Exhibit 1- Dominant Economic Features
The quick serve restaurant industry is a large with 2012 annual revenue of $169.7 billion spread over 190,000 businesses. Globalization of the industry is expected to add $186.2 billion in revenues by 2017. The economy and new health trends caused an average annual contraction of 0.7% across the fast food industry from 2007 to 2012. However, the industry was able to grow by 1.8% and 1.3% in 2010 and 2011. The number of rivals has been increasing because of new entrants that take advantage of low capital that is needed to open a franchise. The franchise model has allowed companies to compete on a growing global level. The QSR companies have extended operations into Europe to take advantage of their affluent population, as well as, growing business in China and India as American brand image becomes more popular. Due to US saturation of the QSR, firms have found it prudent to expand into these oversea markets. The demand for these restaurants is not fragmented as the customers are price sensitive and want to have food in a hurry. This price demand has caused a large amount of product differentiation because there is almost no cost associated with switching from restaurant to restaurant. The differentiation is not just among the food offered but also the hours of operation, meal incentives, contests, and types of location. McDonald’s has done a great job of utilizing meal incentives and contests. They use toys in their kid’s meals to build brand loyalty at a young age. Their monopoly contest is also a large loyalty driver; it keeps customers coming back to try and collect more game pieces to win prizes in the contest. This also raises the switching cost between McDonald’s and other QSRs. Chick-fil-A has restaurants in multiple kinds of locations including drive-thru only, mall, and stand alone locations scattered around a city. Having multiple locations in different kinds of stores gives the consumer the convenience they are looking for. Chick-fil-A has also opened some hybrid of fast food and sit down locations to give consumers the option to sit down in a more traditional setting but still get to enjoy the low priced, quick service of fast food restaurants. Innovation among products has helped the QSR industry overcome the growing health concerns of Americans. Many QSRs have switched to using fat-free oils and introducing new healthier options such as grilled products, salads, and even fruit. This was a necessary innovation to continue growth within the US since the market has demanded healthier foods but still wants the quick, almost instant, service from the fast food industry. The market saturation that is present combined with the price sensitive consumer keeps all firm’s price low. Because companies have to keep prices so low, cost saving strategies had to be employed. Chick-fil-A has a heavy emphasis on selecting the best people to work for them and to open franchise locations. This emphasis on the right people for the job has created an astounding 5% turnover rate with an industry average turnover rate near 200%. Being able to keep your employees drastically lowers the cost of training as well as increases customer service by having the best people working for you.
Exhibit 2- The Five Forces Model
The competitive rivalry is very strong within the QSR industry for a number of reasons including the amount of new moves and strategies made by competition, the low switching costs for buyers, the amount of competitive capabilities, and globalization of the market. Also having KFC and Chick-fil-A be so far head of the competition in revenue causes strong rivalry between the two. KFC and Chick-fil-a have annual revenue of $4.5 billion and $4.05 billion, which is more than double what the next industry leaders have.
With the switching costs essentially being nothing for the QSR consumer as well as the consumer being extremely price conscious, rivalry is...