I. Demand Environment: Macroeconomic data (Exhibit 1) for Korea suggests that the country has favorable demand environment for the fast food industry in Asia. Although China and Singapore’s economies grew at seven and ten percent, respectively, within the last year, the former is too undeveloped for a company with no operations in Asia and the latter represents a market that has been saturated. Ranking fifth on GNI per capita is a double-edged sword. On the one hand, Korea only ranks behind the countries whose fast food industries have already matured and thus showing that Korea may hold the same potential; on the other, the country is only six spots away from having one of the lowest GNI per capita figures, which could prove beneficial since consumption of fast food has been shown to increase with lower incomes. Additionally, Korea ranks fourth in terms of urban population (the segment of its market that is serviceable) and has one of the highest people to store ratios. In Korea, there is 1 store for every 1.7 million people. Taken in comparison to Japan’s 1:200,000 ratio, this suggests that there may be unmet demand in the Korean market (Exhibit 2). II. Industry Analysis: The fast food industry in Korea is moderately unfavorable. Supplier power is strong and rivalry, intense. These two factors have the strongest impact on a company’s bottom line and are thus weighed more heavily than the threat of new entrants, substitutes, and buyer power, which are factors favorable in the industry.
Rivalry within the industry is intense and is dominated by price wars led by Lotteria and McDonald’s—companies, which have the financial resources to absorb losses in promotional pricing. However, the industry has not yet reached perfect competition where competitors are numerous and relatively of the same size. As long as the firms continue to have differentiated offerings, they maintain their ability to set prices. Demand is projected to shrink due to the shift in target markets from the baby boomers (previously 29% of the population) to a new generation (only 15%). Although this reduces the size of the market, it also represents an opportunity to serve a segment that may not be currently targeted. Since the industry is still recovering from the Asian financial crises, this slowdown in growth suggests that competition will be based upon battling for market share. The high fixed costs of procuring raw materials and setting up business creates high exit barriers, meaning that franchisees are likely to compete on price as a means of staying in the game.
The threat of new entrants is low. There are high capital requirements for doing business in the fast food industry since franchises are high fixed cost investments that require economies of scale in order to be profitable. There is existing brand loyalty to Lotteria, who has been in the market since 1978, while other fast food incumbents have already obtained the most favorable store locations. These existing competitors are also more likely to have stronger supplier relationships, which allow them to enjoy cost advantages that new entrants cannot. Although Korean entrants are unlikely to have the same access to financial intermediaries, they benefit from their connections to the Korean chaebol of business and supplier networks.
Substitutes in the fast food industry comprise of family restaurant chains, pizza restaurants, and local Korean restaurants. The majority of these substitutes, with the exception of low-end Korean restaurants, set a price ceiling for the fast food industry. These restaurants typically charge higher prices, but are reserved for more formal, sit-down dining. These substitutes have also moved into niche markets and the suburbs. As a result, they do not compete on the same dimensions as fast food, which is perceived to be convenient and relatively cheap. Thus, substitutes compete only weakly with fast food since they do not offer the...
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