An Analysis Of The Fast Food Industry

Fast food is a food that prepared and served quickly at a fast food restaurant or a shop. It is served usually in a carton or bags in order to minimize cost. Most fast food outlets often provide take away or take out foods in addition to sit down services.

Fast food is quite popular product now days. With the development of economic and society, the fast food Menu which was used to be quite limited became variable. Moreover, it’s difficult to provide a qualitative distinction because fast foods have a really big range. The best way to distinguish fast foods is to use formal characteristics: Time required – those who eat fast foods do not want to spend a lot of time on selecting and eating, and if necessary will eat standing or walking, on the bus, park bench, or at work. Actually, although it is familiar to everyone’s life because we were purchasing, few people has focus on the operation module, marketing competition and influence of fast food industry.

1.2 Why I chose this topic¼Ÿ

Fast food is a multi billion industry continuing to grow rapidly in these years. As a result, the competition between the industries was farce now. Fast food is often highly processed and prepared in an industrial fashion. With standard ingredient, methodical cooking and production methods, the competition of fast food was though service, taste, promotion and supply chain. Fast food was found at America firstly. Moreover it has big influence in American society and culture. The notion of fast food reflect American culture of in which the speed and efficiency are highly priced. Moreover, these years, American fast food is facing new challenges both from economic and society. Fast food, in many ways, is the story of contemporary America .Therefore; this report would focus on American market of fast food industry.

2. PEST

Pest analysis is a method to describes a structure of macro-environment factors of a business by examining related political ,economic, social and technological .it is kind of market research which give some important elements that the company have to take into consideration when making strategic decisions.

2.1 Background

There are three general categories of fast food businesses: 1,Self-service restaurants with a fast-food palette like McDonalds, Burger King, Pizza Hut, etc. this kind of food was favorable is because it provide a place for customers meeting friends. 2, Take-out restaurants which sell ready-to-eat foods and beverages which were favorable by working people are also popular. 3, Hot-dog stands and snack stands with counters or a pair of stand-up tables. The big advantage of these kind restaurants is convenient and cheap.

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The concept of fast food pops up during 1920s.In 1921, White castle was found in Kansas of America. At that time ,most people consider the burger sold there was not as good and cheap ,so White Castles’s decided to change the public perception of hamburgers and built their restaurants for show customers how the food being prepared.The McDonald brothers opened their redesigned restaurant in 1948. After that, fast food developed quickly during the economy and society rapidly changing period. (Warsi&Nisa, 2005)

Several factors that contributed to this explosive growth in 50’s.The first one is American love affair with the automobiles. More people chose buy car at that time. With this development, buying food outside the restaurants and eat in the car could save time. In addition, the construction of a major new highway system also contributes to the development of fast food industry for it is convenient and quick for drivers. Finally, the development of sub-urban communities has speed up the fast food industry. (Schlosser, 2002)

2.2 Politics

2.2.1 Food policy

Government has more control of service industry; as a result, food industry has more regulations than manufacturing industries. The government itself is playing a role of active operator, such as controlling on transportation, information provision and heath care, or it heavily controls and subsidizes certain service .These policies do help to keep food industry in good condition. In addition, there are frequently restrictions in foreign investment in some sectors in order to protect local firms or enhance national security. An example is American agriculture and food law, it shows that fast food provider should be use local grow product to guarantee customers nutrition and healthy. (Neal & Fortin, 2008)

American government is famous for its strict food related policies.2009 Food Safety Act is a very important law for food industry. Under this act, the main responsibility for all food business are ensuring that the food do not include anything, remove anything from food or treat food in any way which makes it be damaging the health of people. Moreover, food retailers have to ensure that the food they sold is of the nature, substance or quality which consumers would expect to ensure that the food is advertised or presented in a way that is not misleading. Under this act, fast food retailer has to make higher quality standards with its supplier. Therefore, many Chinese food producer facing great challenges, especially on the aspects of labeling and related regulations.

McDonald’s food safety is of a very high-quality and is recognized as one of the best in the fast food retail sector these years. One of their main successes has been their training program. They train all of their staff before they begin work in one of their restaurants on all aspects of food quality, food safety and hygiene. This kind of training, along with being made aware of the importance of cleanliness, continues throughout their employment. Another of their responses is in the food handling areas; staff must wear special aprons and hats to maintain hygiene, and also have to abide a strict washing procedure which is monitored on a day-to-day basis. (McDonald’s report, 2009)

Policies play an important role in food industry because it reflect the country’s focal point and new trend of related policies .Although American government have strict food policy to keep food in good quality which also limited other countries’ export because it was consider bad quality. With the development, these countries are also can provide good food, and American is trying to open its food market .In 2005, American open food market for Chile, buying pork, beef and mutton from Chile. Although, import foreigner meat could bring force competition in American fast food industry, cost of product was reduced significantly. As a result, it brings new competitions to the industry. (Neal & Fortin, 2008)

2.2.1 Animal right

In 2004, KFC was involved in a legal dispute with an animal rights group about the treatment of chickens. A videotape was showing slaughterhouse workers drop-kicking chickens like footballs. Animal rights groups have long time complained that sheer malicious behavior. Fast food chains such as McDonald’s, KFC, and Burger King are major players in the production, marketing, and consumption of animal-derived food throughout the world. Animal rights activists are quick to point out the link between the highly efficient factory farms that supply these chains and extreme animal cruelty and environmental degradation. Strategically, fast food is well positioned to leverage change in the methods by which animals are raised and processed for human consumption. Although progress has been made ,as the fast food industry has responded to pressure exerted by animal rights organizations, there is little indication of true collaborative efforts that would harness the power of the market to bring about substantive changes. Public views on animal welfare and food production are still hot issue. (Ronald .A. 2008)

2.3 Economic

2.3.1 Expansion

The Federal Trade Commission Franchising Rule defines franchising by the presence of three factors: “distribution of good and services associated with the franchisors trademark; exercise of significant control over, or giving significant assistance to the franchisee by the franchisor; payment by the franchisee to the franchisor of at least $500 before expiration of the first six months of operation of the franchised business.” The main reason behind the success of the multinational chains is their expertise in product development, sourcing practices, quality standards, service levels and standardized operating procedures in their restaurants. A strength that they have is experiences of development over years around the world.

Most fast food companies are using this management method to expansion and some of them use is as main way of extension. That is an important reason of rapidly growth of fast food companies around the world. Take Domino’s as an example, according to the information on the company website, it provides training of employees and standards of restaurants to keep the service and product standards and quality, even new cooking machines. In addition, it needs less capital than other food industry investment for franchisee could just follow the modules what the company has established.

For example, as the chart shows, McDonald’s have both franchise shop and company owned stores, but after 2004, the number of company-owned stores was decrease from 26.8% to 19.3% while the numbers of franchises were increase.

Graph 2-1 McDonald’s franchises versus company-owned restaurants

Source: http://www.wikinvest.com/wiki/McDonald%27s_ (MCD)

Although the influence of financial crisis is also influence fast food industry, depend on the market share .different company has different revenue, until 2007, we can see from the chart, fast food companies is a high profit company.(Hodgson ,2008)

Graph 2-2 total revenue in billions USD

Source: http://ancasterdatamanagement.wikispaces.com/Hodgson,+S?f=print

2.3.2 Labor

As mentioned above, employees in majority fast food shops are training by companies. They do not have to handle some high level technology. As a result, except managers and few senior employees, these shops tend to hire part-time employees which are cheap and flexible. For example, the financial crisis makes economic down, but also bring cheap labor for the market. (Aaronson& French, 2007)

2.3.3 Income Decrease

The first financial crisis in 21centry was last about 3years, from 2007-2010, American economy was decrease quickly in a short time. Between 2007 and 2008, Americans lost an estimated average of more than a quarter of their collective net worth .More than 5millons people loss their job and have to depend on relief fund. Even some rich families have to reduce family budget. Also it also influences food industry because fewer people chose eat out. However, fast food has a growing demand in this period because it becomes a better choice for some families. Decreasing family income make customers have to remind themselves the good side of fast food and push it becomes a better choice for it is cheap to majority people. A business reports that fast food industry is doing well during the recession that people are losing their job, savings and investment .McDonald’s net profit grow up by 80 %.( McDonald’s report, 2009)

Graph 2-3 Burger King FY 2006-2007

Graph 2-4—Sales of Burger king, Wendy’s and McDonald’s

Source :http://www.wikinvest.com/stock/Burger_King_Holdings_(BKC)

2.4 Social

2.4.1 Obesity problems

Fast food, which have high energy and glycemia load, may be greatly contributing to and escalating the rates of overweight and obesity(Rosenheck, 2007).With the increasing number of researches showing too much fried food is bad for body and vegetable is best for our heath, in the USA, the population of vegetarian also goes up quickly. More articles show that American has more obesity children than before. Consumption of fast food by children increased a remarkable fivefold from 2% of total energy in the late 1970s to 10% of total energy in the mid-1990s. The number of fast food restaurants more than doubled from 1972 to 1995 and now totals an estimated more than 200, 000 nationwide. “Children who ate fast food, compared with those who did not, consumed more total energy.” Moreover, the excess energy of fast food does not include necessary nutrition for children.(Bowman, 2004).

Graph 2-5 prevalence of obesity among U.S. children and adolescents

Source: http://wine-econ.org/page/2.aspx

Another date shows that, in 2008, except Colorado, the rate of obesity is more than 20% in almost every states of the USA. As a result, the fast food industry is taking solutions to the problem to increase sales, such as provide healthier meat, using better cook way .

Graph 2-6 2008 states obesity rates of USA

Sources: http://www.cdc.gov/obesity/data/trends.html

2.4.2 Increasing vegetarian

The population of vegetarian and part time of vegetarian is growing. From a report, America has about 5% people who are trying avoiding eat meat in 2008. They tend not to choose traditional fast food which has too much meat and fried food. For maintain these customers , many fast food companies are now have special menu for these kind of customers ,for instance , McDonald’s have Cookies (contain honey and sugar), buns, and McSalad Shaker salad. In Domino’s, the Marzetti, Italian and Lite Italian dressings are suitable for vegans. (Gruère, 2004)

On the other hand, with the open of food industry to other country, many other fast food companies come into American’s life. It brings new competitors to American food industry.

In addition, for these famous big companies, they already have a stable number customers and famous menus. It might hard for them to change their business strategy and turn to other products. If a new company wants to come into the market, it has to take a long time to overcome customer loyalty. However, to some extent, it is also a chance when the social culture and life style is changing. With the increase demand of vegetarian menus, compare with famous brands which are popular for meat, new entrants who are focus on these people is more acceptable. (Richardson &Aguiai, 2004)

For new companies, when they are trying to entry American food market, they would be having an idea on the new trends of customers. For example, Nissin which was successes entry American market just because it knew what is customers really want .Nissin’s main product is soup and noodle; the products do not conflict with majority traditional fast food.

2.4.4 Environment problems

To balance a society’s expectation regarding environment with the economic burden of protecting the environment. Government is legislating laws in order to keep check on the fast food industry and it is emphasizing more on the usage of bio-degradable , environment-friendly products and processes . Although associated with this issue is the problem that fast food player faces: the cost associated with the environment friendly product. They cost much higher then the normal products that companies uses for packaging or wrapping their products. Many players are using eco-friendly products these years, For example, McDonald’s now use trash and recycling receptacles throughout the dining and kitchen area. Because it can not only reduce cost of produce, also help to build good company image. (West, 2005)

2.5 Technology

With the development of new technology, it is getting cheaper and easier to use machines makes it possible to monitor work in new ways. Computer technology has allowed the fast food industry to monitor aspects of its operations in ways previously undreamed of. New software decrease inventory input and raw product costing for monitors could indentify the quantity and quality of inventory to make a reasonable inventory which could avoid waste and avoidable cost. In a report of a newspaper, in 2005, after use new software system for drive-thru, waste has been cut in half and wait time of customers have been reduce by 25 to 40 seconds for driver customers.

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Touch-screen kiosks and self-checkout lanes are now used in fast food outlet. These contactless payment kiosks often include colorful, animated touch-screen menus that give customers the option to browse through the entire menu, customize their order, and then pay with cash or a credit card. It gives customers more freedom, ease long lines and, in some cases, reduce labor costs. (Pipes, 2007)

Although internet is very popular in last century, at the beginning of the new century, on line food order was accept by many customers and food companies. These years more fast food companies and delivery companies join in the new purchase way and using online food ordering software. On line food ordering service is a popular food ordering service, through which using the internet, customers can place orders, setting at their home or workplace and get their orders delivered right at their doorstep. It is a sort of advancement over the ritual home delivery system for which customers had to make calls after calls. From 2001, many fast food companies have build up website for online order. Service firms that value customers’ requirements are able to provide higher levels of service effectiveness. (Yuan, 2001)

3. POTER’S FIVE FORCES

Porter’s theory provides a framework that industries are influence by five factors. The enterprises can take their business and competitive power separating from their own interests as far as possible. In order to enhance their competitive strength and market position, companies can firstly occupied favorable market position and then take offensive competition action to cope with the five competitive forces. (Hou, & Liu, 2008)

3.1Barriers to entry

3.1.1 Supplier

Industries possess characteristics that protect the high profit level of firms in the market and inhibit additional rivals from entering the marker are calling barriers to entry. Barriers for entry are more than the normal equilibrium adjustments that markets typically make. For example, when industry profit increase and market stable, it tend to be more firms to entry the market and take advantage of the high profit levels. Barriers to entry are unique industry characteristics that defined by the industry. Barriers reduce the rate of entry of new firms. In my point of view, maintaining a level of profits for the firms already in the industry, from a strategic perspective, barriers can be created or exploited to enhance a firm’s competitive advantage.

For fast food industry, supply chain is a very import element of product security and quality .it could cost a new firm long time to find out a suitable and reliable supplier because every competitor have long time and close relationship with suppliers. Some times it is easy to identify a firm by its supplier and a good supplier is a signal for good quality. As a result, for new entrants, it is very important to create a good distribution channel. (Gereffi, 2009)

3.1.2 Customer loyalty

It is interesting to notice that fast food consumers tend to be High brand loyalty, less shop loyalty. The main reason is that most fast food has franchisees around the country and most of them have similar menu as well as relatively lower price than other kind of food, although they have company owned outlets at the same time. Traditional fast food brands such as McDonald’s, Burger King and KFC indicate strong brand recognition. Brand recognition also means that it still conveyed a strong association between consumer perception and expectation. The switch cost is another reason that customer would like to stay in one outlet which can maintain their friends relationship.

3.2 Bargaining power of supplier

Operational and relational capabilities demonstrate a strong positive relationship with customer satisfaction .Some research focused on the strategic implications of logistics service performance has defined two distinct capabilities, which are firm’s logistics operational capabilities and relational capabilities. I think operational capabilities related to product availability, product condition, delivery reliability, and delivery speed, as well as relational capabilities, such as communications and responsiveness has been shown to have a positive relationship with customer satisfaction.

A producing industry requires raw materials, such as labor, components, and other supplies. The requirements build up a buy-supplier relationship between the industry and the firm that provide it the raw materials which used to make products. In my opinion, if the supplier is powerful, it can give an important influence on the producing industry, such as selling materials at high price to capture some of the industry’s profits.

Quick to capture the changing nature of the business, the fast food industry has also changed the face of the food chain in the last decades. Suppliers have bargaining power is because of supply chain would influence the price and quality of product. Changes in food presentation and preparation were derived from technological improvements that facilitated the preservation of both uncooked and precooked foods.

Actually , most supplier is not just do business with one company , they supply products to some firms , as a result ,there are some important customers for supplier, comparing with less important companies , suppliers have less bargaining power to them . (Gereffi, 2009)

With the global traffic industry development, worldwide supply is a new characteristic of the industry. In order to get cheap and fresh meat and vegetables, some companies try to choose to give up local suppliers and buy neighbor countries’ cheap products. For example, in 2005, Chile became a supplier of American pork. A report shows that in 2004 the import beef from other countries increase 78.9% .and Taiwan is another big supplier of pork of American. It could reduce cost of food and also provide better product. Most importantly, more competition in suppliers can reduce bargaining power of them. However, at the same time, American government pay more attention on security of import food to keep them in good quality, in another word, these food suppliers have to maintain their competitive advantages and compete with local supplier. (Donald, 2006)

3.3 Bargaining power of customers

First of all, the price of fast food are already been accepted by customers although there are little different in different place and brands. Therefore, most customers are sensitive to price because the price and size is quite familiar to them. On the same time, supplier has to keep the quality and standard of food. Customers of food industry are different from other industry, because of the eatable time of food, they can not buy a big volume but they can buy frequently if they are like the taste and service.

A survey shows that the bargaining power of customers seems to focus on quality and price. The force from customer is better taste, more convenience, lower fat and lower price. The main attributes regarding traditional fast food provision such as ‘taste’, ‘cleanliness’, ‘convenience’, ‘speed’ and ‘predictability’ are still ranked high in the respondent’s recall.

However, as the survey also found that other attributes such as ‘healthiness’, ‘provision of choice’ and ‘friendly staff’ are relevant to consumers when thinking of alternative outlets. Therefore, consumers perceive that attributes of the traditional fast food retailer no longer meet their discerning expectations specially those belonging to higher income brackets. In addition, the respondents indicated desired characteristics missing from today’s fast food products include: ‘lesser fat content’ (68.7%), ‘better service’ (48.6%) and both ‘organic ingredients’ and ‘biodegradable packaging’ (41.4%) as well as ‘broader vegetarian. (Richardson & Aguiai, 2004)

For recent years, financial crisis push fast food comeback as many people’s choice. It is a so important product for them that they can neglect other aspects of the product. Despite other reason, in these three years, the barging power of customers is lower than before.

3.4 Threat of substitutes

In porter’s model, substitute’s products mean the products in other industry. As many economist mentioned, a threat of substitutes exists when a product’s demand id affected by the price change of a substitute.

I think, with the development of research on medical technology and the increasing of diseases that caused by fast food, more substitutes become available, the demand becomes more elastic since customers have more alternatives. As a close substitute product constrains the ability of firms in an industry to raise prices.

First of all, although the menu of fast food restaurants changed in these years, we can see KFC, Subway, most of them are still selling the classic products, such as hamburgers, chips. The fast food did not follow the changes of customers’ requirements closely. On the other hand, with the development of technology, pre-cooked food and healthy food also available in supermarket .Compare with fast food, most of them are more healthy and cheaper.

However, researches show evidence of a threat in fast food purchasing habits whereby supermarkets are possibly eroding the power of strong brands in the contemporary fast food market. In spite of supermarkets having very low brand recognition as a food outlet, with only 2.8% brand recognition, by providing fast food meal solutions they have captured a considerable share of the market. (Gereffi, 2009)

3.4.1 Organic food

Convenience shop and supermarkets came up in the panel as the ultimate expression of food outlet. This may be due to supermarkets localization strategies in recent years that have promoted a widespread acceptance as a potentially competitor of fast food.

American Whole Food Market is a supermarket which focuses on organic food. It does survey every year. From their survey in 2007, 70.3% responders do not want to eat food with agricultural chemical, 68.3 % people choose organic food is just because it is fresher. 67.1% responders like organic food for it is more health than ordinary food. Customers who eat organic food more than 5 times a week is growing from 7% in 2004 to 10% in 2005. We can see that more American people choose food just for safety and healthy. (Knudson, 2007)

These years ,many supermarkets have special chain store which just sales organic food , for example, super-flower was found in 2006 by super-value, and it plan to open 50 outlets in five years . The greatest retailer, Wal-mart also opens a new super center for organic food in Texas in 2006. (Willer, 2008)

3.4.2 Fast casual restaurants

Fast casual restaurants are a growing business of competition for the fast food industry. Fast casual restaurants like Chipotle and Panera was combining the convenience of fast food restaurants with the quality of casual dining. This new alternative to fast food and sit down restaurants threatens to capture market share from both. Still the fast food restaurant stands to benefit from a U.S. consumer slowdown as strapped consumers trade down from more costly fast casual restaurants.( Mcphillip, 2010)

3.5 Rivalry with the competitive

Economists measure rivalry by measuring the industry concentration. The industry concentration shows the percentage of market share that was hold by about four largest companies. In my opinion, high industry concentration ratio means that a high concentration of market share is hold in the hand of largest firms. When there are only a few company holding a majority market share, the competitive landscape is less competitive, also mean it is closer to a monopoly. However, now, the concentration of fast food industry is very low which means the industry is characterized by many rivals, none of which has a significant market share. As a result, the market of fast food is said to be competitive.

Although it is not hard to have a fast food restaurant, it is hard build up a brand to attract and maintain customers. Therefore, it is hard to entry the fast food industry. The competition is in the aspect of price, advertising and customer services (See table 3-1) .As a result, the most force competitions are between big companies which share almost the whole market. Actually, market share competition is the rivalry in the industry market.

Graph 3-1 source: Experian Simmons, 2009

Actually, although fast food still has limited Manu choices, few differentiations, every restaurant has its own advantages at taste, service, or delivery, and they are attracting different group of customers. As a result, price war is main way they compete with each. Due to the private sector of business being so competitive, businesses have to keep their overheads to a minimum in order to provide reasonable prices, and still make a profit. Large companies could raise the cost of their menu slightly in order to keep cost down but profits up. Smaller take-away businesses, such as local takeaways, have lower profit margins and therefore may have raise their prices significantly to keep staff employed and may consequently lose customers to their lower priced competitors.

As mentioned above, fast food has many disadvantages, but with some changes in raw materials, cooking method and menu, there are a huge number of customers like or have to be purchasing in fast food outlets.

In addition ,it is not the time that only have American flavor fast food , it is easy to find some Indian and Chinese restaurant around the world ,which is more health and cheaper than the former one.

4. COMPETETION

Fast food companies are better than other industries for they are holding up better than other industries, although they are begin to suffer from the downturn .such as McDonald’s, in late 2009, it was the No1.on sales, then declined in the October and November. According to a new study from consulting and research firm -Technomic, consumer perception of fast food has expanded beyond the traditional burger joint to locations that serve up the chow quickly but put more emphasis on “flavor, quality and ambiance.” Indeed, 41% of the eating public apparently now considers places offering “fast food” to include fast-casual restaurants like Panera and even full-service restaurants that offer carryout or curbside service. “As Americans continue to trade down from full-service concepts, more restaurants are competing for the ‘fast food /food fast’ customer. Both quick-service and fast-casual restaurants are borrowing elements from the other to drive traffic.” (Spain .W. 2010)

Service firms that value customer closeness are able to provide higher levels of service effectiveness-the ability to ‘do the right things’ .A model of service performance effects on customer satisfaction and loyalty is introduced and tested in the fast food service industry using customer perceptions of provider performance rather than relying on providers’ self-reported performance indicators. Firms can understand customer needs and expectations and develop processes to fulfill them. Successful service firms perform well on both elements, for example, they understand customers’ needs and expectations and have the ability to provide quality services to meet them in an efficient manner .in my opinion, customer satisfaction is an important performance outcome for industrial service operations and is one of the most viable means of influencing customer loyalty. Loyalty improvements enhance financial performance and are used in empirical research as an indicator of market share and profitability growth. (Zhao, & Stank, 2003)