CDonalds Industry Analysis Group 3 Chase MuellerAshley Hoptay Olivia ErwinTanner Gilreath Paige StoneBrandon Laviage Anna Rendon.

cDonald’s Industry Analysis

Group 3Chase Mueller Ashley Hoptay

Olivia Erwin Tanner Gilreath

Paige Stone Brandon Laviage

Anna Rendon

SIC Codes The fast food industry is categorized under:

SIC 5812, Eating Places establishments primarily engaged in the retail sale of

prepared food and drinks for on-premise or immediate consumption as well as caterers and industrial and institutional food service establishments.

Consists of seven different categories: dinner theaters, full-service restaurants, limited-service restaurants, cafeterias, snacks and nonalcoholic beverage bars, food service contractors, and caterers.

NAICS Codes With the replacement of the SIC Codes, the

fast food industry is categorized under: NAICS 722211, Limited-Service Restaurants

establishments primarily engaged in (1) providing food services where patrons generally order or select items and pay before eating or (2) selling a specialty snack or nonalcoholic beverage for consumption on or near the premises.

Orders may be consumed on premises, carried out, or delivered to the customers’ location such as pizza delivery.

History of Fast Food Industry 1921 – White Castle is viewed as the beginning

of fast food Changed the public’s perception; gave hamburgers a

better reputation of quality and gave the image of cleanliness through its use of “white”

Rise of cars also gave rise to the industry Many restaurants utilized short-hand cooks, drive-ins,

and carhops to capitalize on the new craze that the American people had with staying in the car and eating.

History of Fast Food Industry 1948 – Dick and Mac McDonald reopen their

restaurant, McDonald’s Famous Hamburgers, after implementing the “Speedee Service System”, which is synonymous with the assembly line. Simplified operations.

The McDonald brothers also switched from dishes and glassware to paper and plastic to increase efficiency.

History of Fast Food Industry Ray Kroc capitalized on the blue ocean that

the McDonald’s brothers created 1955 – Ray Kroc opened the first restaurant

in the McDonald’s Corporation As other fast food restaurants opened in

the mid-1950s to the late-1960s, they imitated and implemented the “Speedee Service System”.

The Four Major Players McDonald’s is the leading global quick service

restaurant retailer as well as one of the world’s most well-known and valuable brands. 31,377 restaurants in 118 countries Franchisees operate 20,505 restaurants

YUM! Brands Incorporated consists of KFC, Pizza Hut, Taco Bell, Long John Silvers, and A&W All-American Food Restaurants. 35,000 restaurants in 100 countries and territories

80% owned by independent franchise operators.

The Four Major Players Burger King Holdings, Incorporated

Operates 11,565 restaurants in the United States, Canada, Europe, the Middle East, Africa, the Asia Pacific, and Latin America.

10,205 are owned by franchisees.

Wendy’s/Arby’s Group Operates about 10,000 restaurants in the United States and 21

countries. 6,645 of them are Wendy’s, and 5,231 of all Wendy’s fast food

restaurants are franchised.

The Four Major Players Hedgehog Concept

The fast food industry utilizes the hedgehog concept of doing one thing really well: to serve the most customers as possible in a given time period.

The four companies focus on speed, quality, and convenience, and they keep these factors at the forefront of their operations in every location.

The Four Major Players Hedgehog Concept

One of the key success factors of the fast food industry is uniformity, which has allowed the companies to go global and exceed at their endeavors.

Offering the same service at every location gives customers reassurance in the brand

Ray Kroc was quoted as saying, “the organization cannot trust the individual; the individual must trust the organization.”

Chief Business and Economic Characteristics Fast food restaurants represent one of the

largest segments of the food industry. In the United States alone, over 200,000

fast food restaurants are operated bringing in $120 billion a year.

Also known as quick service restaurants.

Chief Business and Economic Characteristics

Industry is made up of international, national, regional and local chains

Chains can be corporate owned or franchised

Chief Business and Economic Characteristics Franchising:

The fast food industry can contribute much of its growth and success to franchising

Why franchise? Franchisees are given the ability to leverage a well-known

brand name and benefit from the purchasing efficiencies and operational expertise of the franchiser.

Franchisers still hold the right to control operational guidelines and quality adherence, and they also hold most of the rights over menu offerings, hours of operation, pricing,

and store design. Gives the company the ability to grow.

Chief Business and Economic Characteristics Franchising and McDonald’s:

Kroc realized the company could be franchised differently than others, which would help them grow and attain profits.

McDonald’s invested in real estate and rented the property to its franchisees, which enabled the returns to be much higher.

Largest owner of retail property in the world Makes most of its profits from rent it receives from its

franchisees

Chief Business and Economic Characteristics Convenience

Volume-driven business so customer convenience is key

Located in high traffic areas Transaction speed is vital to ensure more

customers are served in a given amount of time Limited menus speed the food preparation

process and help with quality control by reducing the amount of worker error

Chief Business and Economic Characteristics Technology

Used to maximize efficiency and effectiveness Double drive-thru windows – speed transaction time Inventory management/automated replenishment – important since

dealing with perishable items; saves time dealing with suppliers, new equipment, and computerization

New equipment - ovens that combine convection heat, air impingement, and microwave energy to help cook the food faster

Computerization – Point-of-Sale (POS) Systems and Express pay; reduce ordering errors and cut down transaction time

Chief Business and Economic Characteristics Technology and McDonald’s

McDonald’s has been at the forefront of fast food technology since the company opened

Implemented E-ZPass, FasTrak, and FreedomPay on top of Express Pay

McDonald’s Philippines Help Desk Service Echelon’s LonWorks Technology

Chief Business and Economic Characteristics Role of Government

The government does not control profits or contracts of the industry, but local, state, and federal governments have adopted laws and regulations that involve various aspects of the restaurant business, such as:

Legal and regulatory environment of the industry worldwide exposes the companies to complex compliance, litigation, and other risks that affect operations and increase the cost of doing business

Developing markets also bring risks associated with new and untested laws and judicial systems

Chief Business and Economic Characteristics Role of Government: Intellectual Property

Each company owns or is licensed to use trademarks, service marks, patents, copyrights, trade secrets, and other proprietary information that is important to the company’s business.

Depending on the jurisdiction, trademarks and service marks are generally valid as long as they are being used or are registered.

However, patents, copyrights, and licenses only last for various durations.

Chief Business and Economic Characteristics Role of Government and McDonald’s

The “McDonald’s” trademark and the “Golden Arches” logo are imperative to the company’s business and brand equity.

The “Golden Arches” are now more widely recognized than the Christian cross

To protect its investments in foreign operations, McDonald’s uses forward foreign exchange contracts, foreign currency exchange agreements, and foreign currency denominated debt

Chief Business and Economic Characteristics Problems and Issues

The fast food industry has taken a lot of heat for: Advertising to children – it sparks obesity at a young age Health concerns – taking the blame for people’s diet issues

and weight related diseases Environment – no federal laws or regulations; must follow

local laws; largest consumer of electricity in the American retail sector; accounts for 20% of U.S. litter

Employment concerns – largest private sector employer; do not offer workers valuable life experience, the opportunity to move up, safe working conditions, or satisfactory wages and benefits

Chief Business and Economic Characteristics Mass Production and Control of Suppliers

Mass production is utilized to retain consistency and uniformity in products

Food is mass produced in a factory Since this process involves sending a large

amount of food through a factory in a short amount of time, bacteria, viruses, and parasites can contaminate a significant portion of the food very easily and quickly

Chief Business and Economic Characteristics Mass Production and Control of Suppliers

A handful of corporations have an unprecedented degree of power over the nation’s food supply.

The vast purchasing power and demand for a uniform product have encouraged fundamental changes in how cattle are raised, slaughtered, and processed, which has made the meatpacking industry very dangerous for both its employees and consumers of the product.

Can induce deadly pathogens such as E. coli.

Chief Business and Economic Characteristics Mass Production, Control of Suppliers and

McDonald’s Safety control through Echelon’s LonWorks

Technology Taken stands against the meatpacking industry

by only purchasing the meat that followed FDA rules

Chief Business and Economic Characteristics Competitive Environment

All companies compete on the basis of quality of food and quick service; therefore, differentiation is key

Service, experience and brand name High levels of competition have caused bloody red oceans

in this industry Dollar menus and value meals

Chains own about 88% of the market share causing independents to go out of business much faster than the national failure rate; rising threat of fast casual restaurants is currently low

Chief Business and Economic Characteristics Economic Factors: State of the economy

The spending slowdown and high food and energy prices have caused a slowdown in growth in the fast food industry

In 2008, 55% of restaurant operators reported a same-store sales decline

Food and beverage inputs account for 33 cents for every dollar of sales. With already low operating margins, a slight increase in these costs can have an outsized effect on profitability.

The bloody red oceans caused by price wars makes it difficult to pass the rising costs to customers

Chief Business and Economic Characteristics Economic Factors: State of the economy

Explosive growth in foreign markets offset slowing growth in the United States

Prices are being cut in China, which is McDonald’s and YUM! Brands largest market for growth

However, the limited-service eating places are in better shape than the full-service eating places.

With the economic downturn, more people are cutting back on how much they spend when eating out, and therefore, are turning to fast food restaurants.

Chief Business and Economic Characteristics Economic Factors: Market Growth

Gaining new customers as consumers are looking for the convenience of eating out and quality meals at lower prices

Due to China’s size and growth rate, it still remains an attractive market

Vast room for international growth as well as exploring strategy canvases enables the industry to grow and remain attractive

McDonald’s utilizes research and development to cater to international tastes and attain customers

Chief Business and Economic Characteristics Strategy Canvases and McDonald’s

McCafes – increase customer base and redefine McDonald’s image

Revamping stores in the United Kingdom to appeal to businessmen/women and increase the experience of all customers

Constantly searching for ways to redefine its market boundaries or to create blue oceans and attain a larger market share as well as provide its customers with more convenience and a better experience.

Social Factors Health Food

New menu items Listing nutritional facts

Corporate Social Responsibility Ronald McDonald House Dave Thomas Foundation

Social Factors Diversity

Workers Pride 360˚

“Going Green” Packaging Buildings

Technological Trends Wi-Fi

15,000 McDonald’s Burger King, Wendy’s, Subway, Taco Bell

Equipment Drive – Thru’s Outsourcing orders

Time Clocks

Economic Factors Current Economic Status

People want cheap food

Minimum Wage High percent of workers make minimum wage Raise food prices

Political and Legal “Cheeseburger Bill”

Prevent law suits

State Issues California - ban on fast food

International Issues Canada - calorie count

Law Suits

Geographical Factors Globalization

McDonalds - 60% Yum! Brands - 50%

Convenient locations Way home from work Corner of block

Malls, Supermarkets, Gas Stations McDonalds - Wal-Mart Little Caesars - K-Mart

Competitive Factors All other factors

Social Technological Economic Political/Legal Geographical

Predicting next move

5 Forces Model Rivalry Among Existing Firms

Main Competitors McDonald's, Yum! Brands, Wendy’s, Burger King

Total Industry Sales Growth

5 Forces Model Concentration of Competitors

5 Forces Model Differentiation

Hard to separate each other because they offer similar products

So they compete on price McDonald’s able to dominate the market because of the

size of the company

Switching Costs Hard to do, why?

Real Estate, franchisees, and many employees

5 Forces Model Economies of Scale

Efficiency R&D, New Technology

Economies of Scope Learning from past experiences

Example: Dollar Menu

5 Forces Model Threat of New Entrants

Economies of Scale

5 Force Model First Mover Advantage

Get in while its early, and grasp suppliers and consumers

Legal Barriers Patents, trademarks, contracts, licenses, and

government regulations to limit new companies

5 Forces Model Threat of Substitute Products

Relative Price and Performance Everyone produces the same products, need to

compete on price and convenience Buyers Willingness to Switch

Brand performance, and high quality relationships with customers

5 Forces Model Bargaining Power of Buyers

Price Sensitivity Differentiation of products, and cost of switching to

another firm, easy in the fast food industry Relative Bargaining Power

Real vs. Nominal buying power Customer Loyalty

5 Forces Model Bargaining Power of Suppliers

Price Sensitivity Leverage over small suppliers Large Industry, companies name prices and

quantities Supplier relations and price breaks Strategic Alliances

Competitive Moves McDonalds

is the industry leader and has been known as the industry trend setter, yet it has not always been at the forefront on capitalizing new niche markets

They were the first to create and master the “speedee service system “ also known as the assembly line

They were also made the first strategic move of purchasing their own land to rent to franchisees

They were also the first to advertise with an character , which strengthened their brand equity

Competitive Moves YUM! Brands

Taco Bell The first fast food chain to offer free drink refills for

its customers Also created a 3 tier pricing strategy, offering

products at 79¢, 89¢, 99¢ Also the first its menu completely trans-fat free

Competitive Moves KFC

Was the first company to franchisee its businesses

Made the strategic move of offering home cooked style meals, which included coleslaw, macaroni and cheese, baked beans, and rice

Burger King Was the first to emphasize customized order

with its “Have It Your Way “ campaign

Competitive Moves Wendy’s

First to implement value menu, also referred to as the dollar menu

First to create a super bar which was their concept of an all you can eat buffet

First to introduce salads and grilled chicken sandwiches

Next Competitive Moves McDonalds is seen as being the company who

will make the next strategic moves because of their need to be at the forefront of the market and remain the leader in the industry.

Implementation of the McCafes to draw customers from coffee shops

First to respond to economic downturn by lowering prices

Competitive Success Customers seek products that are readily

available and quickly delivered

Major fast food players look across the industry to understand the driving forces behind the market’s competitive success, so companies can capitalize on these concepts

Industry’s Consistency Approach One of the biggest key success factors for the fast food

industry is their ability to offer consistent products and services at every location

Franchises and chain stores must reliably offer the same product or service at numerous locations to build customer loyalty

YUM! Brands, Wendy’s, and Burger King all take the same approach which has made them leading competitors with McDonald’s

Icons Another driving force of the fast food industry has been its ability to

capture both young and old audiences Each leading competitor has easily recognizable icons that appeal

to its target audience, which in turn differentiates them from its competitor

These icons are easily recognizable and add to the experience when eating and also create a positive attitude

Convenience Consumers look to quick services restaurants to

provide them with a quality meal that will fit into the pace of their fast moving lifestyles

The large number of locations within close proximity to each other is ensure customer convenience at every turn

Many fast food chains can be spotted at shopping centers, airports, gas stations

Franchising the Industry Franchising has played a key role in the

success and growth of the fast food industry

Inside Out Approach: Focusing on Quality McDonalds has taken an “inside out” approach to drive

sales, by improving its inside approaches of store operations, product offerings, and customer experiences

McDonald’s Skillful Marketing: 5P’s People

In order to ensure a friendlier and more customer focused support staff the emphasize hospitality training known as the People Approach - Respect, Commitment Enhancement, & Talent Management

Products Incorporates uniform quality products and implemented the McDonald’s

Holistic Approach- High Quality Choices, Consumer Friendly Nutrition Information, & Communicate Responsibly

Place Each location is strategically analyzed based on demographics,

population, major roadways, and traffic that passes through the site to find the best location

McDonald’s Skillful Marketing: 5P’s Price

Allows customers to enjoy a quality meal without a hefty price Created the Value Menu (Dollar Menu) to get great food at bargain

prices Although McDonald’s is taking dollar menu items as a “loss leader”

adding to the menu such as large fries and a drink has allowed the restaurant to be profitable

Promotion Promotional character and symbols Subliminal Marketing Co-operative Marketing Traditional Advertising

Conclusion After analyzing the fast food industry’s history, growth, and current

success factors, one can conclude that it is safe to stay in this particular industry.

The fast food industry has seen substantial growth since its creation through the proliferation of its chains through franchises. By franchising the industry, chains have been able to rapidly expand and quickly capture a large percentage of the market share at a cheaper cost to them.

The major players in the fast food industry offer consistency and convenience, which are two characteristics of commodities that people search for because these needs have been instilled in people since they were born.

Conclusion Some may argue that the industry is coming to a halt due to the

market saturation in the United States, but there is a lot of room for growth nationally and internationally.

The industry also does not need to worry about new threats entering the market at this time because of the state of the economy.

McDonald’s understands the importance of brand awareness and recognition, so it consistently spends the most on advertising, which has solidified its position as one of the most well known brands in the world.

Conclusion McDonald’s stands at the forefront of the fast food industry. Another

driving force that keeps the company locked in its position is the large amount of capital that McDonald’s owns as well as its influence with other industries.

McDonald’s is the largest private real estate owner, and the company employs about 1.6 million people worldwide, plus it is a large purchaser of beef, poultry, pork, cheese, beverages, and paper and packaging material.

Therefore, the company is extremely vital to the industry as well as the economy as a whole because its presence impacts jobs and the success of other industries. This also reinforces the company’s and the industry’s market strength and attractiveness.