The purpose of this paper is to investigate a specific industry and select a representative company from that industry. To organize the paper, this report has selected global fast food industry considering the growth rate, customer base, and competition in the market. The paper will consider McDonald’s Corporation as a representative company of the industry.
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The global fast food industry instigated its journey at the inauguration of the industrial age; it obtained massive consumer attention along with the materialization of several big businesses in the industry.
The globalization of the corporate world has boosted the industry to play a major role in causing economic growth to the participating countries as more people prefers fast food because of its time saving approach.
In 2007, the international growth rate of the industry was 4.1 percent, whilst the sales increased by $106.9b; in the following year all the giant players enjoyed rising sales volume with McDonald’s sales increasing by 3.07 percent, KFC’s sales by about 10 percent, and Burger King’s also by 10 percent.
More surprisingly, in spite of the economic crisis, the global fast food industry has showed significant developments in its profit margin in both 2008 and 2009.
A glance of the profit margins of the major players in the US industry will provide a more clear perception of the fast food industry’s success in 2009 in global perspective:
|Key Competitors||Profits 2009|
|Yum! Brands, Inc.||$11bn|
|Wendy’s/Arby’s Group, Inc.||$3.6bn|
|Burger King Corporation||$2.54bn|
Table 1: Profits of Key Competitors in 2009
Source: Self-generated from IBISWorld (2010)
Overview of McDonald’s Corp.
According to Yahoo Finance (2010), McDonald’s Corporation, together with its subsidiaries, operates as a global food service retailer; it has franchises that operate McDonald’s restaurants offering a range of foodstuffs, soft drinks, coffee, and other beverages all over the world; McDonald’s Corporation formed in 1948 based on Oak Brook, Illinois.
In December 2009, the business operated 32,478 restaurants in 117 nations, out of which franchisees of McDonald’s operated 26,216 and McDonald’s itself operated 6,262; until September 30, 2010, profit margin of the business was 20.65% and operating margin was 30.18% with a revenue of 23.83 billion, gross profit of 8.79 billion, and quarterly earnings growth of 10.10% (Yahoo Finance, 2010). The following figure illustrates the common stock price of the company from January 2006 to January 2010:
Figure 2: Common Stock of McDonald’s Corp.
Source: Yahoo Finance (2010)
The figure below shows a clear comparison in the common stock price of McDonald’s and its competitors:
Figure 3: Comparison of stock price history
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Source: Self generated from Sterling, et al., (2007)
Current Statistics and Information of the Industry:-
Types of Products
The global fast food industry is composed of restaurants from different national and cultural backgrounds with abundantly diverse product types of distinct tastes, flavors, and origins.
Cheeseburgers, hamburgers, double cheeseburgers with extra mustard, Sandwiches, French Fries, Fried Chicken, Pizza, Donuts, Apple/Banana Pie, Hot Dogs, Tacos, etc are amongst the most popular foodstuffs in the western countries; moreover, the globalization of the business world has led fast food items of different ethnicities to come and fuse together to form a range of new fast food items.
Numerous Chinese food items are nowadays attracting the consumers as well, which, as a result, are increasing the market for Chinese food to the entire world; these includes snacks like noodles, meat, seafood, Fried-Rice, Chicken Chow-Mein, Crab Rangoon, Chicken Fried Rice, Hot/Sour Soup, Sesame Chicken, Wonton Soup, Shrimp Fried Rice, Beef with Broccoli and so on.
A significant part of the fast food industry in UK and USA are now dominated by Bengali and Indian fast food restaurants (especially central London); snacks like Kheema, Paratha, Keshar Pista-Kulfi, Aloo Posto, Amer Chatni, pickles, Khichdi, Batter Fried Fish, Bengali Fish Curry, Payesh, Coconut Almond Sandesh, Fish Cutlet, Rasgulla, Yoghurt Fish, Ras Malai, etc are largely preferred by customers.
Cyclical or Non-Cyclical Product:
In the US Fast Food Industry, product differentiation is another criterion where the McDonald and other firms put into practice by branding, packaging, advertising; price, flavor, and color successfully motivate the customer to determine their requirements from their own product line rather than going to the other firms.
Number of Major Suppliers in the Industry
The major suppliers of the industry could categorize into a number of segments because the raw materials required in the production process of food products are not necessarily available from any single supplier. The most essential suppliers of the fast food industry include:
- Suppliers of meat and dairy products– there are many meat and dairy product producers throughout the world from where large organizations like Burger King and McDonald’s obtain the raw materials. It is noteworthy that the New Zealand is highly specialized in this sector and many firms of the fast food industry take their stuffs from here.
- Suppliers of kitchen equipments– this include producers of ovens, kitchen utensils, cookware, crockery, etc. IKEA, for example, are a major supplier of these appliances.
- Coffee bean suppliers– the producers of fresh Arabica coffee from African and Asian countries are a key choice of the fast food market leaders.
- Suppliers of wheat, rice, cereal, and fresh vegetables – the supply of these foodstuffs generally comes from primary industries (directly from cultivators) of the corresponding countries.
- Poultry farms– these are large poultries dealing with production and delivery of hen and eggs to the food companies.
- Firms of wine and beer brewing industry– the specialized brewing industry businesses usually supply these items.
Number of Firms
Manta Media Inc. (2010) reported that there are almost 49,888 Fast-food companies and chain shops in the USA and this number is increasing in every week where the major player are Arby’s Group, Burger King Corporation, Doctor’s Associates Inc. McDonald’s Corporation, Starbucks Corporation, Wendy’s Inc., Yum Brands, Inc.
The number of firms in the industry indicates that the markets with huge numbers of firms would contribute further competitiveness rather than the market with little numbers of firms, thus McDonald face extra competitiveness in the US Fast food industry and enjoys more a major market share. The firms who are working in the US Fast Food Industry have a strong relatively among them that evidenced huge competitiveness within the industry.
Buysse (2010) assessed that the US citizens spend an anticipated US$ 185 billion on fast food consumption per year with is a contribution of 12% of the total national food consumption. This data illustrates that the size of US Fast Food Industry is enough large.
The size of McDonald is enough big but in the US Fast Food Industry has so many Economic small players who are inclined to behave additionally competitive manner in context of the big players in the industry while the size of the firms fluctuates but their tends to be competitive drives the industry into different dimension of competition.
Most firms of the industry are highly specialized in diverse product line operating with local and global chains through franchising or self-regulating operators.
Sterling et al (2007) identified that the US Frat Food Industry contains at least 200,000 firms and it is extremely labor intensive as well as vastly fragmented while the top fifty firms griped 25% of the industry share.
The product life cycle of different food products in the fast food industry develops through a four-staged series of introduction, growth, maturity, and decline; these are interrelated with alterations in market situations influencing the marketing mix. The introduction of a new food item and its NPD consumes a lot of time and money because businesses also need to advertise them among public; therefore, profits are pessimistic or low at this stage. At growth stage, customers realise that that particular food item would profit them by some means and so they purchases it resulting rapid sales growth; at maturity, sales slow down as product sales reach the highest level, and finally, at the decline stage, sales and profits start to fall, and companies may try to modify pricing strategy to stimulate profits. The following figure shows an example of what the product life cycle of a food item is likely to be:
Figure 4: Life Cycle of Fast Food Items
Current Economic Environment and Growth Factors
Whilst the recent financial downturn has caused many industries to face severe hardship with many businesses becoming insolvent, the key players of the fast food industry like McDonald’s, KFC, Domino’s and Subway have planned to open more branches; in 2009, McDonald’s planned to open 1000 new restaurants, 20 of which will be in the recession weary UK.
However, the economic crisis put adverse affects over Burger King, and the company closed-off 11.8 percent of its retail stores all over the UK.
McDonalds recently generated 4,000 employments in UK and redecorated its outlets investing £37m; KFC has proposed its £150m expansion plan forming 300 outlets and 9,000 employments; meanwhile, Domino’s Pizza beat its profit prediction by 25% and it planned to open 50 new outlets creating 1,500 new jobs in 2009.
A similar scenario exists in the US fast food industry as well; it attained the highest sales level in 2008 and has recently observed enough growth that will result in further development in upcoming financial years and will exceed the $170b target by the end of 2010; moreover the industry’s growth rate increased by 5% in this year. The figure below shows some essential data about the US fast food industry in 2009:
|US Fast Food Industry||2009|
|Industry Gross Product||42,114|
|Number of Establishments||303,989|
|Number of Enterprises||212,952|
Table 2: Data on US Fast Food Industry
Source: Self-generated from IBISWorld (2010)
There are approximately 90.29b consumers in the global fast food industry who contributes to an average yearly sales volume of $106.9b, constituting to 81.4b transactions; in contrast to that, on average, the Australian fast food industry serves nearly 1.69b takeaways and cuisines every year.
The Market Structure and Economic Model of McDonalds
Bailey (2005) pointed out that in economics it is familiar that the structure of an industry is the clarification that forecasts how a firm within that industry would behave in the market and it also a deliberation to persuade profitability as well as efficiency to influences the options of pricing and marketing strategies of any firm.
The structure on an industry would identified with four major criterion such as number of firms working in the industry, their size, quantity of product differentiation including entry and exit mode of the industry. Theoretically, there are four types of industry structure such as Duopoly, Monopoly, Oligopoly, and perfect competition.
To determine the market structure of US Fast Food Industry and McDonald Corporation as a player of this industry, it is essential to understand all the four structures, their criteria, and then identifying which one is best fit for the Fast Food industry.
Identification of the Market Structure:
Mankiw (2003) pointed out that the market structure where all the firms sell same product, behave as price taker, posed with comparatively little market share, buyers are well informed and all players in the industry have easy entrance and exit opportunities is know as perfect competition.
Such a hypothetical structure is absent in the real life but it just categorized as a benchmark indicator to defining the other structures. As a backward linkage to the Fast Food Industry, Agriculture Industry has illustrated as evidence of perfect competition but this structure does not fit with the Fast Food Industry.
Samueldon and Nordhaus (2006) defined that the market structured where only two firms enjoys lion market share for some particular product or service is called Duopoly that acts as a tiny monopoly, the US Fast Food Industry does not belong to such criteria and possibly will not fit in this structure.
Menger (2007) identified Oligopoly as a form of monopoly where the market controlled by little group of firms, in the fast food industry there is no such control, thus this category also not fitted here.
Bailey (2005) and Mankiw (2003) in the market where many firms of almost same size perform with highly differentiated products and the consumer’s perception develops that there subsists noteworthy differences among the products offering by different firms and the market demand influenced by means of the prices and promotional shifts by the firm, such structure is called monopolistic competition.
Under this market structure, the operational strategy of the firms gain higher profit more than normal while the cost is lower in context of competitors and in such condition firms would be interested to explore more outlets and would be eager to decreasing further cost for better products and services. All this criteria of market structure matched with fast food industry and this industry belong to the market structure of Monopolistic Competition.
Why Fast Food Industry concerned with Monopolistic Competition
In the Fast Food Industry the corporations are enough bulky, the each single outlets are comparatively small, and drives into extreme competition among the industry, most of the players pay out huge amounts of money for just differentiating their product line compete against one another. Thus, the market structure of Fast Food Industry appropriately fits with monopolistic competition.
Traditional Economic Model
As the Fast Food Industry belong with the market structure of monopolistic competition, there exists rivalries, the traditional economic model of Porter’s Five Force would appropriate to analyzing the fir McDonald.
Porter’s Five Forces Model
The market competition of McDonald’s would be considered by following Porter’s five force model –
Figure 5: – Porter 5 forces model for McDonald’s
Source- Self generated from Porter (2004)
- Threats from new entrants: In present world economic environment, it would be hard for a new entrant to enter in the fast food industry as it involves large investment. Moreover, food industry is highly competitive and investors will not appreciate a new entrant to invest for them but McDonald’s has to face competition if existing rivals can enter in a new market by applying their experience and financial strength;
- Bargaining power of the suppliers: David (2008, p. 219) argued that suppliers of the company are crucial for the well functioning of that company and the key suppliers of McDonald’s are food suppliers, machinery, and other raw material suppliers. However, power of suppliers within the company would be comparatively low as the supply of various food ingredients, green coffee beans are being produced all over the world, but the price of these products is subject to significant volatility. On the other hand, this power has interrelation with many other issues, such as production area of raw materials, weather condition, political circumstances, financial downturn, and so on;
- Bargaining power of the buyers: The bargaining power of the buyers is relatively high due to availability of similar company exist in this industry;
- Threats of substitute products: The threat of substitute products of fast food is increasing, but most challenging substitute products for McDonald’s would be beverages, dairy products, Chinese traditional food, or Indian traditional food.
- Rivalry among existing competitors: The rivalry further increases when competitors of an industry come from different national backgrounds with different competencies and McDonald’s faces high competition from other brands of this industry, such as Burger King, Jack in the Box Inc, Dominos Pizza, Wendy’s, KFC, Domino, and Taco Bell are the major rival of this company.
The future prospects of fast food industry
Future Effect on market structure
Datamonitor (2009) reported that the total value of global fast food market in 2008 was approximately $154.70 billion with 6.60% growth rate while it is estimated that this value would be more than $200.0 billion with 10.41% by 2013 because this segment remains an attractive investment sector with a steady growth rate of 4.1%.
More than 91.29 billion consumers have strengthened the foundation of the industry and this industry would expand rapidly with exiting and future customers. At the same time more new firms will take entry in the market while the existing major players would grow stronger than before but due to expanding market size would not effect on the market structure.
As a result the Fast Food Industry would prolong with the Monopolistic Competition.
Prediction representative company – McDonald
To predict the future of McDonald, this paper has analyzed the hast ten years share price which was US$ 25.00 on 27 October 2000 and that raised up to US$ 77.35 on 27 October 2010. The Morningstar (2010) also demonstrated that the Operating Margin of McDonald’s Corporation was 19.66% in 2005 and it stands at 30.08 % in 2010 while the EBT margin was 18.05%, in 2010, the company gained 28.52%.
Figure 6: McDonald’s Corporation Share Price Data
Source: The Morningstar (2010)
If the company sustain with such a growth rate and there is no major external environmental effect, McDonald’s Corporation would become stronger and keeps its market leading position unchanged.
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