Fast-food Industry Analysis

1. (a) Service and production:

Fast-food industry has also been called Quick Service Restaurant (QSR) Industry. There are several segments of production in the QSR industry, which include burgers, chicken, pizza, sandwiches and Mexican food. Nevertheless, the burger sector still exists as the main item of production. A majority of QSR companies offer this product though signature brand names. For example The Big Mac, Six Dollar Burger, The Whopper, The Famous Star, and The Sourdough Jack.

QSR industry contains both traditional and non-traditional quick service restaurants. Traditional restaurants units are located at shopping centers, gas stations and in residential areas. Non-traditional units and kiosks operate in locations like airports, convenience stores, stadiums, amusement parks, and colleges. One of the main services that differentiate the fast-food industry from other restaurants is fast service and accessible prices for general public. To make the service even faster fast-food restaurants offer drive through services that reduce the order time even more.

Fast-food industry is not only domestic industry, but also international. There are over 222,000 fast food restaurants around the world, which generate about 130 billion dollars in sales annually. As the leader, McDonald’s has over 30,000 restaurants in 120 countries.

(b)What technology does it use to produce its products:

In order to keep cost low and to maintain production efficiency, the fast-food industry has developed new technology solutions. Refrigeration, freezer, and microwave technologies significantly speed up the process of fast food and service. McDonald's, for example, works with utilities and manufacturers to develop more energy-efficient equipment, such as two-sided grills for cooking hamburgers and more-efficient fryers. In addition, they use state-of-the-art heating, ventilation, and air conditioning (HVAC) systems that use programmable thermostats to automatically lower temperatures when restaurants are empty; economical rooftop vents circulate the air inside restaurants every several minutes, using cool air from the outside when it's available instead of air conditioning, saving electricity (http://www.mcdonalds.com/countries/usa/community/environ/info/commit/index.html).

Furthermore, the majority of food processors utilize heating, cooling or both in their respective operations. Most of the products are pre-packaged and frozen, therefore, it is essential to have powerful microwaves that make the food preparation process faster.

1. (c) Who are the key suppliers to this industry?

Companies in fast-food industry are broken into two groups in terms of suppliers. First, in house suppliers such as KFC, which grow their chickens on large chicken farms throughout the nation (Poulter, Sean Daily Mail, Jan. 7 2003). Second, companies that contract outside suppliers to sustain their demand. For example, YUM! Brands is a substation purchaser of a number of food products and restaurants supplies. The company’s internal division is called Supply Chain Management, which negotiates contracts and purchases specified food and supplies from hundreds of suppliers worldwide (work cited). The principal products provided by suppliers include beef, chicken, cheese, cooking oil, corn, flour, lettuce, pinto beans, seasonings, tomato products, and packaging material. In addition, Yum! Brands has also entered into multi-year agreements with Pepsi-Coal Company for the latter to be provider of Pepsi-Coal beverage products as its restaurants (10K, 2003)

There are also companies that do both. For example, McDonalds built its own farm in Russia in 1988 to provide food supplies to its restaurants in Moscow. From the other hand in US McDonald’s is the nation’s largest purchaser of beef, pork, and potatoes -- and the second largest purchaser of chicken (Fast Food Nation, 2001).

(D) What are the industries key human resource needs:

The restaurant industry is now America’s largest private employer, and it pays some of the lowest wages. The industrialization of the restaurant kitchen has enabled the fast food chains to rely upon a low-paid and unskilled workforce. Roughly 3.5 million fast food workers are by far the largest group of minimum wage earners in the United States (Fast Food Nation, 2001). While a handful of workers manage to rise up the corporate ladder, the vast majority lack full-time employment, receive no benefits, learn few skills, exercise little control over their workplace, quit after a few months, and float from job to job (Fast Food Nation, 2001).

The fast food industry has serious human resources problems that also gained more and more attention from food critics, public, and the government in the last five years. The fast food industry has come under attack from allegations of sweatshop conditions, inhumane treatment, and poor wages. For example, Taco Bell owned by Yum! Brands was recently boycotted in April 2002 by the Coalition of Immokalee Workers, for ignoring labor laws by keeping workers at below- poverty wages, with no overtime pay, no right to unionize, no health insurance, no sick leave, no paid holidays or vacations, and no pensions (Madison Capital Times, Feb 11, 2003).

However, in order to promote mass production and profits, the industry must keep labor and material costs low. Eric Schlosser, author of Fast Food Nation, states teenagers and recent immigrants make up much of the fast food workforce, often under intimidating and poor conditions. Turnover is huge, and the companies profit from it because short-term workers accrue few benefits and are less likely to organize (Fast Food Nation, 2002). Because workers fear being deported, they are unlikely to complain about poor wages or conditions. It is likely that most illegally recruited workers have no idea that a company is obliged to compensate them if they are injured on the job. Moreover, Schlosser recounts how McDonald's and other company’s have fought against unions, sometimes closing stores to prevent workers from unionizing and maintaining profits (Fast Food Nation, 2002).

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Moreover, the fast food suppliers have come under attack. Their poor working conditions have caught the eye of the government and unions. Most notably, meat suppliers who run slaughterhouses are notorious for inhumane conditions. Eric Schlosser, author of Fast Food Nation, states, "Lacerations are the most common injuries suffered by meatpackers, who often stab themselves or stab someone nearby" (Fast Food Nation, 2001). In addition, Schlosser suggests that, "although official statistics are not kept, the death rate among slaughterhouse sanitation crews is extraordinarily high” (Fast Food Nation, 2001). Death rates may not be accounted for since workers are very expendable and disposable. Most slaughterhouse workers are illegal, illiterate, impoverished, and untrained. Scholsser concludes that “the nation's worst job can end in just about the worst way - sometimes these workers are literally ground up and reduced to nothing" (Fast Food Nation, 2001 / Copyright, Guardian Newspapers Limited, Feb 08, 2003)

Who are the major customers and consumers of the industry?

On any given day, one quarter of our adult population visits one of the nation's 300,000 fast food restaurants. Much of the popularity of fast food is related to our modern day American lifestyle and what accommodates us most - convenient, predictable, and most importantly FAST. This is why fast food outlets they have become an integral part of the busy American lifestyle. According to Fast Food Nation, more than 90 percent of American children eat at McDonald's at least once a month, and the average American eats three hamburgers and four orders of fries every week.

A research conducted by Restaurants and Institutions (1998), revealed that people with children—regardless of race or income—tend to eat at quick-service restaurants more often than other groups. About 47% of those reporting at least some college education eat fast food at least once a week, versus 38% of those with only high school diplomas. Occupation, however, does not seem as important a factor in dining behavior, as white-collar and blue-collar workers report about equal quick-serve frequency. And, not surprisingly, those 35 years and under eat at fast-food restaurants nearly three times more than seniors.

However, despite the popularity of fast food the trend is that Americans have become increasingly health conscious, especially the aging baby boomers. The top four leading causes of death-heart disease, cancer, stroke, and diabetes - are affected by diet (U.S. Surgeon General, 2001). The fast-food industry is, increasingly, being blamed for the long-term costs it imposes on society, echoing the criticism directed at the tobacco industry since the 1960s. It is estimated that more than 50% of North American adults and 25% of adolescents are overweight (U.S. Surgeon General, 2001).

Influenced by diet rends some restaurant chains have began or focus more on continuing more healthful and vegetarian menu items. McDonald’s is the most recent in a number of restaurant chains looking to provide its customers with healthy eating choices. Wendy’s has introduced Garden Sensations Salads, Burger King has a Veggie Burger and offers their sandwich orders without mayonnaise. Arby’s also offers a light sandwich menu—a new line called Market Fresh Sandwiches.

Who are the major competitors?

(Source: QSR Magazine, 2003)

3.) A.) Yum! Brands, Wendy’s, Mc Donald’s, Jack in the box. Take from company reports:

There are many different areas of criteria that can be judged including size, market capitalization, and amount of stores, states, yearly annually sales, and growth. By number of units and system wide sales, McDonald’s and Yum! Brands are the industry leaders.

Ranked on 11th place among the fast-food restaurants in US by QSR Magazine, Jack In The Box has the highest earning per share, overbidding the giants like McDonald’s and Yum Brands.

The Wendy’s franchise is the third largest quick-service hamburger restaurant chain in the world, with more than 8,811 restaurants open in the United States, Canada, and other international markets (www.wendys.com). Wendy’s systemwide sales totaled 9.4 billion in 2002 and currently controls 13.1% market share in the quick-service restaurant industry, while major chains comprise 80.4%, and smaller chains retain 6.5% (10k, 2002).

McDonald’s is the world’s leading fast food service retailer with more than 30,000 restaurants in 120 countries serving 46 million customers each day, with systemwide sales 42 billion in 2002.

Everyone should add the information about his/her company!

3) C) how are companies differentiated.

Basically all companies offer same services and products through their signature style hamburgers, such as The Big Mac, Six-Dollar Burger, The Whopper, The Famous Star, and The Sourdough Jack. In addition, many produce a variety of items such as chicken sandwiches, fries, frosties, soft drinks, and a variety of fresh foods - salads, grilled chicken sandwiches, baked potatoes, and chili. McDonald’s creates family atmosphere for customers, playground, toyes and Happy Meals for children. Wendy’s puts more efforts on green salad for health conscious customers. Burger King provides fresh grilled burger for better tastes. Companies put an emphasis on development of new products in order to differentiate from the competitor.

4. How are companies structure themselves within this industry?

a) Is this industry consolidating? Are there mergers?

The fast-food industry is structured under two types of restaurants, company operated and franchised. 75% McDonald’s and YUM businesses are owned and operated by franchisees. Some times companies operate additional restaurant chain under different name. Moreover the additional chain may be in a different restaurant segment. Consolidation is a common practice in QSR industry. For example, the McDonald’s Corporation not only operates and franchises quick-service restaurant businesses under the McDonald’s brand. The company also operates other restaurant concepts under its Partner Brands: Boston Market, which is home-meal replacement concept, serving chicken, meatloaf and variety of other main and side dishes; Chipotle Mexican Grill, which serves gourmet burritos and tacos; Donatos Pizzeria, which sells pizza, submarine and salads; Pret A Manager, which serves mainly prepared and packaged cold sandwiches, snacks, and drinks during lunchtime. The same structure is for YUM Brands, Inc., which has KFC, Pizza Hut, and Taco Bell. Wendy’s also operates Tim Hortons, Baja Fresh Mexican Grill, Café Express, and Pasta Pomodoro.

b) Are firms in this industry expanding or downsizing? Why?

The firms in this industry are expanding. Wendy’s is expecting to open around 200 new restaurants in year 2003 in the U.S. and Canada (Wendy’s Annual Report, 2002). Jack in the box only closed 3 restaurants last year and opened about 103 including 100 company operated and 3 franchised. The company is planning to expand 5-7% in the future (Annual Report, 2002). Lynn Schweinfurth of Investor Relations believes that YUM! Brands will expand by at least 1,000 units worldwide (Personal communication, 2003). Although McDonald’s management decided to close 751 underperforming restaurants, primarily in the U.S. and Japan because of sluggish economy and location, McDonald’s will continue to expand the business in the future. McDonalds plans to open about 100 more restaurants this year in big malls. By 2020, the U.S. will grow by 50 million to 80 million people and become more diverse. Food spending is expected to surge 26% between 2000 and 2020. USDA estimates a 1% increase in income each year between 2000 and 2020, after adjusting for inflation and taxes and barring an economic crisis (The Kiplinger Agriculture Letter, 2002). The rising consumer income will also stimulate the fast food industry growth.

c) Are firms integrating vertically? Why? What are the advantages?

Even though most of the companies in fast-food industry do not own their supply chains, most of the basic products are delivered on contract base. In order to provide more efficiency and lower facilities and administrative expense, companies in fast food industry are vertically integrating in suppliers. For example, KFC grow their chickens on their own large chicken farms. McDonalds built its own farm in Russia in 1988 to provide food supplies to its restaurants in Moscow. Companies securing their supplies by creating the backup contracts, that are made to provide them with the solution to supply shortage or quality problems. It is essentially important for the big companies to be able to switch to another supplier fast, because the company’s demand for such a supplies, as food and packaging material is high.

5. Fast food technology changing:

Every year the food industry is finding new ways to produce their food more efficiently for profitable purposes. For example, many fast food companies have now introduced The Bax (R) system, a genetics-based screening method that quickly screens for food borne pathogens (PR Newswire, Mar 31, 2003). In addition to being very cost effective, The United States Department of Agriculture (USDA) has approved this system to detect Salmonella in the nations ready to eat meat, poultry, and eggs (PR Newswire, Mar 31, 2003).

In addition to food production, you will find fast food companies evolving their register systems. McDonald’s, for example, recently begin testing a new payment system from FreedomPay Inc. that uses radio frequency identification devices (RFIDs) linked to a credit or debit card (Rosen, 2001). Payment is processed in less than 15 seconds, and the company gets the data on who you are and what you bought. Most importantly, technology lowers labor cost and increases the standards to satisfy the customer.

6. Regulations affecting fast-food industry:

The restaurant industry is subject to extensive federal, state and local governmental regulations, including those related to preparation and sale of the food and those relating to building and zoning requirements. Fast food restaurants are also subject to laws governing relationships with employees, including minimum wage requirements, overtime, working and safety conditions and citizenship requirements.

The first group is regulations affecting preparation of food. Health issue is one of the most important issues in restaurant industry and especially in fast-food industry. It is an easy task to control the quality of ingredients and the way the food is prepared in one restaurant. But when we talk about fast food we have to keep in mind that there are tens thousand restaurants across USA. Part of them operated by the company and part of them are franchised. Those restaurants are located in all states, which creates even greater task for health control. Most of the regulations are the same in all states, at least the government regulations. But each end every state can add the regulations of his own. Here comes the real problem for the fast food industry, they have to provide restaurants in different states with regulatory updates in order to keep up with regulation differences. It is not an easy task taking into account that most of big cities has their own regulations in addition to the state and government. I think that one of the best examples to illustrate the effect of those regulations is Jack In The Box case of mass poisoning in 1992 in Washington State. Had the company in 1992 followed state regulations, which mandate that hamburgers be cooked to an internal temperature of 155 degrees, the epidemic would have been prevented, health experts say. State officials say a state law superseded a federal guideline at the time of 140 degrees. Three children died and about 600 got injured as a result of poisoning (work cited). Company paid tens millions of dollars in court settlements and efforts to recover from the damage its image. Today Jack In The Box is one of the industry leaders in monitoring of the food quality from suppliers to the customers. It took years to recover from the damage. Hazard Analysis & Critical Control Points (HACCP) system for managing food safety and quality adopted by JBX since1994 (work cited). HACCP system has been recognized as a leader in the industry by U.S. Department of Agriculture. This program was one of the steps that helped company to improve its image and become the one of the biggest fast-food company’s in USA.

The second group of regulations are affecting the placing of restaurants. There are some regulations that prevent building restaurants within some areas, which make those areas inaccessible for fast-food companies. That may prevent companies from future growth. And companies cannot do a thing to improve this situation. That is why in many places we can see representative of all fast-food companies within 100 feet one from another, sharing the same customers. The decision to build those restaurants does not come as initiative from the company but more as an answer to the regulations. JBX for example is building restaurants nearby the military bases; unfortunately for the company those restaurants lost most of clients to the field kitchens of US army during the wartime.

Last, the third group of regulations are the employee employer regulations, they do not differ from any other industries. But in some cases they lead to the lawsuits against the company, which by itself does not differ from any other industry.

7. International Competition:

Fast food is totally American creation. The companies in this industry don’t have any compatible local competitor in the international market. Although some of local restaurants try to build their restaurants around the fast food idea, they do not have the same amount of resources to outbid American companies in the short term run. However, for the long term, the local competitors may have the advantage of providing local people with local taste. American fast food companies also have advantage of associating with the American culture. America used to be a symbol of freedom. As Dmetri witnessed, the opening of the first McDonald restaurant in Moscow in 1988. People were standing for hours in line in order to eat American food. Fast food companies abroad may not face the same amount of competitors as in US, but it is less stable and less predictable than domestic market.

Forecasts:

Primary market risk is associated with borrowing money and the fluctuations of interest rates in the United States. Companies attempt to minimize this risk through the utilization of various derivative financial instruments, primarily by hedging the borrowed amount. In addition, changes in foreign currency exchange rates would impact the translation of investments in foreign operations that can significantly affect international earnings and cash flows. Companies attempt to minimize the exposure related to foreign currency denominated financial instruments by purchasing goods and services from third parties in local currencies when possible. Furthermore, companies are subject to volatility in food costs as a result of market risk associated with commodity prices. Companies manage their exposure to the risk primarily through pricing agreement as well as commodity future and option contracts.

9.) (A) growth in demand of the fast food industry?

In 2001, the quick service restaurant industry had over 222,000 locations generating sales of more than $125 billion (National Restaurant Association, 2003). McDonalds, which dominates the burger category and quick service segment in general, has over 13,000 units worldwide with sales of $20 billion. Reports indicate that there is little growth for fast-food sector. Andrew Barish, a restaurant analyst at Bank of America Securities predicts that fast-food sales will stay flat in the year ahead due to the recent attacks on fat foods provided by the industry and human resource issues of concern (The Los Angeles Times; Los Angeles, Calif.; Mar 6, 2003; ).

Moreover, there is a demand for the quick-casual segment, boosted by demand for healthier choices. Forecast indicates a growth of 20% and Baja Fresh and Boston Market, should see its market share grow to $6 billion. (The Los Angeles Times; Los Angeles, Calif.; Mar 6, 2003; ). The segment is getting a boost from baby boomers looking for healthier, more tasteful alternatives to fast-food staples such as burgers and fries. Overall, forecasts indicate a change in fast-food sales of plus or minus 1%, with growth prospects dimming as some major chains close restaurants to improve their bottom line.

9.) (A) Substitution of goods and services:

The quick-casual sector is small compared with the $120-billion fast- food industry. However, analyst indicate their will be a large growth due to health concerns. As a repercussion, companies have begun to add and change their menus. For instance, Wendy’s has spent large amounts of capital toward the 2002 induction of their Sensation Salads (www.wendys.com). In addition, many companies have begun to put more investment in quick-casual outlets to take advantage of the new growth. For example, Wendy’s has purchased Baja Fresh, and McDonalds is investing more into Boston Market ( / mcdonalds.com). Analysts predict that casual-dining restaurants, a niche that includes sit-down chains such as the Los Angeles-based California Pizza Kitchen Inc., should see growth of 6% to 8% (The Los Angeles Times; Los Angeles, Calif.; Mar 6, 2003; ).

9 (A) Geographic changes or not: CALIFORNIA:

California restaurants, especially those in the Southland, may fare slightly better in 2003 than those in the rest of the country. California generally is a stronger restaurant market than the nation as a whole because it has a big population of affluent people and large numbers of young adults who frequently eat at fast- food eateries The Los Angeles Times; Los Angeles, Calif.; Mar 6, 2003; ; .

Interesting notes that can be used:

The McDonald’s Corporation is the largest owner of retail property in the world. Indeed, the company earns the majority of its profits not from selling food but from collecting rent. McDonald’s spends more money on advertising and marketing than any other brand. As a result it has replaced Coca-Cola as the world’s most famous brand. McDonald’s operates more playgrounds than any other private entity in the United States. It is one of the nation’s largest distributors of toys. A survey of American schoolchildren found that 96 percent could identify Ronald McDonald. The only fictional character with a higher degree of recognition was Santa Claus. The impact of McDonald’s on the way we live today is hard to overstate. The Golden Arches are now more widely recognized than the Christian cross.

9.) (A.) Human Resources Forecast:

In the heat of constant controversy, fast food company’s are making some attempts o clean up their business. For instance in the supplier sector, McDonalds McDonald's hired a scientist to create a more clean and efficient slaughterhouse (Keith DuCharme Daily Correspondent December 02, 2002). However, in light of all the industry’s attempts to improve their working conditions, high profits will not be sacrificed for a more ethical work environment.