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Fast Food Industry Analysis

MBA 615
Prepared By Elizabeth Minder Theshin Angulugaha Matthew Miller Andrew Newman

March 7th, 2011

Agenda
Elasticities & 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

Introduction
Industry Definition
Fast 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 Segments
Quick Service Restaurants Takeaways Mobile & Street Vendors Leisure Locations (Cinemas, Racecourses..etc)

Market Conditions
Saturated Market Output increases as price remains steady (Supply curve shift to the right) Franchised Store Give owners the control to run the restaurant best suited to the location

Industry Make Up
Monopolistic Competition to Oligopoly Does McDonalds run the show? Industry Subset Why did the chicken cross the road? To show the cheeseburger who s boss.

Market Conditions
Horizontal Marketing System McDonalds and Walmart Starbucks and Target Hires 3.5 Million Employees Pays lower wages, simply minimum wage, to a higher percentage of workers than any other industry. 90% of workers receive no benefits.

Elasticity
Price elasticity is HIGH
High availability of substitutes Consumer tastes & preferences vary one day to next Low proportion of overall budget

Income elasticity is LOW to MODERATE


Latest study showed elasticity as 0.386 Overall market is income inelastic and normal goods Premium fast food chains may be more income elastic (i.e. Chipotle, Five Guys, etc.)

Supply & Demand Determinants


Demand determinants

Advertising and promotion Consumer tastes & preferences (i.e. health awareness) Negative publicity (i.e. food scandals) Seasonality Prices of related products

Supply determinants

Environmental conditions (weather, seasonality, etc.) Government regulations (food and labor laws) Supplier relationships Costs & technology

Cost Drivers
Cost-intensive industry High cost of labor (25-30% costs) Rising commodity and energy prices Lower operating margins Solutions Technology innovation Economies of scale/scope

Porters Five Forces


Buyer Power (MODERATE)
Financial crisis strengthens Power No switching costs High price elasticity of demand Consumer tastes can very day to day

Supplier Power (HIGH)


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)

Intensity of Rivalry (HIGH)


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

Porters Five Forces


Threat Of Substitutes (MODERATE)
Frozen meals, home cooking, etc.. Healthier options Americas 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 kitchen Main driver of fast food is convenience

Threat Of New Entrants (HIGH)


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 loyalty

Industry Performance - United States


Market Value $ 71billion -2009
Year 2005 2006 2007 2008 2009 $ Billion 61.8 64.7 68.6 71.4 71.3

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

Industry Performance - United States


Market Volume 40.3 billion transactions in 2009
Year 2005 2006 2007 2008 2009 Billion transactions 36.1 37.5 39.1 40.0 40.3

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

Sales performance
Year 2007 2008 2009 2010 2011 Year 2007 2008 2009 2010 2011

Industry Performance - United States


Sales in Millions $ 156694 160909 159415 166238 174611 Sales $ per Employee 32569 32536 32145 32576 33349 -0.7% -0.7% 1.3% 2.4% 2.7% -0.9% 4.3% 5.0% % change % change

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 countries

Global Markets
United States dominates the global fast food industry
Top ten fast food chains are (sales, and # of restaurants) US companies
TOP Fast Food Chains in Europe Turnover 2007 in million Rank 1 2 Operator McDonald s Yum! Burger King Autogrill Quick Greggs Telepizza Le Duff Starbucks Nordsee Brand Banner McDonald s KFC, Pizza Hut Burger King Autogrill, BK, a.o. Quick Greggs, Bakers Oven Telepizza Brioche Doree Starbucks Nordsee 1,700e 900 860 800e 455 350e 305 Turnover 5660 Outlets 6400 1880 1,800e 900e 400 1368 820 440 743 360 17 12 3 2 16 4 7 4 Countries 40

China

1.3 billion population 4 KFC, McDonalds major US players McDonalds currently 800 restaurants,5 potential 10,000 to 15,000 stores 6 Drive through a brand new concept McDonalds signed a contract with 7 Chinese oil company 8
9 10

Reflection Analysis
Surprised by how easy it is for new firms to enter the market and how large firms like McDonald s 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, industry s impact in US economy (GDP)

Sources
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. Fast Food, Health, and Fitness Trends. Practical Nutrition. August 30th, 2010 The Future of Fast Foods. Healthy Habits. March 19th, 2009 Tough Economic Times Demand Tighter Spending. B. Bead. Arizona Times. May 23, 2010. Fast Food in the United States. DataMonitor. Industry Analysis. September 2010 Worldwide Fastfood Restaurants Industry. (NAICS 72221) Barnes Report. 2010 edition. C. Barnes & Co The Economics of the Fast Food Industry. Social Alternatives Publications 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 2001 www.mcdonalds.com, www.yum.com Wikiinvest.com Economist.com