Research question: Do the Chinese fast food chains in Hong Kong behave in oligopoly structure?

By comparing the above feature of oligopoly discovered by the economists and the behaviors of those Chinese fast food chains, the essay aims to justify that the Chinese fast food chains act like an oligopoly

Methodology

In order to have a full picture of how the Hong Kong Chinese fast food market works, different methodologies have been used in this research paper. For the primary source, it will be personal visit and survey of consumers. For the secondary source, it will be collecting relevant secondary data for data analysis.

Personal visit to different Chinese fast food chains

This is the best way to get to know how different Chinese fast food chains operate, the differences among them when providing the food to their consumers, and how they compete with each other. As Café de Coral, Fairwood and Maxim are the biggest three in the market, so my investigation will focus on these three. The time for my visit was a normal working days during lunch hours, as this was the busiest time for the Chinese fast food restaurants with high consumer flow. I visited five outlets of each chain, so as to adjust the consistency of service provided by each chain. During each visit, I would record the time required for the outlet to serve one consumer, and how long does it took to finish the exchange. Since speed is very important for the fast food industry, since most of the consumers go to the fast food is because they believe the food will be served very quickly.

Survey of consumers

It is a significant element in looking at the different ways of operation in different chains. By conducting the survey, impression and expectation of the consumers can be revealed. This can also help to understand consumer behavior and how the chains response to meet their desires. I have distributed 100 questionnaires to the consumers. I chose the interviewers randomly, as I discovered that their impressions could be very different if I interview them in front of a fast food outlet. Therefore, the places that I interviewed were not very close to any Chinese fast food outlets, so as to make survey become more objective and fair.

Collecting relevant secondary data for data analysis

Business environment is also another factor that affects the operation of Chinese fast food. Since the changes in the market may have a direct influence to the situation of the operators, so it is a good way to know how the market works and the responses of the chains to these changes. In addition, investigating the yearbook published by the chains will help to have a deeper understand on their different ways of operations. This can also help us to understand how they compete with each other. 

Food Price of different Chinese fast food chains

Table 2 different food prices in different Chinese fast food chains during different time periods

Table 2 is the price range of different Chinese fast food chains during different time periods. Since Chinese fast food chains rotate their menu regularly, so it is impossible to list out all the prices in their menu. Moreover, the food provided by different Chinese fast food chains is different. Also, even the outlets in the same chains provide the same kind of food; the price listed may have slightly different. This is due to different living standard in different regions of Hong Kong. Therefore, the above data can only be used as the reference. In fact, when comparing the above data, we can discover that the price difference is only $1 -$3, which does not have a significant different in price.

Price competition

Maximizing profits is an ultimate objective of many commercial firms; fast food chains have no exception. With this apparent goal, price determination becomes exceptionally important for them. In the oligopoly structure, price determination is a strategic decision, since the firm needs not just needs to consider the cost, but also need to take its rivals’ response into account. Because of this, the market price tends to be very stable and rigid. The demand curve is divided into two segments. The upper part is highly elastic because if the firm raises the price, other firms will not follow, thus it loses the market share. The lower part is highly inelastic because if the firm lowers the price, other firms will follow, no firms will expand their share, but their profit is reduced. This kind of demand curve is called KINKED DEMAND. (Fig.2)

Fig 2 kinked demand curve in oligopoly structure

In Table 2, we can see that the Chinese fast food chains seem to follow the oligopoly behavior. They seem to engage an implicit collusion to charge the same price. However, if kinked demand curve is really the curve in Chinese fast food market; according to the economic theory, the market price should be very stable and rigid. For what reason that the Chinese fast food chains need to decrease their price together, the answer may be found in my survey conducted.

According to my survey conducted, 76% consumers visit the Chinese fast food chains only one to two times per week. The frequency is not very high. And I believe they will not only eat out in such a low frequency. Therefore, we can assume that consumers will visit other restaurants/ western fast food chains instead of Chinese fast food. From that, we can see that there are a lot of close substitutes to compete with Chinese fast food. There are many alternative for consumers to choose other than Chinese fast food. To compete with these substitutes, Chinese fast food must be positioned in an optimum price level to attract the consumers. Due to the economic recession (Fig.3), the total value of fast food restaurant receipts has slashed significantly. (Fig.4 and Fig.5) From that, we can deduce the demand for Chinese fast food also has dropped greatly in this few years. In order to regain the lost revenue back, the Chinese fast food chains need to cut their prices.

Fig. 3 

Fig. 4

In fact, when comparing the tables (Fig.3 and Fig.4) above, the reason becomes more obvious. We can see that when the growth rate of the GDP decreases, the fast food receipts also decrease, but in a greater extent. So, it becomes more logical to understand why the Chinese fast food chains need to cut price. Since the fast food market has slimed in this few years, in order to maintain the same market shares, Chinese fast food chains have no choice but to cut their prices.

Statistics of Fast Food Receipts and Purchases

Table 3

*Index of restaurant receipts (Quarterly average of Oct 1999 – Sept 2000 = 100)

Fig. 5

Non-price competition

In this research paper, my investigation on non-price competition includes the variety of food, the quality of food, the environment and the service.

The variety of food

67% people think that the Chinese fast food chains have already provided enough food choices. They also think the food provided by different fast food chains are similar with each other which is a characteristic of the oligopoly. The firms in oligopoly structure tend to provide standard goods or similar goods, so that they will not lose any potential consumers from their competitors. In addition to that, 38% people wish the Chinese fast food chains can provide more healthy food. They think that the food now provided is too oily, and too much meat.

The quality of the food

79% people think that it is an important factor, and will critically affect their preference to Chinese fast food chains. The quality of food does not only mean the taste of the food, but also the cleanliness. In fact, consumers are more concern the cleanliness than the taste of the food. According to the result of my survey, over 60% people rank Maxim as the best chains among the three in this aspect. From that, we can see that Maxim has comparative advantage.

 

Environment and service

Though environment and service do not seems to be as important as the others, since there are only 46% people consider it important. However, among that proportion, over 90% people believe that they will go to that chain again because of these externalities. From that, we can see that value-added to the product is very important. Though it may not be able to reflect from the price, it can have a great influence to consumer decision making. From the point of consumers’ view, fast food chains not just provide food, they are also providing services.

In fact, among the three dominant Chinese fast food chains, Café de Coral is the one which is most aggressive in upgrading its service and the decoration of its outlets. In 2003, it invested HK$29.5 million to renovate 15 Café de Coral shops. Altogether, it has invested HK$60 million (US$7.7 million) over the past three years. It is the one who invest the largest amount of money on its outlets among the three Chinese fast food chains. In fact, the result of this was quite satisfactory. According to the chairman of Café de Coral, Mr. Michael Chan, after the outlet was decorated, it could have 20% increases in sale. This year, Café de Coral will spend HK$100 million to renovate 20 shops. It further increases its investment in this area, so as to uplift its competitive. Seeing success of Café de Coral, Fairwood and Maxim are now planning to invest significant amount in this aspect. Fairwood has already planned to invest HK$60 million to redecorate its 20 outlets. Maxim is now going to carry out similar project.

On the other hand, my survey conducted also has drawn the same conclusion. Over 60% people rank Café de Coral as the one which provides the best service and environment. In order to figure out the reason behind that, I have visited five outlets of each Chinese fast food chain, so as to see how the service and environment of Café de Coral different from others.

From my observations, I discover that the employers of Café de Coral will help the consumers to find their seats during the busy hour, and also will take the food directly to the consumers. This is what employers in other chains will not do. Furthermore, the employers of Café de Coral are generally more polite than the others. They are more willing to say welcome or thank you to the consumers whenever they enter or leave the outlet. Though all these are only very tiny little things, it does give me a deep impression. From my experience in Café de Coral, the food provided is fast food, but the service is at restaurant level. I think this may be the reason that Café de coral gains its reputation from consumers for providing good service and environment.

For the Fairwood, I discover that it is now not just providing food. In its outlets, it also provide CD music, magazine for consumers to read. It hopes to become a place not just a place for food, but a popular meeting place for all walks of life.

Location

According to my survey, I discover that location is the most important factor for the consumers. It has the greatest influence to consumer decision. 88% consumers said the reason that they visit the Chinese fast food restaurant is because of its location. Most of them will only visit the one which is nearest to their working place, or home.

We can see that consumers will usually consider the location of the outlet first, before they choose which fast food chains they will go. Therefore, the site of the outlet can have direct effect to the sale of the outlet. I think this may be the reason that explains why the fast food sector can still have a sustainable growth in the past few years or in the future. Since more and more people are willing to move out from the crowded area to the suburb, this creates an opportunity for new outlets to open. In addition, I find that the location of the outlets of different chains tends not to be very close to each other. This may be because they do not want to have direct competition, since the food provided is very similar with each other.

By looking at the above analysis, we can see that Chinese fast food chains do compete severely in the non-price competition. This may be because they are unable to adjust the price, as they need to consider their rivals and consumers responses. Thus, in order to differentiate from their rivals, they need to compete in these areas, so as to capture the most market share. From that, we can see that they behave in oligopoly behavior.

Business model of Chinese fast food restaurants

As I have mentioned above, the economics of Hong Kong has been in a decline in these few years. Fast food market of Hong Kong is also becoming more saturated. Competition is very tough. Supernormal profit earned becomes smaller and smaller. In order to regain the profit, Chinese fast food chains need to carry out effective implements to reduce the marginal cost, to obtain a greater profit. To achieve this goal, Chinese fast food chains are now upgrading their management system, extensive use of central kitchen, and changing business strategy.

   (Fig.6)

In Fig.6, we can see that when the chains have carried out the above implements, they exploit economies of scale, its marginal cost and average cost will both decrease. As the average cost of producing one unit decreases, holding the same for the selling price, the profit therefore increases. Also, this can create entry barrier for new firms entering the market. Since the food price is already very low, in order to obtain the profit, the new firms need to invest the same amount of fixed costs so as to achieve the same degree of economies of scale as the existing operators. Thus, prevent the potential rivals to enter the market, and help to maintain the existing Chinese fast food chains’ dominant position.

Cost cutting

Improvement in management system

The Chinese fast food restaurants had spent money on creating business management system. It actually includes five systems: Branch Intelligence System, Human Resources Management System, Cash Management System, Sales and Marketing System, and Procurement and Inventory Control System. This system enables the Chinese fast food chains to retrieve and analyze large volumes of data across geographic and business unit boundaries. This system can also help the Chinese fast food chains to develop a more sophisticated warehouse, effective mechanism for central ordering and distribution. Thus, enable them to streamline business processes, improve productivity, promote effective strategic planning and generate savings in manpower and administrative expenses.

The use of central kitchen

Central kitchen is used to prepare some pre-prepared ingredients. Due to the mass production, a lot of complicated food processing can be separated into many small parts, thus help to reduce the time and cost, lead to a higher productivity. According to the Café de Coral’s source, the central kitchen can finish up to 80% of food procedure, only the remaining 20% will be done in their outlets. In Fairwood, all these implements can help to reduce 5-10% operation cost and also increase its operation efficiency 20%. The use of central kitchen has other advantages too. It can help to reduce the size of the kitchen in their outlets, thus reduce the rents. Also, as all the complicated food processing is done in the central kitchen, so anyone can be the chief in their outlets, since it does not require many special skills. Thus, it helps to reduce the training time and can easily hire the most suitable person to do the jobs. Other than that, the central kitchen can be used to produce large quantity of lunch boxes to whole-day school, thus help to diversify fast food chains’ market base.

Other ways:

As the Chinese fast food chains usually buy food in large scale, so they have certain bargaining ability to negotiate with their suppliers, asking for certain discounts from them. In addition to that, the Chinese fast food chains now buy the food globally. For example, according to Café de Coral’s source, they buy hams from Brazil, but chicken wing from USA, and the fish are from New Zealand. This can diversify their food source, ensure a sustainable food supply, and enhance the variety of their dishes.

Changing the business strategy

Unlike the Western fast food restaurants, which are more image oriented, i.e. trying to create an “experience” for the consumer, Chinese fast food restaurants are more focus on providing product variety and regularly rotating their menu. But, in order to attract and retain the teenagers, who generally prefer to eat Western fast food, the Chinese fast food restaurants now have changed their strategic marketing. For example, Café de Coral now asks some famous teenager singers as their spokesmen; Fairwood is now asking some movie stars as their spokesman. In addition to that, Chinese fast food restaurants now include more western dishes, like chicken wings, French fries in their menu to meet teenagers’ desires too.

Conclusion:

---