Analysis of Fast Food Industry from the Perspective of McDonald Company - Case Study Example

Industry analysis: fast food industry at McDonald company perspective Student’s Name: Instructor’s Name: Course Name and Code: University: Date of Submission: Industry analysis: fast food industry at McDonald company perspective Introduction The fast food industry is one of the fastest growing industries in the world. This industry has several characteristics. The purpose if the paper is to provide a detailed analysis of the industry by taking McDonalds as a case study. The market is quite big, and McDonalds faces quite a number of challenges. The study is on the market, general environment, internal and external analysis, SWOT, strategies and recommendations. These paper discuses the performance and operations of McDonald’s restaurants in the fast food industry. Industry background The people’s lifestyle is getting more and more hectic due to the different changes occurring in the world. The first food market is one of the largest restaurant markets and continues to grow even with the economic recession affecting people. This can be shown by the increase in the profits of the first food chains like McDonalds. The sales of these restaurant chains have not been affected by the shrinking economy. The time saving and convenient meals offered by the fast food restaurants have caused an increase in demand for fast food. Consumers are cutting down on expensive items like cars but their expenses on first foods remain the same. There has been a considerable increase in the amount of cash spent at fast food restaurants. This has caused an increase in the number of restaurants offering fast foods. Company background of McDonalds The McDonalds is the largest restaurant food chain in the world (Fortune 2008, p. 19). The McDonalds food chain restaurants were started in the 1940’s. The first restaurant was owned by Richard and Maurice McDonalds in California (Namita 2000, p. 34). It became a fast food restaurant in 1948 when self service was introduced. The restaurant was later purchased by Ray Kroc in 1955 by buying all the shares of the McDonalds brothers. The food chain became listed in the stock market in 1965. The food chain started expanding into the international markets in the 1950s. The restaurant currently operates in 120 countries world wide with over thirty thousand outlets. These outlets serve over 54 million customers in the world daily. The brand of McDonalds is recognized globally and is a way of life in America. McDonalds’ earns the money from the investment in properties, restaurant franchises and operating the restaurants (Love 1986, p. 23). The company owns and operates 15 percent of the McDonalds food chain restaurants. The remaining restaurants are either joint ventures or franchises operated through agreements. The company collects franchise fees and marketing fees which are calculated as a percentage of the sales. Where the company owns the property where the restaurant is operated and leases it to the franchise it collects rents. Most of the agreements on the franchise vary on locations, country, age and contract. The franchisers are trained at Hamburger University in Illinois McDonalds’ fast food target markets Market segmentation McDonalds’ operations target the whole population. This is the same market that other fast food chains target so there is a fierce competition for customers. The company follows a strategy of targeting the whole population although there are certain markets that give more money than others. The market is differentiated into different segments. Working population McDonalds’ targets both middle and high income earners. The company targets people who earn more than 250 dollars per month. This working population has little time to make their own meals and therefore go to the fast food restaurants for their meals. Demographic segmentation The fast food restaurant also targets people of all ages (Hunger & Wheelen 2003, p. 344). They target young children, teenagers, college students and adults who have families. The fast food restaurant has put up the facilities to attract this king of customers including playgrounds for young children. Location segmentation McDonalds’ food chain restaurants are located in different places to target different markets. Some of the restaurants are located in central and secondary business districts to attract people who work in these areas. The other place McDonalds restaurants are located is in chain stores like Wal-Mart and at shopping centers. These ones target people who go out shopping. They are also found in tourist attractions airports and casinos to attract tourists. The McDonalds stores are also found in free standing locations like highways and attract all kinds of customers General environmental analysis of the market McDonalds’ mostly sells hamburgers, chicken products, French fries, breakfast, deserts and soft drinks. In international markets it sells salads, vegetarian meals and other local cuisines. It also sells some seasonal meals within its restaurants. The food chain is well known for selling local foods which deviate from their normal meals. The food chain abides by any local food taboos and makes food which people are more familiar with. The restaurants constantly change their menus to take into consideration the local changes. The performance of McDonalds indicates that there is a big market for fast foods. This is because fast foods are convenient and cheap. The products produced by fast food chains are experiencing a ready market. Market structure McDonalds’ operates in a very competitive industry. The firms involved in the production of first foods are many in the market. Some are big operating chains of restaurants while others are small. Each firm sells it products at its own price. The products produced by the first food chains are very similar. These products are differentiated to make each restaurant unique. The profits in the industry in the wrong run are not very high as the firms enter the market freely and take advantage of these market structures. The restaurant chain controls a very small market share of the whole market. The amount of market share depends on how well the company differentiates its products in the market (Barney 2002, p. 242). The demand curve of the market is elastic as the firms are in a competitive market. The firm which has the lowest price sells the largest amount of their products. The buyers in the first food industry are well informed and can make their decision on where to buy more rationally. Entry costs There are low barriers to entry for new fast food restaurants. This means that even the entry cost for these new businesses is also low. There are a number of factors that affect the cost of entry which include the size of the hotel and the location. Generally the costs of gaining entry into the new markets are quite low (Hitt, Ireland & Hoskisson 2008, p. 342). Demographics The choice of where to locate a new restaurant is quite difficult to make (Burke, 1999 p45). This is because there are many factors to consider when locating a new facility. Majorly the firms are located in places where they are quite visible. The convenience of customers is also a factor considered when locating a new restaurant. McDonalds’ restaurants are usually located in places that are easily accessible to customers. Distribution The distribution is done through the restaurant outlets. They fulfill thee customer’s needs by providing the products easily and conveniently (Andreasen & Kotler 2003, p. 234). The service is rapid and there are no long waits. The process from ordering to delivery is quite fast. The staffs are well trained to handle restaurant duties. The ingredients mostly outsourced locally. This helps promote the image of the brand and also the product to meet the quality checks. There economics are of scale are also enjoyed for large scale purchase. Marketing A lot of resources are used in advertising as the market is competitive. The market allows the fast food restaurants to compete on other basis apart from prices. Marketing is very crucial for the success of the business. McDonalds uses a very large amount of its money in its advertising. Pricing Pricing is a very complicated issue and requires some amount of research before fixing the prices. The prices are competitive given the market structure the restaurant operates in. Pricing is used by many fast food restaurants as a competitive weapon (Brooksbank 1999, p. 78). McDonalds’ considers prices charged by others before deciding on their charges. The price of substitutes have also to be considered before making the pricing decision as the customers will most likely turn to substitutes. The consumers change according to the price charged. McDonalds’ is a big brand and therefore well known and not affected so much by this. External environmental analysis The conditions in the fast food industry change with the changes in the consumer choices. The consumer choices in the first food industry change quite fast. The completion in this industry is becoming stiffer as the industry changes. The demand for fast food is there but the restaurants have to change with the changing environment. This is necessary for the first food joints to keep up with their competitors in the market and maintain a competitive edge. For example McDonalds introduced a low fat burger in 1991. The target for this burger was to attract people who wanted to remain healthy. By introducing this burger the restaurant was trying to keep pace with the changing trends in the market. The other challenge facing the first food chains is right market to target. There is always a challenge as to the right market to target. The McLean low fat burger was targeted to the adult population which was the wrong market. This mistakes cost the company a lot of money in the wrong run. The other challenge is that new competition is emerging with time. This makes the market more competitive than before. There is also the problem of fragmentation of the market with the entry of new fast food chains. Another problem facing the fast food market is the raising costs. The advertising costs in the fast food industry are very high. Also the turnover is high which drives costs up in the fast foods market. An analysis of the market using porter’s five forces reveals various things affecting the fast food market. The threats of entry There are many large and well established restaurant chains with big brand names such as ken turkey fried chicken and dominion foods. These big brands do not make the entry of the market difficult for new firms. The presence of many firms makes succeeding when competing with these firms quite difficult. The new restaurant entrants find themselves faced with a lot of competition from the existing restaurant chains. The big restaurant chains compete in the local regional and international level. There is a lot of brand loyalty for the big brands. The big brands have access to distribution via their own outlets or buying out existing restaurants. There are also some economies brought about by brand differentiation. The switching costs for providers are also not very high like in other industries. Customers bargaining power The bargaining power of the buyers is quite low in the restaurant industry. The buyers are price takers in the fast food industry. The switching costs of moving from one provider to another are low therefore customers can make quick decisions. The information available in the fast food industry is way too much. Substitutes are easily available and the buyers are highly price sensitive. There is no fixed cost for moving therefore the buyer can easily move. The buyers are many and products are not very unique but rather similar Restaurants bargaining power The fast food restaurants have very small bargaining power in the market. The market is competitive and they control a very small part of the market. The bargaining power of this restaurant is only available when they are dealing with a product whose ingredients are not easily available in the market. The switching cost of the buyer moving from one restaurant to the next are very low therefore the restaurant has no bargaining power. There is a degree of differentiation but this does not affect the customer very much because there are close substitutes. There are many fast food restaurants which are not united but compete against each other, therefore, further reducing the bargaining power. Suppliers who have a strong distribution channel are the only ones who benefit. The threat of substitutes The threat of substitutes is real in the fast food chain market. The main threats to fast food restaurants like McDonalds are family restaurants and home made meals. The switching costs in the market are low and therefore the buyers are not affected. The information on products and prices is easily available. There is also the threat of competing with substandard and low quality restaurants. Competitive rivalry The industry is highly competitive. There is easy entry and exit of new firms within the industry (Cooper, Demuzilo, Hatten, Hicks & Tock 1996, p. 27). The level of advertising costs is also very high within the fast food industry. The big fast food restaurant chains like McDonalds compete both locally regionally and globally. The competitive Rivalry is on which restaurant is more innovative than the rest. Opportunities The market provides the opportunity for more expansion in order to increase sales. The penetration will provide an opportunity to increase the relationship with the customers (Collis, David, Montgomery & Cynthia 1998, p. 46). The company can take a more aggressive marketing mix for its products. The advertising can also be increased to attract more customers. The company can also take more promotions for its products. This may include short term price cuts. This may help attract more customers. There are opportunities of market development. This means that the company may enter into new markets to increase its sales (Claycomb, Germain & Droge 2000, p. 219). This can be through advertising. The may be an addition of new stores. For example to reach more customers has opened stores at Wal-Mart. These stores have been put at airports, zoos and casinos. The store is also expanding rapidly into international markets. Product development is also another area that the company can improve (Gronroos 2000, p. 34). The present markets can get improved. By the firm knowing its current market it can improve on these markets by satisfying the customers more. By developing the existing products the company is able to keep brand loyalty. Product diversification is also possible for McDonalds. The company can diversify into beverages and soups where it has little presence. MacDonald’s as for a long time ignored beverages for the morning menu but its an area for growth. Strategic groups in the market There are several strategic groups in the market these groups include the college students, the middle and high income earners, the children and families (Fleisher & Bensoussan 2003, p. 40). All these groups form different segments of the market that McDonalds restaurant have positioned them to serve. MacDonald’s uses different advertisements for the three different groups of people (David 2003, p. 56). There are adverts that are targeted for children, students and families. The company also approaches the market groups differently from each other. All the three different groups are treated differently by McDonalds. Internal environmental analysis There are many internal factors that make the company to remain successful; The first internal environment factor that makes the company success full is the strong brand name image and reputation. McDonalds’ has been I existence for some time and there fore its brand is well known among its customers The large market share and strong global presence has also contributed to the success of McDonalds. The global presence promotes its brand and a large market share contributes to its sales. The strong teams of well trained employees at McDonalds have contributed to the success of the business. McDonalds’ trains all its employees at the hamburger school which makes sure they are well qualified. MacDonald’s also has unique products, price and promotions which attract many customers. The restaurants are also located uniquely which ensures that the new restaurants become successful like others in the chain. The good customer focus has been a major contributor to the success of McDonalds. The products and services offered at McDonalds are geared towards satisfying the customer. The company also post good financial statement. The profits gained are geared towards gaining more growth for the company. Good financial statements means there are no financial problems at McDonalds. McDonalds has also been very innovative introducing new products into its menu frequently. The company has ensured it is not left behind as the fast foods market changes. For example they have been introducing healthy foods into the market. The internal factors that are affecting McDonalds negatively are; The bad publicity that the company faces is affecting the growth of its products. The firm been accused of providing unhealthy food in the market. The number of employees quitting jobs including the management has been on the rise. The increase in turnover affects the company negatively as the training costs for new employees are quite high. MacDonald’s has also ignored serving breakfast for a long time (Barnes 2001, p. 11). The company does not have breakfast on its menu. By not serving breakfast the company is not growing. Competitive rivalry has also affected the growth of McDonalds. Other firms are joining the first food market and forming restaurant chains that are providing stiff competition to the company. Law suits against the company have also affected the growth of the company. People have filled law suits against McDonalds accusing it of providing unhealthy food. There are also lawsuits filled by suppliers. The effects of using products that cause pollution and depletion of the ozone have made the company suffer in its quest for growth. SWOT analysis Strengths McDonalds’ enjoys some major strength that gives it a competitive advantage over other fast food restaurants. The first strength of McDonalds is that it has been in existence for a long time therefore there staff understands the business quite well. The managers and employees are well trained at the hamburger university owned by McDonalds. It invests lots money in the training of its staff. Fortune magazine ranked the food chain as one of the best places to work The food chain was also ranked as one of the best food chains that is admired by many people. This advantage provides loyal customers for the band. McDonalds’ brand is also one of the most recognizable throughout the world. The logo of the company is very recognizable within the fast foods industry. McDonalds is a socially responsible company. The company runs facilities that support health care and education. They also offer sponsorship to athletes going for the Olympics. The company operates food chains throughout the world which makes it stronger at dealing with economic disruption in various countries. They operate efficiently during economic downturns as they provide food which is a basic need. The other strength comes from their ability to appeal to different cultures (Boyles 2000). They offer food according to the culture of the place they are operating in Most of the restaurants are franchised and operated independently. This ensures that the food chain is found in many locations. These locations include airports, cities and tourist attractions. This provides excellent locations. The chains of restaurant have a system of preparing food within the restaurants. The system is duplicated in most of its food chain within the food chain restaurants. The food chain serves only food that is from branded companies. This ensures that the food they serve is of the heist quality. Food safety is taken very seriously by McDonald’s food restaurants. They perform various checks to ensure that the food is prepared properly. The food is also kept in a clean environment to ensure that it’s not contaminated. It also provides the nutrition content of its food products. The information is provided on the packs and on its website (Christopher, Payne & Ballantyne 2002, p. 43). The food chain offers different alternative of food with different nutrient contents. Weaknesses The training cost for McDonalds has continued to increase due to the increase in labor turnover for the company. The prices of pizza have dropped considerably which has limited the ability of McDonalds remaining a competitive pizza provider There are also large fluctuations of the net and operating profits which affects the investors. McDonalds’ also has a weakness in that it does not concentrate on the seasonal foods that are offered in other restaurants. The other weakness is that the franchises do not maintain the quality offered by McDonalds. This is a major concern for the outlet. The company has also concentrated on providing burgers and fried foods and neglected the healthier food for its customers. Opportunities There ore still opportunities of expansion by forming joint ventures with the retail outlets. Joint ventures ensure that the company keeps on growing. There are options of getting into the healthier foods due to the changing environmental trends towards healthier food options (Hodgetts 2000, p.36) There is also an opportunity for advertising using the internet at the branch level. This will increase the customer reach. The food chain also has an opportunity of expanding the children’s play field to attract more families. There is an opportunity of targeting the high end market which is not well targeted by the organization. There is also the opportunity of diversifying into beverages which are more enticing (Ordo 2001, p. 34). There is the opportunity of introducing breakfast into the menu. Threats There is a threat because of its enticing all ages of the population from the small children to adults and they have received a lot of criticism. There has been law suits filled against the company for offering unhealthy foods that were added some additives. There are threats of the food being contaminated with germs (Waters 2001, p. 54). This threat is very real in the restaurants that McDonalds operate which may cause spread of diseases. There are many competitors who are coming up with other fast food restaurants. The threat of the changing trends to healthier foods is affecting the fast food restaurant. There is also a threat of the changes in the economy brought about by the downturn in the economy. Strategic alternatives for solving the issues There are various strategies that McDonald’s fast food chains can take to deal with the weaknesses and threats to the firm. The first strategy is to come up with a plan that aims at attracting customers and expanding to other countries. The company should invest more in advertising and promotions (McDonald 2002, p. 160). The company should also form joint ventures or buy existing restaurants to increase distribution points. There should be plans on expansion of market share especially in emerging markets. This can be achieved through joint ventures (Lynch 2000, p. 104). Another strategy that can be used is minimizing the losses for customers by lowering prices and offering discounts. McDonalds should maintain control over the franchises to keep the status and quality of food from the brand (Aaker 2001, p. 24). McDonalds’ should plan on providing new products to keep up the innovation. New products should keep up with the changing trends (Christensen 1997, p. 16). The other strategy is providing more healthy food to the market. The population is now moving to healthier food options. The final strategy is changing from methods that pollute the atmosphere to new methods. There are more environmentally friendly ways of providing packages for the products which can be used. Recommendations’ based on the strategies Forming new joint venture that will help in increasing market share. The company should also introduce new products into the market more so healthy products. The other recommendation is introducing discounts to customers to increase sales. 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