team 3 final project

To: Luke McElfreshTheo MuirAndrew PueschelRalph Riedel

From: Team 3 Audrey DlugoszGordon Domonique Morgan DuffyGabriella Grosh

Sean Kilbane

Date: September 25th, 2016

Subject: Analysis of Quick Service Restaurant Industry

Our team has performed an analysis of the Quick Service Restaurant Industry and prepared a report for the senior partners of Copeland Associates. The report contains details about the current state and trends within the industry. Through the analysis of the current state and trends, we were able to identify key success factors in the industry and where the industry will be in the future.

Key Success Factors

1. Convenience 2. Implementation of Innovative Technology3. Adapting to Consumer Preferences

This report will provide information about the current state of the market, as well as details about segments within the industry. At the end of the report, you will find an evaluation of our report, an analysis on the key success factors and a conclusion on our findings.

Findings

As we researched the Quick Service Restaurant Industry, we discovered a lot of competition the industry faces. Not only is the competition within the industry, but also competition outside the industry as well. Our teams assessments found that the reason for the high competition is because of consumers wants and needs, and because consumers are drawn towards healthier lifestyles and wanting higher quality ingredients, the industry is forced to meet and exceed the needs of its consumers.

Morgan Duffy

Sean Kilbane Gabriella Grosh

Team 3

Gordon Dominique Audrey Dlugosz

Deliverable #3: Project Briefing #2

Prepared for Senior PartnersCopeland Associates @ OHIO Integrated Business ClusterPrepared by team #3

EXEC

UTIV

E SUM

MA

RY

Abstract

This report is a general overview of the entire quick service industry including macro and microeconomic trends within the industry, industry segmentation and competitor identification, key success factors, and data to support all of the analysis. We also prepared both Porter’s analysis and PESTLE analysis to further analyze our data and research.

Key Success Factors

We identified three key success factors that are necessary to thrive in the future of the industry. The first key success factor was convenience and speed of the food. After researching, we found that consumers eat at quick service restaurants because they constantly on the go, and looking for something fast and efficient. A second key success factor that we found was the implementation of technology. We noted this is extremely important because in order to keep costs low, companies must continue to adapt new technology to increase operational efficiency. The third and final key success factor we hit on was the ability to adapt to consumer preferences. Since the threat of substitution is so high and the industry is consumer driven, it is extremely important that these restaurants are able to change their menus to accommodate for consumer preferences.

PESTLE Analysis

The PESTLE Analysis is a report over political, economic, social, technological, legal, and environmental trends within the industry that may have an impact. The major political impacts the report mentions are increase in minimum wage and taxes on fatty foods and sugars. The major economic trends it mentions are consumer spending and different factors that may impact consumer spending, considering this is a major driver in the industry. Then it mentions social trends and appealing to the younger consumer in order to comply with their ever-changing desires. Next the report mentions technological trends, which primarily deals with the use of technology for marketing. Legal trends follow and this is important because the food industry has a relatively high level of regulation for safety. It finally ends with environmental and the trends that new upcoming restaurants are focusing on to go green.

Porter’s Analysis

We also conducted Porter’s analysis on the industry. This included threat of new entrants, which we considered to be a medium threat. It also included threat of substitution, which we found to be very high, especially amongst the large franchises. Next, we spoke about the bargaining power of buyers that we found to be relatively high considering this is a consumer preference driven industry. Then that lead us to the bargaining power of suppliers, resulting in finding a high influence on companies due to the limited number of suppliers in the market. Following that, we discussed the competitive rivalry and how it influences the other four factors of the Porter Analysis. Since competition within the Quick Service Restaurant Industry is high, companies need to provide motives to promote loyalty, make sure they have reliable suppliers, find ways to lower the risks of consumers substituting their food, and focus on the experience they have to offer.

Executive Summary

Company Analysis

We analyzed three major companies within the Quick Service Restaurant Industry. These companies were McDonalds, Chipotle Mexican Grill, and Yum! Brands. When looking at the companies we consider things such as the ability to expand, the strategic plans, and general company overviews. We also compared the financial situations of the three companies to help project growth into the future.

TAB

LE OF C

ON

TENTS

Introduction 1

Comprehensive Industry Analysis

Industry Overview 2

Macro and Micro Key Trends 3

Industry Segmentation 4

Company Analysis: McDonalds Corporation 5

Company Analysis: Yum! Brands Inc. 6

Company Analysis: Chipotle Mexican Grill 7

Examination of Key Competitors 8

Financial Analysis 9

Key Success Factors: Convenience 10

Key Success Factors: Implementation of Innovative Technology 12

Key Success Factors: Adapting to Consumer Preferences 15

Key Success Factor Weighting Scale 18

Conclusion 20

References 21

Appendixes

Porter’s Analysis 26

PESTLE Analysis 29

Business Model Canvas 33

SWOT Analysis 36

Ratios 39

LIST OF TA

BLE A

ND

FIGU

RES

Figure 1: Market Share of Leading Brands 2

Figure 2: QSR Industry Segments 4

Figure 3: McDonalds High Growth Segment 5

Figure 4: Restaurant Count 7

Figure 5: Market Share 8

Figure 6: Revenue Growth YoY% 9

Figure 7: Drive Thru Seconds and Cars Present 10

Figure 8: How Often Consumers ages 18-34 Eat Out 11

Figure 9: Mobile Order Forecast 13

Figure 10: % of US Social Media Usage by Age 14

Figure 11: McDonalds Number of Menu Items 15

Figure 12: Before and After Breakfast Lunch 15

Figure 13: Market Share of Fast-Food Restaurants In China 17

Figure 14: By the Numbers 27

Figure 15: Revenue Forecast 29

Figure 16: Global Obesity 31

Table 1: Sustainability of Companies 16

Table 2: Weighting Scale of KSF’s 18

Table 3: McDonalds Ratios 39

Table 4:Yum! Brands Ratios 39 Table 5: Chipotle Mexican Grill Ratios 39

INTR

OD

UC

TION

Purpose Statement

The purpose of this report is to analyze in rigorous detail the Quick Service Restaurant Industry. Throughout our research we will identify its key successes and what influences these factors. We will do this by analyzing companies within the industry and how they operate. Also, through the use of macro and micro environmental statistics and our very own PESTLE analysis, we will present an extensive and in depth overview of this massively successful industry. The results of our analysis defined which company is the most well suited for success in the future of the industry based on the three key success factors.

Key Success Factors

Several factors are responsible for providing and continuing to present the Quick Service Restaurant industry with much success throughout the years. Through our extensive analysis of the Quick Service Restaurant Industry led to the finding of the following three key success factors:1. Convenience 2. Implementation of Innovative Technology3. Adapting to Consumer Preferences

1

Introduction

Introduction Industry Overview KSF 1: KSF 2: KSF 3: Conclusion

Companies Analyzed

Our report summarizes the success of these three Industry's and identifies the key contributions to how they have excelled in the Quick Service Restaurant Industry

• McDonald's Corporation• Yum! Brands Inc.• Chipotle Mexican Grill

QSR Criteria

A Quick Service Restaurant can be defined as:

• Previously prepared food• Limited service provided• Purchasing food before it is received either at a counter, drive thru or delivered

Industry Overview

The Quick Service Restaurant Industry generates billions of dollars in revenue every year. So much revenue, that it's economical value is greater than many countries across the globe. In 2015, this massive market industry generated over $500 billion and around $200 billion in the United States alone. In 2016, there were 241,379 establishments accounted for in the Quick Service Restaurant Industry (Statista, 2016). In the past few years, the industry has seen a slight down turn but this recently changed as the market is seeing a small percentage increase this year itself, and projected years to come.

Competition Within The Industry As A Whole

The major players in the Quick Service Restaurant Industry are McDonalds who makes up 17% of the market share, Yum! Brands who makes up 11% and Subway who makes up 7% of the market share. Each of these restaurants within the Quick Service Restaurant Industry use fast and efficient operations which is what makes them successful. Consumer’s eat at quick service restaurants due to low prices. Many of the choices are inexpensive, with options usually less than $6. Most of the demand in the industry is driven by consumers taste and personal income.


IND

USTRY

OV

ERVIEW

AN

D K

EY C

OM

PETITOR

SOverview of the QSR Industry

Figure 1: Market Share of Leading Brands

(Statista, 2015)

2


KEY

TREN

DS

Key Macro and Micro Economic Trends

3

Internal Trends

The Quick Service Restaurant Industry is driven by new trends of their consumers. As consumers have become more health conscious, they are shying away from foods that have high fat and salt content. Due to this trend, restaurants are altering their menu items, and spending money to promote these healthier menu options. Another way this industry is keeping up their consumer trends, is by providing convenience for those who work long hours, have busy lifestyles, and do not have time to cook. These Quick Service Restaurants have become the easiest way for consumers to grab a cheap and quick meal and still balance the other needs in their lives.

The Quick Service Restaurant industry is highly competitive. Not only does the quick service industry compete with each other, but they also have other, non QSR industry, competitors such as full service restaurants, coffee shops, grocery stores, and hotels. The quick service restaurant industry competes internally based on price and quality. High quality ingredients are important to consumers, along with finding a balance between quality and price. “This industry also competes with location, style, ambience, hospitality and service” (Fast Food Restaurants in the US, 2016). The experience that consumers get at a restaurant is the deciding factor between where they want to go. In order to be successful, the industry needs to keep up with consumers expectations. The Quick Service Restaurant industry competes with other food sectors because of the experience the other restaurants have to offer. Full service restaurants offer dine in and take out to their consumers with higher quality meals. Grocery stores and convenient stores offer low price, high quality foods, further pushing the home cooked meal experience. When the economy is not doing well, consumers are more likely to choose the cheapest option, often sacrificing convenience and service to save money. In order for the Quick Service Restaurant Industry to stay competitive throughout these times, they are forced to lower their prices, focus on service, and constantly innovate new and exciting products.

External Trends

The Quick Service Restaurant (QSR) industry is an industry within the consumer digression sector and its performance is highly correlated directly with the strength of any given country’s economy as a whole. However, the QSR industry tends to outperform its sector during economic downturns as well because it can act as a less expensive alternative as opposed to other restaurants. The QSR industry faces many external trends such as the government controlling wages, and companies all over the globe updating their technology in order to increase efficiencies. Other external trends would include social trends such as consumer preferences shifting to healthier, fresher food. Finally they will experience economic trends such as international economies. Even though there is international expansion, there is little international trade within the QSR industry. This is primarily because the food needs to remain fresh for the longest amount of time possible, so most food is relatively local.

The Quick Service Restaurant Industry is segmented based on menu options that a restaurant provides. Due to the vast variety of restaurants and what they serve, it is hard to segment them into just one category.

The biggest competitors in the pizza segment are Papa Johns, Pizza Hut, Little Caesar’s and Dominos. Restaurants in this segment have been allocating more resources towards improving and implementing carryout or delivery services.

The Burgers segment takes up a large majority in this industry. Some of the biggest competitors in this segment are McDonalds, Burger King, and Wendy’s. Recently some of these restaurants have been outperformed by restaurants like Five Guys and In-N-Out Burger because of their emphasis on customizable and high quality food.

The Chicken segment in the Quick Service Restaurant Industry is dominated by three major restaurants. These restaurants are Chick-Fil-A, KFC, and Popeye's. Chick-Fil-A has recently surpassed KFC as the leader in this segment with an average of 3.2M sales per restaurant (Bixler, 2012). The reason for this can be attributed to Chick-Fil-A’s great customer service, high quality food items, and menu variety.

The sandwich segment of the Quick Service Restaurant Industry is dominated by Subway with Panera, Arbys, and Jimmy Johns following behind. This segment focuses primarily on specialty items, customization, and food quality. Fresh, high quality foods are being demanded by consumers and sandwich restaurants are providing that, while adding unique specialty items to their menus

Mexican food consumption has been increasing as the Mexican population and immigration grows. Taco Bell, Chipotle, and Qdoba are the top competitors in this industry segment and Chipotle has been growing very quickly. Chipotle’s focus on high quality and customizable food items is the reason why it has been growing so quickly.

The Asian food segment is very different from other quick service restaurant segments. This is because of the relatively low amount of Asian chain restaurants. The largest one in America is Panda Express. The low number of chain restaurants are due to the fact that many Asian restaurants run as privately owned family restaurants.

There are a very wide variety of food places and options in this segment such as seafood, snack foods, coffee shops, and bakeries. The top three restaurants in this segment are Starbucks, Dunkin Donuts, and Dairy Queen.

IND

USTRY

SEGM

ENTATIO

N


Industry Segmentation

42%

14%10%

10%

9%

8%7%

Burgers SandwichesAsain Food ChickenPizza and Pasta Mexican FoodOther (Alvaraz, 2015)

Figure 2: QSR Industry Segments

4

Major Segments

AN

ALY

SIS OF K

EY C

OM

PETITOR

S

McDonald’s Overview

McDonald’s is a world leading company in the Quick Service Restaurant industry. McDonald’s has over 36,000 locations in over 100 countries and is heavily reliant on franchising to expand. McDonald’s is made up of four segments including US Market, Foreign Leading Markets, High-Growth Markets, Foundational Markets. McDonald’s offers an extremely generic menu including items such as burgers, french fries, and salads. McDonald's is the largest company in the quick service restaurant industry taking up about 16% of the total market share.

Marketing and Cost Structure

McDonald’s is often times referred to as a company with an excellent marketing strategy and a well known global brand. With a mixture of branding and knowing what the “Golden Arches” bring and bringing local flavor to different regions in order to appeal to specific geographical preferences. McDonald’s invests a significant amount of money into marketing because they believe it is very important to give the best experience possible to all customers and they want to be able to promote that. McDonald’s also is able to control their margins because they have had success with their cost structure and have been able to maintain good relationships with their suppliers. Similar to many companies in this industry the primary source of costs come from raw materials for their food followed by labors costs. McDonald’s is planning on cutting labor costs by adopting the use of kiosks and cutting their staff number. This will also offer a more modern, faster, customer experience.

Geographical Breakdown

Expansion

McDonald’s is extremely reliant on franchising in order to continue to grow. About 80% of its restaurants are franchised, as McDonalds plans to grow that number to 95% by 2018. Franchising is so important to them because the margin on franchising is higher than opening their own restaurant. This is especially prevalent in their high growth market segment, which is currently only 44% franchised, yet makes up 25% of their total revenue. This high growth market includes places like China, Korea, Spain, Russia, Poland, Italy, Netherlands, and Switzerland. If McDonald’s is successful in its attempts to bring franchising to these countries it could experience a second wave of major growth. This would be extremely important in maintaining its global market share as many other quick service restaurant companies continue to grow at a fast rate.

McDonald’s Corporation Company Analysis

Introduction Industry Overview KSF 1: KSF 2: KSF 3: Conclusion 5

Figure 3: McDonald’s High Growth Segment

(Source: Mcdonalds.com)

AN

ALY

SIS OF K

EY C

OM

PETITOR

S

Yum! Brands Inc. Overview

Yum! Brands is one of the largest companies in the quick service restaurant industry and owns about 11% of the market share. The only company bigger is McDonalds, who takes up about 17% of the market share. As of 2014 Yum! Brands has over 537,000 employees working at its 41,000 locations globally. Yum! Brands is made up of three restaurant chains that are all in different segments of the quick service restaurant industry. These restaurants are Kentucky Fried Chicken (KFC), Taco Bell, and Pizza hut. They all rank in the top two of their respective segments according to 2015 total sales.

Key Partners

Yum! Brands has one exclusive supply chain and they are a private company named Restaurant Supply Chain Solutions, LLC (RSCS). RSCS manages the supply chain of Yum! Brands restaurants in the United States and negotiates purchases of over $6 billion. The primary products included in those purchases are chicken, cheese, beef and pork products, and paper and packaging materials. Once the purchases are made they are distributed to the various Yum! Brands restaurants. McLane Company Inc. is an exclusive distributor for Yum! Brands in the United States. They are one of the biggest wholesale suppliers of food in the United States with over 40 distribution centers.

In 2015 Yum! Brands decided to separate from its China division to make them two independent, publicly traded companies. Yum! Brands started evaluating the decision to separate from its China division when it became publicly known that the Chinese supplier OSI was selling returned and spoiled products. Yum! Brands ended their relationship with OSI in China but still experienced a decline in sales. Yum! Brands China now has local management that knows the culture, preferences, and trends in China. They are also partnered with over 600 local suppliers. The rapidly growing Chinese consuming class is expected to double from 300 million in 2012 to more than 600 million people by 2020 (Yum.com). This huge growth will give Yum China a big opportunity to grow.


Activities

Yum! Brands is expanding quickly through franchising, having 80% of its current stores being franchised with goals of it being 96% by 2017. Yum! Brands strategically places these restaurants in high traffic areas. It is common to find KFC, Pizza Hut, and Taco Bell restaurants near each other or even in the same building. Having restaurants in different QSR segments that are located near each other helps increase the diversity of their customer base. Even with Yum! Brands vast amounts of restaurants, they are finding it hard to increase sales due to changing consumer preferences and trends. As healthy eating is becoming more popular, Yum! Brands is adapting by implementing menu and ingredient changes. Taco Bell has become more focused on simple ingredients and the removal of artificial flavors and colors. Pizza Hut has removed over 2 million pounds of salt from their menu since 2012. Yum! Brands is quickly expanding globally, with restaurants located in over 130 countries. Yum! Brands is increasing its focus with emerging economies like China and India because of their high growth potential.

Yum! Brands Inc. Company Analysis


AN

ALY

SIS OF K

EY C

OM

PETITOR

S

Chipotle Overview and Vision Food with Integrity

Chipotle has made it an extreme initiative of theirs to keep there food local, fresh, and organic. Chipotle adopted this practice over 10 years ago and ran with it. Chipotle emphasizes on the integrity behind the farming and raisin of cattle of their food. Chipotle also does not use any Genetically Modified Organisms in their food. This has led to great success in for the company and according to Chipotle they plan on continuing this trend long into the future. CMG also manages to keep these practices while maintaining a relatively high operating income. This leads us to believe that Chipotle will have major success in growth in the future, as long as it is willing to continue to adapt to consumer preferences and not break away from its core values.

Expansion

As of the start of 2016 Chipotle had over 2000 locations and plans to add about another 230 restaurants throughout the year. CMG has also done this with issuing only a small about of debt. Chipotle has been growing exponentially, however, there are concerns that their growth is limited in the long term because CMG chooses to not franchise their business. This allows them to focus on their vison and values because private owners, running their own operations, is not a concern. Chipotle’s growth has primarily came from the United States. Chipotle only has 13 restaurants outside of the US, in countries like Canada, France, England, and Germany. This is another concern for the future of Chipotle's growth. If chipotle only limits themselves to domestic customers they may hit a wall when it comes to high growth. This leaves chipotle with two options, consider franchising and sacrificing the company brand or expanding globally to continue high growth after the number of restaurants in the US begins to mature.

Chipotle has an extremely unique strategy for operating their company. It involves growth through adapting to consumer preference and being extremely aware of the environment, which many consumers enjoy. They started an initiative that involves only using the freshest, non-GMO foods that are provided from local farms. This has grabbed the attention of many domestic consumers and allowed them to grow extremely fast within the US. They do not, however, have a very strong international presence, which limits their growth in the future. Chipotle also chooses to not franchise their business in order to be able to keep their brand for what it is know for today, which also may limit growth in the future. CMG has a vision to change the way people look at and eat fast food. They want to remove the negative stigma tied to it with only unhealthy options. They have made a promise to their customers that they will continue to only offer options that meet their “food with integrity” standards.

Chipotle Mexican Grill Company Analysis


Figure 4: Restaurant Count

(Source: Kalogeropoulous, 2015)

AN

ALY

SIS OF K

EY C

OM

PETITOR

S

Operations and Brands

The operations of these three competitors in the Quick Service Restaurant industry are very different. In this case McDonald’s and Yum! Brands operate relatively similar, however, Chipotle Mexican Grill operates significantly different. Yum! and McDonald’s both use high growth through franchising as a strategy for growth, but Chipotle does not franchise and they are in full ownership of all of their restaurants. Chipotle also operates primarily in the US while the other two companies have a strong international presence. This allows McDonald’s and Yum! Brands to continue their growth, since they’re both limited to more growth within the United States given their already strong presence. McDonalds has the most valuable brand of the three and this comes with little surprise, as shown in the figure below. . People all over the globe understand what the company is and what they have to offer.

Strategy

When comparing these three different competitors it’s important to look at their strategies they have going into the future. For example, McDonald’s strategy is to grow through leveraging their alignment with franchising and suppliers. They plan to be a modern and progressive burger company. Chipotle too uses progression as a growth strategy, however, there is different. Chipotle uses a fresher/heathier menu to appease a more modern consumer reference. This has proven to be very successful in recent years. Similar to McDonalds, Yum Brands! Is also a massive Quick Service Restaurant company that also experience growth through large scale franchising. It also will often put multiple restaurants in the same building in order to control its costs.

Financial Comparisons

All three competitors are in different financial situations. For example, Chipotle has experienced a much stronger top line growth than the other two companies. CMG also has a much higher P/E ratio (59.59), showing more potential growth as well as a negative Net Debt to EBITDA, signifying they were able to grow with issuing little debt. But on the other hand, McDonald’s has a much better operating margin and a stronger asset turnover ratio, showing a stronger efficiency of their operations. A large concern of Yum! Brands would be that they have a negative Quick Ratio, which is concerning for both them and bond investors. If YUM is unable to pay off their short term liabilities than it would make it much more difficult to acquire cheap capital and limit their future growth.

Figure 5: Market Share

Examination of Key Competitors


FINA

NC

IAL A

NA

LYSIS

McDonalds’s

McDonalds has experienced top line contraction over the past few years yet they falling from $28.5 billion in 2013 to $25.41 billion in 2015. However, same store sales increased 1.5% in 2015, and are currently projected to increase 3.1% in 2016. This did not hurt the performance of the stock. The price has risen about 20% over the past year, this is likely because of the debt issuance in late December that was used to unlock shareholder value through property investments. This did however hurt them from a creditor standpoint. Their Net Debt/EBITDA increased from 1.09 in 2013 to 2.52 in the LTM, which lead to a downgrade from 2 major ratings agencies. However, with a current ratio of 3.27, short term creditors aren’t extremely worried. (Bloomberg, 2016)

Yum! Brands

Similar to McDonalds, Yum! Brands has experienced no revenue growth since 2013, yet they still managed to increase their EPS to $2.97 from $2.41, this signifies more efficiency through operations. Which can be seen though their increase in margins over the past couple years, yet they still remain low compared to McDonalds. Yum! also has concerns with its debt. The company’s Current Ratio is currently below 1 and the company has been increasing its financial leverage consecutively since 2013. (Bloomberg, 2016)

Chipotle

Chipotle has had much more success in increasing revenue and this is likely because they are growing as a company very quickly. Their revenue increased from $3.2 billion to $4.5 billion in 2015. With that being said they have no consistency with their same store sales growth. Chipotle has also managed to maintain all of this growth without issuing large amounts of debt. They also have a P/E ratio of 31.22, which is much higher than the competitors, showing they have much more growth potential. (Bloomberg, 2016)

Figure 6: Revenue Growth YoY%

Financial Analysis


2013 2014 2015

-10

-5

0

5

10

15

20

25

30

0

-3.7

-7.4

01.5

-1.30

27.8

9.6

MCD YUM CMG (Source: Bloomberg)

KEY

SUC

CESS FA

CTO

R

The QSR industry is convenient because of how fast the food is able to be ready. Most consumers of quick service are ones who are on the go constantly, moving from one place to another. The reasons for drive-thru’s is to make consumer’s lives easier by not making them have to get out of their car. “On average, the drive thru represents more than 65% of the revenue quick service restaurants bring in, says Frank Amoruso, the CEO of HyperActive Technologies, Inc. a provider of restaurant technology solutions.” (Amoruso, 2010). The average amount of seconds it takes to place an order at a drive thru and retrieve your food is approximately 203.29 seconds, according to a study across 23 quick service restaurant brands. McDonald’s experienced an average speed of 189.49 seconds with an average of 3.81 cars in the drive thru. Yum! Brands Taco Bell experienced an average speed of 158.03 seconds with an average of 2.11 cars in the drive thru. This data is relevant because 81% of consumers said they are satisfied with the convenience factor of drive thru restaurants due to how quick, easy and efficient they are.

Speed and Efficiency

Chipotle not offering a drive thru option has been a controversy within the industry. Experts within the industry believe that if Chipotle adapted a drive thru, it would ruin the Chipotle experience, which is being face-to-face with their employees and having the ability to customize their entire order with ingredients right in front of them. Chipotle’s average service time consists of 41.6 seconds from the moment they press the tortilla into the cast iron, to the time they wrap up the burrito. One of the strategies that quick service restaurants do to increase speed is evaluating their daily operational procedures and measure the amount of time it takes to deliver food to their customers. They even analyze their footsteps and arm reaches to estimate the efforts it takes to get the food retrieved. But all in all, customer perception of time is more important than the actual number of seconds. For example, food presented with a long line moving quick and efficiently is perceived as quicker service, than a slow line, in the same time frame. The perceived speed that a quick service restaurant is able to deliver the food, the happier the customers. The convenience of speed and efficiency within the quick service restaurant industry is key to success because the industry is defined by being fast and easy. According to a recent quick service survey, 67% of people said they eat at quick service restaurants because they are convenient. (Pilon, 2014). Since the majority of consumers are on the go from one destination to another, their own only option is something convenient, easy, fast and efficient. The way the food is operated in the kitchen, and focusing on food that can be cooked quickly are ways the industry remains successful.

10

Convenience


Figure 7: Drive Thru Seconds and Cars Present

(Quick Service Restaurant Magazine, 2014)

Strategic Location

Another reason quick service restaurants are convenient is because of where they locate themselves. Quick service restaurants are located in accessible high traffic areas where they see potential growth. By placing these restaurants in neighborhoods, shopping malls, airports, tollways, and colleges, they gain business because of impulse purchases from consumers. Other factors that are researched before quick service restaurants open are age and income levels of the locations population. According to qsrmagazine.com, when quick service restaurants are targeting locations because of age, they consider targeting millennials. They target millennials because of all the generations, they spend the majority of their food expenditures on food away from home. 54% of consumers who eat at quick service restaurants at least once a day are between the ages of 18 and 34. 37% consumers who eat at quick service restaurants two to six times per week are also between the ages of 18 and 34 (Oches, 2012). Due to these statistics, quick service restaurants locate themselves in areas surrounding millennials, to convenience them and drive impulse purchases.

In order for quick service restaurants to provide convenience to consumers, they choose to put the majority of their locations in middle class areas. The global middle class makes up about 3 billion (42%) of the global population and spends two-thirds of the worlds consumer spending ($33 trillion). This statistic makes it a targetable market because middle class areas spend a significant amount of money annually on food away from home. On average, household incomes that bring in revenue of $42,000-$125,000 spend 42.78% of their food expenditures away from home. This provides an ideal environment for quick service restaurants to locate their restaurants.

Convenience


KEY

SUC

CESS FA

CTO

R

11

The importance of strategic location within the quick service restaurant industry lies in the idea that in order to be convenient, the restaurants need to be easily accessible. For example, McDonald’s has restaurants on some of the most prime real estate in the world. They have 36,000 locations in over 100 countries. They look for a location that is 50,000 square feet, even though they have some restaurants with more or less square footage. They also look for corner locations so they are able to put up signs that are visible from two major streets. The reason they are able to have so many restaurants, especially on a global level, is due to franchising. Franchising is key for convenience because it allows restaurants to open multiple locations at a lower cost, which makes it more accessible for consumers who are on the go. The franchising model applies to Yum! Brands as well. It operates 40,000 stores across 125 countries. One strategy Yum! Brands uses to be convenient to their consumers is that, in some locations, they have all three of their quick service restaurants in one building (Taco Bell, KFC, and Pizza Hut). They do this to be more accessible to consumers, as well as cut the costs incurred with constructing multiple buildings in different locations. Chipotle on the other hand, does not franchise and currently has 2,010 restaurants in 5 countries. Chipotle has considerable growth potential through their current business model, as they intend to grow to about 4,000 units in the coming years. Within this plan, they are looking shift their restaurant design much smaller as two thirds of their business is now takeout (changing from a mostly dine in restaurant earlier on). This model will cut occupancy costs, lower operating expenses, and allow Chipotle to place restaurants in higher value locations. This will provide enhanced accessibility and convenience to their customer base, as there will be more locations, and more emphasis on the quicker take out option.

Through franchising McDonalds and Yum! Brands continue to grow their total restaurants globally, allowing customers to access them almost wherever, and Chipotle is set to double their locations globally in coming years. Strategic location is key to success in the quick service industry by providing more accessibility to consumers.

Figure 8: How Often Consumers Ages 18-34 Eat Out

(QSR, 2014)

KEY

SUC

CESS FA

CTO

R

General Overview

Implementing innovative technology is a convenient and efficient way to improve ordering, paying procedures, marketing and ultimately all business processes. Through different media outlets, small and large businesses are able to stay up to date with the daily demands, concerns, and the recent social trends such as busier lifestyles and longer working hours of the consumers. Recently, many major industry players have even begun to develop and release their very own applications, downloadable onto any compatible phone across the globe. With newly hatched businesses popping up across the US and other countries, comes even bigger and brighter ideas.

Digital Innovation cont..

12

Implementation of Innovative Technology


Digital Innovation

One of the biggest changes in the quick service industry is not the food being offered, it is the rapid development of technology. McDonalds is on the rise in improving on hospitality and on customer experiences. They do this by implementing new technology like kiosks. Newly implemented Kiosks provide customers with a new way of ordering, eliminating a face to face experience. Kiosks have been proven to reduce service time by 7 seconds and improve customer satisfaction. McDonald’s customer satisfaction increased by 6% in stores that used kiosks. A kiosk allows customers to order their meals specifically how they want them, which both removes the risk of human error and also cuts back on labor hours. Research within the pizza industry, concluded that 14% more special instructions were given compared to orders taken over the phone. This concluded, customer’s ability to remove social friction and negative judgments from their eating habits was a key driver in this change (Gavett, 2015).

As talks of a rising minimum wage continue effectively controlling the cost of labor is arguably the most important factor that companies within the QSR industry must address, and kiosks offer a solution. The CEO of McDonald’s USA stated “it’s cheaper to buy a 35,000 robotic arm than it is to hire an employee whose inefficient making $15 an hour bagging French Fries.” Many large QSR companies are starting to think similar to him. Taco Bell division operating profit fell 7% to $152 million from $163 million, due to higher expenses related to incentive compensation and investment in strategic growth and technology initiatives. System sales grew 7% for the quarter and 8% for the year. Same-store sales advanced 4% for the quarter and 5% for the year. (Watrous, 2016) This shows that they are investing in these machines and they will benefit from them in the near future. In all, kiosks act as great way for a company to manage costs and increase margins, while simultaneously improving customer satisfaction.

QSR Mobile

Implementation of Innovative TechnologyK

EY SU

CC

ESS FAC

TOR


Advances in mobile technology are beginning to change the way QSR industries understand and engage with their customers. Most QSR restaurants are adopting this trend because of the success it has illustrated through companies like Taco Bell, KFC and McDonald’s. KFC’s mobile app presented 2 million downloads in just the first 4 months and over 30% higher average-order values on mobile compared to in-store purchases (Borison, 2014). This shows how many customers believe this to be an efficient and convenient way of communication to the industry. Yum brands’ Taco Bell offers a private mobile app, allowing consumers to pay and order on their phones in advance and even save their favorites for a more convenient future visit. In response, 3.7 million downloads and check growth of 30% resulted from this app (Lieberman, 2015). According to Business Insider intelligence, Quick Service Restaurants offering order placement via smartphone are projected to compose more than 10.7% of QSR sales by 2020 (Taylor, 2016).

With this much popularity surrounding mobile ordering, it is expected to be a $38 billion dollar industry by 2020 (Bakker, 2016). The importance of mobile capabilities is huge for brands that are dependent on delivery. Yum Brands’ Pizza Hut new idea of “Easy Beats Better” is directed linked to a positive 5% increase in same-store sales growth. Today, food orders through digital and mobile networks accounted for 46% of their sales and average spending per pizza increased by 18% while ordering online than over the phone (Taylor, 2016). McDonalds has seen more than 7 million downloads from its mobile app since the 2015 launch, ultimately proving welcome offers are directly linked to high registration rates (Jargon, 2016). Restaurants implementing mobile devices into their company’s structure will raise customer awareness of deals and coupons, which will in the end raise company’s revenues. A recent survey surfaced indicating “82% of diners would do almost anything to avoid long lines at fast food restaurants when they are with their children, and nearly half of millennial parents say they would rather not eat at all than stand in a line.” (NACS, 2016). This indicates mobile devices will have more success because it will shorten lines by 60-70%.

Figure 9:Forecast: Mobile Order- Ahead Volume at US QSR

(Source: BI Intelligence)

Implementation of Innovative TechnologyK

EY SU

CC

ESS FAC

TOR


Social Media Marketing

Social media has become a booming force behind the marketing success of many businesses throughout all industries. Social networking from a company standpoint, allows consumers to stay in immediate contact with new information. It can also be use it to monitor trends from the direct voices of the buyers which eliminates many blind spots companies use to miss. This gives the people something that makes them feel good about themselves, albeit in the moment, and the people seemingly can not live without either in this upcoming generation. McDonalds, being one of the strongest brands in the world, invested in $963 million in ad production last year, going up 8.6% from the year prior (Bhasin, 2014). Through social media marketing strategies, promotions and limited time offers, they take the reins when reaching out to a large consumer base with an astonishing 67 million “likes” on their Facebook page (Facebook,2016). In recent years, social media has become a booming force behind the marketing success of many businesses throughout all industries. Unlike television ads and billboard, which are often overlooked or not heard, social media is sure to have the American populations attention. 90% of young adults 18-29 years old use social media, a 78% increase since 2005 and a 69% increase among the ages 30-49 (Perrin, 2015). Millennials are spending more money in the restaurant industry than any other generations before, verifying companies need to shift their attention to marketing them properly so they spend it accordingly. In the recent years, its standard practice for a restaurant to be engaged through channels and a key tool in their marketing strategy. This shift to social media reveals how big of an impact social media has on the restaurant industry. Social media is revolutionizing the Quick Service Restaurant industry. There is a very positive correlation between a restaurants revenue and its social media reviews. If you know how to reach the target market properly, you have endless opportunity of grabbing the attention of a hungry follower and publicity through social media platforms.

Figure 10: % of US social media usage by age

(Source: Pew Resource Center)

New Items Breakfast

Adapting to Consumer PreferencesK

EY SU

CC

ESS FAC

TOR

The introduction of new menu items is important to success in the industry. This is proven by the increase in sales due to the introduction of different items by Chipotle, McDonald’s and Taco Bell. Chipotle runs their business by being very steady in their menu items so the introduction of new items is rare. While Chipotle is just starting to introduce a new type of meat in order to draw in customers after their recent e-coli scare, McDonald’s and Taco Bell have completely launched new items with great responses from consumers.

Taco Bell had massive success after introducing their Doritos Locos Tacos. They sold 100 million in 10 weeks. It took McDonald’s 18 years to sell their first 100 million burgers. The Doritos Locos Tacos increased sales by 6% in 2012, the year they were introduced (Kim Bhasin, 2012). McDonald’s had major sales increases from the introduction of the McGriddle, which is a breakfast sandwich made between two pancakes. In the year following their introduction they contributed to 40% of same store sales (William Harris, 2009).

A more recent example of success from new introduction of menu items is McDonald’s garlic fries. They were first offered at four restaurants around the San Francisco area and sold out due to a lack of supply in less than two weeks. The local garlic limits the production of this item to the San Francisco region, but they were spread to 240 restaurants in the San Francisco area due to their booming success (Michal Addady, 2016).

Breakfast is a consumer trend that has been dominating the industry in the last few years. An article discussing the new type of meat which Chipotle is beginning to introduce suggested that the new menu item is often used in breakfast foods (Haley Peterson, 2016). While Chipotle does not intend to go down this route with their menu, it illustrates the consumer demand for breakfast food.

McDonalds and Taco Bell both saw improved sales following their recent changes involving breakfast food. McDonalds has been serving breakfast food since the 1970s, but started serving all day breakfast in October of last year. Taco Bell only recently started serving breakfast in March of 2014. These introductions have increased complexity of kitchens, but have had some significantly good impacts on the companies.

Figure 12 above shows the average increase in foot traffic across locations in McDonald’s and Taco Bell during the weeks before and after their recent breakfast changes. According to Jeff Glueck, McDonald’s saw a 9% increase in foot traffic immediately following the launch of all day breakfast. This is impressive until you see that Taco Bell saw a 20-25% increase in foot traffic immediately after introducing breakfast items, and these breakfast items still account for 7% of total revenue for Taco Bell. McDonald’s same store sales increased 5.7% in the US and 5% globally. It is also noted that this launch improved McDonalds perception (Jeff Glueck, 2015).


Figure 12: Before and After Breakfast Launch

1980 1990 2004 20140

20406080

100120140Figure 11: McDonald’s Number of Menu Items

2 weeks

before

1 week b

efore

1st week

2nd week

00.40.81.2

mcdonalds Taco bell

Sustainability

Brands like Chipotle have been focusing on sustainability in their ingredients and menu items. Chipotle only uses organically grown produce and responsibly raised meats. This has been a generally successful practice for Chipotle in growing its customer base, but the high risk associated with using these types of ingredients was proved detrimental to the company. In 2015 there was an e-coli breakout that severely damaged the company’s reputation and drove customers away. This incident illustrates the higher costs and risks of using more sustainable ingredients.

According to ChicagoTribune.com, Yum! Brands has been one of the few quick service companies who have been holding out on more sustainable practices (Roberto A. Ferdman, 2015). Reasons for resisting include high costs and slowness of supply chains. With so many restaurants switching to more sustainable practices, supply chains are having a hard time keeping up with consumer demands. Chipotle was forced to limit pork supplied to their restaurants because of a supplier who was found not following practices accepted by Chipotle. Healthy options and higher quality food also cost more money, so profit margins get smaller with a switch to organic produce or cage free eggs.

McDonald’s has been using more sustainable practices as discussed earlier with the introduction of Gilroy Garlic Fries, which only use locally grown garlic. McDonald’s only uses free range eggs and fair trade tea and coffee. McDonald’s is involved in many programs that support sustainability like White House American Business Act on Climate Change, and has plans for 100% recycled packaging by 2020.

Customizable Options

Customizable options are a newer trend in the industry, so some companies are testing new products paired with technology to attract new customers and keep them interested. Chipotle has been able to succeed with almost no change to their menu due to the customization of their meals. With the different kinds of rice, meats, salsas, and other toppings offered, there is a possibility of 76,800 different combinations to make your personalized burrito(Walter Hickey, 2013). This, along with the sustainability of their ingredients, has been able to keep their business steady and their customers loyal.

McDonald’s is introducing the new Create Your Taste menu. It is currently available in Australia and Singapore and has been a success despite criticism about whether the new menu was worth the time customized burgers take to make, and money needed to launch it (Aza Wee Sile, 2015). A customized burger costs $5.09 with the price only rising for an extra patty or bacon and the cost to implement the technology involved to make these burgers costs between $100,000 and $150,000 (Haley Peterson, 2015). One main criticism is that Create Your Taste is not available in the drive through. Despite this, restaurants that have Create Your Taste hired 15-20 more staff members to keep up with the increase in orders, and there is a plan to launch Create your Taste across more restaurants in Australia and Singapore. There are also plans to introduce this item to Shanghai and Seoul.

Taco Bell has not been as quick to give consumers more customizable options, but they have been slowly adding more options for their meals. Many items have the options of different meats and sauces, but their most recent and customizable options involve their mobile app. Using this app, a customer can choose their menu item and add or remove different options which are not advertised in store.


EY SU

CC

ESS FAC

TOR


Cage Free Eggs? Eco-Friendly Packaging? Responsibly Raised MeatsMcDonald's Yes Yes, plans for 100% recycled No, only in CanadaYum! Brands No Yes NoChipotle Yes Yes Yes

Table 1: Sustainability of Companies

16

Global Preferences

While some trends are worldwide, there are many trends which are particular to certain countries or continents. Companies are forced to change menus, building styles, customer service and more to meet the needs of different consumers around the world. McDonalds has over 36,000 locations in over 100 countries and international markets make up 30% of McDonald’s total sales in 2015, but with different trends across the globe they have to make menu alterations in different countries to stay competitive. In India, the majority of people don’t eat beef because of religious reasons, so the McDonald’s menu consists of mostly chicken, vegetarian, and spicy food items. McDonalds now generates $220 million in revenue because of its ability to adapt to the preferences of its consumers in India. In China, rice is a common everyday staple of the diet in most households. To attract customers in China, they have introduced items like the chicken rice wrap, beef rice wrap, chicken rice bowl, beef rice bowl, and the McRice burger. Yum Brands is the leading company in the quick service restaurant industry in global store locations. 54% of Yum Brands sales come from foreign markets. In India, KFC has made some menu changes to appeal to the 42% of households in India that are vegetarian. Some of the changes that KFC has made are introducing menu items such as fried potato burgers, veggie burgers, veggie strips, and veggie rice bowls. With India becoming an emerging market for quick service restaurants making changes like these is huge. In China, KFC has not only adapted to the tastes of the Consumer there, they have also altered building styles so consumers feel more comfortable. KFC in the United States is built to try to maximize takeout convince but in China, the KFC buildings are about twice the size they are in the US to allow for bigger kitchens and more floor space (hbr). They do this to welcome big families into the restaurant and the bigger kitchen is because of the increased menu options that they offer.

Healthy Eating

As the changing market heads towards healthy eating, companies that have been known for unhealthy food are being forced to adapt to a market that is rapidly changing, and are competing with companies that were formerly less competitive in the industry. As consumers have been gaining more knowledge about the food they eat, they are becoming more conscious of what goes into the food they are eating. Preferences are starting to change to healthier food options. While restaurants like Chipotle may offer menu items with a higher calorie count than McDonald’s KFC and Taco Bell, they also provide nutrients that the other brands often do not. Chipotle offers organically grown produce and uses responsibly raised meats in their products, which causes it to be more expensive than some other quick service restaurants. Consumers have been shown to be willing to pay more money for higher quality foods. “Nielsen’s 2015 Global Health & Wellness Survey that polled over 30,000 individuals approximately 88% of those polled are willing to pay more for healthier foods” (Nancy Gagliardi, 2015). Salads were introduced to McDonald’s menus in 2003 in response to consumers looking for healthier options without wanting to sacrifice convenience. Since their introduction, McDonald’s has sold more than 500 million premium salads. An even more popular healthy item on the McDonald’s menu is apple dippers which were introduced in 2004 as a part of their balanced lifestyle platform. This platform included new menu items including apple dippers and fruit juice with happy meals as well as easily accessible nutritional information and sponsoring of physical activities.


EY SU

CC

ESS FAC

TOR


McDonald's KFC0.00%

10.00%20.00%30.00%40.00%50.00%

2010 2015

Figure 13 :Market Share of Fast-Food Restaurants

17

KEY

SUC

CESS FA

CTO

R W

EIGH

TING

SCA

LE

Rational


After analyzing the quick service restaurant industry, we were able to rate and compare our top three competitors within our key success factors. We rated convenience as our top key success factor because the majority of consumers eat at quick service restaurants because of how accessible and convenient they are. We broke up convenience into speed, efficiency, and strategic location. We then rated our companies based on how well they do in each category. In result, McDonald’s received an 8 for speed because of how quickly they are able to deliver their food to their consumers. McDonald’s has been known for how quick their drive thru is, and consumers of quick service are satisfied with the convenience factor of the drive thru. We ranked Yum! Brands as a 7 for speed because of how quickly all of their three restaurants are able to deliver their food to their consumers. Although Taco Bell is extremely quick with their drive thru, Pizza Hut’s wait time is longer which is why we gave them the average of a 7. We ranked Chipotle as 7 as well because although the amount of time it takes for them to make a burrito or a bowl is very minimum, their wait time to get into the restaurant is a lot longer than other quick service restaurants. We ranked McDonald’s as a 6 for efficiency because of how often consumer’s food orders are not correct. According to a quick service restaurant survey, out of all the restaurants, McDonald’s was ranked lowest for efficiency due to the amount of mistakes they make on a daily basis. We ranked Chipotle as an 8 for efficiency since consumers are face to face with employees, it decreases the chance of them messing up their order. We also ranked them as an 8 because Chipotle has a fast moving environment, consumers see them as being more efficient. We ranked Yum! Brands as an 8 for efficiency because they focus on setting up standardized kitchens that can cook food quickly and be delivered to their consumers in a timely manner. We ranked McDonald’s as a 9 for strategic location because they have 36,000 locations in over 100 countries. The locations are off almost every highway exit, in shopping malls and areas that are accessible to consumers. McDonald’s strategically picks their locations where there are consumer impulse purchases, which is a reason they have been so successful. We ranked Chipotle as a 5 for strategic location because they only have 2,010 restaurants in 5 countries. Chipotle remains to be successful because the majority of consumers are willing to drive the extra 10-20 minutes to eat Chipotle. We ranked Yum! Brands as a 7 for strategic location because one of the reasons they strategically locate is by placing all three of their restaurants in one area. Introduction Industry

Overview KSF 1: KSF 2: KSF 3: Conclusion 18

Weighting Scale of KSF’sTable 2:

KEY

SUC

CESS FA

CTO

R W

EIGH

TING

SCA

LE

Rational



Weighting Scale of KSF’s

For our second key success factor, technology, we broke it up into adopting to digital technology, adopting the use of Kiosks, and marketing. We ranked McDonald’s as an 8 for adopting to digital technology in this portion because of their heavy emphasis on their mobile app. We ranked Chipotle as an 8 too because of the use of their app and the future it entails. Consumers are allowed to custom order their meal through the app and skip the line to pick it up. It also has a promotional deal, Chiptopia, which helps them retain customers through the use of their mobile app. It also gives their customers an incentive to come back often. Yum! Brands received an 8 as well because of the success they have had with digital ordering and the use of their apps amongst a heavy portion of their customers.

We ranked McDonald’s as a 7 for adopting use of Kiosks because of their 2,000 locations that currently use the “Create Your Taste” Kiosks and their plans to expand them even more. Chipotle only received a 2 in this category because they have not made any effort to adopt kiosks. Yum! Brands was ranked as a 4 because they are using “Xpress Order” Kiosks at Taco Bell and KFC, however it’s not much compared to McDonald’s. We ranked McDonald’s as an 8 for digital marketing because of their strong social media presence. The invest a lot of money into digital marketing and they have previous success with their digital marketing campaigns. Chipotle received an 8 in marketing because of their social media strategy. Yum! Brands received a 5 in this category because of the success that Taco Bell has implemented with social media. On the other hand, KFC and Pizza Hut have not had the same success. Taco Bell is currently ranked as the number one on Digital CoCo’s Restaurant Social Media Index. KFC and Pizza hut have humorous social media pages, but they lack mentioning promotions and deals. Our final key success factor is adapting to consumer preferences which we broke up into willingness to change menu, fresh/healthy/sustainable and price. McDonald’s received an 8 in this category because they have continuously proven that they will customize their menus based on their geographically location. Chipotle on received a 3 because of their limited menu items and their strict strategy to keep their food fresh. Yum! Brands received a 7 on this portion because they adopt new items to their menu such as the grilled chicken at KFC and Doritos Locos Taco at Taco Bell as well as a breakfast menu at Taco Bell. We ranked McDonald’s as a 4 for fresh/healthy/sustainable food because they have traditionally been known for having not fresh food and having an unhealthy menu. Although they have made a point to offer more salads as a healthier option, their unhealthy food is still outweighed. Chipotle received a 9 because it is a major point of their brand to implement all of the things listed in this category. Chipotle offers high quality meet and that’s a big part of why they have been successful. Yum! Brands received a 2 because they’ve had a horrible history with the quality of their food. KFC was reported to have high levels of anti-biotics in their food in China in 2014 which drew consumers away for a period of time. We ranked McDonald’s as an 8 according to price because of their numerous cheap options. The average amount a consumers spends at McDonald’s is only $4.72 (Lutz, 2015). Chipotle received a 4 in this portion because the average person spends a whopping $11.00 at Chipotle per trip. This seems much higher, however, the quantity and quality of their food is greater. Yum! Brands received a 7 in this category because they also offer several cheap options. Taco Bell is very cheap, but KFC and Pizza Hut are a little pricier. They average person spends $7.50 at Pizza Hut, and $5.13 at Taco Bell per order.

CO

NC

LUSIO

N

Industry Overview

The quick service industry is a constantly growing, massive market with a lot of key players which differ from each other. Quick service includes many different kinds of food all across the world. Companies differ from each other by differentiating their menus and their service across borders. The industry is most prominent in the United States, but has global players as well. It is estimated that fast food restaurants in the United States see a total of 50 million customers every day.

This industry is affected by many macro-environmental factors including political trends, economic trends, technological trends and social trends. Micro-economic factors affecting the industry include customer service experiences, health food trends, and product price. These are all significant trends when shaping he future of the industry and will all have a major impact on the industry going forward.

Segments of the industry are identified by type of food sold at different quick service establishments. while food is segmented, it is difficult too place restaurants into certain segments due to the variety of foods served at fast food restaurants. The largest segment of the industry is burgers at 42% followed by chicken at 14%. Other segments include sandwiches, Asian food, pizza and pasta, and Mexican food. Burgers and chicken are familiar foods to Americans, which is an important part of the industry. Consumers tend to go to fast food that they are familiar with.

Key Success Factors

Key success factors include convenience, adapting to consumer preferences, and implementation of innovative technology. Convenience is the main factor that distinguishes fast food from other parts of the fast food industry, so it is key in being successful in the industry. Adapting to consumer preferences is important currently due to Americans shifting towards healthier food without being willing to sacrifice speed. If companies don’t adapt to this change they will begin to lose customers to companies that will. Innovation and technology are a key success factor due to the importance of keeping up with social trends, along with controlling and reducing costs. Technological advancements reduce human labor while increasing speed and efficiency.

20

Conclusion


REFER

ENC

ES

21

Citations

REFER

ENC

ES

22

Citations

REFER

ENC

ES

23

Citations

REFER

ENC

ES

24

Citations

REFER

ENC

ES

25

Citations

APPEN

DIX

A: PO

RTER’S 5 FO

RC

ES

Buyer Power

Buyer power is high and extremely important in the Quick Service Restaurant Industry due to the competition for consumers. The brands in the industry have to adapt to different buyers in different countries by having different menu items to meet all of consumers needs and expectations. Companies must maintain a sustainable competitive advantage in order to be globally successful.

In the United States, buyers are drawn towards a healthier lifestyle which has caused a change in the Quick Service Restaurant Industry. Since buyers are more concerned about healthier diets, they are requesting healthier food options. This is increasing the popularity of brands like Panera Bread and Chipotle who revolve around business models that provide more options and higher quality food to consumers. The other reason that consumers are drawn towards brands like Panera Bread and Chipotle is because they provide more customizable options. This trend towards fast casual restaurants has influenced other fast food restaurants like McDonald's to have healthier and more customizable options to stay competitive in the industry.

Cost of Changing (Buyer Power)

Cost of changing is currently high due to consumers looking for restaurants that serve healthier foods. This is illustrated by the Chipotle E-coli scare because of their focus on locally grown foods. Their effort to be a more sustainable business increases their food safety risks, which forces them to increase spending on quality food inspections. Without these food inspections they are ultimately losing money when a problem arises and they lose loyal customers. Chipotle’s stock value was $757 before the E-coli breakout and dropped to $475, a 37% decline. (CNN 2016).

26

Porter’s AnalysisSupplier Power

Suppliers in the quick service industry have great influence on companies due to the limited number of suppliers in the market. When there are few competitors, their bargaining power is very high, which has an impact on profit margins for companies. The profit margin for restaurants is very low because these suppliers have the power to raise prices. Although the cost of changing suppliers is high, companies may have to change suppliers due to industry trends towards healthier and higher quality food options. Some companies like Panera Bread eliminate the middle man by making their products within the company, providing fresher food than the food that goes through a manufacturer.

Regulation on food safety is becoming more strict which means that suppliers are spending more money on food inspections and are being forced to raise prices. Not only are these food regulations prominent in the United States, they are also increasing regulation globally. China especially is focusing heavily on making sure their food is sanitary because of the evidence of unsanitary practices in the food industry.

APPEN

DIX

A: PO

RTER’S 5 FO

RC

ES

To be competitive, they need to maintain loyal customers as well as attract new ones. McDonald’s has loyal customers in part because of their convenience and low prices despite ranking lowly on taste tests. While Dominos has loyal customers because of their convenience. Chipotle and Panera Bread have loyal customers due to their “healthy” food and sustainability. In order for other quick service restaurants to remain competitive, they need to provide motives to promote loyalty.

Threat of substitution is important to competitive rivalry because in order to compete with rival companies, they need to find ways to lower the risks of consumers substituting their food for another company. In order to do this, existing companies have updated their menu items to follow the social trends. Threat of new entry is important to competitive rivalry because if there is a new entry into the market, then threat of substitution increases which increases competitive rivalry.

The experience operators of certain restaurants have to offer could be a deciding factor to consumers on where they want to eat. Not only does fast food compete with other fast food and fast casual places, but it also competes with full service restaurants, grocery stores, bakeries and cafes. For example, consumers may go to a full service restaurant like Applebee’s for a better experience eating out, but they also might choose to shop at the grocery store to cook at home and get the home cooked meal experience. Market changes are effecting where and how often consumers are eating at restaurants and ultimately trying to find the most worth while option.

Competitive Rivalry

27

Porter’s Analysis

(The 2015 Franchise 500)

Figure 14 : By The Numbers

APPEN

DIX

A: PO

RTER’S 5 FO

RC

ES

Threat of New Entry

In the quick service restaurant industry, the threat of new entrants is high due to the relatively low cost to start up a restaurant. Although major players make up a significant portion of the industry, new restaurants have a way of changing food trends in growing markets, as well as pulling customers away from the major brands.

Although the threat of new entrants is high because so many companies are entering and exiting the market all the time, the actual threat to the major players isn’t high because of the influence of franchising. It takes a lot of time for a company to reach the level it needs to in order for it to be a threat to a company like McDonald’s. Consumers look for brands they already know when they are looking for a fast food restaurant. Economies of scale are achieved in the fast food industry due to the popularity of chain restaurants. Chains are more profitable as they can bargain more with suppliers.

Its relatively easy to start a quick service business, so time and cost are not significant barriers in the beginning of a business venture. The most prominent barriers to entry would be the power of the current major players and the increased expenses of opening a business due to the higher regulation and minimum wage increases. An entryway is having a brand that is more sustainable and healthier since there aren’t as many restaurants like that already.

Threat of Substitution

Threat of substitution is a major key that brands focus on in order to effectively market towards consumers and suppliers. This is the force that drives companies to hold a sustainable competitive advantage. The competitive advantage of these companies revolves around their marketing strategies and deals. For example, Wendy’s offers the 4 items of food for $4, but Burger King offers the 5 items of food for $4. These differences are what influence consumers to eat at one fast food restaurant rather than the other, while the food is relatively the same quality.

Chipotle and Panera Bread have a different sustainable competitive advantage and it revolves around the quality of their food not the pricing. Consumers are drawn towards these fast casual restaurants because of the quality and customizable options they have to offer. The prices may be higher, but consumers are becoming more and more willing to pay for superior foods.

Threat of substitution is so prominent within the industry that very specific locations are important. Many restaurants focus on location in order to gain customers because one mile could cause a great impact on the amount of traffic coming through a specific restaurant. Many fast food restaurants have locations along the same road because of the convenient placement within a town or city. Restaurants often have multiple locations in a city if there are multiple heavily trafficked areas. If they do not have locations this close together they lose customers because the average consumer will go to the most accessible restaurant.

28

Porter’s Analysis

APPEN

DIX

B: PESTLE A

NA

LYSIS

Economy

The Quick Service Restaurant industry plays a large roll in both the domestic and global economy, and as a whole makes up 80% of the food services industry (Kell, 2016). This is primarily due to the success of franchising and it comes to no surprise, when 50 of the US’s largest companies account for about 20% of total revenue. This industry is a part of the consumer discretionary sector and is heavily driven off of consumer spending. Because of this it tracks the global economy as a whole and with the recent strength of the domestic economy the quick service industry has seen major success as consumer spending increases. It has grown at a high rate since the recession in 2008 and is expected to continue to grow at a rate between 3-5% over the next few years (refer to figure 8).

The International Monetary Fund recently projected a global economic slowdown and a potential recession. A rise in the Federal Funds Rate may possibily have a negative effect on the economy as a whole and slow economic growth. Given the fact that a major driver of the QSR industry is consumer spending, an economic retraction will slow the growth of the food services industry significantly. The QSR industry will have to maintain effective cost control in order to mitigate losses and keep loyal customers. Despite not having a positive impact on the industry, the QSR industry tends to outperform in economic slowdowns because it acts as a cheaper alternative to other restaurants.

Agricultural Price Index

There has been major effects on the Agricultural Price Index (API) over the past few years, some of which being falling oil prices, stronger US dollar, and inflation. These have brought the API down from its high of 107.0 in 2013 to an estimated 94.9 in 2016, and will continue to decline over the next 5 years. This is important to the Quick Service Restaurant industry because it has a direct effect on the price of the food they are getting from their suppliers. This leads us to believe that if prices continue to rise the companies might start looking for alternative substitutes.

2015 2016 2017 2018 2019 20200.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

Revenue ForecastFigure 15:

(First Research, 2016) 29

PESTLE Analysis

APPEN

DIX

B: PESTLE A

NA

LYSIS

Politics

Politics have played a major roll in the shaping of the Quick Service Restaurant industry and will likely play an even larger roll in shaping it in the future. As obesity grows at an international level it gives governments the incentive to do something about the problem. A major way governments are starting to address this issue is through “junk food” taxation. This slows the consumer interest in the industry and in all makes the food more expensive. Another political influence would be that the government does not issue food stamps to lower income families to fast food restaurants. This begins to take action against obesity in lower income families.

A final political trend that could possibly influence the QSR industry would be the increase in minimum wage. Since the QSR is generally made up of low paid employees, a significant increase could be a major threat to the industry and have a negative effect on the margins of QSR companies. Since 2007, wages have seen a small price hike every year, mainly due to strong public outcry along with political backing. As of recent, the debate over what to do with minimum wage has grown stronger and stronger as we’ve seen major U.S. cities set their own ground breaking precedents.

30

PESTLE Analysis

APPEN

DIX

B: PESTLE A

NA

LYSIS

Social

When thinking about the progress of the quick service restaurant industry, social trends are perhaps the most valued when understanding customer preferences and the future of the industry. Health trends are continuing to be a huge topic of discussion and more and more people are developing these habits. Because of this quick service restaurants will have to adapt to their market, and if they don’t they will lose business to substitutes that are complying with the preferences of the consumers. This can be problematic for all quick service company’s because it is more expensive and inconvenient to assure these demands.

Despite the higher cost of healthy eating, it may outweigh the negative health complications that go along with unhealthy food. By offering healthier options, they are attracting a much larger market. Historically, the quick service industry was know for quantity over quality, but because of recent social trends we are seeing a dramatic shift in the menus options offered. Today, peoples expectations for fast food are significantly higher than past generations when looking for quality, low cost entries.

Being aware of your demographics is very beneficial when accurately targeting a multicultural market. By understanding what food is desired in specific geographic locations, a company can precisely tailor their menus. By knowing your market, you can take full advantage of not only advertising strategies, but also distribution channels, product placements, trends and much more. In all, social trends will have a huge impact in shaping the future of the quick service restaurant industry.

Environmental

Environmental trends run hand in hand with many of the social movements today. More company's are progressively working towards becoming earth friendly and green. This is not only good for the environment, but surprisingly more profitable. For instance, improving the efficiency in the supply of their goods, initially reduces hauling and packaging costs. Starbucks for example offers a reusable cup for $1, which gives the consumer incentive to return, while simultaneously reducing waste. Another example, chipotle is known to grow all of their organic products locally, which reduces transportation costs as well as reducing carbon emotions in the atmosphere.

Quick service restaurants are also becoming more aware to animal rights, and the morality of farming and breading animals. For example McDonalds, joined the coalition for Sustainable Egg Supply, which is known for assessing the well being of the hens and the environmental impact associated with the production. This is important because it shows very large companies within the industry are already making an effort to become more environmentally aware. As the social awareness of the environment increases we believe it is key to a companies reputation to adapt eco-friendly incentives and encourage corresponding activity.

31

PESTLE Analysis

2005 20150

0.5

1

1.5

2

2.5

Overweight Obese(World Health Org, 2015)

Figure 16:Global Obesity

APPEN

DIX

B: PESTLE A

NA

LYSIS

Technology

Technology will play a major role in the future development of the quick service restaurant industry. Not only will the advancement in technology make service more productive but also cut costs simultaneously. We are slowly beginning to see a shift in robotic based employee systems. This business is one of many that have begun a quest to remove the human element from your dining experience. An anti human based staff could very well change the environment in how you experience your nightly meals, but it could also change job markets and wage structures. With the elimination of human service all together millions of people all around the world would be left without jobs. The idea itself has been proven feasible and profit worthy, so more company’s will adopt to this as the price of production increases.

Technology is also used within the quick service restaurant industry for promotional purposes. Social media has forever changed the world as we know it. If the whole QSR took advantage of these advancements and applied it to their marketing and PR would ultimately be most effective for reaching a wider consumer base. The quick service industry have taken advantage of this by using these outlets for general communication with customers, immediate feedback and advertising. The use of social media has increased exponentially. In order for industry’s to thrive, they must adapt to the preferences of their target markets. The major players will do and are willing to take any steps to make sure they continue to fit into the lives of the everyday individual. The quick service industry is prominent because it is just that, fast. Social networking moves in a similar way, in that it could also be considered a sort of instant gratification type scenario.

Social Media (Technology)

Both outlets provide people with something that makes them feel good about themselves, albeit in the moment, and the people seemingly can not live without either in this upcoming generation.

Legal

Law and politics can have a major influence on how companies within the Quick Service Restraints operate. Similar to any other cooperate industries, regulations are applied in order to comply with the legal rights of humans, especially in the food industry. FDA implements regulations to ensure the health of the consumers and to guarantee the safety of the food. The FDA essentially sets guidelines for what is acceptable within the food industry, and this is done through a set of specific inspections on food in both large franchises and small restaurants across the country. The US government finds these set of regulations extremely important and grants the FDA a large annual budget to ensure they provide a high quality of work and make certain that the $1 trillion worth of food they oversee is safe (FDA, 2015). The current level of regulation is medium, however is increasing and becoming more important to the industry.

Not only is food regulated in the Quick Service Restaurant industry but there are also a set of regulations in place on how the companies within the industry must operate. For instance, a large number of establishments within the industry are engaged in franchise agreements. There are several agencies at both the federal and state level that implement laws on how these franchise must operate. In general, these franchising laws fall under three classifications including discloser, registration and relationship laws.

32

PESTLE Analysis

Value Proposition • Food deals• Compensation and programs for

employees• Non-profit organizations• Franchising

Key Resources • Raw materials• Suppliers• Real estate• Employees• Consumers

Key Partners• Restaurant Supply Chain Solutions• McLane Company Inc.

Channels• Social media• Foundations and organizations• Global Volunteerism• Commercial advertisements

Customer Segments• Busy families/people• Low income families• International market

Cost Structure • Real estate• Labor• Marketing and advertising• Inventory

Revenue Streams• KFC• Pizza Hut• Taco Bell• Yum! China• Yum! India

Customer Relationships• Promote loyalty through branding• Promote loyalty through differentiated

options• Health and wellbeing programs • Adapt to different consumer preferences

Key Activities • Environmental friendliness

Green buildingsenergy and water

efficiencypaper based packagingwaste recovery and

recycling• Programs and foundations

Yum! Feed he worldYum! Brands foundationHarvest Food DonationsGlobal Volunteerism

• Culture and engagement• Diversity and inclusion

APPEN

DIX

C: B

USIN

ESS MO

DEL C

AN

VAS

Yum! Brands Inc.

33

Value Proposition • Value menu • Relatively extensive menu• All day breakfast

Key Resources • McDonalds well-known brand • Labor• Relationships with material suppliers

Key Partners• Food suppliers • Sponsorships

Cost Structure• Research and marketing• Labor• Materials

Customer Relationships• Monopoly encourages repeat customers• Ronald McDonald house• Offering different menus in different

geographical locations based off consumer preference

Revenue Streams• Franchised stores• Company owned stores

Key Activities • Growth through franchising • Preparing food quickly • Advertising

Customer Segments• On the go consumers • People of all ages

Channels• Restaurant chains• Mall food courts

APPEN

DIX

C: B

USIN

ESS MO

DEL C

AN

VAS

McDonald's Corporation

34

Value Proposition • Simple menu • Alcoholic beverages• Loyalty deals

Key Resources • Relationships with local farmers, • Promotional events • Well trained employees

Key Partners• Suppliers of local grown produce • Local Farmers

Cost Structure• Out sourcing to local farms• Paying employees• High quality food is expensive

Revenue Streams• Individual orders • Catered orders • Alcohol and drinks

Key Activities • Food with integrity• Locally grown fresh food • Mobile app to order electronically

Customer Relationships• Returning customers • Chiptopia • Sticking to quality standards to make

consumers happy

Customer Segments• Millennials- target market

Channels• Social Media• In store experience• Electronic orders

APPEN

DIX

C: B

USIN

ESS MO

DEL C

AN

VAS

Chipotle Mexican Grill

35

APPEN

DIX

D: SW

OT A

NA

LYSIS

McDonald’s SWOT AnalysisIN

TE

RN

AL

EX

AM

EX

TE

RN

AL E

XA

M

STRENGTHS

POSITIVE INFLUENCES

NEGATIVE INFLUENCES

OPPORTUNITIES

WEAKNESSES THREATS

• Economies of scale• Well-known brand• 40,000 restaurants

globally

• Growth in emerging markets

• Healthier menu items

• Over saturated• Limited growth

• Substitute companies

• Altered consumer preferences

• Cost of labor

36

APPEN

DIX

D: SW

OT A

NA

LYSIS

Yum! Brands SWOT AnalysisIN

TE

RN

AL

EX

AM

EX

TE

RN

AL E

XA

M

STRENGTHS

POSITIVE INFLUENCES

NEGATIVE INFLUENCES

OPPORTUNITIES

WEAKNESSES THREATS

• Economies of scale• Diverse selection of

food

• Growth in emerging markets

• Healthier menu items

• New recipes

• Quality of food• Weak R&D

• Substitute companies

• Economic slowdown effects pizza more than other QSR companies

• Cost of labor

37

APPEN

DIX

D: SW

OT A

NA

LYSIS

Chipotle SWOT AnalysisIN

TE

RN

AL

EX

AM

EX

TE

RN

AL E

XA

M

STRENGTHS

POSITIVE INFLUENCES

NEGATIVE INFLUENCES

OPPORTUNITIES

WEAKNESSES THREATS

• Rapid growth• Good financial

strength• Quality of ingredients

• Store expansion• New product

categories

• High price menu items• Limited choice of menu• Major presence in the US

and Canada

• Additional food safety issues

• Competition with fast casual

38

RATIO

S

39Retrieved from Bloomberg

Table 3:

Table 4:

Table 5:

team 3 final project

Documents