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Fast Food Industry Meghan Brown, Melissa Schwartz, Blair Davis, and Brittany Canaski.

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Presentation on theme: "Fast Food Industry Meghan Brown, Melissa Schwartz, Blair Davis, and Brittany Canaski."— Presentation transcript:

1 Fast Food Industry Meghan Brown, Melissa Schwartz, Blair Davis, and Brittany Canaski

2 Overview Industry Background Competitive Environment Government Regulation Trends Primary Pricing Strategies – Bundling – 2 nd Degree Price Discrimination Quantity Discounts Versioning – Advertising Secondary Pricing Strategies – 3 rd Degree Price Discrimination – Psychological Pricing – 2 nd Degree Price Discrimination: Coupons Upstate New York Case Study Recommendations

3 Fast Food Definition Pay before eating Limited service On-site, carry-out, drive-through consumption Source: www.ibisworld.com

4 Industry Breakdown

5 Industry Performance Recession actually hurt fast food industry – Less disposable income But expected growth to 2015 of 2.5% to $208.16 billion

6 Cost Structure Low profit margin (2-5% captured) Economies of scale for large players High level of labor intensity

7 Technology Medium level Reduce food wastage and preparation time Reduce need for human capital Less room for error Streamline ordering process

8 Overview Industry Background Competitive Environment Government Regulation Trends Primary Pricing Strategies – Bundling – 2 nd Degree Price Discrimination Quantity Discounts Versioning – Advertising Secondary Pricing Strategies – 3 rd Degree Price Discrimination – Psychological Pricing – 2 nd Degree Price Discrimination: Coupons Upstate New York Case Study Recommendations

9 Franchise Definition Using another firms successful business model Franchisor controls the business concept Franchisee purchases the license, but still seen as an independent merchant – Must pay the franchisor a royalty for the trademark and reimbursement for the training and advisory services given to the franchisee – Protected by the franchisor from any trademark infringement by third-parties

10 Non-Franchise Fast Food Remember definition: pay before you eat Single establishment Ex: Ma and Pa locally-owned fast food restaurants (sub shops, pizzerias, burger joints, etc)

11 Competitors 300,645 businesses total! Yum! Brands Inc – Brand names: KFC, Taco Bell, Pizza Hut, Long John Silver, and A&W Doctors Associates – Brand name: Subway

12 Concentration Calculations Four-Firm Concentration Ratio (CR4) – McDonalds, Yum!, Wendys/Arbys, Starbucks – 34.9% – Low Herfindahl-Hirschman Index (HHI) – 390 – Extremely low – US Department of Justice considers anything below 1,000 to be a competitive marketplace

13 Concentration Concentration is low – A lot are small businesses – Although large franchises account for 65% of industry revenue Data from www.ibisworld.com

14 Concentration Continued Concentration has been increasing – Wendys and Arbys merger (2008) – Burger King bought out by a private equity firm 3G (2010) – Expected to continue to increase

15 Barriers to Entry Franchisor CompanySingle FranchiseLocal FF Restaurant CompetitionHigh ConcentrationLow Capital IntensityMediumLowMedium Regulation & PolicyHeavy Overall low barriers Capital Intensity Low for single franchise because the franchise agreement includes outfitting and equipment, training, and computer systems Medium for others because they have to invest from scratch

16 Internal Competition Internal – Price-based – Location – Food quality and consistency – Style and presentation – New products – Variety – Service – Franchise operators vs. non-franchise

17 External Competition Fast Casual Dining Full-service restaurants offering take-out services Frozen restaurant meals at grocery stores

18 3 Legged stool philosophy Small number of strategic suppliers Suppliers = partners Long term relationships Some open book costing McDonalds Supply Chain Efficiency

19 Overview Industry Background Competitive Environment Government Regulation Trends Primary Pricing Strategies – Bundling – 2 nd Degree Price Discrimination Quantity Discounts Versioning – Advertising Secondary Pricing Strategies – 3 rd Degree Price Discrimination – Psychological Pricing – 2 nd Degree Price Discrimination: Coupons Upstate New York Case Study Recommendations

20 Government Intervention Heavy and steady regulation Employee protection Health and sanitary laws Calorie counts on menus Banning toys in Happy Meals Banning trans fat – New York, NY Fast food ban – California

21 Overview Industry Background Competitive Environment Government Regulation Trends Primary Pricing Strategies – Bundling – 2 nd Degree Price Discrimination Quantity Discounts Versioning – Advertising Secondary Pricing Strategies – 3 rd Degree Price Discrimination – Psychological Pricing – 2 nd Degree Price Discrimination: Coupons Upstate New York Case Study Recommendations

22 Health Consciousness Bk.com Fitsugar.com

23 Product Expansion Foodbeast.com Wendysarbys.com

24 Joint Branding Formats Flickr.com

25 Changing Product Sizes Calorieking.com

26 Ethnic Chain Restaurants Discoverspringtexas.com

27 International Expansion Map.net.au

28 Overview Industry Background Competitive Environment Government Regulation Trends Primary Pricing Strategies – Bundling – 2 nd Degree Price Discrimination Quantity Discounts Versioning – Advertising Secondary Pricing Strategies – 3 rd Degree Price Discrimination – Psychological Pricing – 2 nd Degree Price Discrimination: Coupons Upstate New York Case Study Recommendations

29 Bundling A group of items are sold as a single unit at a discounted price Reduces heterogeneous demands to extract maximum consumer surplus (like 2 nd degree PD) Ex: Value Menus – mixed bundling

30 Bundling CompanyBurger Medium Drink Medium Fries Total IndividuallyBundleDifference McDonald's 2.991.491.596.074.991.08 Burger King 3.491.792.097.376.091.28 Wendy's 3.291.491.796.575.780.79 Data from three fast food restaurants on Elmira Road in Ithaca, NY on April 14, 2011

31 Overview Industry Background Competitive Environment Government Regulation Trends Primary Pricing Strategies – Bundling – 2 nd Degree Price Discrimination Quantity Discounts Versioning – Advertising Secondary Pricing Strategies – 3 rd Degree Price Discrimination – Psychological Pricing – 2 nd Degree Price Discrimination: Coupons Upstate New York Case Study Recommendations

32 2nd Degree Price Discrimination: Quantity Discounts Bulk food discount by larger sizes or quantities of food S,M,L drink/fries; 5, 10, 20 chicken nuggets 69% discount at Wendys going from small to large drink Super Size Me – public backlash

33 2 nd Degree Price Discrimination: Versioning TenderGrill Sandwich - $4.99Chickn Crisp Sandwich - $1.00

34 Overview Industry Background Competitive Environment Government Regulation Trends Primary Pricing Strategies – Bundling – 2 nd Degree Price Discrimination Quantity Discounts Versioning – Advertising Secondary Pricing Strategies – 3 rd Degree Price Discrimination – Psychological Pricing – 2 nd Degree Price Discrimination: Coupons Upstate New York Case Study Recommendations

35 Advertising: Ad-to-Sales Ratio Depends on the type of product, advertising elasticity of demand, and the price elasticity of demand: A/(P*Q) = E A / lE D l Industry ad-to-sales ratio is low - homogeneous products and a high price sensitivity of consumers (from 2008 data) Fragmented industry Company Spending on Advertising (2008) Revenue (2008) from IBISWord Advertising to Sales Ratio (%) McDonald's50,233,5438,078,300,0000.62 Burger King4,249,7352,455,000,0000.17 Wendy's/ Arby's 26,456,6801,822,800,0001.45 Industry329,342,510184,766,700,0000.18

36 Advertising Burger Kings:Combative Advertising Shifts consumer preferences toward the advertising firm, but does not expand the category demand If the real differences between brands are modest, then combative advertising could just be undercutting profits

37 Advertising Persuasive Advertising Alters consumers tastes and creates perceived product differentiation, making demand for the firms product more inelastic The company can therefore raise their prices, resulting in higher profits Wendys Square Never FrozenBurgers

38 Funny, but product differentiated? http://www.youtube.com/watch?v=0eN9KP6l OZs http://www.youtube.com/watch?v=0eN9KP6l OZs Less effective?

39 Product and Price Differentiation http://www.youtube.com/watch?v=NV8anwJ b3R8 http://www.youtube.com/watch?v=NV8anwJ b3R8 More effective?

40 Advertising Informative Advertising Reduce consumers search costs Pro-competitive consequences if prices are advertised because consumers become more price sensitive

41 Overview Industry Background Competitive Environment Government Regulation Trends Primary Pricing Strategies – Bundling – 2 nd Degree Price Discrimination Quantity Discounts Versioning – Advertising Secondary Pricing Strategies – 3 rd Degree Price Discrimination – Psychological Pricing – 2 nd Degree Price Discrimination: Coupons Upstate New York Case Study Recommendations

42 3 rd Degree Price Discrimination Charge different prices in easily identifiable submarkets, dependent on the geography and demographics of their consumers Charge more for their products in busy, metropolitan areas where competition is more intensive, customers have higher income, and they are selling at a higher volume i.e. New York City

43 Overview Industry Background Competitive Environment Government Regulation Trends Primary Pricing Strategies – Bundling – 2 nd Degree Price Discrimination Quantity Discounts Versioning – Advertising Secondary Pricing Strategies – 3 rd Degree Price Discrimination – Psychological Pricing – 2 nd Degree Price Discrimination: Coupons Upstate New York Case Study Recommendations

44 Psychological Pricing Retail prices often end in 9, 5, or 0 due to the theory that this drives greater demand Consumers ignore the least significant digits rather than doing proper rounding Fastfood.ocregister.com Xanapus.com Mediapost.com

45 Overview Industry Background Competitive Environment Government Regulation Trends Primary Pricing Strategies – Bundling – 2 nd Degree Price Discrimination Quantity Discounts Versioning – Advertising Secondary Pricing Strategies – 3 rd Degree Price Discrimination – Psychological Pricing – 2 nd Degree Price Discrimination: Coupons Upstate New York Case Study Recommendations

46 2 nd Degree Price Discrimination: Coupons Coupon-coupons.com

47 Overview Industry Background Competitive Environment Government Regulation Trends Primary Pricing Strategies – Bundling – 2 nd Degree Price Discrimination Quantity Discounts Versioning – Advertising Secondary Pricing Strategies – 3 rd Degree Price Discrimination – Psychological Pricing – 2 nd Degree Price Discrimination: Coupons Upstate New York Case Study Recommendations

48 Basket Good Comparison: Individual Item ItemsMCDBKWendysAvg BurgerStandard2.993.493.293.25 BurgerDouble3.694.594.294.19 Chicken SandwichStandard3.694.794.194.22 Chicken SandwichGrilled3.694.994.194.29 Chicken NuggetsNuggets3.392.002.382.59 SaladFull4.394.995.995.12 SaladSide1.00 1.491.16 FriesSmall1.001.891.491.46 FriesMed1.492.091.79 FriesLarge1.892.391.992.09 DrinkSmall1.001.591.29 DrinkMed1.491.791.491.59 DrinkLarge1.892.091.691.89 Basket31.637.6935.5634.95 11.1931.1251.106

49 Basket Good Comparison: Individual Item

50 Basket Good Comparison: Med Meal ItemsMCDBKWendysAvg BurgerStandard4.996.095.785.62 BurgerDouble5.697.196.786.55 Chicken SandwichStandard5.697.096.686.48 Chicken SandwichGrilled5.697.096.686.48 Chicken NuggetsNuggets5.394.795.185.12 ComboMed Upgrade0.000.500.49 Basket27.4532.2531.130.26 11.1751.1331.103

51 Basket Good Comparison: Med Meal

52 Basket Good Comparison: Large Meal ItemsMCDBKWendysAvg BurgerStandard5.496.596.186.09 BurgerDouble6.197.697.187.02 Chicken SandwichStandard6.197.597.086.95 Chicken SandwichGrilled6.197.597.086.95 Chicken NuggetsNuggets5.895.295.585.59 ComboLg Upgrade0.501.000.890.79 Basket29.9534.7533.132.6 11.1601.1051.088

53 Basket Good Comparison: Large Meal

54 Fast Food Basket Summary McDonalds cheapest basket – BK basket 19% premium – Wendys basket 13% premium No significant basket price difference by individual item or meal. MCDBKWendys Individual100%119%113% Med Meal100%117%113% Lg Meal100%116%111%

55 Local Advertising: Rochester Market Advertising Spending (Thousands $/year) % Total McDonalds13,73047.78% Wendys6,03320.99% Burger King2931.02% Total28,737

56 Local Advertising vs. Price MCDBKWendys Basket11.1921.125 Advertising10.0210.439

57 Operating Margin vs. Price MCDBKWendys Basket11.1921.125 Operating Margin Q2-1033%13.30%15%

58 Overview Industry Background Competitive Environment Government Regulation Trends Primary Pricing Strategies – Bundling – 2 nd Degree Price Discrimination Quantity Discounts Versioning – Advertising Secondary Pricing Strategies – 3 rd Degree Price Discrimination – Psychological Pricing – 2 nd Degree Price Discrimination: Coupons Upstate New York Case Study Recommendations

59 Analyst Recommendations MCDWendys P/B5.54.91 Wendys Overweight (Buy) – Trading significantly discounted to pre-recession levels – Large room to improve operating margins with new management – High potential for revenue growth by leading new healthy options/small portions trends Yahoo Finance

60 Firm Recommendations Focus on product differentiation through combative advertising Consider mergers to raise market concentration (and therefore pricing power) If products are well differentiated (they should be!) consider raising price Limit persuasive advertising to innovative products (such as McCafe)

61 Questions??


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