Fast Food Industry Leaders

Topics: KFC, PEG ratio, Fast food restaurant Pages: 7 (2140 words) Published: November 25, 2013
Cory Collins
10/25/13
ECON 450

The quick service restaurant (QSR) industry, also known as the fast food industry, consists of a large variety of restaurant types, including but not limited to ice cream parlors, fast food restaurants, pizza parlors, coffee shops. With all of these different types of eateries, the QSR industry makes up a massive section of small businesses in America. This means that the market size is large, and that there are not restrictive barriers to entry. Some of the giants in the fast food industry are McDonald’s (MCD), Starbucks (SBUX), and Yum Brands (YUM). While McDonald’s and Starbucks operate under only one brand name, Yum Brands consists of multiple fast food restaurant brands such as KFC, Taco Bell, Pizza Hut, and WingStreet. In order to compare how these industry leaders compare to one another, performance metrics be used. Due to the nature of the fast food industry, the metrics that are most used to measure are Food Cost, Labor Cost, Weekly Sales, Average Order per Customer and Employee Turnover. To further analyze this market we must understand how some of these key metrics works. Food (Variable) Cost is calculated as % of total expense. For larger franchise chains such as Subway and McDonald’s the food cost is usually lower due to their large buying power.1 Labor (Fixed) Cost is also calculated as a percent of total expense. Much like Food Cost, it is usually one of the most expensive costs that restaurants incur. Sales (Revenue) is another important metric because this allows you to see which companies are collecting the most money through their only service, which is sales. This will be found in the income statement of a company’s financial statements. Demand:

In the quick service restaurant business, the products being offered are food and drink at the lowest cost possible to satisfy company revenue as well as the consumer’s willingness to pay. Demand for the industry’s product is has been referred to as anti-cyclical. This is largely due to the fact that when the economy experiences growth, the food industry in developed countries does not significantly grow. On the other hand, when the economy goes down, food companies are not greatly affected because consumers still have to eat and they dispose other expenses before giving up eating. Undoubtedly, consumers adjust purchasing behavior during economical stress. They replace more expensive products with cheaper products.2 Thus, the industry is non-cyclical. The buyers of the industry’s products are consumers, more so middle and lower class consumers who have less disposable income to spend. They buy these products because it allows them to save more money for other necessities. Because of the nature of the industry, the inputs are produced through agricultural industries, which means that the inputs purchased by these companies to produce outputs for sale are subject to cyclical fluctuation. That is to say, if there is a shortage of tomatoes due to some unknown factor, then these outputs that rely on this input will be at a loss. Because the fast food industry revolves around restaurants, many of the agricultural commodities used will be subject to this fluctuation.

Expansion outside of the country is very important for these types of company. This is because consumers of the product are not restricted to any one country. All of these companies serve customers outside of the United States, although there is little data that gives specific numbers. These companies are all very large players in the industry. As seasoned, large corporations they make sure to pay dividends to their stockholders.

Although each of these companies is an industry giant, in terms of the individual companies’ revenue and earnings, these companies differ in how much net income they accumulate annually.

Source: Morningstar Financial Statements – Graph 1

On the graph shown above, we see that since 2008, McDonald’s has generated the...
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