Industry Analysis
Fast Food Industry
Anna Sterling
Johnnie Davis
Zane Barnes
Kimberly Smith
Nolan Bosworth
Shaina Weaver
Clay Jones
History of Industry Competitors
 McDonalds
 First store opened in 1940 by the McDonald brothers
 Headquarters- Oak Brook, IL
 Sonic
 First store opened in 1945
 Headquarters- Oklahoma City
 Jack-In-The-Box
 Founded in 1951
 Headquarters in San Diego, CA
 Burger King
 Founded in 1954
 Headquarters in Miami, Florida
Industry Overview
 Fast-food industry includes about 200,000
restaurants
 Combined annual revenue of about $120
billion
 Industry is highly fragmented: the top 50
companies hold 25% of sales
Industry Details
 The industry is highly labor-intensive: the average
annual revenue per worker is just under $40,000
 Most fast-food restaurants specialize in a few main
dishes
 Restaurants include national and regional chains,
franchises, and independent operators
 Most fast-food restaurants use a POS (point of sale)
system to take orders from drive-thrus and the
register
The Fast Food Industry’s Dominant
Economic, Political, and Social
Features
 Industry break down
 Restaurant Industry
• Full-service
• Limited-service (NAICS 722211)
•
•
•
•
•
•
Burger Segment
Sandwiches
Pizza/pasta
Chicken
Mexican
Etc.
2008 Burger segment Annual Sales
(http://www.qsrmagazine.com/reports/qsr50/2008/burgers.phtml)
Rank QSR 50 Chain
Sales ($Mil)
1
1 McDonald’s
$28,666
2
2 Burger King (U.S. & Canada)
$8,781.0
3
4 Wendy’s1
$7,956.0
4
10 Sonic Drive-In
$3,608.8
5
13 Jack in the Box1
$2,975.0
Economic Factors
 How does a Recession affect the limitedservice restaurant industry?
 As a general rule, when disposable personal
income is tight, fast food restaurants fare
better than their casual and high end cousins
because people will shift their purchases
downward.
 The best recession survival plan is having a
well advertized $Dollar menu and tight cost
controls in place .
Political Factors
Economic Stabilization Act of 2008 gives
restaurants two helpful benefits during
recession.
 Banks have an injection of capital and are being
urged by the government to make loans.
 Restaurants must acquire loans form banks to make much
need expansions or updates.
 Accelerated 15 year depreciation schedule for new
construction on restaurants saves money.
 Old depreciation schedule was 39 ½ years.
 Ex: on a $700,000 project it would save $7,000 a year
versus the 39 ½ year schedule.
Social Factors
The fast food industry pays close attention to
what the American society wants and needs.
 Must add value by being affordable and of
consistent quality.
 Menus with a vast variety of products
 Healthier options and brand Image needs to be
provided
 Must be convenient and fast to accommodate
the fast pace of American lifestyles.
The Five Forces Model
 Threat of New Entrants
 Economies of Scale:
 The firms in the limited-service restaurant class do see some advantages to economies
of scale, but these advantages are undermined by the ease of creating a quick service
restaurant. The saturation of the industry is also a huge limiter of how much an
advantage can be attained by economies of scale.
 Product Differentiation:
 While differentiation is a large and necessary expense for the large fast food chains in
the industry, it is not difficult for private startups to overcome and thus not a significant
barrier to market entry.
 Capital Requirements:
 Capital requirements will quell the formation of new, national competitors, but is not a
significant barrier to private startups.
 Cost Disadvantages:
 These disadvantages stem form the fact that “established companies already have
product technology, access to raw materials, favorable sites, advantages in the form of
government subsidies, and experience” (referenceforbusiness.com). The extreme
saturation and similarity in product offering make convenient locations essential for
quick service restaurants large and small. This is a significant barrier to entry.
The Five Forces Model Cont.
 Threat of New Entrants Cont.
 Distribution Channels:
 Speedy and reliable channels are essential among all firms in the industry, they are not
necessarily difficult for new comers to attain, however. Also the economies of scale
enjoyed by large firms are not so great as to shut out smaller competitors.
 Government Regulation:
 Government regulation is more intense for the larger firms which have to deal with
franchising regulations. Smaller establishments are subject to the standard array of
government regulations including: zoning, health, safety, sanitation, and building.
These are standard for almost any new business and thus do not pose large threat to
new comers.
 Conclusion:
 Due to the lack of any of the barriers to entry being so significant as to thwart the
majority of private startups, we feel the threat of new entrants is high.
The Five Forces Model Cont.
 Bargaining Power of Customers
 Even though customer switching costs are nearly zero, the fast food
industry does not worry about loyalty because “On average, one-fifth of
the population of the USA eats in a fast-food restaurant each day”
(Oxford University Press). It is this volume that keeps customer
bargaining power low by diluting the effect of a few picky customers.
 Bargaining Power of Suppliers
 Large fast food chains thousands of suppliers to choose from and select
theirs through a competitive bid process. They can switch suppliers
easily and tend to make up a large portion of the supplier’s revenue.
This severely limits the bargaining power of suppliers.
The Five Forces Model Cont.
 Threat of Substitutes
 With so many firms in the quick
service/burger industry, low
switching costs, similar products,
and healthier options, the threat of
substitutes is very high.
 Rivalry Among Existing Firms
 The limited-service industry
defines a red ocean industry.
Firms compete for market share in
a saturated market. Growth,
particularly in hamburger chains,
is very slow so the customer base
is not growing as fast as the
industry. This leads to high rivalry
among firms.
Conclusion
Threat of New
Entrants
High
Bargaining Power of
Customers
Low
Bargaining Power of
Suppliers
Low
Threat of Substitutes
High
Rivalry Among
Firms
High
Price Performance
Price Performance
Changes in Social Norms
 Changing American attitudes toward food.
 Companies Answers
 New Competition
Industry Risks Factors
 Events Reported by Media
 Competition of Industry
 Changes in Economic and Market
Conditions
Industry Risks Factors
 Earnings Dependant on Franchise
 Litigation Affects all Members of Chain
Positions Within the Industry
 Jack in the Box- The first mover.
 McDonalds- Universally accepted name.
 Burger King- Competing with McDonalds.
 Sonic- American values.
Strategies
• Jack in the Box- “We don’t make it ‘till you order it.”
• McDonalds- Global.
• Burger King- “Have it your way.”
• Sonic- “America’s Drive-In” and “Your ultimate drink
stop!”
Financial Performance: Last 12
Months
 Jack in the Box- sales were 2.54 billion, income
was 118.21 million, sales growth was up 1%, and
income growth was down 23%.
 McDonald- sales were 23.52 billion, income was
4.31 billion, sales growth was up 3.2%, and
income growth was down 22.6%.
 Burger King- sales were 2.55 billion, income was
186 million, sales growth was up 9.9%, and
income growth was down 10.2%.
 Sonic- sales were 798.6 million, income was 53.87
million, sales growth was up 4.4%, and income
growth was down 47.5%.
Stock Price History
Key Success Factors
 What are key success factors?
-Things that a company must do to be
successful in an industry
Misconception
 Key success factors are often looked at as
core-competencies, which are sets of skills
or systems that create a uniquely high
value for customers
Key Success Factors
 Differentiation
-The fast-food burger industry is difficult to
differentiate on a single product, such as the
burger
-Differentiation in this industry can be focused
more towards your atmosphere and unique
menu items
-Brand and product advertisement can also be
major players in becoming a household name
and bringing customers in to your industry
Key Success Factors
Answer
Agree
Neither
Agree/Disagree
Disagree
Strongly Agree
Strongly
Disagree
Total
Percentage
41%
29%
18%
10%
3%
Key Success Factors
 Competing on Low Cost
-In a synonymous industry, consumers
can find a good burger at a comparable
price from just about any of the
competitors
-It is important to cut down on overhead
cost of your firm in order to make the most
off of your sales
Quick-Service Restaurant Segment
(QSR)
 In the United States QSR is the largest segment
of the restaurant industry
 Growth in sales include…
-Rising population
-increases in real disposable income
-busier lifestyles
 Fast food chains provide consumers with food at
reasonable prices which offers an alternative to
cooking at home
Industry Attractiveness
 The restaurant industry is highly competitive in terms of
price, service, location, and food quality and is often
affected by changes in consumer trends, economic
conditions, demographics, traffic patterns, and concerns
about the nutritional content of quick-service foods.
Factors that could affect the quickservice restaurant industry
 Changing dietary preferences among
consumers in favor of alternative foods
 Changes in economic conditions, consumer
tastes and preferences, and the type and
location of competing restaurants
 Sales promotions by competitors, changes in
customer visits, and changes in things such as
energy costs
Growth
 According to Dun and Bradstreet
subsidiary First Research, the output of
US food and drinking places, which
includes fast food restaurants, is forecast
to grow at an annual compounded rate of
4.3% between 2007 and 2012. Quickservice restaurants are projected to post
sales of $163.8 billion in 2009.
Growth
 According to a leading marketing research company, the NPD
Group, the restaurant industry remained stable for most of 2008,
although traffic dipped in the fourth quarter, leading to the industry’s
slowest traffic and dollar growth since the recession of 2002-2003…
 The graph shows the total restaurant industry traffic from November
2003 up until November 2008.
Prospects for long-term profitability
 The QSR segment is generally less vulnerable to
economic downturns and increases in energy prices than
the casual dining segment is, although the economy may
adversely impact QSR chains.
 The following information in the graph is done by First
Research and forecasts the estimated growth of the food
industry in relation to the economy…
National Restaurant Association
 According to QSR Magazine, “Nearly 7 in 10
adults agreed in a recent National Restaurant
Association survey that purchasing meals from
restaurants, take-out and delivery places makes
it easier for families with children to manage
their day-to-day lives, and nearly eight in ten
agreed that it is a better way for them to make
use of their leisure time rather than cooking at
home.”
Conclusion
 Despite the downturn in the economy, the QSR industry
will remain a cornerstone of the economy, representing
4% of the U.S. gross domestic product and employing
9% of the U.S. workforce.
 Future growth in the fast-food restaurant industry
depends on how well retailers are able to innovate,
provide value for money, and keep up and surpass
competitors.
Conclusion
 The fast-food industry is becoming more
global and it seems that will continue
 Fast-food restaurants mostly compete on
price, location, and food quality
 The growth of the fast-food industry is
expected to generally stay the same over
the next few years