Fast Food Industry Essay
Fast Food Industry
1. Executive Summary
This report provides an analysis of the international marketing environment of fast- food industry in US and evaluates the international marketing activities of McDonald’s, which is considered a key player. Firstly, the PEST framework is used to analyse external environmental factors influencing the industry. The Porter’s Five Forces framework is utilised to analyse the competitive rivalry within the industry, and its attractiveness for potential new entrants. Key players and their positioning was identified using a strategic-groups model, mapping brand value against global presence. Based on the industry analysis, McDonald’s was identified as the market leader and an examination of their market entry modes was carried out.
Their international marketing mix was evaluated to identify success factors, drawing focus upon international branding, international distribution, international communications and standardisation vs. adaptation of the service offering. An internal analysis identified the firm’s strengths and weaknesses whilst an external analysis considered the opportunities and threats posed to McDonald’s as market leader. Finally, short and long term strategic and tactical recommendations were outlined in order to enhance McDonald’s competitive position within the global fast-food industry. These recommendations are both realistic and well supported, based upon the evaluation of their current strategy and activities.
The global fast-food industry is dynamic with a variety of competitors. This report identifies the current factors influencing the industry before specifically focusing on McDonald’s Corporation, who is considered as the current global leader. Based on this analysis, the report identifies several areas for improvement and makes strategic recommendations for McDonald’s to enhance its position.
3. International Marketing Analysis 3.1. PEST Analysis and Environmental Impact Matrix (Macro Environment) The following framework provides an analysis of the external international marketing environment, relating to the fast-food industry: *These ratings are based on the authors’ subjective judgement
Global fast-food firms must comply with country-specific political requirements, such as national minimum wage regulations, affecting costs. Hygiene and quality regulations vary significantly between nations and may influence the quality of products provided by fast-food outlets (FDA, 2012). Different countries set varying regulations regarding labelling and packaging. For instance the UK government pressured firms to promote healthy eating, and several fast-food companies have voluntarily included calorie information on their products (BBC, 2011).
Despite the 2008 recession and the resulting decrease in consumer confidence across the globe, average consumer fast-food spending has increased (The Economist, 2010) due to convenience and low-cost. Consumers are still looking for the convenience of eating out, but are drawn to the low prices of fast-food over table-service restaurants (Financial Times, 2009). Many fast-food chains have capitalised upon the recession by introducing new deals in addition to their already low-priced menus. Between 2005 and 2010, Latin America, Asia Pacific, Eastern Europe and Russia accounted for 89% of global growth in the fast-food industry (Passport, 2012).
Increasing consumer awareness about healthy lifestyles has pressured many fast-food players to offer healthier selections within their menus (BBC, 2011). This includes offering low- calorie options and salads alongside burgers, and prominently displaying nutritional content. The fast-food industry has also been heavily criticised for targeting young children by including toys within children’s meals (New York Times, 2003). Recently in the UK, the broadcasting of ‘junk food’ adverts during commercial breaks in children’s programmes has been banned (BBC, 2007), following increasing childhood obesity.
As consumer familiarity with new technology increases, fast-food firms are using channels such as social media websites to engage with their customers. For example, McDonald’s is the 9th most ‘liked’ brand on Facebook (CNBC, 2012) (Appendix 1). Additionally, digital displays allow outlets to change their menus efficiently, to suit the time of day (NRA, 2012) and self-service ordering points have increased service speed and reduced labour costs. Environmental Environmental lobbyists and governments are pressuring the fast-food firms to become more ‘green’ (Greenpeace, 2012). Rainforests are being destroyed to increase the area of land for beef production to meet the demand for beef-burgers (Kline, 2007).
Recycling is a prominent global issue and in response, McDonald’s adopted recyclable packaging. Increased environmental awareness among consumers provides firms with a significant opportunity to position themselves as ‘green’ to garner customer loyalty (National Pollution Prevention Centre for Higher Education, 1995).
Global operators must comply with country-specific regulations and legislation. This includes opening hours, taxation and employment regulations such as the National Minimum Wage Regulations (1999) in the UK. Firms are often required to meet national food standards such as the requirements set out by the US Food and Drug Administration (FDA). Furthermore, authorities are becoming increasingly worried about childhood obesity associated with the industry (WHO, 2012) and have tightened regulations regarding targeting children.
3.2. Porter’s Five Forces – Fast-food Industry
This framework identifies the competitive forces affecting the fast-food industry:
THREAT OF NEW ENTRANTS
Industry dominated by global chains with very high brand values High brand awareness and loyalty
Retaliation from strong incumbent players
Low initial capital outlay Low fixed costs Economies of scale
POWER OF SUPPLIERS
Many undifferentiated suppliers
Fast-food chains have high purchasing power due to high volume
COMPETITIVE RIVALRY IN THE FAST-FOOD INDUSTRY
Fragmented market Low exit costs
Low margin, high turnover – drives competition
High brand power
POWER OF BUYERS
High product differentiation Target many segments High price sensitivity
THREAT OF SUBSTITUTIONS
Alternative foodservice options
Ready meals and home cooking ingredients
Main players quite differentiated
No switching costs
Convenience is the value adding component which is difficult to substitute
Threat of New Entrants – Moderate
The industry is dominated by a number of international Quick Service Restaurant (QSR) chains, including McDonald’s, Burger King, Pizza Hut, KFC and Domino’s (Datamonitor, 2010). These global brands are extremely valuable, boasting strong customer loyalty and recognition; indicating consistent quality and service. Key players including McDonald’s, adapt their marketing orientation to suit local cultures and social norms (Datamonitor 2010), strengthening the brand and avoiding consumer alienation. New players struggle to compete with incumbent firms, as their brands are unknown and advertising campaigns are expensive.
Established chains have the resources to retaliate aggressively through pricing promotions, deterring new players from entering the marketplace. New entrants lack economies of scale, which existing chains have developed over time, and utilise to remain competitive in this low-margin, high-turnover industry. However, social media websites have evened the playing field in terms of marketing communications; they allow firms to efficiently communicate their message inexpensively. Initial capital outlay and fixed costs are low, encouraging new entrants (Datamonitor, 2012).
Threat of Substitutions – Moderate
Substitutes are readily available: food can be purchased almost anywhere, through foodservice or retail. However, convenience is the value-adding component of the service which reduces the threat of substitutes. Consumers can cook at home cheaply, but this lacks the convenience element which people require nowadays. Ready-meals are therefore a more substantial threat, competing with fast-food on price as well as convenience (Datamonitor, 2012). If you are ‘on-the-go’ however, without access to a microwave, QSRs are almost uncontested if you want a hot meal in a short timeframe. With many differentiated players (Datamonitor, 2012) and varying service offerings, customers can select the best value option.
Competitive Rivalry – Strong
Although McDonald’s and Burger King almost hold a duopoly in the ‘burger segment’, the market as a whole is fragmented with many global chains and independent operators (Datamonitor, 2012). Competition is primarily cost-based with firms continuously investing in their production and service processes to undercut competitors. Exit costs are low and capacity is easily increased through franchising. Branding is the most prevalent weapon for competing; McDonald’s spent over $650 million on global advertising in 2009 (Datamonitor, 2012).
Power of Buyers – Moderate
Figure 1 shows sales and growth of the top ten fast-food companies (Euromonitor International, 2012). The market’s competitiveness increases buyer power and customers are price sensitive (Muhlbacker et al., 1999) with no switching cost between providers. However, key players attempt to reduce buyer power, offering a product range which caters for the entire demographic, rather than one specific segment. For example, McDonald’s target children with ‘Happy Meals’ and professionals with breakfast options and take-away coffee (McDonald’s, 2012).
Firms are increasingly promoting differentiated products: McDonald’s “Big Mac”, Burger King’s “Whopper” and offers such as Domino’s “Two for Tuesday” campaign. High brand value and customer loyalty has reduced buyers’ bargaining power. The 2011 ranking of the top 100 brands indicates McDonald’s’ success (Interbrand, 2011). 10
Power of Suppliers – Moderate
Figure 1: Top Ten Fast-food Companies by Growth.
With a competitive global supply chain, supplier power is limited. “17,500 British and Irish farms that provide us with top-quality ingredients.” (McDonald’s – UK, 2012) These farms supply Tier 1 suppliers who transform raw materials into food items, ready for McDonald’s to cook and serve. Due to the number of suppliers in the industry, it is difficult for them to leverage significant power over fast-food firms. The supply of soft-drink is dominated by Coca-Cola (McDonald’s and Burger King) and Pepsi (KFC) due to their global distribution channels. Additionally, Coca-Cola and Pepsi provide fast-food chains with equipment such as refrigerators and drink dispensers. This markets their brand and aligns it with fast-food brands, reducing costs for customers, which would otherwise be passed onto them (SMO, 2011).
3.3. Identification of Key Players and their Competitive Position 3.3.1. Strategic Groups The following framework identifies the key players in the international fast-food industry and identifies which firms are in the most direct competition with each other: Brand value and the chain’s global presence (Appendix 2) are significant indicators of overall performance. The above strategy-group chart maps the firms’ performance. Brand value (US$) is plotted against the chain’s global presence, in terms of the number of outlets worldwide. The strategy-grouping shows that McDonald’s has the highest global market value and revenue in the industry, despite Subway having more international outlets. 4. Key Player – Evaluation of International Activities 4.1. Identification of Key Player Based upon their global presence, market value and revenue, McDonald’s is identified as the key player in the industry.
4.2. McDonald’s International Market Entry Modes
In 1940, McDonald’s operated only one QSR but today has restaurants at 33,000 locations in 119 countries. McDonald’s utilises a variety of international market entry modes for rapid expansion: sole ventures, franchising, master franchising and joint ventures. 15% of McDonald’s branded restaurants are operated as sole ventures. This involves a significant capital commitment but allows the highest degree of control. Most restaurants are operated as franchises, allowing rapid expansion without high capital requirements. Franchising has also allowed McDonald’s to benefit from local knowledge, demonstrated by the menu differences by country.
However, McDonald’s maintains control over crucial aspects such as the supply chain, marketing mix and staff training. Master Franchising introduces a third party as a ‘go-between’ to overcome geographical and cultural barriers. The combination of the master franchisee’s local knowledge and McDonald’s brand and model has been a successful formula, allowing expansion whilst maintaining significant control. McDonald’s has also expanded internationally through joint ventures. Again, this allows for rapid expansion and utilises the knowledge of firms in closely-linked markets.
Both firms invest equity in the project, there is a lower financial risk for both parties; however, many joint ventures end in hostility and conflict due to firms taking advantage of one another (Brown and Harwood, 2010).