Australia Fast Food Industry - Essay Example

? Australia Fast Food Industry Analysis (Hungry Jack) Table of Contents A.Introduction 3 B.Industry Analysis 4 PESTLE Analysis 5 Porter Five Force Analysis 6 Competitor Analysis 9 Critical Success Factor (CSF) 10 Contingency Theory 11 D.Conclusion 15 Appendices 17 Appendix 1- McDonald's: Key Financial Ratios 17 Appendix 2- McDonald's: Revenues & profitability 17 Appendix 4- Domino's Pizza, Inc: Revenues & profitability 18 A. Introduction Australian fast food industry has revamped in last five years because consumers are shifting their preference from calorie rich fast foods such as hamburger, fries to healthy fast foods. Australian people are becoming aware of the health hazards of fast foods and for this reason they are avoiding calorie rich fast foods in order to avoid health problems like diabetes, cardiac problem and others. IBIS has reported that the fast food industry of Australia will grow at a rate of 3.7% per annum for next few years while there is a possibility dwindling spending capacity of consumers caused by economic recession might decrease the projected growth rate (IBIS World, 2012). Low entry of barrier is an important characteristic of Australian fast food industry. IBIS (2012) has reported that new entrants need to invest capital in the range of $90,000 up to $300,000 to set up fast food outlet in Australia. The analysis will try to determine the dynamics of the industry in terms of external environment, industry forces, competitor analysis and critical success factors. Major aim of the study is to analyze the Australian fast-food industry in terms of both internal and external environment. Major findings of the study can be explained in the following manner. Entry barrier for fast food industry in Australia is low. Companies need to launch low calorie fast foods to keep pace with changing consumer preference. Major recommendation for companies planning to enter fast food business in Australia are 1- use market development strategy in order to increase penetration and 2- use focus strategy to decrease risk factors. First section of the study will discuss brief introduction of fast foods industry in Australia, second portion of the study will analyze the fast-food industry in Australia in terms of PESTLE analysis, porter five force analyses & contingency theory and critical success factors. Third section of the study will provide suitable recommendation to companies planning to enter in fast food business in Australia. B. Industry Analysis A snapshot of the fast food industry of Australian can be used in order to understand the underlying opportunities in the business environment of the country. Market Value Market Value Forecast Market Volume Market Volume Forecast Category Segmentation Market Competition Total market value of fast food industry in the country is more than $5,000 million. The market value will increase at growth rate of 2.5% and it will touch the mark $6,000 million within 2016. Total transaction recorded for the industry is recorded as $1,160.1 million for the year 2012. Market volume will decrease at a rate of 3% and it will touch the mark $1,130.1 million transactions within 2016. Restaurant business contributes 66% of total market value of the industry. 45% of market share is dominated by four big players such as Domino's Pizza, McDonald's, Hungry Jacks and Yum! Brands. (Source: Market Line, 2011) Market volume of Australian fast food industry has decreased by significant level in last two years. Compound Annual Growth Rate (CAGR) of the industry has decreased by 4.2% in last five years. PESTLE Analysis Henry (2008) has stated that PESTLE analysis is an important tool to analyse the macro environment of any country. Political Australian government has implemented carbon tax on companies operating in the country. High carbon tax rate imposed by government can increase the operating cost of fast food companies. Australian government also increased restriction on advertising for children hence fast-food companies need to be careful while designing advertisement for end users. Economic Australian economy is growing at a rate of 1.9% for last one year (Market Line, 2012). High amount of external debt of Australia has reduced the purchasing power of the country. Decrease in consumer spending power has also affected the demand of fast food items. Industry analysts have predicted that fast food companies will face a slump in volume growth for next four years. Social IBIS (2012) has predicted that change in lifestyle pattern of customers has forced fast food companies to redesign their product portfolio. Demand for low calorie and nutrient based fast foods has increased by more than 10 % in last three years which shows the changing paradigm of social environment of the country (Market Line, 2012). Fast food companies like Hungry Jack’s have reduced calorie percentage by 75% in order to cater to the demands of the changing social environment. Technological Government has introduced schemes like subsidies, tax concessions and research grants for fast food companies in order to encourage them to decrease calorie quotient in their products. Government encourages fast food companies to use state of art technologies in order to decrease health hazards related to fast-food items. It has been observed that seven step refining and reverse osmosis are the most popular trend for fast food companies to reduce the fat level in food item. Environment Australian Government is forcing domestic and foreign companies to reduce carbon emission level throughout the value chain by 5% within 2020. Government has asked fast food companies to submit a detailed carbon emission report which will increase pressure on companies like Hungry Jack’s, McDonald's and others to decrease carbon footprint throughout the value chain (Market Line, 2012). Carbon tax imposed by government is expected to increase overall operational cost of fast food companies. Legal Australian Food Standard has created a maximum limit for daily adult energy intake which is creating pressure on fast food companies to reduce calorie quotient in their offering. On the other hand national wage law of the country is forcing fast food companies to pay employee penalty rate every weekend. Porter Five Force Analysis Porter (1980, 1985) has argued that companies can achieve competitive advantage in industry adjusting five forces like buyer power, supplier power, industry rivalry, entry barrier and threat of substitutes. Five force frameworks for Australian fast food industry can be explained in the following manner. Buyer Power Dwindling spending capacity of customers has forced fast food giants like KFC, Hungry Jack’s to decrease price of the offered products in order to cater to the demand of price sensitive customers. High transaction volume has also decreased the individualistic buyer power significantly hence overall buyer power of the industry is estimated as moderate. Supplier Power Supplier power of the industry has increased by perishing nature of foods. Big player in fast food industries in Australia emphasize sourcing the vegetables, chicken, beef and other items from local suppliers at low prices in order to decrease overall procurement cost. High degree of fragmentation has decreased the supplier power significantly. Australian association of suppliers has further decreased the power of individual supplier. On the other hand wage norm created by Australian government has increased the supplier power marginally hence overall supplier power is estimated as moderate. Threat of New Entrant IBIS (2012) has reported that new entrants do need to deploy huge amount capital in order to enter the Australian fast food industry. An entrepreneur needs to spend $90,000 to $300,000 for establishing fast food outlet in Australia. Big players like McDonald's, Burger King operate in the country through franchisee model in order to decrease cost of operation. Big players use franchisee model in order to avoid problems related to land lease, bearing cost of equipments, local labour management and local political issues. New entrants in Australian fast food industry might face entry barrier like lack of understanding of Australian culture, price competition from big players and low switching cost. Overall threat of new entrant is estimated as moderate for the industry. Threat of Substitute Products like home made food, item served by other types of profit food service, packaged foods can be considered as substitutes for fast foods. People prefer fast foods for reasons of easy availability and convenience of time which are also the value drivers for fast food industry in Australia. Demand for frozen re-heatable prepared food is increasing in the country which is a cause of concern for fast food companies. Availability of alternate food products has increased threat of substitutes significantly hence overall threat of substitutes is assessed as high for the industry. Degree of Rivalry Concentration of the market is dependent on the characteristics of particular segment. For example, burger segment is dominated by Hungry Jack’s and McDonalds. As a whole Australian fast food market is characterized by high degree of fragmentation. Business rivalry has decreased by low exit cost while flexible capacity building characteristics of the industry has further decreased the degree of rivalry. Profitability of the industry depends on issues like maintaining low margin on sales, relying on volume over value etc. Companies serving value meal at a price range of $1-$2 face price competition from both local and foreign players. Competition in fast food industry of Australia is dependent on issues like brand power, market capitalization of particular company, marketing communication strategy, resource utilization etc. Overall competitive rivalry for the industry is assessed as high. Macro Environmental Threat Macro Environmental Opportunity Consumer preference is shifting from high calorie fast to nutrient based fast foods which will force companies to change product strategy in near future. Low switching cost has decreased entry barriers for the industry. Stable political environment of the country provides the opportunity to foreign players to expand business without many hackles. Low supplier power has given the opportunity to new entrants to decrease procurement cost and increase operating margin. Competitor Analysis Domino's Pizza Domino's is one of leading player in fast food industry of Australia. The company operates business with the help of owned stores and franchisee in the country. Distribution channel of Domino's Pizza is complemented with supply chain and manufacturing centres. The company uses resource based view model in order to achieve competitive advantage over other players. Domino's operates its business with the help of three operating segments such as international division, domestic stores and domestic supply chain. McDonald's McDonald's Corporation is a major competitor for Hungry Jack’s in burger segment. Market penetration of the company is far higher than that of Hungry Jack’s. The company operates business in Australia with the help of franchisee chains and company owned stores. The company follows both conventional franchise arrangements and developmental license agreements in order to run franchisee stores in the country. McDonald's earn 70% of its business revenue from franchisee owned business in Australia. Next section of the study will discuss the competitive position of Hungry Jack’s in order to draw the Competitive Profile Matrix for all three companies. Hungry Jack’s Hungry Jack's Pty Ltd is franchisee partner of Burger King Corporation. The franchisee works under the supervision of parent company, Competitive Foods Australia. The franchisee business is headquartered at Osborne Park, Western Australia. Hungry Jack's was established by Warren Haven and James McLamore in the year 1971. The company offers products like beef burgers, chicken burgers, desserts, drinks and many others (Hungry Jacks, 2012). Critical Success Factor (CSF) CPM is given in the following table. Domino's Pizza Hungry Jack’s McDonald's Critical Success Factors Weight Rating Score Rating Score Rating Score Advertising 0.15 3 0.45 1 0.15 4 0.60 Food Quality 0.20 2 0.40 3 0.60 3 0.60 Price Competitiveness 0.1 1 0.1 3 0.30 2 0.30 Management 0.15 3 0.45 2 0.30 4 0.60 Distribution 0.20 3 0.60 2 0.40 4 0.80 Customer Loyalty 0.05 2 0.10 3 0.15 4 0.20 Market Share 0.05 3 0.15 2 0.10 4 0.20 Global Expansion 0.1 3 0.3 2 0.20 4 0.40 Total 2.55 2.20 3.7 [Note: CPM analysis is showing that Hungry Jack’s has the weakest market position with score of only 2.20 in comparison to Domino's Pizza and McDonald's. McDonald's has the best position in market with a score of 3.7. All data have been taken from the report published by Market line about Australian fast food industry in the year 2012. Key matrices used by Market line for companies like Domino's Pizza, Hungry Jack’s and McDonald’s have been used in order to calculate the CSF. Appendices 1, 2, 3 & 4 have been attached with the analysis in order to justify the CPM analysis.]. Contingency Theory Hofer (1975) has stated that a firm can achieve competitive advantage with the help of contingent variables like product differentiation, purchase frequency, price elasticity of demand, characteristics of need of buyers, distribution cost versus economic value added. Contingency theory states that companies need to align contingent variables with macro environment in order to achieve business competitiveness. According to Hoffer (1975), marketing life cycle is the most important contingent variables for companies. Contingency theory states that there is no universally acceptable strategy for doing business for all companies because effectiveness of any strategy depends on macro environment conditions and interdependency of contingent variables. Hence it can be inferred that particular business strategy implemented by companies planning to expand business in Australia is basically contingent in nature. According to contingency theory, firms need to control moderating variables in order to align business strategy with independent macro environmental variables. Contingent variables for Australian fast food industry can be segregated into three parts such as macro environment variables, strategic orientation variables and organizational variables. Macro Environmental Variables Changing consumer demand for low calorie fast food and decrease in spending capacity of customer are major macro environmental variables in the industry while low entry barriers, low switching cost can be classified as secondary macro environmental variables. Strategic Orientation Variables Pricing policy, product life cycle, service quality, franchising business model and penetration of distribution channel are five major strategic orientation variables for fast food companies while advertising strategy and integration of technology can be termed as secondary strategic orientation variables. Organizational Variables Managerial control over franchisees, resource capabilities and value chain integration capabilities are organizational contingent variables for big player like Hungry Jack’s, Domino's Pizza and McDonald's who are planning to expand business in Australia. C. Recommendation Next portion of the study will discuss recommended corporate and business level strategies for the companies planning to enter into business environment of Australia. Corporate Level Strategies Companies planning to expand business in Australia need to use growth strategy in order to increase market penetration. They should use market development strategy instead of diversification strategy in order to avoid business risks. In the next five years they need to focus on developing the fast food business portfolio instead of deploying resources in related and unrelated diversification. Ansoff matrix can be used in order to understand the recommended corporate level strategy. (Source: Stone, 2001, p. 51) Fast foods companies can use following strategies to develop market in Australia. It is evident from the CSF matrix that product quality and distribution play a crucial role in increasing market share for fast food companies. Companies have the opportunity to develop existing market by launching low calorie fast food items while it is necessary that companies should implement integrated marketing communication to support the new product launch. Companies planning to increase market presence in Australia can develop a market by using the right blend of marketing mix without investing too much on new product development. They can push an existing product portfolio with the help of integrate marketing communications like sales promotion, below the line and above the line advertising and public relation activities. Business Level Strategy Resource capabilities play crucial role in deciding the business level strategy for fast food companies. For example, a resource-constrained fast food company should use focus strategy in order to decrease the risk factors. PESTLE analysis is showing that Australian consumers prefer low calorie fast foods over chips and high calorie burgers hence fast food companies should introduce food items with high nutritional value in their product portfolio. Time line for the recommended strategy is given below. Time Line Year 1 Year 2 Year 3 Activities Launching low calorie fast food for Australian customers Increasing market penetration with the help of conventional franchise arrangements and developmental license agreements. Increase depth, breadth and height of the product portfolio on the basis of market requirements. Support Activities Rigorous promotional campaigns complemented with outdoor advertising, public relationship activities and TV commercials should be used to push the brand. D. Conclusion I am grateful to my teacher for proving me the opportunity to conduct analysis on Australian fast food industry. Although in the initial stage I faced difficulties for understanding the key strategic concepts like Critical Success Factors, Contingency theories but there is no doubt that using these theories to analyze Australian fast food industry has enriched my knowledge and strategic thinking capabilities. I believe the project was challenging due to two reasons, 1- the project required detailed knowledge of strategic management such as resource based view, contingency theory, generic strategies and many others from students in order to complete the analysis and 2- the project asked the students to select right information from a large pool of data to analyze Australian fast-food industries. It was difficult for me to select right information from the available data sources because I was hesitant about the authenticity of these publicly available data. For example, analysis done by one online report was showing that Australian fast-food industry is on the verge of saturation while another secondary source was showing that the market is unsaturated, hence there was some amount of ambiguity about authenticity of these two reports. In such situation, my supervisor has suggested that I use a database like IBIS World in order to get authentic data about Australian fast-food industries. I have also used a database like Market Line in order to understand competitive position of industry leaders like Domino's Pizza, Hungry Jack’s and McDonald's. Understanding the contingency theory was also a challenge for me because many of the research scholars such as Weill and Olson (1989), Schoonhoven (1981) have stated that there is no significance of contingency theory. I used academic peer reviewed journals in order to overcome the challenge of understanding contingency theory. Reference Henry, A., 2008. Understanding Strategic Management. Oxford: Oxford University Press. Hofer, C. W., 1975. Toward a Contingency Theory of Business Strategy. The Academy of Management Journal 18,4 pp. 784-797. Hungry Jack’s., 2012. Menu. [online] Available at: [Accessed 3 January 2013]. IBIS World., 2012. Fast Food in Australia: Market Research Report. [online] Available at: [Accessed 3 January 2013]. Market Line., 2011. Australia - Fast Food. [online] Available at: [Accessed 3 January 2013]. Market Line., 2012. Country Analysis Report: Australia, In-depth PESTLE Insights. [online] Available at: [Accessed 3 January 2013]. Porter, M. E., 1980. Competitive Strategy. New York: Free Press. Porter, M. E., 1985. Competitive Advantage. New York: Free Press. Schoonhoven, C., 1981. Problems with contingency theory: testing assumptions hidden within the language of contingency “theory”. Administrative Science Quarterly 26 pp. 349-377. Stone, P., 2001. Make Marketing Work for You: Boost Your Profits with Proven Marketing Techniques. Oxford: How to Books Ltd. Weill, P. and Olson, M. H., 1989. An Assessment of the Contingency Theory of Management Information Systems. Journal of Management Information Systems 6 pp. 59-85. Appendices Appendix 1- McDonald's: Key Financial Ratios (Source: Market Line, 2011) Appendix 2- McDonald's: Revenues & profitability (Source: Market Line, 2011)Appendix 3- Domino's Pizza, Inc: Key financial ratios (Source: Market Line, 2011) Appendix 4- Domino's Pizza, Inc: Revenues & profitability (Source: Market Line, 2011) Read More