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Fast Food Industry Analysis MBA 615

Prepared ByElizabeth MinderTheshin AngulugahaMatthew MillerAndrew NewmanFast Food Industry Analysis

MBA 615March 7th, 2011

AgendaElasticities & Supply and Demand conditions- Presented by Andrew Newman

Porters 5 Forces Analysis Presented by Matthew Miller

Market Structure - Presented by Elizabeth Minder

Industry Performance, Market forecast and Global Industry Analysis Presented by Theshin Angulugaha

IntroductionIndustry DefinitionFast Food industry also known as the QSR (Quick service Industry) comprises establishments primarily engaged in the retail sale of prepared food and drinks for on-premise or immediate consumption. Caterers and industrial and institutional food service establishments are also included in this business.

Industry SegmentsQuick Service Restaurants TakeawaysMobile & Street VendorsLeisure Locations (Cinemas, Racecourses..etc)Market Conditions

Saturated MarketOutput increases as price remains steady (Supply curve shift to the right)

Franchised StoreGive owners the control to run the restaurant best suited to the locationIndustry Make Up

Monopolistic Competition to OligopolyDoes McDonalds run the show?

Industry SubsetWhy did the chicken cross the road? To show the cheeseburger whos boss.

Market Conditions

Horizontal Marketing SystemMcDonalds and WalmartStarbucks and Target

Hires 3.5 Million EmployeesPays lower wages, simply minimum wage, to a higher percentage of workers than any other industry.90% of workers receive no benefits.ElasticityPrice elasticity is HIGHHigh availability of substitutesConsumer tastes & preferences vary one day to nextLow proportion of overall budget

Income elasticity is LOW to MODERATELatest study showed elasticity as 0.386Overall market is income inelastic and normal goodsPremium fast food chains may be more income elastic (i.e. Chipotle, Five Guys, etc.)Supply & Demand DeterminantsDemand determinantsAdvertising and promotionConsumer tastes & preferences (i.e. health awareness) Negative publicity (i.e. food scandals)SeasonalityPrices of related products

Supply determinantsEnvironmental conditions (weather, seasonality, etc.)Government regulations (food and labor laws)Supplier relationshipsCosts & technologyCost DriversCost-intensive industryHigh cost of labor (25-30% costs)Rising commodity and energy pricesLower operating margins

SolutionsTechnology innovationEconomies of scale/scope

Buyer Power (MODERATE)Supplier Power (HIGH)Intensity of Rivalry (HIGH)Porters Five Forces Large number of competitors Dominated by Oligopoly of players Key Success Factors include location and cost advantages Advertising budgets. 2009, McDonalds spent $650.8 million Globally Financial crisis strengthens Power No switching costs High price elasticity of demand Consumer tastes can very day to day

Vital to maintain reliable product Supplier market is consolidated (Sysco and US Food Services, Inc.) Suppliers service many other markets Minimum wage laws and healthcare reform strengthens employees (supplier of labor)

Threat Of Substitutes (MODERATE)Threat Of New Entrants (HIGH)Porters Five Forces Frozen meals, home cooking, etc..Healthier optionsAmericas Health reform bill requires fast food chains to post calorie content on menu Main substitute is home cooking where the only switching cost is the opportunity cost of the time spent in the kitchenMain driver of fast food is convenience

Does not require large capital Expansion using Franchise model No switching costs for consumers They do face barriers such as price wars from competitions Optimistic growth rates predicted for the industry Low consumer loyaltyIndustry Performance - United StatesMarket Value $ 71billion -2009

Compound annual growth rate of the Market Value (2005-2009) 3.7%, in comparison Europe 4.7%, Asia 6.1%

Year$ Billion200561.8200664.7200768.6200871.4200971.3Industry Performance - United StatesMarket Volume 40.3 billion transactions in 2009

Compound annual growth rate of the Market Volume (2005-2009) 2.8%Industry production -12% of the GDP

YearBillion transactions200536.1200637.5200739.1200840.0200940.3Industry Performance - United StatesSales performance

YearSales in Millions $% change200715669420081609092.7%2009159415-0.9%20101662384.3%20111746115.0%YearSales $ per Employee% change200732569200832536-0.7%200932145-0.7%2010325761.3%2011333492.4%Fast food in United States

Market Forecast In 2014, Market Value is forecasted to be $77.5 billion increase by 8.9% (2009

In 2014, Market Volume (# of transactions) is forecasted to be $42.9 billion increase by 6.3%

Worldwide Fast Food Industry Analysis

United States and the Asia Pacific accounts for 70% of the global food market (35% each)

McDonalds- 28,000 stores outside US in 119 countries, close to 50% of the total revenue from global operations

Yum Brands (KFC, Pizza Hut, Taco Bell) 14,000 stores outside US, 110 countriesGlobal MarketsUnited States dominates the global fast food industryTop ten fast food chains are (sales, and # of restaurants) US companies

China1.3 billion populationKFC, McDonalds major US playersMcDonalds currently 800 restaurants, potential 10,000 to 15,000 storesDrive through a brand new concept McDonalds signed a contract with Chinese oil company

TOP Fast Food Chains in EuropeTurnover 2007 in million RankOperatorBrand BannerTurnoverOutletsCountries1McDonaldsMcDonalds56606400402Yum!KFC, Pizza Hut18803Burger KingBurger King1,800e174AutogrillAutogrill, BK, a.o.1,700e900e125QuickQuick90040036GreggsGreggs, Bakers Oven860136827TelepizzaTelepizza800e820168Le DuffBrioche Doree45544049StarbucksStarbucks350e743710NordseeNordsee3053604Reflection AnalysisSurprised by how easy it is for new firms to enter the market and how large firms like McDonalds create brand awareness through large marketing campaigns.(MATT)

The fast food industry is recession proof. There will always be a need for a quick convenient dinner. There may be subsets in both the US and international markets but the cheeseburger will always be king(Elizabeth)

Methods and ways in which the different companies differentiate their product vary across the board(Andrew)

Surprised by how US companies dominates the global fast food industry. Why they have not yet successful in the Chinese market compared to other markets. Recession and Fast food industry, how massive the industry, US impact in other cultures, industrys impact in US economy (GDP) SourcesFast Food, Health, and Fitness Trends. Practical Nutrition. August 30th, 2010The Future of Fast Foods. Healthy Habits. March 19th, 2009Tough Economic Times Demand Tighter Spending. B. Bead. Arizona Times. May 23, 2010. Fast Food in the United States. DataMonitor. Industry Analysis. September 2010Worldwide Fastfood Restaurants Industry. (NAICS 72221) Barnes Report. 2010 edition. C. Barnes & CoThe Economics of the Fast Food Industry. Social Alternatives Publications7. Jekanowski, Mark, Binkley, James, Eales, James. (2001). Convenience, Assessibility, and the Demand for Fast Food. Journal of Agricultural and Resource Economics. 2001. Fast food Nation by Eric Schlosser,