eco_proj

Economics Project Fast Food Industry

INTRODUCTION TO THE FAST FOOD INDUSTRY

OVERVIEW

Fast food is the term given to food that can be prepared and served very quickly. While any

meal with low preparation time can be considered to be fast food, typically the term refers

to food sold in a restaurant or store with low quality preparation and served to the customer

in a packaged form for take-out/take-away. The term "fast food" was recognized in a

dictionary by Merriam-Webster in 1951.

A fast food restaurant, sometimes known as a quick service restaurant or QSR, is a specific

type of restaurant characterized both by its fast food cuisine and by minimal table service.

Food served in fast food restaurants typically caters to a "meat-sweet diet" and is offered

from a limited menu; is cooked in bulk in advance and kept hot; is finished and packaged to

order; and is usually available ready to take away, though seating may be provided. Fast

food restaurants are usually part of a restaurant chain or franchise operation, which

provisions standardized ingredients and/or partially prepared foods and supplies to each

restaurant through controlled supply channels

FAST FOOD OPERATIONS

Old commercial fast food is highly processed and prepared on a large scale from bulk

ingredients using standardized cooking and production methods and equipment. It is

usually rapidly served in cartons or bags or in a plastic wrapping, in a fashion which

promotes reduces operating costs by allowing rapid product identification and counting,

promoting longer holding time, avoiding transfer of bacteria and facilitating order

fulfillment. In most fast food operations, menu items are generally made from processed

ingredients prepared at a central supply facilities and then shipped to individual outlets

where they are cooked (usually by grill, microwave or deep-frying) or assembled in a short

amount of time either in anticipation of upcoming orders (i.e., "to stock") or in response to

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actual orders (i.e., "to order"). Following standard operating procedures, pre-cooked

product is monitored for freshness and disposed of if holding times become excessive. This

process ensures a consistent level of product quality, and is the key to delivering the order

quickly to the customer and avoiding labor and equipment costs in the individual stores.

Because of commercial emphasis on taste, speed, product safety, uniformity and low cost,

fast food products are made with ingredients formulated to achieve an identifiable flavor,

aroma, texture and "mouth feel" and to preserve freshness and control handling costs

during preparation and order fulfillment. This requires a high degree of food engineering.

THE ECONOMY OF FAST FOOD

The prevalence of fast food may affect more than just people's eating choices - it can also

affect the economy. Fast food restaurants need lots of unskilled & skilled workers who will

work for close to minimum wage. Some analysts feel that this gives unskilled & skilled

workers an opportunity to find jobs. Others theorize that it weakens the economy by

causing people to accept low-wage jobs with little room for advancement.

In addition, large fast-food chains have buying power much the way Wal-Mart does. In

other words, large chains can influence how much their suppliers charge as well as how

they process and distribute food and supplies.

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HISTORY

Although fast food restaurants are often viewed as a representation of modern technology,

the concept of "ready-cooked food to go" is as old as cities themselves; unique variations

are historical in various cultures. Ancient Roman cities had bread-and-olive stands, East

Asian cultures feature noodle shops. Flatbread and falafel are ubiquitous in the Middle

East. Popular Indian “fast" food delicacies include Vada pav, Papri chaat, Bhelpuri,

Panipuri and Dahi vada.

The hamburger restaurant concept which is most associated with the term "fast food" was

created by two brothers originally from Nashua, New Hampshire. Richard (Dick) and

Maurice (Mac) McDonald opened a barbecue drive-in in 1940 in the city of San

Bernardino, California. After discovering that most of their profits came from hamburgers,

the brothers closed their restaurant for three months and reopened it in 1948 as a walk-up

stand offering a simple menu of hamburgers, french fries, shakes, coffee, and Coca-Cola,

served in disposable paper wrapping. As a result, they were able to produce hamburgers

and fries constantly, without waiting for customer orders, and could serve them

immediately; hamburgers cost 15 cents, about half the price at a typical diner. Their

streamlined production method, which they named the "Speedee Service System" was

influenced by the production line innovations of Henry Ford.

EVOLUTION OF FAST FOOD INDUSTRY IN INDIA

Before the entry of multinational fast food outlets, Nirula's, which started in 1934, was a

popular domestic fast food provider for eating-out. Nirula's started with ice-cream parlors

and later moved on the range of fast food including burgers, pizzas, sandwiches etc. The

chain with over 60 outlets operating in five states successfully caters to the Indian palate of

over 50,000 guest everyday for over 70 years. Wimpy was another fast food provider

besides Nirula's in Indian market. Wimpy was the only multinational fast food outlet in

India before 1990s with one outlet in New Delhi. In the initial years of its operations, it was

mainly the foreigners in India who would visit the place. Today Wimpy has 8 outlets in the

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capital city New Delhi and it is expanding its menu with Indian dishes with a view to

attract Indian consumer.

After the liberalization policy that came in force in 1991, fast food industry grew in India,

as multinational fast food providers set up their business either jointly with Indian partners

or independently. McDonald's signed two joint ventures – one with Amit Jatia and

another one with Vikram Bakshi in April 1995. The first outlet was opened in New

Delhi.

In 1995, Kentucky Fried Chicken (KFC) company owned by PepsiCo, also entered the

Indian market and opened its first outlet in Bangalore. After an ambitious start, KFC was

accused of using illegally high amounts of MSG and frying its chicken in pork fat (India's

150 million Muslims don't eat pork). Activist groups protested outside the restaurant in

Bangalore. It relaunched the brand in 2004 after a gap. In December 2006, KFC changed

its logo too.

In 1996, Domino's set up base in India, it entered into a long-term franchisee agreement

with the Bhartia Brothers. Domino's had grown from one outlet in 1995 to 101 outlets in

April 2001.

Pizza Hut entered India in June 1996 with its first outlet in Bangalore. In the

beginning, outlets were owned by the company itself but later on they entered into the

franchisee owned restaurants.

McDonald's, Domino's, Pizza Hut and Nirula's are the most popular and frequently visited

fast food outlets. KFC has limited outlets and has faced number of problems since entry in

India. Besides these, there are Pizza Express and Pizza Corner which are actually not so

popular. With changing life style and aggressive marketing by fast food outlets, fast food is

also becoming popular in small towns and success of existing fast food outlets and entry of

more is inevitable.

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PRESENT SCENARIO OF FAST FOOD INDUSTRY IN INDIA

India currently has more than 900 fast food restaurants and coffee joints, and is likely to see

the addition of at least 400 restaurants, fast food outlets and coffee joints:

Yum has around 134 Pizza Hut restaurants in India and plans to scale up to 175 by

2010.

McDonald's has about 220 outlets by end-2008, investing about US$ 125.28 million

in the next 2-3 years

Pizza Hut serves over 300,000 customers every week in India, runs 30 KFC outlets

and intends to add 15-20 new restaurants

Domino's Pizza India will invest US$ 55.12 - 57.62 million in India in the next

three years to expand its retail chain and manufacturing capacities

Pizza delivery and dine-in is a US$ 117.76 million business and is growing at the

rate of 35 per cent per annum.

TRENDS, GROWTH AND CHANGES IN THE INDUSTRY

The food habits of India have changed faster in the course of the last generation than at any

other time. Hamburgers, pizzas and cola are now recognized easily by at least some and

often most children in every part of the country. The shift to what can only be called the

"All-American" meal is now very evident in India. An increase in the number of dual-

income families and rising disposable incomes has fuelled the growth of foodservice.

Growth has been witnessed not only in the major cities, such as Delhi and Mumbai, but

also penetrating in Tier II and Tier III cities.

The large influx of tourists from Bangladesh, the US and the UK is also driving demand, as

well as stimulating the launch of new cuisines and food beyond the traditional Indian meal.

Results indicate that the young Indian consumer has passion for visiting fast food outlets

for fun and change. Three dimensions (service and delivery dimension, product dimension,

and quality dimension) of fast food outlets' attributes are identified based on factor analysis

results. People buy fast food because it's cheap, quick, and heavily promoted. Another

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reason for the rising popularity is that through economies of scale in purchasing and

producing food, these companies can deliver food to consumers at a very low cost. In

addition, although some people dislike fast food for its predictability, it can be reassuring to

a hungry person in a hurry or far from home.

Fast-food retail chains such as KFC, McDonald's, Domino's, Pizza Hut and others are

constantly changing their marketing strategy and segmenting their products to capture

Indian consumers across diverse income levels and lifestyles. The strategy for foreign

conquest by these companies is called "global realization". International chains have

adopted “Indianised” menus for expansion. Companies are gaining customer acceptance in

the metros like Delhi and Chennai, international food chains such as McDonald’s, Subway,

Pizza Hut and KFC and are expanding into the suburbs in the metros, and are also entering

Tier II and Tier III cities across India.

It is notable that international chains have altered their menus to suit the Indian palate,

offering regional food like chettinad chicken or chana/paneer pizza. Burgers with tikkis and

kebabs have also been launched to appeal to the Indian public, along with vegetarian

options. With the establishment and rapid expansion of market shopping malls throughout

the country, these international companies are finding an ideal environment to thrive.

McDonald’s has adopted a menu especially for the Indian market that is not found

anywhere else in the world, including vegetarian burgers and chicken tikka. This

localization strategy is backed by strong marketing and promotional initiatives. The brand

has successfully penetrated the metros and is also considering a massive expansion in the

rest of India. McDonald's says it survived and expanded in India by developing innovative

menus to cater to the Indian taste bud, something it has not done anywhere else in the

world.

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KEY PLAYERS

1) YUM BRAND

Yum Brands develops, operates, franchises and licenses a system of restaurants, which

prepare, package, and sell various food items. The company operates various restaurant

concept brands like KFC, Pizza Hut, Taco Bell, Long John Silver's and All American

Food. KFC restaurants offer fried chicken-on-the-bone products, primarily marketed under

the names Original Recipe and Extra Tasty Crispy. Other principal entree items include

chicken sandwiches (including the Snacker and the Twister), KFC Famous Bowls,

Colonel's Crispy Strips, Wings, Popcorn Chicken and, seasonally, Chunky Chicken Pot

Pies. KFC restaurants also offer a variety of side items, such as biscuits, mashed potatoes

and gravy, coleslaw, corn, and potato wedges, as well as desserts. While many of these

products are offered outside of the US, international menus are more focused on chicken

sandwiches and Colonel's Crispy Strips, and include side items that are suited to local

preferences and tastes.

PIZZA HUT – A major player in the Indian fast food and beverage sector

Pizza Hut entered India in 1996, and opened its first restaurant in Bangalore. Since then it

has captured a dominant and significant share of the pizza market and has maintained an

impressive growth rate of over 40 per cent per annum. Pizza Hut now has 95 outlets across

24 cities in India; and employed nearly 4,000 people by end of 2004. Yum! has invested

about US$ 25 million in India so far; this is over and above investments made by

franchisees. Yum! Brands Inc is the owner of the Pizza Hut chain worldwide.

According to an article in Financial Express, the market size of the pizza segment is around

US$ 87 million and currently growing at the rate of 15 per cent to 17 per cent per annum.

According to Pizza Hut sources, most of their outlets are financially successful,

encouraging further expansion. In India, the average investment for each outlet is US$

275,000-335,000 and is borne by the franchisee.

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Pizza Hut India; Yum! Restaurants International: AT A GLANCE

• Pizza Hut: Serving from 134 outlets in more than 50 cities of India.

• A major player in the Indian fast food and beverage sector, holding about 50 per cent of

the organized pizza market.

• Factors for success: Offering value food, moving beyond metros, aggressive marketing

and tie-ups with local and popular brands, developing the local supply chain and

customizing product offerings.

• For Pizza Hut, India is one of the top 5 growth markets worldwide

2) NIRULA’S

Navis Capital Partners and Samir Kuckreja have completed the 100% acquisition of the

Nirula’s group of companies with effect from 30 June, 2006. Navis Capital Partners is an

eight year old private equity fund based in Malaysia. Navis currently manages US$500

million in capital commitments and it has interests in various sectors including hospitality,

food processing, car rental, outdoor media and others in eight countries across Asia.

Established in 1934, Nirula's today is a diversified group having a chain of Elegant

Business Hotels, Waiter Service Restaurants, Family Style Restaurants, Ice Cream Parlors,

Pastry Shops and Food Processing Plants in India. The chain with over 56 outlets operating

in 5 states successfully caters to the Indian palate of over 50,000 guests’ everyday for over

70 years

3) MC DONALD’S

McDonald's Corporation (McDonald's) operates fast food restaurants all over the world.

The company is the world's largest food service retailing chain, preparing and serving a

range of foods. All McDonald's restaurants offer a standard menu, which comprise food

items such as hamburgers, cheeseburgers, chicken sandwiches, French fries, salads, milk

shakes, desserts and ice cream sundaes. Some McDonald's restaurants offer additional food

items to suit local taste and preferences.

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The company also operates restaurants under the brand name 'Boston Market'. In fiscal

2006, the company operated 31,667 fast food restaurants in over 119 countries in the

following geographic segments: US; Europe; Asia Pacific, Middle East and Africa

(APMEA); Latin America and Canada.

McDonald's generates revenues through company operated restaurants and franchisee

restaurants. Of the company's total restaurants, over 8,000 are operated by the company and

over 18,000 are operated by franchisees. The remaining restaurants are operated by

affiliates. The company's revenue comprises sales from company operated restaurants and

fees as well as rent from franchisees and affiliates. Under the franchise arrangement, the

franchisees invest in the equipment, signage, seating and decor, while the company owns or

leases the land and building. Franchisees pay the company service fees and rent for

premises. A Service fee is set as a percentage of sales, while rent and other terms of

occupancy are stipulated in the franchise agreement, which is drawn for a period of 20

years.

The company and its franchisees as well as affiliates source purchase food, packaging,

equipment and other goods from approved suppliers. The company maintains quality

standards through assurance labs around the world. A quality assurance board, including

the company's technical, safety and supply chain specialists, provide guidance on all

aspects of food quality and safety.

4) DOMINO’S

Domino's Pizza India Ltd. was incorporated in March 1995 as the master franchisee for

India and Nepal, of Domino's Pizza International Inc., of USA. Since inception, Domino's

Pizza India Ltd. has proceeded to become one of the largest and fastest growing

international food chains in South Asia. The first Domino's Pizza store in India opened in

January 1996, at New Delhi. Today, Domino's Pizza India has grown into a countrywide

network around 148 outlets in 39 cities and is the leader in the fast food delivery segment.

Ever since it was established, Domino's Pizza India has maintained its position of market

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leadership with its constant product innovation and maintenance of stringent service

standards. More importantly, it has established a reputation for being a home delivery

specialist capable of delivering its pizzas within 30 minutes to its community of loyal

customers from its entire chain of stores around the country. In fact, Domino's was the first

one to start this facility for its customers.

The company will add 45-50 stores to the list each year. US based Domino’s Pizza is

eyeing a five percent increase its share in the estimated Rs. 500 crore Indian Pizza market

during the next fiscal and plans to add about 50 outlets every year.

Domino’s recorded a 50 percent growth over the last fiscal, while it witnessed a 30 percent

increase in same store growth. It has a 60 percent share in the pizza delivery space.

20%

10%

22%24%

24%

Market Shareof Major Players in Indian Fast Food Industry

Mc Donald's KFC Pizza Hut Domino's Others

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FINDINGS AND ANALYSIS OF THE INDUSTRY

DEMAND AND SUPPLY

In past decade there is a sharp increase in the demand of fast food in the country. Following

are some of the reasons for the same.

Substantial growth in per capita income over the last 15 years, has led to growing

demand for food. In 1993, only the top 15 per cent of India’s rural population spent

more fast food than on cereals and pulses. In 2004, this had risen to over 30 per

cent.

Changing household structure in the country is also leading to high demand of fast

food. The trend of families with 1 or 2 children, both the parents working and

scarcity of time has led to rise in demand for readymade fast food snacks.

Fast food is especially popular among adolescents, who on average visit a fast-food

outlet quite frequently. In India large proportion of population is under 30 which is

also a major factor for high demand for fast food.

Younger educated people are more aware and more brand conscious. They prefer

going to established branded fast food outlets.

With more and more MNCs coming to India and the influence of west also leading

to increase in consumption of fast food.

With government relaxing it’s FDI policies in the food sector, more and more branded fast

food chains like Mc Donald’s, Pizza Hut are coming and opening their outlets in the

country. Thus the supply of fast food has also increased.

But the increase in demand is far more than increase in supply. This is leading to increase

in equilibrium price of the fast food as shown in the graph below.

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Here the demand curve is shifted towards right from D to D1 and the supply curve is also

shifted towards right from S to S1. Shift in demand curve is more than shift in supply curve

thus the equilibrium price has increased from P to P1.

CONSUMER BEHAVIOR AND ANALYSIS

Every human being is unique and consequently they differ in their likes and dislikes. This

is true for their choice of food as well. The main attributes regarding traditional fast food

provision such as ‘taste’, ‘cleanliness’, ‘convenience’, ‘speed’ and ‘predictability’ are still

ranked high in the respondent’s recall. However, other attributes such as ‘healthiness’,

‘provision of choice’ and ‘friendly staff’ are relevant to consumers when thinking of

alternative outlets. Therefore, consumers perceive that attributes of the traditional fast food

retailer no longer meet their discerning expectations specially those belonging to higher

income brackets.

It can be inferred that a significant population of them do consider the side effect of the

food they take. This has to be taken seriously by the fast food companies and we believe

this is actually an opportunity by the fast food companies because at present the fast food

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industry is catering to that percentage(which is again significantly urban) of the Indian

population who have scarcity of time and are actually making a trade off with the hygiene

factor and therefore if the fast food companies can actually change their image to a health

friendly one then we think there is going to be a dramatic change in the profits of the fast

food company. What we observed from our interaction with the people is that fast food is

still not perceived as a full meal by a large percentage of the population. So we think fast

food companies should undertake huge advertising campaigns to create a positive image

for their and adjust themselves according to the Indian eating habits.

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CHANGE IN CONSUMER BEHAVIOR DUE TO FOLLOWING EFFECT

Fast Food Industry-Growth Factors (Income effect, Substitution Effect)

Increase in Growth in the Fast Food Industry

The reasons for the sudden growth in the Fast food segment are

1. Increase in consumer Income2. Exposure to western cuisine.3. Rising number of nuclear families4. Growth in the number of employed women is having a significant impact.5. Increase in Marginal utility of time. Lack of time is shaping consumer preferences

in India.

Implication on the Food Industry

While the projected economic prosperity is likely to reduce share of food in overall consumption expenditure, processed food will take a bigger share within the food pie. The increase in the population will aid this shift towards processed food with increasing demand for convenience from these consumer sets.

As a result of the trend, all the international food players like Pizza Hut, Dominos, McDonalds and KFC are investing huge amount of money to grab a share of this highly lucrative market.

Real Facts and Figures-Income of Urban India

Between 2005-06 and 2013-14, the number of households with annual income greater than Rs 12 Lakh (USD 30,000) will grow nearly four fold. Within this band, there are 3.4 Mn households with an income in excess of Rs 24 Lakh (~USD 60,000) at 2005-06 prices. This segment is likely to include more than 15 Mn people, greater than the population of Denmark, Finland and Ireland put together. By 2014, the middle-high income band will consist of a substantial 11 Mn households. At a median income of USD 22500, this segment represents a total income pool of nearly USD 250 Bn. With spending patterns similar to the high income group; this segment represents a very significant chunk of consumer base. Seeing this rise the Fast Food Industry mainly targeted the Middle, Middle-high and High Income groups.

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Substitution Effect

Assuming that the income of the consumer remains constant if price of any product changes, consumer with the same degree of satisfaction purchases more quantity of 1 product and less quantity of other. This is the basic essence of Substitution effect.

As per as the Fast Food industry in India is concerned if we take Pizza Hut, Dominos, Mc Donald and KFC as the four samples and base our discussion on it we will see that the range of products Pizza hut and Dominos offers are alike and that which Mc Donald and KFC offers are alike.

So we would base our comparison on them as per the product offerings.

EXHIBIT 1

Products offered by Mc-Donald’s Products offered by KFC

1.Chicken Mac Grill - Rs 25 1.Chicken Snacker-Rs25 2.Mac Chicken Burger- Rs 39 2.Chicken Wings-RS 353.Chicken Maharaja Mac-Rs 55 3.Fried Chicken-Rs 504.Chicken Salsa Wrap-Rs 79 4.Chicken Zinger-Rs 895.Fiet-O-Fish-Rs 55 5.Kentucky FriedChicken-Rs 50

If we compare and contrast the items offered by both the outlets we see that the prices are almost comparable. Certain features might be present in each product due to which prices vary by marginal amount.

Let us suppose that a consumer has Rs 100 to spend on 1 particular day and he likes Fried Chicken of KFC the most followed by Chicken Mac Grill. With this budget he can afford 2 pieces of fried chicken. But if the price of fried chicken shoots up to 90(say) then with the same budget constraint he goes to Mc Donald and prefers to have 2-3 pieces of Chicken Mac Grill followed by his third preference which might be chicken snacker from KFC(say).So If price of Fried Chicken becomes 75 instead of 90 he prefers to have 1 piece of Fried chicken from KFC followed by 1 piece of Chicken Mc Grill from Mc Donald.

So the consumer basically tries to consume more amount of 1 product and compensate for the loss in consumption in another product, his overall budget constraint and satisfaction remaining the same. This is the concept of substitution effect.

Because of substitution effect there is always high competition between these food chains for pricing a product of the same type. They might loose out their business completely if due to price increase in 1 particular type of product consumer shifts his focus on a different product item of a different food chain.

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Alternate Substitution

With restaurants today changing their focus from pure authentic cuisine to snacks and beverages of various types consumers instead of going directly to fast food joints can prefer going to restaurants and have the necessary tit-bits along with proper dinner/lunch.So this indecision of shifting from having exclusive snacks to something for which they don’t need to go out of home twice(if at all they have planned to eat outside) might act as a threat to the existing Fast food chains.

Complementary Goods

The graph illustrates that if there is an increase in price in 1 product it will lead to a decrease in demand in the other product and vice versa where the products are close complements of each other.

Complementary goods for Fast Food industry

The possible complementary goods for fast food industry are

1. Burgers and Burger buns(which make up products like Chicken Mac Grill,Chicken Snacker etc)2. Small pieces of boneless chicken and salsa wraps.3. Combination of snacks and beverages for special value added combo packs etc.

For each of the cases as per the exhibit 1 if the price of the burgers which are put inside the buns increase it would result in an increase in the entire product be it Chicken Mac Grill burger or Chicken Maharaja Mac or Chicken Snacker. So consumers with the same budget constraint would try to experiment a close substitute in the same price range. So these burgers and the burger buns are complementary goods.

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http://en.wikipedia.org/wiki/File:Supply-and-demand.svg


INTRODUCTION TO MARKET STRUCTURE

In economics, market structure (also known as market form) describes the state of a

market with respect to competition.

Perfect competition, in which the market consists of a very large number of firms

producing a homogeneous product.

Monopolistic competition, also called competitive market, where there are a large

number of independent firms which have a very small proportion of the market

share.

Oligopoly, in which a market is dominated by a small number of firms which own

more than 40% of the market share.

Monopoly, where there is only one provider of a product or service.

Natural monopoly, a monopoly in which economies of scale cause efficiency to

increase continuously with the size of the firm.

The main criteria by which one can distinguish between different market structures are: the

number and size of producers and consumers in the market, the type of goods and services.

being traded, and the degree to which information can flow freely.

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http://en.wikipedia.org/wiki/Information

http://en.wikipedia.org/wiki/Service_(economics)

http://en.wikipedia.org/wiki/Product_(business)

http://en.wikipedia.org/wiki/Consumer

http://en.wikipedia.org/wiki/Economies_of_scale

http://en.wikipedia.org/wiki/Natural_monopoly

http://en.wikipedia.org/wiki/Monopoly

http://en.wikipedia.org/wiki/Oligopoly

http://en.wikipedia.org/wiki/Monopolistic_competition

http://en.wikipedia.org/wiki/Perfect_competition


Perfect Competition

A perfectly competitive market refers to a market which adheres to certain criteria, and is used to benchmark how competitive our current markets are. We make a few assumptions when observing perfect markets, most notably we assume all firms want to maximize profit.

Assumptions

Homogeneous Products Price Taking Free Entry & Exit Barriers

If all these assumptions are valid them we can say that the market enjoys “Perfect Competition”.

In a perfectly competitive market products must be homogeneous, this means products are identical. This is very important, introducing brand names, or labeling a product organic will interfere with the price. This encourages producers to price “fairly”, which should lead to an increase in consumer welfare.

Price taking means that, each firm sells very small proportion of total market share so firm has no influence over the market and thus takes the price set by the market.

It is important that there are no barriers to entry or exit of a market, barriers to entry can cause monopolies to occur (single seller markets). This could be in the form of legislation, high start up costs, and predatory pricing. Another barrier to entry is health and safety, the training involved, takes time and is a cost. Barriers to exit could be in the form of legislation, for example workers benefits and pensions, it may be cheaper to let the business struggle on, instead of getting rid of workers/replacing workers to produce a new product. Another barrier to exit is high “sunk costs”, costs that cannot be recuperated, an example of this is the nuclear power industry, the cost of decommissioning a factory is immense.

Another feature of a perfectly competitive market is labour mobility; this means if an increase in demand for a good occurs, then people can produce it. This means they must be able to get to work (transport), and if need be, relocate (affordable housing).

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Another feature is perfect information; all consumers must know about all suppliers, the prices must be clear, as must the contents. This allows consumers to make the best choice when deciding between producers.

Picking Quantity under Perfect Competition

For profit maximization a firm will choose quantity Q* at a price P* where

Marginal revenue = Marginal Cost.

Is there a perfect competition in fast food Industry?

The first assumption of the perfect competition model assumes that the products are homogeneous but when considering the fast food industry we have a very diverse product range i.e. the products are not homogenous rather they are similar.

For example consider the major players in the fast food industry

Pizza Hut Dominos Mc Donald`s K F C

All these players serve fast food products but there products are not homogeneous rather they are similar. Pizza hut and Dominos both serve pizza the product is similar but the pizza is not identical. Similar is the case with K F C and Mc Donald`s they both serve fast food but the product is not homogeneous (refer exhibit). As there exist diversity in the products which the players in the fast food industry have to offer we can say that the products are not homogeneous. An example of perfect competition would be “Agriculture sector “, where the products are homogeneous

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As the Products offered by the fast food players are similar but not identical we can say that the fast food industry does not have Perfect Competition. Rather there exists a “Monopolistic Competition” in this industry as the products are similar but not identical.

Exhibit

Products offered by KFC Products offered by Mc Donald`s

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Monopolistic competition

A monopolistically competitive firm acts like a monopolist in that the firm is able to

influence the market price of its product by altering the rate of production of the product.

Unlike in perfect competition, monopolistically competitive firms produce products that are

not perfect substitutes. As such, brand X's product, which is different (or at least perceived

to be different) from all other brands' products, is available from only a single producer. In

the short-run, the monopolistically competitive firm can exploit the heterogeneity of the

market to reap positive economic profit (i.e. the rate of return is greater than the rate

required to compensate debt and equity holders for the risk of investing in the firm). One

possible effect of advertising on a firm's long run average cost curve when earning an

economic profit in the short run is to raise the curve.

In the long-run, however, whatever distinguishing characteristic that enables one firm to

reap monopoly profits will be duplicated by competing firms. This competition will drive

the price of the product down and, in the long-run; the monopolistically competitive firm

will make zero economic profit (i.e. a rate of return equal to the rate required to

compensate debt and equity holders for the risk of investing in the firm).

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Unlike in perfect competition, the monopolistically competitive firm does not produce at

the lowest attainable average total cost. Instead, the firm produces at an inefficient output

level, reaping more in additional revenue than it incurs in additional cost versus the

efficient output level.

Oligopoly

An oligopoly is a market form in which a market or industry is dominated by a small

number of sellers (oligopolists). Because there are few participants in this type of market,

each oligopolist is aware of the actions of the others. The decisions of one firm influence,

and are influenced by the decisions of other firms. Strategic planning by oligopolists

always involves taking into account the likely responses of the other market participants.

This causes oligopolistic markets and industries to be at the highest risk for collusion.

Oligopolistic competition can give rise to a wide range of different outcomes. In some

situations, the firms may collude to raise prices and restrict production in the same way as a

monopoly. Where there is a formal agreement for such collusion, this is known as a cartel.

Firms often collude in an attempt to stabilise unstable markets, so as to reduce the risks

inherent in these markets for investment and product development. There are legal

restrictions on such collusion in most countries. There does not have to be a formal

agreement for collusion to take place (although for the act to be illegal there must be a real

communication between companies) - for example, in some industries, there may be an

acknowledged market leader which informally sets prices to which other producers

respond, known as price leadership.

In other situations, competition between sellers in an oligopoly can be fierce, with

relatively low prices and high production. This could lead to an efficient outcome

approaching perfect competition. The competition in an oligopoly can be greater than when

there are more firms in an industry if, for example, the firms were only regionally based

and didn't compete directly with each other.

22


http://en.wikipedia.org/wiki/Price_leadership

http://en.wikipedia.org/wiki/Collusion

http://en.wikipedia.org/wiki/Cartel



http://en.wikipedia.org/wiki/Competition


http://en.wikipedia.org/wiki/Strategic_planning

http://en.wikipedia.org/wiki/Industry

http://en.wikipedia.org/wiki/Market

http://en.wikipedia.org/wiki/Market_form


In an oligopoly, firms operate under imperfect competition and a kinked demand curve

which reflects inelasticity below market price and elasticity above market price, the product

or service firms offer, are differentiated and barriers to entry are strong. Following from the

fierce price competitiveness created by this sticky-upward demand curve, firms utilize non-

price competition in order to accrue greater revenue and market share.

The motivation behind this kinked is the idea that in an oligopolistic or monopolistically

competitive market, firms will not raise their prices because even a small price increase

will lose many customers. This is because competitors will generally ignore price

increases, with the hope of gaining a larger market share as a result of now having

comparatively lower prices. However, even a large price decrease will gain only a few

customers because such an action will begin a price war with other firms. The curve is

therefore more price-elastic for price increases and less so for price decreases. Firms will

often enter the industry in the long run.

23

http://en.wikipedia.org/wiki/Non-price_competition

http://en.wikipedia.org/wiki/Non-price_competition

http://en.wikipedia.org/wiki/Sticky_(economics)

http://en.wikipedia.org/wiki/Kinked_demand

http://en.wikipedia.org/wiki/Imperfect_competition


Monopoly

A monopoly exists when a specific individual or enterprise has sufficient control over a

particular product or service to determine significantly the terms on which other individuals

shall have access to it. Monopolies are thus characterized by a lack of economic

competition for the good or service that they provide and a lack of viable substitute goods.

Likewise, a monopoly should be distinguished from a cartel (a form of oligopoly), in which

several providers act together to coordinate services, prices or sale of goods.

A government-granted monopoly or legal monopoly is sanctioned by the state, often to

provide an incentive to invest in a risky venture or enrich a domestic constituency. A

monopoly sells a lower quantity of goods at a higher price than firms would in a purely

competitive market. The monopoly will secure monopoly profits by appropriating some or

all security of the stop consumer surplus. Since the loss in consumer surplus is higher than

the monopolist's gain, this creates deadweight loss, which is inefficient and a form of

market failure.

It is often argued that monopolies tend to become less efficient and innovative over time,

becoming "complacent giants", because they do not have to be efficient or innovative to

compete in the marketplace. Sometimes this very loss of psychology efficiency can raise a

potential competitor's value enough to overcome market entry barriers, or provide incentive

for research and investment into new alternatives.

Some argue that it can be good to allow a firm to attempt to monopolize a market, since

practices such as dumping can benefit consumers in the short term; and once the firm

grows too big, it can be dealt with via regulation. When monopolies are not broken through

the open market, often a government will step in, either to regulate the monopoly, turn it

into a publicly owned monopoly environment, or forcibly break it up (see Antitrust law).

Public utilities, often being natural filiations and less susceptible to efficient breakup, are

often strongly regulated or publicly owned.

24

http://en.wikipedia.org/wiki/Public_utility

http://en.wikipedia.org/wiki/Antitrust

http://en.wikipedia.org/wiki/Regulation

http://en.wikipedia.org/wiki/Dumping_(pricing_policy)



http://en.wikipedia.org/wiki/Interest_group

http://en.wikipedia.org/wiki/Oligopoly

http://en.wikipedia.org/wiki/Cartel

http://en.wikipedia.org/wiki/Substitute_good

http://en.wikipedia.org/wiki/Good_(economics)


FAST FOOD INDUSTRY: A MONOPOLISTIC COMPETITION

The markets, which combine both the price making of a monopoly with a large number

of suppliers and free- entry conditions of pure competition are the most popular and wide

spread ones. Among these are almost all retail stores like record shops and clothing shops,

food facilities like restaurants and fast-food enterprises such as Mc Donald’s, Pizza Hut,

KFC and producers of non-alcoholic beverages like Coca-Cola or Pepsi and a great variety

of others. Because such markets combine the features of monopoly and competition, they

are called monopolistically competitive.

Food Industry is a monopolistic competition Industry as there are large number of players,

however number of established players is small. Also the barriers to entry are few. These

food chains like Pizza Hut, KFC, Domino’s provide slightly differentiated product but the

major differentiation occurs on brand names, pricing strategies and value added services. In

this type of market structure, there is greater choice for the consumer.

These are the following characteristics of the fast food Industry under the monopolistic

structure.

1. Sellers are price makers

The reason for this is that unlike perfect competition where the product is

identical, there is a slightly differentiated or heterogeneous product. Even if some

firm has a monopolistic right on its trade mark and other firms are not allowed to

produce the identical commodity, they have the opportunity to produce similar, but

slightly different product and compete with it on the market. The greater is the

difference of the firm’s product from other one’s (can be based even on location),

the greater is the monopolistic power of that firm and the less elastic is the demand

curve for its output. This feature enables it to charge a slightly different price relative

to its competitors without loosing all its customers. Product differentiation leads to the

potentiality for a firm to affect the price for the good or service it produces. Although

this ability is very limited and depends on the degree of differentiation, a

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monopolistically competitive firm faces the downward sloping demand curve like

a monopoly or oligopoly

Product differentiation makes this model different from pure competition model.

Economic rivalry takes the form of non-price competition:

1. Product differentiation may be physical (qualitative).

2. Services and conditions accompanying the sale of the product are important

aspects of product differentiation.

3. Location is another type of differentiation.

4. Brand names, advertising and packaging lead to perceived differences.

5. Product differentiation allows producers to have some control over the prices of

their products.

2. Sellers do not behave strategically. As there is a large (like in perfect

competition) number of small firms, we assume, that each of them does not have a

noticeable effect on the price decision of other producers, while changing the price for

its output. Thus, firms do not take into consideration the expectation of a reaction of

their competitors to their price and output decision. Buyers & sellers are independently

acting.

3. All participants have perfect information.

4. No or very few entry barriers on the market. Neither technological nor legal barriers

to entry exist. This feature is similar to the perfect competition market. Firm's goal is

to take the pure competition’s demand curve and shift it in the direction of the

monopolist’s demand curve. It does this through price discrimination.

PRICING STRATEGY ADOPTED BY THE MAJOR PLAYERS:-

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Pricing strategy is extremely important for succeeding in price sensitive Indian market. Pricing includes the list price, the discount functions available, the financing options available etc. It should also take into the consideration the probable reaction from the competitor to the pricing strategy. The price must take into consideration the appropriate demand-supply equation.

Mc DONALD’S PRICING STRATEGY

VALUE PRICING. This approach is used where external factors such as recession or increased competition force companies to provide 'value' products and services to retain sales. Happy Price menu – Rs 20. Economical – Rs 49. (save Rs 11) Mc Chicken & Mc veggie meal – Rs 75, Rs 65 (save Rs 15) Happy meal for kids - Rs 69, Rs 99, Rs 109.

BUNDLING PRICE STRATEGY. Combining several products in the same package. Big saving Meals – Combos Rs 109 – Rs 119 (save Rs 36).

VALUE LADDER STRATEGY. Customer can try low priced entry level product and gradually move to higher priced products. Started offering value meals in a range of prices. (Rs 29 – Rs 89, in Rs 10

increments). For example: - A customer can start with Mc AlooTikki (Rs 25) and gradually

move to Mc Veggie (Rs 75).

80 – 20 PRICE MENU BOARD STRATEGY. Product description 80% visual - 20% descriptive. Easier for the customer to understand what 29,39,49,59,69,79,89 Rupee options are.

IMPORTANT REASONS FOR MC DONALD’S PRICE FLEXIBILITY

Well established supply chain management, which ensures efficiency and speed in distribution.

Advanced food processing technology. Established Supplier Base (Vista Processed Foods Pvt. Ltd, supplier of chicken &

vegetables, Dynamix Diary, Supplier of Cheese). Bulk buying, long-term vendor contracts, and manufacturing efficiencies.

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PIZZA HUT & DOMMINO’S (A COMPARISION)

The organized Pizza market in India is worth Rs 600 Crore. The dominant players in the market are Pizza Hut and Dommino’s whose market share are around 45% and 35% respectively.

Pizza Hut45%

Dommino's35%

Others20%

Pizza Market in India

PRICING STRATEGIES OF PIZZA HUT :- HIGH/LOW RETAIL PRICING STRATEGY

Such pricing strategy will help segment the market. Different groups of customers are willing to pay different prices for the same

product. Targeting the rich and upper middle class people.

PRICE SIGNALING STRATEGY Pizza Hut sets a high initial price for its products. Organized restaurant system with great ambiences and amusement. Emphasize product and service quality. Pioneered the practice of advertising and promotion in the fast food industry.

PRICING STRATEGIES OF DOMMINO’S :- VALUE PRICING.

This approach is used where external factors such as recession or increased competition force companies to provide 'value' products and services to retain sales. Claims to price its products so as the customer gets ‘Value for Money’. Trying to attract the middle and lower middle class people who are interested to

spend their money on pizza but in low price.

'Fun Meal for 4’ pack, offering four pizzas at the rate of Rs 180. This means charge of one pizza costs just Rs 45 (Economical by Indian standards).

Introduced price cuts, discounts and freebies to attract the customers. In 1998, Domino’s introduced the Pizza Mania scheme where it offered

28


a large pizza for just Rs.129.

EMPLOYS PUSH MARKET STRATEGY:- Uses sales force, trade promotion, money or other means to induce intermediaries

to carry promote and sell its products to end users. Most of the sales are through home delivery of pizzas (30 Minutes Home

Delivery Concept). 60% of revenues from home delivery of pizzas and 40% from the restaurant

sales.

PRODUCT PIZZA HUT (Price in Rs) DOMMINO’S (Price in Rs)2 Medium Size Veg Pizzas 259 200

2 Medium Size Non-Veg Pizzas 299 245

100-20024%

200-50060%

Above

50016%

Price Range & Percentage of Customers

From the above Pie Chart it is clear that majority of customers are willing to spend money in the price range of Rs 200-500 (i.e 60 %) and minority of them says that they are willing to spend money in the price range of Rs 100-200 (i.e 24%) in a fast food restaurant.

PRICING STRATEGIES OF KFC:-

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PRICE SKIMMING. Charging a high price because of substantial competitive advantage. The high price

tends to attract new competitors into the market, and the price inevitably falls due to increased supply.

The pricing strategy is to gain maximum profits before any competitor enters in the market.

PREMIUM PRICING. Using a high price when there is uniqueness about the product or service. This

approach is used where a substantial competitive advantage exists. KFC holds the First-Mover advantage into the ‘Non-Veg Food’ specialty food

segment. Established Brand name. Little rivalry with similar fast-food chains in India. The primary reason is that their core products are different. For example a full meal at KFC costs around Rs 100 whereas a full meal at Pizza Hut Costs over Rs 300.

KFC India is a leading Chicken and Fast food restaurant offers varieties of Fried chicken, Hot and crispy chicken, 'Kentucky fried chicken'. KFC Menu card includes 'Chicken Delight' and 'Zinger Burger' and 'Share a Bucket' and 'Boneless Chicken' and Veg options.

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GOVERNMENT REGULATION

International fast food brands spice up their plans of entering India. Many like UK brand

Dixy Chicken and pizza outlet Papa John's made their foray recently, Cinnabon and

Barnie's will open their first store this year and a host of other brands, including SumoSalad

and Panda Express, are scouting for local partners to tempt the Indian palate.

Fast-food retail chains such as KFC, McDonald's, Domino's, Pizza Hut and others are re-

learning marketing lessons and segmenting their product portfolio to capture Indian

consumers across diverse income levels and lifestyles. The strategy is an attempt by some

top retailers to tone up profit margins with a multi-layered product portfolio that addresses

the aspirational need of consumers willing to splurge while meeting the basic requirement

at the bottom-end.

With cut-throat competition to set up standalone outlets at busy marketplaces getting

tougher, fast-food chains have come up with a new recipe for success takeover and manage

canteens across schools, colleges and corporate offices.

With global supermarket majors such as Wal-Mart,Tesco and Carrefour among others

increasing sourcing of processed foods from the country, it makes monetary sense for local

companies to enter/expand in this arena. In fact, Food Processing Minister Subhodh Kant

Sahai had said at the beginning of the year that foreign retail giants are willing to buy as

much as USD30 billion worth of processed food from the country.

FDI IN INDIA

Foreign direct investment of around US$1 billion has already been approved in

India's food processing industry since 1991.

Changing lifestyles, breakdown of the joint-family system, increasing number of

working wives and Western influence (via TV channels) in the urban areas are

fuelling a demand for packaged foods.

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India already has all the requirements for a head-start in the food-processing

industry. Basic materials such as food grains, pulses, vegetables and meats (non-

beef) can be sourced locally or easily imported if local availability is inadequate.

Foreign investors can own 100 per cent equity in plants they set up. However, it is

advisable to take a local partner.

Many Indian firms are eagerly seeking foreign partners for joint-ventures to avail

of their technological advantage.

Supermarkets are just beginning to appear in India's big cities and this is the time

for international chains to set a foothold. Competition will only increase with

time.

There has been some civilized resistance from ultra-nationalistic quarters of

opinion to foreign food products. This resistance will be less if a local partner is

involved.

India's liberal intelligentsia is gradually building the opinion that foreign

investments in the processed food sector will benefit rural agriculture, thus beating

the nationalists with their own slogans. The liberal intelligentsia is gradually

prevailing.

Relaxation in rules and regulations: with the economic liberalization of 1991, most of the

tariff and non-tariff barriers from the Indian boundaries are either removed or minimized.

This helped significantly the MNC’s to enter in the country. The Confederation of Indian

Industry (CII) has estimated that the fast food-processing sector has the potential of

attracting USD 33 billion of investment in 10 years and generates employment of 9 million

person-days. The Government has formulated and implemented several Plan Schemes to

provide financial assistance for setting up and modernizing fast food processing units,

creation of infrastructure, support for research and development and human resource

development in addition to other promotional measures to encourage the growth of the

processed food sector.

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Investments

The food-processing sector needs investment of about USD 28-35 billion to meet the

changing food demands in India, according to industry estimates. The outlay for the food-

processing segment has been increased from USD 19.5m in '04-05 to USD 41.4 million in

the next year, more than twice the earlier amount.

Foreign direct investment (FDI) in the country's food sector is poised to hit the USD 3-

billion mark. In the last one year alone, FDI approvals in food processing have doubled.

Add to this the USD 55 million that has been invested in sugar and cooking oil companies,

and you can see how the changing diet of upwardly mobile India along with the new mega

food parks are becoming dishy to overseas investors. Foreign direct investment in food

already beats the money being pumped into the far-more-glamorous hotels and tourism

industry.

According to latest industry ministry data, the cumulative FDI inflow in food processing

reached USD 2,804 million in March '06. In '05-06, the sector received approvals worth

USD 41million. This figure is almost double the USD 22million approved in '04-05.

Foreign investors are keen in investing in the country. Recently, India has received an

encouraging response from investors in the UK for establishing joint quality control testing

facilities for agriculture products and establishing cold storage facilities in the country,

Minister of State for Food Processing Industries Subodh Kant Sahai said.

Why Global Retailers are Interested in fast food industry in India?

More specifically the global players are interested in India due to following reasons:

I) Strategic Location & Geography: India enjoys unique geographical advantage. It is

strategically located in Asia with access to all leading markets of the World. With total area

of 32, 87,590 Sq. Km, Coastline of 7000 Km and borders with six countries India becomes

most promising destination for the foreign direct investment.

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II) Versatile Demographics: Demographically with a population of more than 1.1 billion

and diverse culture, India is a land of all seasons. India presents a real cosmopolitan

population with diverse religions and culture. Hinduism, Buddhism, Jainism, Sikhism,

Christianity and Islam are the main religions of India. This variety of religions provides

India with a diverse culture. Besides, India has versatile population of urban and rural

nature. This versatility of population makes India a ready made market for foreign retailers.

III) Vast growing Economy: On economic front, India the largest democracy of the

world, have a stable Govt. with robust programme of economic reforms. India with a

foreign exchange reserve of more than US $120 billion, FDI of more than US $9.9

billion ,average GDP growth of more than 7% per annum, rupee appreciation Vs U.S dollar

of more than 2% in last two years and with a rapidly growing investment in infrastructure

has all the ingredients of a emerging economic super power. India is tipped to be third

largest economy in terms of GDP by the year 2050.

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CONCLUSION

From onion rings to double cheeseburgers, fast food is one of the world's fastest growing

food types.

The fast food industry came into existence primarily to address the problems of urban

working class. Problems such as scarcity of time, fast life, double income families. It also

serves the purpose of outing many times. In India till some years ago fast food industry was

almost synonymous with McDonald’s. But of late with the entry of many other brands the

fast food sector in India is maturing. If we look at the present trend more and more people

are shifting to cities and towns are getting more urbanized and fast food industry as a whole

is very well positioned to take advantage of this opportunity. The fast food industry in India

is ready to take off. It’s in the maturing phase now where the margins are very low and as

result the profits are very low. Most of the industries go through this phase. After this phase

they can really charge a premium for their offerings.

Witnessing value growth of over 20% in 2006, India saw the most dynamic growth within

fast food in Asia Pacific during 2006, with most other countries witnessing single-digit

growth. Increased availability, novelty in terms of products and offerings, and convenience

were all factors driving fast food growth in India during 2006. Brands such as McDonald’s

and KFC are seen as family venues in India and most Indians attach aspiration value to

them. With such outlets in their infancy and given the absence of any significant campaigns

connecting ill-health and fast food, growth remains strong for this sector in India.

The fast food industry is investing in its future by going for brand building. It’s trying to

position itself as a possible healthy alternative. Also the main issue with the fast food

industry is that people don’t perceive it to be complete food and take it as a sort of snacks.

The Fast food industry has to work on changing this image from a place where you go for

an outing or for a snack to a full meal provider.KFC has already started this trend. Going

forward the strategy of the fast food players should be to have a pan India presence ( i.e in

major towns at least). That will make sure that they can use economies of scale. The main

35


challenge for the fast food industry is to change its brand image and make it more

acceptable to the people residing in tier 2 cities. A fast rising economy, an increasingly

urbanizing India and the rise in disposable income should ensure a rosy future for the fast

food industry.

With a constant value CAGR of 8% between 2006-2011, consumer foodservice in India is

predicted to witness one of the fastest growth rates in Asia Pacific. During the same period,

more than 500,000 outlets are predicted to be added, taking the total number of outlets in

India close to 2 billion and second only to China in this region. While new domestic

players are likely to make their appearance, a host of international companies are also

expected to enter India. Some of the prominent brands which are predicted to make their

foray include Starbucks, Burger King and Church’s Chicken. The existing brands, such as

Café Coffee Day, McDonald’s, KFC etc, have also lined up expansion plans to move

beyond the metro cities. As players continue to build strong regional brands, the

franchising of outlets is expected to become more commonplace over the forecast period.

MAJOR PLAYERS IN THE INDIAN FAST FOOD INDUSTRY

Company Number of Outlets Cities Covered

Mc Donald’s 160 35

Pizza Hut 137 36

Dommino’s 274 55

KFC 78 14

Sub Way 145 26

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BIBLIOGRAPHY

www.emeraldinsight.org

www.wikipedia.org

www.google.com

www.tribuneindia.com/2003/20030109/biz.htm

www.ers.usda.gov/Briefing/FoodMarketStructures/foodretailing.htm

www.indiastockmarket.com/IiI/News/100906.asp

www.tsmg.com

www.bnet.com

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http://www.indiastockmarket.com/IiI/News/100906.asp

http://www.ers.usda.gov/Briefing/FoodMarketStructures/foodretailing.htm

http://www.tribuneindia.com/2003/20030109/biz.htm

http://www.google.com/

http://www.wikipedia.org/

http://www.emeraldinsight.org/


CONTRIBUTION OF MEMBERS

Every member in the group contributed to this project.

Amit kumar Singh- Finding & analysis of Industry- Demand & Supply & Consumer

Behaviour

Sumalya Chakraborty- Income effect, Substitution Effect, Complementary Goods.

Saurabh Kumar Dudani- Pricing Strategy adopted by major players- McDonald’s, Pizza

Hut, Dominos & KFC

Ankur Agarwal- Perfect Competition, Is there perfect competition in Fast food indistry.

Piyush Agarwal- Introduction, Company Details, Monopolistic Competition, Oligopoly,

Monopoly.

Mrinal Mathur- Government Regulations- Fdi In India, Investments

Edited by: Piyush Agarwal & Ankur Agarwal

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