microphone. This also allows for more accuracy in that orders stand a better chance of being completed correctly if the order pops up on a screen instead of being delivered through word of mouth. Another technology that has emerged and is helpful to customers and the restaurant is the use of LED screens in the drive thru. This allows for the customer to view their order as it is place to insure accuracy. This also will show them the price they owe for their purchase so they can have it ready at the window. This also increases the speed and turnover rate (). Porter’s Five ForcesThreat of New EntrantsFast food restaurants represent one of the largest segments that the food industry has to offer today. Their convenience factor is yet to be matched, and their menus are expanding daily targeting every demographic in the world. The fast food industry is estimated to account for $169.7 billion in 2012. Although fast food is only one part of the food industry as a whole, the fact that it represents 38% of all global food service in 2012 speaks volumes (IBISworld).Economy of ScaleEconomies of scale would appear to exist in the fast food industry due to the large gaps between the big players and new entrants into the market. McDonalds, Yum! Brands, Doctor’s Associates, and Burger King will account for 23.5% of the available market. Growth is expected to increase 3.2% in 2012. (IBIS world) McDonalds is the current leader controlling 12.9% of the market share. They experienced strong revenue growth in 2011 in large part to its rapid expansion throughout Asia and Europe.An Indicator that economies of scale exist in the industry is McDonalds’ has had steady increases in total assets in the past 6 years. The increase in assets is significant because of the results of economies of scale. During the recession (’08) was the only drop in total assets McDonalds has experienced (likely do to the recession itself as it readjusted). (Shown in table 1, 10k) The fact that the big players are so significant in this market creates economies of scale because it is extremely difficult to cut into their market share. Consolidation also plays a substantial role in economies of scale in the industry. In 2008, Wendy’s and Arby’s agreed to merge (Arby’s was then sold off in 2011), and in 2010 3G capital acquired Burger King. Growth in consolidation suggests that major companies are taking advantage of economies of scale and attempting to create a competitive advantage through acquisition. (IBISWorld)With that being said, economies of scale are undermined because of the ease of creating a fast food restaurant. Entry Barriers are low in this aspect since new owners can easily lease their buildings, equipment, and furniture. This will cut down on other costs such as loans. The saturation of the industry also prevents economies of scale from being a significant advantage (IBIS world). Many owners enter the market under franchising agreements as well.Market entrants do, however; face some barriers entering the industry. They increase the possibility of a price war in a highly concentrated segment. The brand name strength of the larger chains may negate much of the effect of low switching costs for the consumer. There are arguments both for and against economies of scale in the industry however the most likely answer you will get is that barriers of entry are low and threat of new entry is high. It will be difficult to compete with larger companies, but it is very easy to establish a restaurant. The question is, how long will your life cycle be and can you make your mark in the billion dollar industry?? (Marketline)TABLE 1GAINS IN TOTAL ASSETS FOR MCDONALDS (2006-2011)Millions201120102009200820072006$32,989$31,975$30,225$28,462$29,392$28,974Working CapitalThe industry’s capital intensity level is measured by the ratio of capital to labor costs. In 2012, every dollar that was used for buildings or equipment there was seven dollars spent on wages making the ratio 1:7. This allows for low capital intensity. The fast food industry is high labor-intensive which makes it hard for new comers to compete nationally right from the start. Labor costs accounted 21.6% of all costs in 2012. Capital requirements suppress new comers from entering the market, but they are not significant enough to turn them away completely. Small private companies tend to do well entering the market. (IBIS world)Absolute cost advantages.Patents do prevent new entrants from copying ideas or products from already established corporations, but they do not prevent new companies from creating their own competitive strategy and product. Regulations are relatively high for the larger corporations. These include policies such as minimum wage, sales, worker conditions, and franchise regulations. McDonalds owns and is licensed to use their intellectual property including trademarks. They consider “McDonald’s and the “Golden Arches Logo” to be of material importance and the trademarks and patents are valid for durations.The smaller new entrant companies are the more subject they are to the typical zoning, sanitation, and building permits. These are relatively inexpensive and do not pose a large threat to new companies, which makes the barriers low and the threat of new entrants high. ()Brand IdentityWhen it comes to brand identity in the fast food industry, it often depends on which types of products you will be offering on your menu. It is very easy to enter the market because of the low entrance costs and moderate to low capital commitments, but brand building is very difficult in an already overcrowded market. It takes a lot of time, money, and a very good product to create a competitive advantage in the industry. When it comes to the burger industry, it is difficult to differentiate your product because of the simplicity of the burger. New entrants will have a very tough time trying to compete with the leading competitors such as McDonald’s and Burger King.Other fast food chains such as pizza and sandwiches have a better chance of establishing a company in the fast food industry. A reason for this is that their costs are lower due to the materials. Since the costs are so low, the competition is extremely high therefore brand building is more expensive. The barriers are moderate because of the costs of marketing, but if you are able to enter the market you will have a better chance of competing than if you were in the burger market. In a recent interview with 10 different buyers, all 10 of them said that they choose to eat places because of the brand name. “I go to McDonald’s because it is consistent everywhere I go, and because they have the best fries in the world” said Nolan Borzelleca. People choose places based on reputation of their brand name. McDonalds is a leader in the industry when it comes to brand identity and their marketing to sales percentage shows this.Brand Identity doesn’t pose a large enough barrier to prevent new entrants making the threat of new entrants high, but the attractiveness is low because of the big powerhouse names. There is a high level of competition but mainly between the leading competitors. (Lisbon School of Business) Access to DistributionThe responsibility and end result for companies in the quick service industry is getting their finished product into the hands of hungry customers. They do this by preparing their products in store and directly serving fully prepared food to customers. Quick reliable forms of distribution are essential to all firms in the industry. (Wikinvest). When it comes to McDonald’s, you will see intensive distribution. For example many McDonald’s locations operate 24 hours a day. This allows McDonalds to meet their customers in as many distribution channels as possible. McDonalds take pride in their relationships with suppliers. The chart below introduces McDonald’s main featured suppliers and shows their location and business activity with McDonald’s. You can see that loyalty is a key value between McDonald’s and its suppliers because of the long term relationships. (McDonald’s) All suppliers operate in multiple countries and their distribution plans are very extensive. All materials will arrive at McDonalds locations by ship, aircraft, truck or a combination of the three. Being successful in the industry requires you to have a distinguished distribution plan making the access for distribution a high barrier and the industry attractive. This results in low threat of entry.TABLE 2: McDonald’s SuppliersSUPPLIERLOCATIONBUSINESS ACTIVITY w/ McDonaldsGavina Gourmet CoffeeSouthern California25 yearsLopez FoodsOklahoma City25 yearsKeystone FoodsWest Conshohocken, Pennsylvania40 + years100 Circle Farms/Lamb WestonWarden Washington40+ years (McDonalds)Expected RetaliationBecause competition in the industry is so high we often see efforts of retaliation. Large companies such as McDonald’s are constantly spending money on market research so they can reach every consumer in the communities they operate. Companies continually monitor products of their competition and create their own products to offset. It is extremely hard to compete as a new entrant because of the cash flow large companies can spend on research and development, and marketing. Trends are changing in the industry, and companies are expanding their menus to appeal to a wider range of customers. Some of these new items at McDonalds include wraps, salads, and McCafe products. You can always expect companies to align with your ideas and thrive off competition. To compete with Starbucks, McDonald’s has offered their premium roast coffee for only $1 all day every day. Price wars are often the result of retaliation within the industry. More exotic products have entered the market as well. “I promise you three, four, five years ago, we couldn’t pronounce ‘asiago,’” says Wendy’s Senior Vice President Denny Lynch. “We certainly wouldn’t have known it was a smoked cheese that tastes great with chicken. It’s one of our more popular chicken sandwiches now.” (Time. Business) Marketing teams throughout the industry will continue to change and adapt to the changes occurring in the world and the large budgets of the industry’s leaders will help them to do so.Overall the fast food industry retaliation is very high and this makes it very hard for smaller new entrants to do well. Attractiveness is high due to the expected retaliation.ConclusionIn conclusion the threat of new entrants is high due to the lack of any barriers being so significant as to prevent new startup companies from trying to enter the market. That being said, new entrants will find it hard to compete at the same level as the dominant players in the industry due to capital, access to distribution, and retaliation. The dominant players are way too powerful, and control too much of the market for small new entrants to make an impact. Therefore the new entrant threat that can sustain growth and survive over time is low, barriers are high, and the industry is attractive.Decision Matrix for Threat of New EntrantsThreat of EntryAttractivenessBarriersEconomy of ScalemoderatehighmoderateWorking Cap. RequirementshighlowlowAbsolute Cost Adv.lowhighhighBrand IDhighlowlowAccess to DistributionlowhighhighExpected RetaliationlowhighhighOverall Threat of New EntrantslowhighhighSubstitute ProductsThe pressure of substitutes on the fast food industry occurs from several different areas. The obvious threat too many of the fast food restaurants is the competition within the market. There are many different fast food places that can offer the customers similar products and fulfill the customers’ need just as sufficiently. If a customer wanted to get a burger and fries for dinner, they have several different options, mostly all within a one mile radius of each other. They can choose to go to McDonalds, Wendy’s, Burger King, Five Guys, Sonic, or even Dairy Queen. The firm’s power to have control over the customer for lack of substitutes is very low because there are so many different options that the consumer has in terms of receiving fast food. Another substitute threat the fast food industry is faced with is the consumer’s choice to go to the grocery store or delivery restaurants. Customers can choose to go to the grocery store and purchase the products needed to make their food on their own. If a customer wants a chicken sandwich for a meal, they can go to McDonalds, Wendy’s, KFC, Bojangles, or Cookout. The other option that a customer has is to go to the grocery store and make their own at home. Lately this has been a growing trend because the price is around the same and it is healthier to make your own at home. Customers can also choose to have food delivered. This eliminates the need for the customer to leave the comfort of their own home. The threat of substitutes is very high. SuppliersSupplier ConcentrationThe main foods that companies in this industry offer include pizza, sandwiches (including hamburgers) and chicken. Major franchises are beginning to offer chicken burgers, and other poultry products. Also, companies have been branching out to provide healthier foods such salads and extending into cafes. Again, companies will compete in anyway in order to gain more market share and they are excising this fact consistently. Companies in this industry have used different strategies in order to enter the market under different brand names to offer different styles of food and to gain market share while somewhat hidden from their other brands. For example, McDonalds has its popular Chipotle which serves a Mexican style of food. “This trend reflects changes in consumer attitudes needs and desires over the past five years” (IBIS).For McDonald’s supply chain is very important and the company takes great responsibility in considering themselves partners with their suppliers. McDonald’s has taken the time necessary in order to properly establish an efficient supply chain. According to Pamela Cheema report from Logistics Week, “Food ingredients are supplied by two categories, Tier-I and Tier-2 suppliers. Tier-2 suppliers comprise growers and processors who include importantly, lettuce and potato growers, poultry farms and companies which manufacture coating systems that coat the vegetable and chicken patties. The ingredients are supplied to Tier-I suppliers who process them, for instance, into vegetable and chicken patties — this is done by Vista Processed Foods Pvt. Ltd. — or potato products like French fries, potato wedges and hash browns which are expertly churned out by McCain Foods India Pvt. Ltd” (Cheema, 2011).This shows that the power of suppliers is quite significant especially with such dependence on quick service and high volumes of customers at any given time. Access to CapitalAccess to capital is low for this industry, for new entrants as well as well-established firms. As shown below, the performance for the key players compared to inflation show that even well-established firms show little growth making it hard for them to access capital. U.S Sectors Fast food Revenue against InflationIndustry versus Inflation Overall industry revenue is relatively small on average and has not outperformed inflation in the last five years. The industry’s revenue outlook for the next five to six years is expected to grow at about 1.98% a year on average. This amount of growth seems small but is up from how the industry has been performing in the past. The industry is highly competitive because of the ability to compete and be rewarded if done correctly. For companies that are well established in the industry, each are fighting for market share from other competitors and have the resources to keep small entrants from rising. When looking at the average industry revenue growth compared to inflation from the chart above, it can be seen that there is not much access to capital for new entrants. For big players such as McDonald’s and Yum brands this remains the case but can look to the market to raise capital. Revenue OutlookYearRevenue $ millionGrowth %?2013173,443.302.22014177,086.002.12015180,982.202.22016182,834.9012017186,244.201.92018190,865.502.5 Bottom of FormAccess to Labor According to IBIS World “wages are high due to the labor-intensive nature of food preparation, cooking, serving and cleaning up” (IBIS). IBIS World also states that “industry wage costs will account for 26.3% of an average firm’s revenue in 2012” (IBIS). Unfortunately, with continuing economic hardship, higher prices from labor cannot be easily passed down to the ultimate consumer without business being directly affected by the decision (IBIS World). However, when comparing the employment data from below it can be seen that the employment rate for this industry increases over time and is expected to continue as well as wages. This shows that jobs for this industry will be less competitive and in more supply. But, according to the table below in averaging the amount each employee is paid, it can be seen that each employee averages less than 15k annually. YearEmployment Wages ($m)20033,297,25841,818.320123,529,55844,570.620173,654,12848,122.6When considering the industry, the supplier’s power is high. This can be easily observed from the industry’s largest company McDonalds. With capital proven to be difficult to obtain for new entrants the attractiveness for this industry is low. It also doesn’t help that this industry’s labor makes up for a good portion of its revenue. Decision Matrix for Supplier Power PowerAttractiveness SupplierHigh Low Buyers Buyer Concentration The primary buyers for the fast food industry are franchisees. Franchising is considered a quick way to grow business and is used by many companies especially in the fast food industry. “The practice of franchising involves a business contract between two companies: a franchisor (or parent company) and a franchisee (or individual business operator). It gives the franchisee the right to construct and operate a restaurant on a site accepted by the franchisor and to use the franchisor’s operating and management systems” (Yin 2012). Franchisees run the day to day operations of the individual unit. The franchisee usually bears the cost of acquiring land, buildings, equipment, and is responsible for paying the franchisor a royalty fee based on percentage of sales (Yin 2012) The Primary distribution channels of this industry are the franchise locations. Companies in the industry have been exercising their franchising efforts in order to find those ways to consistently grow. For example “ fast-food giants McDonald’s, and Yum Brands Inc. franchised 89% and 84% of their US units at year end 2010, respectively, versus only 46% at Jack in the Box” (Yin 2012). This is considered a means of growth for acquired companies in this industry because it allows the companies to receive a royalty fee based on a percentage of sales and pass on other costs such as “acquiring land, buildings, and equipment onto the franchisees” (Yin 2012). Franchisors are especially benefiting from the royalty since it’s measured as a percentage and has little effect on the amount of sales each location does; this allows both parties of the franchise to benefit. The franchisor still receives payments and the franchisee does not get too overwhelmed by the amount. In relations to power, the franchisees and the franchisors somewhat share power. This is true because franchisors give up control of the business with the day to day operations. A poorly run franchise reflects poorly on the company and hurts the franchisees business as well. However, the buyers are still almost powerless in a sense because they are under contract from the franchisor and must follow the management systems that are laid out when entering into the contract. Again, franchising is ways of growth used by established firms and likely do not pertain to new entrants. As a new entrant, there would not be buyers unless the new entrant has proven worthy. Companies in this industry also utilize joint ventures and licensing in order to minimize risk in foreign countries. In conclusion, buyers do not have power which makes the industry attractive. Decision Matrix for Buyer PowerPowerAttractivenessBuyer PowerLowHighThreat of Substitutes With so many firms in the quick service/burger industry, low switching costs, similar products, and healthier options, the threat of substitutes is very high.RivalryThe fast food industry holds a lot of potential for new comers in its billion dollar industry in 2012. When you take a closer look into the industry you find that it is not highly concentrated as you would think which lowers rivalry. Also the industry growth rate has been consecutively higher than the inflation rate which means firms are not trying to steal market share also reducing rivalry. With the overall low rivalry of the industry there are a few exceptions like diversity among competitors which is currently low because of the economy, thus forcing rivalry to increase. Degree of Concentration:McDonald’s leads obesity in the United States fast food industry with a 12.9% share of the market and revenue of $8,528.2 million in 2011(IBIS). Close behind at 9.6% is Yum! Brands Incorporated which includes Taco Bell, KFC and Pizza Hut that reported $3,786 million of revenues in 2011 (IBIS). Coming in third is the Doctors Association Incorporated which owns Subway at 8.2% (IBIS). Wendy’s holds 4.4% of the market share with Burger king following at 2.1% (IBIS); the below table gives you a further look into the leading companies financial conditions on the global market (IBIS). These top five competitors of the fast food industry only control 37.2% of the market combined so the industry is not concentrated. The lack of concentration in the market makes the industry attractive in that sense. The market as a whole may be said to be fragmented but certain segments of the fast food market are actually the opposite. In the burger segment for example the market is concentrated between two leaders, McDonalds and Burger King (Marketline, Fast Food Industry). Other than the concentration among segments, the restaurant industry as a whole is not highly concentrated which reduces rivalry among companies and makes the industry more attractive. -64198520447000Diversity among CompetitorsMost successful companies in the fast food industry follow the same basic strategy of winning over customers with a fast convenient and alternative for meals. Profitability in the fast food industry relies on low-margin and high turnover operations, which is why so many companies have turned to some form of a value menu. Meals in the $1-2 range have recently started causing competition against industry peers like McDonalds and Wendy’s (Marketline). Recently fast food restaurants have started to promote and offer items such as premium salads and coffees which are out of the norm in that these are high-margin products instead of the usual low-margin inexpensive choice (IBIS). According to Darren Tristano in the October issue of Fast Company “Fast food chains are going upscale while full service restaurants are trying to attract younger crowds with grab and go outposts”. For instance Taco Bell has recently started promoting its new steak cantina bowl that goes for $4.99 as opposed to their standard $.89 beef taco, while sit in restaurants like Red Robin have started promoting their $5.99 burger works instead of the $9.29 royal burger alternative (Fast Company, 34). The recent financial crisis has said to have increased buyer power which is most likely the reason fast food restaurants are trying these new strategies (Marketline). Because obesity has become a new battle for the United States most companies are forming strategies that include healthy options for their consumers. One of the leaders in the healthy fast food revolution was Subway, who could forget how much weight Jared lost by only eating Subway for every meal (IBIS). There is pressure to go healthy is not just coming from the public, the National Restaurant Association (NRA) recently passed the “Kids Live Well” initiative that is voluntary of restaurants and requires at least one meal on the menu to be “600 calories or less; two servings of fruit, vegetables, whole grains, lean protein and/or low-fat dairy; with limits on sodium, fats and sugar" plus one additional item that's only 200 calories” (Daily Finance). McDonalds has responded by tweaking their $3 Billion yearly seller Happy Meal, they have cut the normal fry portion in half and added apple slices (Gilbert, Daily Finance). In other news according to the San Francisco Chronicle, McDonalds is said to be opening two new vegetarian restaurants in India next year to cater to the non-beef and pork eating customers (Sharma & Patton), another example of strategic changes aimed at consumer needs. Most leading fast food company’s also put importance in the investment of international expansion and growth into their strategies, with most considering China a considerably profitable and attractive market (IBIS). Due to the recession consumers are cutting back to save money while also trying to avoid unhealthy food choices, this has forced fast-food chains to compete with each other by promoting their particular restaurants as the place for consumers to get the greatest value for their money. As a result, competition has intensified, with fast-food chains focusing on taking market share from each other rather trying to win a larger share of a growing ( IBIS, US Fast Food Industry p.7) Because of the current economic recession coupled with the recent realization that the majority of America is obese the fast food industry has in essence been forced to all follow generally the same strategy. This cookie cutter strategy consists of being as low-cost as possible while also trying to offer something different for a value added like healthy choices or featured items. With all of the leaders of this industry ultimately following the same strategy competition is increasing and thus rivalry. Growth Rate 334327527305000The compounded annual growth rate of the value of the market is projected to fall to 2.6% for the future period of 2011 to 2016 (Marketline). “In 2016 the United States fast food markets value is said to reach $96,600.3 million which is an increase of 13.9% since 2011” (Marketline). The compounded annual growth rate of the market value from 2011 until 2016 is projected to be 2.8% (Marketline). “In 2016 the United States fast food market volume is forecasted to have 52,355.5 million transactions, an increase of 14.7% since 2011” (Marketline). 33293059969500The highlighted cells are to draw attention to the out of the ordinary growth rates from 2011 to 2012. Inflation rates for the months of 2012 thus far have been on average higher than the year before rates which could be to blame for the low growth rates we are seeing. The value and volume growth predictions seem to be close in number with the exception of 2011 where they are extremely high and then in 2012 where they are exceptionally low. This variation could also be due to the current economic crisis reflected in consumer spending. The compounded annual growth rate of the markets value from 2007 to 2011 was 3.1% with historical inflations rates averaging 2.23% for the same period. In the past the growth rate has been higher than the inflation rate which has allowed firms to expand without stealing market shares from other restaurants; thus reducing rivalry and making the market more attractive.Value AddedAccording to McDonalds 2011 10-K they had $18,476.3 million in total operating costs and expenses or fixed costs. McDonalds sales are broken into the sales generated by company operated restaurants and revenues from franchised restaurants which collectively came to $27,006 million in sales for 2011. With this information McDonald’s gross margin is estimated to be 39.57% and the breakeven point would be 46,692.69 million. McDonalds fixed costs are roughly 68% of sales which is relatively high and signals the industry is at maturity, this increases rivalry and makes it unattractive. McDonalds is also continually investing in themselves, in 2010 they spent $968 million on new restaurants and in 2011 they spent $1,193 million (all 10-K). This $225 million increase could be attributable to their interest in foreign markets and expansion. In 2011 McDonalds also spent $1,432 million on the investment of existing stores, most likely for remodeling to keep up with the brand image. Their Debt to Asset Ratio is at a responsible level of 54% which is most likely due to the stockholder and other related party preferences (Morningstar). Foreign CompetitionNo overseas corporations have a chance of penetrating the US fast food industry unless McDonalds was to sell its entire franchise to a foreign company. All of the leading fast food restaurants discussed are incorporated in the United States, though they only control 37% of the market they are the majority and thus far foreign competition in the U.S. has been inexistent. The lack for foreign competition lowers rivalry and makes this industry more attractive. On a global stance, foreign countries should be worried about U.S. companies as competition in their markets because of the increasing interest they have been displaying in foreign investment. Corporate StakesThe corporate stakes are extremely high as McDonalds has no other lines of business to fall back on other than being a fast food service provider. All of McDonalds competitors are only in one line of business as well which makes the industry unattractive from this view. Exit BarriersThe exit barriers for a fast food company like McDonalds would not be very high because of how attractive of a company McDonalds is. If McDonalds was to say that it wanted to get out of the business tomorrow and sell off all their operations you can bet someone would be more than happy to take their place especially with a growing stock at almost $100 and a loyal customer base and well-known brand.Decision Matrix for Rivalry? ConcentrationRival IntensityAttractivenessConcentration and Balance among CompetitorsLowLowHighDiversity Among CompetitorsLowHighLowIndustry Growth Rate LowLowHighFixed Costs to Value AddedHighLowLowIntermittent Overcapacity---Growth of Foreign CompetitionLowLowHighCorporate StakesHighHighLowExit BarriersLowLowHighRivalry OverallLow Rivalry IntensityHigh AttractivenessConclusionOverall the fast food business is an attractive industry to consider entering according to the market share and concentration. Though we would not recommend entering the burger segment of the industry as that is an extremely competitive market with two controlling well-known companies. There is little diversity in the market that you would have to worry about upon entering, you could easily follow a like companies strategy and be profitable. If new entrants can find their niche and a target market they have potential to be successful. Franchising is a great way to enter the market with almost guaranteed profit. A reason for this is because you adopt the trends and strategies of the corporation you are franchising. The growth rates are also positive for the industry and show increasing numbers for the future. Fixed costs for this industry are large but these chains are huge and with such large profits, costs must be incurred. Other advantages are the industry is running at normal capacity and you would not have to worry about foreign competition, at least for now. The corporate stakes are quite high but with large reward comes large risk and if you wanted to sell off your business it would not be difficult. The fast food industry is overall attractive but there is one problem, if you plan on building your own fast food empire that can compete with the likes of McDonalds you are going to need excessive funds. If McDonalds went for sale tomorrow, we would highly advise buying the billion dollar corporation and making a profit off of the operations already set in place.McDonald’s Corporation SWOT AnalysisStrengthsBrand IdentityLoyal Partnerships with suppliersIndustry leader in social responsibilityNutritional FactsCleanlinessCultural awarenessWeaknessesPoor turnover rateAge biased advertisements (happy meals)Health complaintsQuality (exists industry wide)OpportunitiesE commerce capabilityDiscountsJoint-venturesRecyclable packingThreatsEmerging competitionHealth issuesCurrency fluctuationLocal food outletsRecession/economy Critical Success FactorsBrand IdentityMcDonald’s and its golden arches are known all around the world by people of all ages and from different backgrounds. McDonalds is successful at establishing brand identity and keeping everything they choose to represent their company coherent. With so many choices, fast-food companies need to separate themselves from the pack with the brand they are selling and make a lasting impression on the customer to keep them coming back. Economies of ScaleWhen output from a fixed set up increases, the per unit cost of the product decreases establishing economies of scale. Because of McDonald’s international presence and thousands of restaurants they achieve economies of scale from the excess of output they produce on a daily basis. BIBLIOGRAPHYAdams, S. (2011, July 11). Restaurants prepare for new fda rules requiring calories on menus read more: prepare for new fda rules requiring calories on menus. Retrieved from , S. (2011, March 25). Fda says fast food restaurants must list calorie counts starting in march; vending machines, too. Retrieved from Press. (2004, March 03). Mcdonald’s phasing out supersize fries, drinks . Retrieved from , M. (2011, April 16). mcdonald's mccafé: An evolution. Retrieved from é-evolutionAssociated Press. (2012, September 13). nyc board of health passes big-soda crackdown rule . Retrieved from ’s serves up high-tech tills. (2006, July 27). Retrieved from . (2012, July). Fast food restaurants in the us. Retrieved from , D. (2002, April). She knows how animals feel. Retrieved from . (2004, May 21). Super size me . Retrieved from Press. (2009, June 08). Despite recession, mcdonald’s sales still rise . Retrieved from , L. (2012, September 13). 'supersized' drinks on the way out in nyc. Retrieved from , A. (2012, February). Fda-required calorie counts for fast food restaurants will not curb the obesity epidemic . Retrieved from . (n.d.). Mcdonalds compensation and benefits. Retrieved from , J. (2012, June 7). Resturants . Retrieved from benefits and roi associated with qsr drive‐thru order confirmation technology. In (2008). Delphi Display Systems, Inc. Retrieved from Me Design (2012), P. (2011, October 07). Logistics week. Retrieved from ................
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