Fall 2016 PM101 Team 5 P1 Final Report

Team 5Ohio University College of Business

513.484.8447Copeland Hall

fax. 513.922.8798Athens, Ohio 45701

[email protected]

September 19, 2016

Tammy Reynolds, Brandt Connor, Xiaohu Deng, Nadège Levallet Copeland & Associates2 N Court StreetAthens, Ohio 45701

Tammy Reynolds, Brandt Connor, Xiaohu Deng, Nadège Levallet:

Subject: Analysis of the Quick Service Restaurant Industry

As requested by the senior partners of Copeland Associates, our team has performed an analysis of the Quick Service Restaurant Industry and prepared a report. This report contains an external and internal examination of the operating industry as a whole. Through our findings, we were able to identify the key success factors and obstacles quick service restaurants will encounter now and in the future.

The key success factors and obstacles for this industry were carefully considered with criteria that include:

• A breakdown of market share data, three company analysis, competition and the overall industry knowledge.

• The significance of expanding into large emerging markets, such as China and India.

• Utilize strong exclusive partnerships with major sporting events.

• Convenience of partnering with third party delivery services.

Throughout this report, our research consisted of periodicals, articles and online resources. To support our data, the appendices provided go into detail to underline key guidelines that contribute to our success factors. These resources and appendices will help us further our arguments regarding key success factors in the Quick Service Restaurant Industry.

Thank you for the opportunity to research the Quick Service Restaurant Industry. We are pleased to identify key success factors and information about the industry as a whole. If you have any questions about the report or future projects, please contact us at 513-484-8447 or email us at [email protected].

Team 5Jamie Seger Sarah Spirer Maddie Kubaszewski Isaac Bush Eric Winjum

Team 5

Isaac Bush Madison Kubaszewski Jamie Seger

Sarah Spirer Eric Winjum

Executive Summary

Quick service restaurants make up the largest segment in the Food Service Industry. The purpose of this report is to understand overall operational concepts. Research has proven this industry to have various trends, competitors, segmentation among restaurants, internal and external operating influences, and three key success factors. To satisfy customer’s wants and needs, QSRs are constantly evolving with new ideas, new competitors, and new trends. To continue being a successful industry, factors include expanding into emerging markets, such as China and India, strategic alliances with major sporting venues, and partnering with third party delivery services. Our research analyzes the following fields.

Market Segmentation:

- The five most successful market segments include burgers, pizza, chicken, Mexican, and sandwiches.

- Their market shares are as follows: Burgers 30%, Pizza 15%, Sandwich 12%, Chicken 8%, Mexican 7%.

Expansion into China and India:

- Quick service restaurants are looking for new outlets to increase revenue through emerging markets that offer wider growth and profit.

- In order to adapt in new markets, QSRs must utilize smart franchising techniques, reliable suppliers, and the ability to localize their menu.

Market Exclusivity through Major Sporting Events

- With the rapid decline of traditional media outlets, leading brands in this industry are finding success through the use of partnerships with sporting events.

- The leading QSR restaurants make alliances with established sports that have an abundance of viewers.

- Free media exposure shapes brand image and brand visibility.

Partnering with Third-party Delivery Service:

- Our research shoes, delivery is the number one request from customers.

- Companies partner with third party services to assist restaurants that did not previously offer delivery.

Our findings express economic and health trends that currently shape the Quick Service Restaurant Industry. Each field above helped identify key success factors among major players in the industry. These key success factors equipped companies to be more successful in the industry.

Prepared for Senior PartnersCopeland Associates @ OHIO Integrated Business ClusterPrepared by team #5

Eric Winjum*Isaac Bush*Jamie Seger*Maddie Kubaszewski* Sarah Spirer

P1 Deliverable #4: MEETING WITH SENIOR PARTNERS

Introduction 1

Comprehensive Industry Analysis

Industry Overview 2

Industry Segmentation 3

Company Analysis: McDonald’s 4

Company Analysis: Chipotle Mexican Grill 6

Company Analysis: Yum! Brands 8

Decision Matrix 10

Key Success Factor: Expansion into China and India 11

Company Comparison: KSF #1 13

Key Success Factor: Market Exclusivity Through Major Sports Events 14


Key Success Factor: Partnering with Third-Party Delivery Services 17


Conclusion 20

References 21

Appendices

A: Porters Analysis 23

B: PESTLE Analysis 26

C: Business Model Canvas: McDonald's 30

D: Business Model Canvas: Yum! Brands 31

E: Business Model Canvas: Chipotle Mexican Grill 32

F: China and India Financial Graphs 33

G: Third-Party Delivery Service Graph 35

H: Company Financial Ratios 36

Table of Contents

List of FiguresFigure 1: Market Share of Leading Brands within the US in 2015 3Figure 2: Mexican Segment Revenue Growth Percentage 3Figure 3: Operating Costs and Revenue 4Figure 4: Debt to Equity Ratio 5Figure 5: Mexican Segment Market Share 6Figure 6: Number of Restaurant Locations for Yum! 8 Figure 7: Yum! Social Engagement 9Figure 8: QSR Revenue Growth 11Figure 9: QSR Projected Growth 12Figure 10: Sports Market Revenue 14Figure 11: Digital Delivery Order Market Share 17Figure 12: Postmates App 19Figure 13:QSR in New York City 23Figure 14: Sysco Distribution 24Figure 15: Barriers to Entry 25Figure 16: Disposable Income Spent on Food 25Figure 17: QSR Industry Costs in the U.S. 26Figure 18: Littering in the U.S. 27Figure 19: Percent of Revenue by Market 30Figure 20: India Disposable Income 33Figure 21: China Disposable Income 33Figure 22: McDonald’s Revenue Market 34Figure 23: Number of McDonald’s Location in China and India 34Figure 24: Number of Yum! Brands Locations in China and India 34Figure 25: Delivery Services Compared 35Figure 26: Company Comparison Return on Equity 36Figure 27: Company Comparison Debt to Equity Ratio 36Figure 28: Company Comparison Profit Margin 36

Table 1: Chipotle Financials 7Table 2: QSR Social Media Presence 28Table 3: McDonald’s Cost Structure 30Table 4: McDonald’s Channels 30Table 5: Yum! Revenue Streams 31Table 6: Chipotle Revenue Streams 32

IntroductionThe purpose of this report is to describe, in detail, the Quick Service Restaurant (QSR) Industry and its key successes/pitfalls. We will do this by observing the industries consumer research, outlining marketing strategies, and analyzing the change since new technology aspect. Also, we will dissect the industry through a macro and micro environmental lens. Thus, indicating the various segments and key competitors within the foodservice business with the use of the PESTLE and Porter methods.

The in depth analysis of the Quick Service Restaurant Industry supports our results of the following three key success factors:

• Expansion into China and India • Market exclusivity through major sporting

events • Partnering with third party delivery services

Introduction Industry Overview KSF 1: KSF 2: KSF 3: Conclusion

1

Criteria for a restaurant to classify within the Quick Service Restaurant Industry includes:

• Limiting costumer and employee interaction

• Disposing of your own trash

• Purchasing meals prior to eating at either a counter, drive-thru, or delivery

Our report supports the success of these three companies and how they have excelled in the Quick Service Restaurant Industry:

• McDonald's • Yum! Brands• Chipotle Mexican Grill

Company Expansion into China and India

(60%)

Market Exclusivity

(25%)

Third-Party Delivery

(15%)

Weighted Total

(100%)

McDonalds 8.2 9.2 4.3 7.58

Yum! Brands Inc. 9.1 8.5 7.5 8.83

Chipotle 2.0 1.0 8.3 2.70

QSR Criteria

Companies Analyzed

Purpose Statement

Key Success Factors

Upon an in depth industry analysis, our three companies were individually evaluated against our key success factors. We also gave each a score based on their importance to the success factors. The results were then weighted and a final score was given. Refer to page 10 to understand why we gave the scores we did.

Companies Analyzed

Globally, there are over 826,000 quick service restaurants (Gaille,2014). Quick service restaurants make up 80% of the Foodservice Industry and globally generate over $570 billion in revenue annually. The industry is monopolistically competitive where there are multiple brands that produce similar but different products, follows the law of demand precisely, and has an easy entry and exit throughout the market. The largest emerging markets are the U.S, China and India. The industry is dominated by major chains which makes the new, smaller companies struggle to gain market share. McDonalds, Subway, and Yum! Brands, Inc. make up 30% of the U.S market. Smaller firms are then competing to earn more market share in the industry. Hamburger focused QSR’s are the largest segment. With years to come, the industry is looking to change dramatically due to healthier eating trends and technology (Kell, 2016).


Industry Overview

Competition in this industry is on the rise when it comes to price and product differentiation. The main sources of competition are McDonalds, Yum! Brands, Inc. and growing Mexican segments like Chipotle. These three chains make up 30% of the industry, while 70% is smaller fast food restaurants. Due to the rising amount of health awareness in this industry, consumers now have many options to chose from that veer away from quick service restaurants. Fast casual is becoming a large threat, as they offer better quality options while still having lower prices compared to full service dining. Also, supermarkets and grocery stores are increasing in popularity because it gives the consumers a chance to cook cheaper and healthier foods to the portion size they desire. Since 2008, these substitution have increased by 30% (Kell, 2016). Suppliers,

The Quick Service Restaurant Industry makes up 80% of the Foodservice Industry and is expected to grow at compound annual growth rate of 5.54% between 2015 and 2019 (PRNewswire). In order for this to continue, the fast food chains will have to adapt to an emerging trend of health conscious consumers, while keeping their selections reasonably priced. With the rising popularity of technology, QSRs are adapting to ways to connect to consumers through social media and apps. Not only does this give restaurants the ability to advertise their brand/menu, but also gives them different delivery strategies to increase their revenue.

With the help of the the Healthy Eating Index, the Quick Service Restaurant Industry is now adapting to health concerns altering their menus to better quality ingredients to fit customer satisfaction and diet plans. Recently, consumers have become interested in health and fitness. With the rise of obesity, heavily due to people’s laziness to cook, and cravings of fast food, this trend has led people to better understand what they are consuming, while keeping track of their calories. With this new attraction, fast food restaurants have to adapt to ensure that they will not lose their customer base. QSRs feel as though it is necessary to improve the qualifications of their industry. FDA is requiring a visible representation of nutritional facts and opting out trans-fat selections.

2

Industry Overview

External Trends

Internal Trends

although have very low power, are crucial to QSRs. Their performance affects the pricing and quality of their food all around the world. In order to be seen as successful QSRs need to partner with reliable suppliers and need to get their brand name out there through marketing techniques.

Internal Trends (cont’d)

Comprehensive Industry Analysis


The Quick Service Restaurant Industry encompasses a wide variety of food segments for consumers to choose from. The top five segments in terms of market share are burger, pizza, sandwich, chicken, and Mexican. This breakup of the market share can been seen in Figure 1 below (Sena, 2016). These segments include restaurants such as McDonald’s, Chick-fil-A, Subway, Taco Bell, and Pizza Hut.

Burgers are a fast food staple. McDonald’s is the best performer in the Quick Service Restaurant Industry as a whole in terms of revenue, bringing in $25.41 billion in 2015. McDonald’s and Wendy’s account for 19.2% of the total QSR market share within the United States (Statista, 2016This segment makes up 30% of the overall market share for the fast food industry (Statista, 2016).

The pizza segment of the Quick Service Restaurant Industry is dominated by chain restaurants. Chain restaurants account for 61% of the pizza market, which was a 2% increase since 2015. In 2014, Pizza Hut, owned by Yum! Brands, held 14.79% of the market share as the top performer. The Pizza segment holds 15% of the market share within the QSR Industry (Statista, 2016).

3Source: Statista, 2016

The chicken segment of the Quick Service Restaurant Industry is the fourth largest in terms of market share, holding 8%. Some restaurants within this segment include KFC, Chick-fil-A, Popeyes, Churches Chicken, and Zaxby’s. In 2010, the top sales performer in the U.S. is KFC. KFC, who is owned by Yum! Brands, recorded $4.7 billion in sales, making them the top performer within this segment.

The Mexican segment has gained market share while burger’s market share has been decreasing (Sena, 2016). This segment includes restaurants such as Taco Bell, Chipotle, Qdoba, and Moe’s South West Grill. The top two performers are Taco Bell and Chipotle. In 2015, Taco Bell, owned by Yum! Brands, earned $8.76 billion in sales holding 23% of the market share in the U.S. In 2015. Chipotle Mexican Grill received $4.65 billion in revenue as well as holding 12.2% of the market share (IBIS World, 2016). The Mexican segment accounts for 7% of the fast food market share (Statista, 2016).

17.00%

10.80%

6.70%

4.40%2.20%

58.90%

Figure 1: Market Share of Leading Brands within the US in 2015

McDonald's Yum! Brands Subway Wendy's Chipotle Other

2013

2014

2015

0.00% 1.00% 2.00% 3.00% 4.00%

Mexican Segment Revenue Growth Percentage

Industry Segmentation Industry Segmentation (cont’d)

Figure 2

Source: IBISWorld, 2016

McDonald’s Company Analysis

Company Analysis: M

cDonald’s

McDonald's operates through two channels, franchise owned restaurants and company owned restaurants. 80% of McDonald’s restaurants are franchise owned, and these restaurants represent 35% of total revenue for the company in 2015.

77%

9%

14%

Operating costs based on incur-

ing channel

Company Owned Attributed ExpensesFranchise Owned Attributed ExpensesShared Expenses

35%

65%

Revenue share based on channel

Franchise OwnedCompany Owned

McDonald's is the largest restaurant in the QSR Industry in terms of total Revenue. They brought in $25.41 billion in revenue in 2015, however they have been showing a decline in total revenue in the past three years. To see the breakdown of their decrease in revenue, refer to appendix C, table 4. Despite this loss of revenue, their stock price has been increasing over the past three years. On September 1, 2013, McDonald’s share price was valued at $96.21, and it increased up to $98.53. This year I has seen a much steeper increase and has jumped up to a share price of $115.96 on September 1, 2016 (Nasdaq, 2016). 80% of the over 35,000 McDonald’s locations across the world are franchised. Since 2015, McDonald's has begin using a new operational structure that focuses on four separate markets grouped by similar traits. These segments are U.S. Market, International Leads Markets, High Growth Markets, and Foundational Markets (McDonald’s, 2016). McDonald’s CEO is Stephen Easterbrook and receives a salary of $2.84 million per year. He is also the chair of the Executive Committee. McDonald’s board is chaired by Enrique Hernandez Jr. who graduated undergrad and graduate school at Harvard. McDonald’s board committees include Audit and Finance, Compensation, Governance, Sustainability and Corporate Responsibility, Public Policy and Strategy, and Executive (McDonald’s, 2016)


4Figure 2

Company Overview Cost Structure and Channels(Cont.)

While franchises brought in a little over a third of the companies total revenue, only 9% of the companies total operating costs are specifically attributed to them. The only operating cost that McDonald’s Corp. most absorb for franchise restaurants is theiroccupancy expenses. Company owned restaurants make contributed 64.88% of the total revenue for 2015, however 76.51% of the total operating costs were spent on them. These costs include food and paper, payroll and employee benefits, and occupancy and other operating expenses. Another operating cost for McDonald’s that is spread across both franchise and company owned restaurants is their selling, general,

and administrative costs.

Cost Structure and Channels

McDonald’s is looking to go from 80% franchise owned restaurants up to 95% franchise owned in the long term future. McDonald’s future will involve continued competition, including an increase in competition from the fast casual segment of the restaurant industry. McDonald’s, as well as other restaurant’s within the industry, are becoming especially concerned with the increase in regulation. This increase in regulation is being driven by the current trends of environmental conservation and health consciousness. These regulations have the potential to increase costs, so McDonald’s needs to be aware of potential new guidelines in order to respond effectively. These regulations also differ across the various markets that McDonald’s operates within, increasing the potential for issues to arise if a regulation is overlooked. In the future, McDonald’s is looking to carry out its turnaround plan, which includes “restructuring market segments, optimizing restaurant ownership mix through accelerated refranchising, delivering cost savings and enhancing financial value through leverage” (McDonald’s Corporation Annual Report, 2015). This turnaround includes increased leveraging, which can be seen in figure 4. This increase presents a possible financial risk for the company. Effective management will be necessary to roll out this plan effectively in order to reduce the financial risks associated with it.

McDonald’s operates within a very competitive industry. McDonalds Corp. considers its competitors to be part of the informal eating out (IOE) segment of the restaurant industry. This segment includes “quick-service eating establishments, casual dining, full-service restaurants, street stalls or kiosks, cafés, 100% home delivery/takeaway providers, specialist coffee shops, self-service cafeterias and juice/smoothie bars” (McDonald’s Corporation Annual Report, 2015). This segment houses over 8 million eating outlets that generated $1.2 trillion in sales in 2014. Of these 8 million outlets, McDonald’s accounts for 0.5% of them while accounting for 7.2% of the sales (McDonald’s Corporation Annual Report, 2015). McDonald’s believes that in order to compete within this segment, they must improve their existing products, develop new products, price these products appropriately, manage their restaurants effectively, and react effectively to competitor actions. McDonald’s competes on a basis of quality, taste, price, convenience, variety, and quality (McDonald’s Corporation Annual Report, 2015).


Company Analysis: M

cDonald’s

McDonald’s Company Analysis

5

Competition Outlook

-20

-10

0

10

20

30

40

50

Debt to Equity Ratio

McDonald's Yum Chipotle

86/30/2014 6/30/2015 6/30/2016

Figure 4

Source: YCharts, 2016

Chipotle Mexican Grill Company Analysis

Company Analysis: Chipotle M

exican Grill

Chipotle Mexican Grill (CMG) was first opened in 1993, in Denver Colorado, by a man named Steven Ells. As of December 2015 there are 1,971 Chipotles in the United States, 11 in Canada, 7 in England, 4 in France, and 1 in Germany. Also, it is operating multiple ShopHouse Southeast Asian Kitchen and Pizzeria Locale restaurants located around the world (Yahoo Finance).

A wide focus of Chipotle has been to turn its “quick service” into fast casual by offering the best quality ingredients, while still at a relatively lower price. With a smaller menu, CMG focuses in on only a select amount of ingredients that can be mixed together in many different forms. This involves respect for animals, farmers, and the environment, and using suppliers who produce from farms rather than factories. This kind of mindset came from Chipotle’s very serious commitment of “Food With Integrity.” This commitment is a promise Chipotle has made with their consumers to keep ingredients prepared by hand, vegetables grown in healthy soil, and meat from animals who are able to “roam outdoors in deeply bedded barns.” This is an effort to encourage a better world. To continue with this idea of having a healthier earth, Chipotle has contributed to events such as the Local Grower Support Initiative, which supports their suppliers to continue reaching food safety laws and giving fresh produce. Also, events such as the Cultivate Festival, and “Doing Good with Burritos”, nonprofits like Chipotle cultivate foundation, apps such as The Scarecrow, and so on (Chipotle, 2016).

With the rising growth in correspondence to health-related trends, Chipotle has been able to expand with the attention of environmentalist, health and fitness fans, and overall Mexican food enthusiast, enabling them to distinguish themselves in this competitive industry. Another form of differentiation within their company is the fact that all of Chipotles restaurants are company owned rather than franchised, which gives them the ability to maintain its brand (IBISWorld, 2016). Up against other quick service restaurants, in the United States, Chipotle only holds about 2.2% of the market share, compared to other leading brands such as McDonald’s, Yum! Brands Inc., Subway, and Wendy’s who share 40% of the remaining market (Statista, 2015). However, from a Mexican segment standpoint, Chipotle is the second leading company with a market share of 12.2%, right behind the largest chain, Taco Bell, at 23%, and in front of Qdoba Mexican Grill and Moe’s Southwest Grill (IBISWorld, 2016). This can be seen in figure 5.


6

Company Overview Company Trends

Taco Bell23%

Chipo-tle

12%

other65%

Mexican Segment Market Share

Figure 5

Source: IBISWorld, 2016

https://www.google.com/imgres?imgurl=http://www.pdnonline.com/static/photoserve-xml/images/450-chipotle.jpg&imgrefurl=http://www.pdnonline.com/photoserve/Food-Photographer-and-Master-Chef-Francesco-Tonelli-Sizzles-with-Chipotle-and-Playboy-14477.shtml&docid=zI0vRyKg4QohYM&tbnid=EAfwCHaJOX-u-M:&w=450&h=305&noj=1&bih=710&biw=1107&ved=0ahUKEwiAzIH7h5DPAhVr0oMKHSqnB-wQMwg5KAYwBg&iact=mrc&uact=8

Unfortunately, between October and November of 2015, Chipotle Mexican Grill suffered a significant decline in their sales due to illnesses caused by E. Coli bacteria in their food. Starting initially in Washington and Oregon, and rapidly impacting other states and consumers from all around the world, Chipotle decreased their sales by 30% (Statista, 2015, p. 10). This decline affected overall stock price, with an 8% drop.

Chipotle lost respect as their high expectations of the Food With Integrity Commitment failed, as well as getting torn apart through social media, which negatively impacts their ability to recover from this situation. Also, international sales suffered by the E. Coli breakout. The 23 CMG restaurants located outside of the U.S, since 2015, were already destined to not make as much of a profit as in state locations due to unfamiliarity. Now, with rising awareness of this illness, even more advertising promotions, and other cautious measures, will have to be spent internationally to keep countries back on top with Chipotle popularity. Drastic changes had to be made to gain customer loyalty back. There were marketing and promotional tactics put into play such as offering free or discounted food, Chiptopia cards, food and safety protocols, and so on. Because of these high marketing strategies, Chipotle will continue to have a dip in their sales. They will have to raise pricing to ensure better and safer ingredients, and will lose sales because of the promotions (Statista, 2015, p. 13).

Company Analysis: Chipotle M

exican Grill

Chipotle Mexican Grill Company Analysis

Chipotle Mexican Grill states that the managing and employee crew are a key part to their success. There are in total 59,330 employees and classically trained chefs also known as top managers of CMG. A few of the managers include, Steve Ells, the Founder and Co-CEO, Montgomery, F. Moran, also Co-CEO, Stephen E. Gillett, the director, and Patrick J. Flynn, who is the Independent director. During the recent E. Coli breakout, this company has suffered from a decrease in sales. According to table 1, from 2014 to 2015 Chipotle’s gross margin dropped from 27.21% to 26.09%, which ultimately is the lowest gross margin they have had since 2011. Their return on assets also declined from 19.5% to 18.04% during this time (Plunkett Research, 2016).


7

Table 1

Source: Plunkett Research, 2016

Company Standings Company Outlook

Yum! Brands, Inc. Company Analysis

Company Analysis: Yum

! Brands, Inc.Introduction Industry

Overview KSF 1: KSF 2: KSF 3: Conclusion

Yum! Brands, Inc. was founded in Louisville, Kentucky in 1997 and is now one of the worlds largest quick service restaurant companies. Yum! currently has 43,000 restaurants in almost 140 countries and territories. They are ranked 218th on the FORTUNE 500 list accruing more than $13 billion in revenues. Yum! is a global leader in the food segments chicken, pizza, and Mexican-style due to their three restaurant brands KFC, Pizza Hut, and Taco Bell. In 1997 Yum! Brands spun off from PepsiCo and since then they have seen profits outside of the U.S. increase from 20% to nearly 65% in 2015. Their consistent financial growth can be attributed to the installment of six new restaurants on average per day worldwide. Thus, they are the leading company in emerging markets with around 16,500 restaurants. Further, Yum! has approximately 2.5 restaurants per million people in the top 10 emerging markets and another 57 restaurants per million in the U.S (Yum! Brands).

KFC has the majority of establishments for Yum! Brand with 14,100 restaurants in 125 countries (not including China).

Pizza Hut has the second largest share in the company with 14,100 restaurants in more than 100 countries (not including China).

Taco Bell has the smallest share in Yum! with 6,500 restaurants in the U.S. and 300 units in 24 countries outside the U.S. (not including China). Yum! Brands has 7,200 restaurants in over 1,100 cities (Yum! Brands).

Yum! put their “Feed the World” initiative into effect in 2007 and since then have raised almost $640 million in both cash and food donations. All of the proceeds go to the World Food Programme (WFP) and other hunger relief agencies, providing about 2.6 billion nutritious meals. Their World Hunger Relief effort has placed them at the forefront of the private sector hunger relief initiative. Yum! is also the first and largest supporter of Women’s Foodservice Forum (WWF) and the Multicultural Foodservice and Hospitality Alliance (WFHA) (Yum! Brands).

8

Yum! Brands encourages inclusiveness in regards to all people coming from any background whether they are employees or customers. Diversity is one of the company’s main principles which led to the establishment of Leading Inclusion for Tomorrow (LIFT) in 2015. They are striving to promote global inclusion and engagement between all people through the communities that they are rooted in. From an in-house perspective, Yum! created a Minority Leading Assistance Program which helped minority franchisees in the startup of KFC, Pizza Hut, and Taco Bell systems (Yum! Brands).

Company Overview Company Brand

Company Involvement Value

KFC

Taco Bell

Pizza Hut

0 5,000 10,000 15,000

Number of Restaurant LocationsFigure 6

Source: Yum! Brands

Yum! Brands is attempting to reach new heights through utilizing more product customization, more transparency with customers, and more engagement through the use of trending media outlets. They plan on holding the same keys to shareholder value in which they have found success. These keys include: new-unit development, same-store sales growth, and generating high ROI capital.


Company Analysis: Yum

! Brands, Inc.

Yum! Brands, Inc. Company Analysis

Yum! Brands, Inc. operates and competes within three of the five largest market segments within the QSR Industry. Taco Bell competes within the Mexican segment, Pizza Hut within the pizza segment, and KFC within the chicken segment. All of Yum! Brands restaurants are the top performers within their segment. These three segments account for 30% of the QSR market within the United States (Yum! Brands).

9

Figure 7

Source: Yum! Brands

Values (cont.) Competition

Decision Matrix


10

Key Competitor RankingsUpon an in depth industry analysis, our three companies were individually evaluated against our key success factors. We also gave each a score based on their importance to the success factors. The results were then weighted and a final score was given. Refer to page 10 to understand why we gave the scores we did.

Expansion into China and India-60%Expansion into China and India received the highest weight at 60%. This is because the saturated United States Quick Service Restaurant Industry has little room for growth in the coming years. India and China are the next two markets with expected growth, so integrating into these emerging markets is the most important aspect for company expansion.

Market Exclusivity Through Major Sporting Events-25%Market exclusivity through major sporting events got 25% of the ratings. This is because of the successful correlation of competitive quick service restaurants and the procurement of a specific market to better reach consumers. Companies who sponsor high profile events are shown to be more successful in the Quick Service Restaurant Industry.

Partnering with Third-Party Delivery Services- 15%Partnering with Third-Party Delivery received 15% of the weighting. Although technology plays a key role in todays society, consumers are use to the technology era. So companies having more technological advancement does not entice the consumer further to dine there. It is weighted at 15% because it is a newer concept that chains are just now beginning to embrace. This is a key success factor that will continue to grow in importance and getting involved now is a necessity. The companies were graded based on whether or not they are paired with a third party delivery service as well as the amount of markets or cities that the service is available in.

Our Findings


(60%)

Market Exclusivity

(25%)


(15%)

Weighted Total

(100%)

McDonalds 8.2 9.2 4.3 7.58

Yum! Brands Inc. 9.1 8.5 7.5 8.83

Chipotle 2.0 1.0 8.3 2.70

KSF #1: Expansion into China and India

Introduction Expansion in China The first key success factor is integration into emerging markets of China and India. There are over 624,301 quick service restaurants in the United States, resulting in a saturated market with minimal growth opportunities. According to figure 8 there has been an unsteady trend of no greater than a 3% CAGR increase in the past 10 years in the U.S., and is expected to continue (Statista, 2016). This has brought innovation to quick service restaurants as they are now seeking to expand into emerging markets. In order to adapt in a new market, QSRs need to implement effective franchising techniques, reliable suppliers, and the ability to localize their menu. Two of the largest emerging markets, China and India, are prime candidates due to population growth, urbanization, extensive agricultural output, and have wealthier consumers (Aaron Allen & Associates, 2012). QSRs are beginning to take this opportunity to gain a competitive advantage in the industry, as 61% say market size and growth drove firms to make the decision of entering into new countries (Khanna, Palepu, & Sinha, 2016). Franchising has allowed leading brands to take the leap in restaurant advancements. It has introduced over three billion people to the consumer population of quick service restaurants.

China, home to 1.3 billion people, is one of the most economically booming countries and has been the center of emerging markets for QSRs.According to Investopia, in 2014, Chinese QSR Industry grew at a rate of 12.4%, each year, for the past 5 years. This is compared to U.S 2.5% in growth. U.S industry is twice the size of China, but with Chinas urbanization and income trends the Quick Service Restaurant Industry is promised fast growth (Carpenter, 2015). It is important for QSRs to hit a certain target market when they are expanding into emerging markets. In China, 71% of women claim to eat at fast food restaurants compared to 66% of men. This is because women tend to go out to eat for social reasons, to be with children, family members, and/ or friends (PRNewswire, 2012). Also, China’s disposable income is continuing to increase (Refer to Appendix E). Not only do they have to appeal to certain consumers, but also have to localize to meet consumer desire in that geographic area. KFC created Chinese based local dishes such as Congee and Beijing Chicken Roll (AtKearney, 2013). In 2015, QSR sales in China reached over $124 billion and is estimated to increase to $155 billion by 2018 (Burkitt, 2016).

McDonalds and Yum! Brands, specifically KFC and Pizza Hut, are the largest chains spread out in the emerging markets. KFC was the first QSR to open in Beijing in 1987. KFC has twice as many restaurants in China beating any possible competitor and gaining 8.8% of operating margin (Carpenter, 2015). Yum! Brands sees expansion in China as their way to success. KFC and Pizza Hut operate over 5,000 restaurants and is still growing, resulting to more than half of the company’s total revenue. Their ability to operate alone gives them better opportunities to meet customer demands. Throughout China, McDonalds is anticipating on adding 1,300 restaurants on top of the current 2,200. In hope of making 95% of McDonalds outlets franchised, franchising and licensing are key to McDonalds becoming more agile in the local communities (Burkitt, 2016).

Introduction

Industry Overview KSF 1: KSF 2: KSF 3: Conclusion

Figure 8

Source: Statista, 201611

As the United States and Chinese markets continue to steady, brands are looking for the next emerging market to further expand their company into. India’s fast food market is expected to grow 18% by 2020 to be worth $27.57 billion due to changing behavior and demographics that will feasibly make it the next mega market for international fast food (PRnewswire, 2015). Consumers in India are developing confidence in the market due to an expanding middle class, urbanization, and it’s increasing youth population, making it a mandatory market to expand into.

India is thriving economically. Disposable income per capita is on the rise and is expected to continue due to the steady increase of people entering the workforce, especially women and the youth population (Refer to Appendix E). Of India’s population, 65% are under the age of 35 which is the largest youth population in the world (CNBC, 2015). This is the Quick Service Industry’s main target market, making it an ideal place to expand. In 2016, more than 40% of the Indian population said they eat fast food 2-4 times a week, and this number is expected to increase with more development of the country (Statista, 2016). India is shifting towards a more urbanized lifestyle, prompting consumers with fast paced lifestyles to further experiment in the Quick Service Restaurant Industry making it a flourishing market.

Successful companies in the Indian QSR industry have done so quickly and carefully. Because of the miniscule amount of brand awareness in India, companies that have already began to integrate into India have a first entrance advantage in the market (Bloomburg, 2014). Consumers will identify with these brands easier and begin to create a customer loyalty and preference, making companies gain a competitive advantage in the

industry (Bloomburg, 2014). In addition, companies integrating into the Indian Quick Service Restaurant Industry have carefully localized products to the Indian culture. McDonald’s was the first American brand to integrate into the Indian market in 1986. McDonald’s tweaked 70% of their menu to eliminate the presence of beef in order to accommodate to religious values in the country. McDonald’s has also reworked their menu and provided stores that are strictly vegetarian due to 40% of the Indian population not eating meat (CNBC, 2014). Quick entry into the market and localization will make Quick Service Restaurants in India thrive.

In conclusion, the United States Quick Service Restaurant Industry has become saturated and new markets need to be taken advantage of for successful expansion. As seen in figure 9, both China and India are projected to grow at least double the U.S. market in the coming years. Successful QSR brands have recognized this opportunity and moved first into this industry, giving them a clear advantage in brand awareness and understanding of localization to operate in these markets successfully.

KSF #1: Expansion into China and India

The Next Mega Market: India The Next Mega Market: India (cont.)

USA China India

6%

10%

18%

QSR Projected Growth from 2016-2020

Figure 9


12

KSF #1: Company Com

parisons

Chipotle

McDonald’s

Yum! Brands Inc.


13

McDonald’s is not too far behind Yum! Brands. They have the second largest amount of restaurants in global emerging markets, of 5,942 stores, right behind Yum! Brands. Franchising and licensing are a key aspect to their company as they are hoping to make their outlets 95% franchised. In China alone, McDonald’s is anticipating on adding 1,300 more to their current 2,200 restaurants. One thing McDonald’s does exceptionally well is adjusting their menu to its localized culture. They have tweaked about 70% of their menu to meet global consumer needs. They have also expanded to vegetarian outlets to accommodate the 40% of Indian consumers who do not eat meat. As far as brand popularity worldwide, McDonald’s brand value is at the top with $22,040 worth (Statista, 2016). Refer to Appendix F to see how many McDonald’s restaurants there are in China and India.

Yum! Brands has a significant lead over the competition, through emerging markets. With their large capability of franchising and licensing , Yum! Brands took into account the importance of expanding into China and India. KFC, in 1987, was the first to move into China. This gave them a first brand advantage, which allowed them to build their name more effectively. With 40% of Chinas fast food market share as of 2011, it has become such a benefit to their profits that they decided to have their China business as a licensee of the company. Yum! Brands offers the most restaurants and is still constantly growing in number. It has resulted to more than half of the company revenue, with system sales growth increased of 11%, and operating margin of 8.8% (Yum! Brands 2015). Yum! Brands power to localize their menus have also gave the company much strength. KFC’s menu offers 50 items, in emerging markets compared to 27 in the U.S.. Refer to Appendix F to see how many Yum! Brands restaurants there are in China and India.

McDonald’s Yum! Brands Inc.

Chipotle

Expansion into China and India (60%)

8.2 9.1 2.0

Chipotle earned a two out of ten based on their lack of integration into emerging markets. Chipotle received this score because they have not yet integrated into the emerging markets of India and China. At the end of 2015, the company only recorded 2,010 locations worldwide (Statista, 2016). Of these locations, only 5% reside outside of the United States showing minuscule expansion (Statista, 2016). Chipotle does not franchise and has no published intent on further expanding into the emerging markets of China and India, but still have made efforts to launch locations in places like Canada, France, Germany, The United Kingdom, and Paris (Statista, 2016). Chipotle brand value worldwide in 2016 was the lowest out of the three companies evaluated in the matrix at 8.3 million USD in 2016 (Statista, 2016).

KSF #2: Market Exclusivity through M

ajor Sporting Events Introduction Industry


Introduction

14

The expression you are who you hang around stands true to brands in all industries around the world. Major sports events that choose to partner with companies ultimately depicts their values and vision. Through effective use of strategic alliances within the Quick Service Restaurant Industry, companies are able to achieve market exclusivity. Due to an industry wide decline in revenues and customers, companies are partnering with major sporting events to help recapture consumers that are falling out. Advantages of alliance participation include: cost savings, improved quality/consistency, improved service, and increased profitability.

“Alliance partners work together to serve the ultimate consumer by doing together what each partner could not do alone” (Cante, Calluzzo, Ryan). They share information, resources, capabilities and risks. By doing this effectively, the firms involved increase their chances of reaching an abundance of brand management goals with widespread exposure.

The leading QSR restaurants make alliances with established sports that have an abundance of viewers. Successful brands are also partnering with events in the same value range. Upscale chains have no business linking up with a value brand unless they are trying to reposition themselves within the market. Also, partnerships should be measurable to the companies involved. This incorporates “paying out in terms of direct sales, customer acquisition, marketing efficiencies, and so on” (Yohn, 2011).

Source: Sultan, Collignon, 2013

2005 2009 2013 2017 ( F oreca s ted)0

10

20

30

40

50

60

70

80

90

100

46.5

58.4

76.1

90.9

Sports Market Revenue ($ Billion)

Figure 10

Introduction (cont.)

NFL PartnershipsPapa John’s has proven itself to be a master in implementing strategic alliances. An example of their superiority is in their partnership as the Official Pizza Sponsor of the Super Bowl. The company offers a free pizza when spending $15 on an order, essentially receiving two large pizzas for $7.50 each. Any company can pay millions of dollars for a TV spot during this event and hope for a positive return on investment but the smartest companies will mark themselves as the partner of the event.

This gives them exclusivity as the most important brand that essentially has the eyes and ears of anyone watching or attending the event. The Denver Broncos Super Bowl winning quarterback, Payton Manning, already appears in ads and owns franchises of Papa John’s which makes him the perfect candidate to do business with. CEO John Schnatter made sure that he was the first one to congratulate Payton as he won the championship in his last game in the NFL.

Due to the effective implementation of their campaign, Papa John’s was able to see almost instant success. The company had shares closing at $47.75 on January 9th of this year and closed at $58.15 on February 29th, showing a 21.78% increase in market share (Kline, 2016). Since the 2011 Super Bowl where Papa John’s was still the Official Pizza Sponsor, they have seen a gain in market share of an impressive $67.59 and increased profitability by 4.53% in terms of return on assets (Morningstar, 2016; YCharts, 2016).


15

KSF #2: Market Exclusivity through Sporting Events

15

NFL Partnerships (cont.) Olympic PartnershipsMcDonald’s has been the official QSR sponsor for the Olympics for 20 years and has seen growth in the company ever since. This partnership allows them a massive amount of exposure and market exclusivity around the globe. With technology continuously improving, the total amount of television viewership has grown by 1.5 billion from 2002-2012 (Statista, 2016). In the 2012 London Olympics McDonald’s implemented a sign that displayed fan’s celebrations that were submitted from around the world on a massive screen in real-time. Over the 17 days of the Olympics, 4.7 million users posted their celebrations on various media outlets (Mackenzie, 2013).

Metrics showed that McDonald’s had a long-term return on investment (ROI) nearly 25.5 times higher than short-term ROI, proving their campaign to be successful over time. Over the past four summer Olympics, McDonald’s market shares have beat the MSCI Index by over 1.5%. They also tend to beat the benchmark by approximately 6% a year after the games have ended (Shen, 2016). Their largest restaurant ever was built in London’s Olympic Village, and proved the campaign to be a success serving 14,000 people per day (Greyser, Kogan).

KSF #2: Company Com

parison Introduction Industry


16

Table 4

McDonalds Yum! Brands Inc. Chipotle

Market Exclusivity(25%) 9.2 8.5 1.0

We ranked McDonald’s the highest in regards to market exclusivity through partnership with sporting events. McDonald’s has placed itself at the apex of market exclusivity with the procurement of the Olympics for the past 20 years as well as Hockey Canada for over 40 years. Their efforts have shown to be effective through their profitability ratios. In the year of the 2008 summer Olympics they had a return on assets (ROA) of 14.9% and a return on equity (ROE) of 30.1%. By the 2012 Olympics they showed a growth of 1.1% in ROA and 6.7% in ROE. Globally, McDonald’s has continued to grow in return on invested capital by 36.9% proving that they receiving a positive return on investments (Nielson, 2013).

McDonald’s

Yum! Brands, Inc. was ranked as a close second for this key success factor. In 2015 they held 10.8% of the U.S. QSR market share (Statista, 2016). Their respective brands include KFC, Pizza Hut, and Taco Bell. Yum! Brands, Inc. has proven itself to be a master at media based marketing with their sponsorship involvement with the Kentucky Derby. From 2014 to 2015 the Media Exposure Value (MEV) of Yum! had an increase of 32.3% (MarketingCharts, 2015). With an estimated 170,000 attendees and 16 million TV viewers, Yum! Brands gained ground financially each following quarter (Gursky, 2016). After the Kentucky Derby they increased their return on assets (ROA) from 10.66% to 17.36% and increased their return on equity (ROE) from 47.70% to an astounding 175.1% in June 2016 (YCharts, 2016). Yum! is currently far ahead of the rest of the industry by 43.48% in terms of ROA and 154.95% in terms of ROE (CSI Market, 2016). Their success with this sponsorship is shown when comparing Yum! Brands’ management effectiveness ratios to the industry as a whole.

Yum! Brands Inc.

ChipotleChipotle resides in last place for this key success factor with a very minimal amount of sporting event exclusivity. Their largest sports partnership that they have is with Major League Soccer which began in 2014. Although they are the leading healthy alternative for quick service restaurants, they are lagging behind in the sports sponsorship field. After making their way into the market, Chipotle saw a growth in revenue of 18% in 2014 (Saglimbeni, 2014). Since then they have seen a decrease of 14.38% in ROE and 11.19% in ROA (YCharts, 2016). This decline is partially due to the E. Coli breakout in 2015 but with the small amount of positive impact from their insignificant soccer sponsorship, they haven’t been able to stay profitable.


8

KSF #3: Partnering with Third-Party Delivery Services

17

After evaluating the markets and comparing trends, it is certain that partnering with a third-party delivery service company is a key success factor of the Quick Service Restaurant Industry. Partnering with these companies will increase sales and traffic for restaurants. Quick service restaurants are able to sell food through external company’s mobile apps or sites while incorporating the key to delivering, which is producing orders quickly to the customer and avoiding labor and equipment costs in individual stores.

Food delivery for quick service restaurants is a major request from customers across the globe. According to recent surveys, 51% of Americans use delivery services to purchase meals and 26% utilize this service more than once a week. This supports that digital ordering and delivery have been growing 300% faster than dine-in traffic since 2014 (NRN, 2016). Quick service restaurants are incorporating alliances to help them increase the average number of orders and provide a platform to manage their orders more efficiently.

Mobile ordering platforms have been proven to intensify customer loyalty, increase purchase frequency, and lift average ticket sizes through order customization and easier checkout options. This means that mobile ordering is not a substitution but a channel that can enhance the lifetime value of customers. Business Insider Intelligence expects that orders placed via smartphone will make up more than 10% of Quick Service Restaurant sales by 2020. Mobile ordering is the most promising technology frontier within the industry and is projected to be a $38 billion industry (Taylor, 2016). Companies have realized that building norms within each quick service restaurant would be too time consuming and resorted to a third-party delivery service. These services assist quick service restaurants in delivery through external mobile apps which are most popular through smartphones, tablets etc.. Through these outlets, consumers can browse restaurants available in their area while viewing ratings, comments and delivery requirements.

Postmate 24/7 deliver service company Currently only exists in the U.S., but has

missions to be present in every city in the world

Holds 4,000+ partners, (not all being food service) that are active in 200+ cities. (Postmates, 2016)

Partners: McDonald’s and Chipotle (Business Insider, 2016)

GrubHub Nation’s leading online and mobile app Offers more than 45,000 restaurants in

over 1,100 U.S. cities and London. Owns many smaller services such as

Seamless who offer food delivery and picker from 12,000 restaurants and 80+ cuisine types. (GrubHub, 2016)

Source: Business Source, 2016

Figure 11

Key Success Factor

Industry to Change Leading U.S Third-Party Services


KSF #3: Partnering with Third-Party Delivery

18

Figure 11

China:The highly concentrated cities and market potential in China has had a boost in online food ordering. According to the China Internet Network Information Centre, from December 2015 to June 2016, the number of online food ordering users grew from 113.56 million to 149.66 million. The number of mobile users increased from 104.13 million to 146.27 million, and users increased by 40.5% (Daxue, 2016).

With global home delivery sales in foodservice increasing 6% in 2015, the race is on for food delivery services to receive share in the global market. In developed markets across North America and Western Europe, food delivery services are investing heavily in technological innovation in order to compete while trying to find ways to cut costs and reduce delivery times. While much of the attention has been focused on the West, no other region comes close to matching the potential for food delivery services in Asia Pacific (Dutton, 2016).

See Appendix G for delivery service company compared.

All third party delivery services forbid companies to partner with another service where they exist. This means that there are no joint venture, partnerships, employment, or agency relationship that can exist between the restaurant company and another third-party provider. This is only present when the company exists in the country. This means, since Postmates does not exist yet in China, McDonald’s can partner with existing services until they are or if they ever do.

The delivery services in China are not suitable for American society and will most likely never expand West while American based companies plan to expand.

India:India has a great deal of delivery services that exist and is said to be the best target for global players looking to take a greater share of this volatile business. The market for food service industry in India will reach $33 billion by 2020 and with quick service restaurants it will likely reach $4.1 billion (Menezes, 2016).

Meituan-Dianping:• Company claims over 130 million annual active

purchasers, and exists in more than 1,100 cities across China

• Users: McDonald’s, Subway, KFC, Pizza Hut, and Burger King

Ele.Me• Located in 260 cities across China• User base of 40 million patrons• Partnered with over 300,000 restaurants• Works with O2O

Foodpanda:• Market leader in 23 of the 24 markets• Most profitable in Central and East

Europe and the Middle East• User: KFC, Subway

Delivery hero:• 200,000 restaurants in 34 countries• 10 million orders every month • Restaurant partners generating more than

$165 million in monthly sales

Global Services Available

RecapSmart Partnering

Wall Street Journal, 2016


KSF #3: Company Com

parison

Chipotle Chipotle received the highest score for this key success factor. Chipotle was one of the first major brands to pair with a third-party service which is a main reason they received a high score. Chipotle paired with Postmates in early 2015, rolling out their delivery service in 67 cities across the United States (Samuely, 2015). Another major factor in Chipotle’s score was their ability to handle the increase in sales that is seen once a restaurant pairs with a third-party. Every Chipotle restaurant has a second production line that is exclusively for online orders. Having this second line will allow Chipotle to handle an increase in orders without having to make many adjustments to their day-to-day operations (Wahba, 2015).

McDonald’s Yum! Brands Inc. Chipotle

Third-Party Delivery (15%)

4.3 7.5 8.3

McDonald’s McDonald’s received the lowest score for this key success factor. McDonald’s announced their partnership with a third-party delivery service in mid-2015 following in the footsteps of Chipotle. Like Chipotle, McDonald’s decided to pair with Postmates, however McDonald’s implementation of this service will begin at a much lower scale compared to Chipotle. McDonald’s will begin using Postmates service only within New York City. This market encompasses 88 McDonald’s locations in Manhattan, Queens, and Brooklyn (Cruz, 2015). McDonald’s confining this service to only one market is the main reason that they received such a low score.

Yum! Brands Yum! Brands received the second highest score for this key success factor. While grading Yum!, no weight was given to Pizza Hut because third party delivery is obsolete to them as they already see large success with the use of their own delivery service. Taco Bell and KFC were the only restaurants considered during this evaluation. Taco Bell and KFC both paired with the third-party delivery service Doordash in mid- to late-2015. Taco Bell tested out their delivery service in 10 markets and it has already grown to be available in 21 markets that encompass about 500 restaurants (Jennings, 2016). KFC is currently testing out the service in markets across California. Delivery service for KFC is currently available in the San Francisco Bay Area, Los Angeles, and Orange County (Huffman, 2015). The large number of markets that Yum! Brands’ delivery service is available in is the driving factor for score.

19

Figure 12

Soure: Postmates

While gathering research, the Quick Service Restaurant Industry has proven to have various trends, competitors, segmentation among restaurants, internal and external operating influences, and three key success factors. In the U.S alone, the main competitors in this industry are McDonald’s, Subway and Yum! Brands Inc. McDonald’s has a market share 17%, Yum! Brands at 10.8%, and Subway at 6.7%. Other competitors, such as Wendy’s and Chipotle are behind, but not as low as the 58.9% of other smaller chains that make up the rest of the market share.

Based on research, segments in the Quick Service Restaurant Industry are burgers, pizza and sandwiches, chicken and Mexican. Burgers direct the industry with 30% market share as well as drive some of the largest chains such as McDonald’s and Wendy’s to success. Pizza and sandwiches are next in popularity, increasing company’s revenue and growth rate.

The most prominent trend discovered, which has given companies the opportunity to grow and expand their market, was identified as a health trend. This trend displays that the impact on consumers has become a rising concern. All around the world, quick service restaurants are altering menus with better ingredients and noticeable nutrition facts, in order to meet modern demands.

Based on the research conducted in the Quick Service Restaurant Industry, three key success factors have surfaced. The three key success factors are expansion in China and India, market exclusivity, and partnerships with third-party delivery services.

The quick service restaurant market is gradually shifting over in emerging markets, such as China and India. China and India, are the most successful markets due to population growth, urbanization, extensive agricultural output, and the rise of consumer wealth. Therefore QSRs are beginning to take this opportunity to gain a competitive advantage.

Another key success factor is effectively gaining market exclusivity through sporting events in the Quick Service Restaurant Industry. Grabbing an entire market of consumers through partnerships prove to increase revenue as well as brand loyalty, an essential aspect of the industry.

The rapid growth of technology is changing the Quick Service Restaurant Industry. The use of mobile apps and delivery services is the number one request from customers. Companies have partnered with third-party delivery services to meet customer demands.

Conclusion

20



(60%)

Market Exclusivity (25%)


(15%)

Weighted Total

(100%)

McDonalds 8.2 9.2 4.3 7.58

Yum! Brands Inc. 9.1 8.5 7.5 8.83

Chipotle 2.0 1.0 8.3 2.70

Conclusion Key Success Factors

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http://nycfoodpolicy.org/nyc-

http://nycfoodpolicy.org/nyc-

Competitive Rivalry

Competition in the Quick Service Restaurant Industry is very high and can be looked at on a multidimensional level. QSRs are the most monopolistically competitive industry. (IBIS World, 2016). Competition is so high because products all serve the same purpose, which leave sellers few options to differentiate. Within this competitive market the law of demand is followed exactly, which means as prices go up, quantity goes down. This results in consumers going elsewhere for a similar product.

Location and market area matters in regards to competition. As an American custom, fast food has expanded globally, bringing fast food all around the world. This can give QSRs a competitive advantage if they expand.

New York City is highly concentrated of quick service restaurants. In regions similar to New York, where estimated 8.5 million people reside, major competition arises between restaurants (NYC Population). Within New York City alone there are 536 Dunkin’ Donuts, 462 Subway, 280 Starbucks, and 243 McDonald’s locations as of 2014. New York City’s market has 10.62 quick service restaurants for every 10,000 residents and 1.19 QSRs for every one full service restaurant (NYC Food, 2015). This high level of restaurants leads to more intense competition between restaurants, especially compared to rural markets with few dining options.

Competition between restaurants that sell the same types of food can be especially fierce, leaving no margin for error. This competition can be illustrated especially well by the recent struggles of Chipotle following their tainted meat scandal. According to CNN, Chipotle, who is considered an industry leader, especially within the Tex-Mex market, reported a ”double-digit drop in revenue and same-store sales in the first quarter of 2016, compared to the same time period last year” (Smith, 2016).

This drop in revenue can be attributed to the tainted meat. It got around 500 people sick, in the United States, at the beginning of 2016. Prior to this incident, Chipotle had held the number one spot in the annual Harris PollEqui Trend, which “measures the strength of brands based on consumer surveys” (Smith, 2016). Now they have been dethroned. However, they were fortunate enough to not drop down to number 2, instead were actually passed by both Moe’s Southwest Grill and Taco Bell, who is owned by Yum! Brands. This drop by Chipotle perfectly illustrates the competitive nature of the fast food industry, which allows no mistakes without repercussions.

Competition can also be seen through the commonalities in the deals given at the quick service restaurants. Wendy’s has the 4 for $4, Burger King has 2 sandwiches for $5, Taco Bell has a $5 loaded box, and so on. These restaurants are competing with each other for the best value. Customers are attracted to what is cheaper. The competition between these restaurants are intense and can be seen through almost everything that they do.

Appendix A: Porter’s 5 Forces

23

Competitive Rivalry (cont.)

Dunkin' Donuts

Subway Starbucks McDonald's0

100

200

300

400

500

600

QSR in New York CityFigure 13

Source: NYC Food, 2015

Buyer power in the Quick Service Restaurant Industry is considered high because of the growing number of substitutes in the market (First Research, 2016). Even though brand loyalty is crucial in the Quick Service Restaurant Industry, consumers are going to receive the same homogeneity not just in the food, but in the menus, uniform, and basic restaurant experience wherever they chose to dine (Thomadsen, 2007).

Consumers are highly price sensitive because their preferences can vary day to day allowing them to choose the quick service restaurant that satisfies their desire at the moment (First Research, 2016). Fluctuating factors like traffic, number of people in line, and time of day can quickly influence consumer dining options because there is little to no opportunity cost when a different quick service restaurant alternative is chosen (Thomadsen, 2007).


In larger food chains, the supplier power is very limited in the Quick Service Restaurant Industry. They have little control of distribution and sale. Because of its mass, there are many other foodservices competing against each other for profit and food players. It is crucial to have a high volume, great quality, and lower cost business (Business Source, 2012). This is difficult for companies to deal with because if they offer higher priced ingredients, the chain would need to put larger cost on their product, giving them a competitive disadvantage. Sysco is one the largest corporation in North America with over 400,000 customers. However, Sysco is too dependable on the restaurant industry, if customers bail out or the economy collapses, they will no longer have enough revenue to support themselves (Business Source, 2013).

24

Buyer Power Supplier Power

Sysco Distribution Figure 14

Source: Google Images

The Quick Service Restaurant Industry is dominated by global chains. Established companies have the resources and capability to avoid consumer separation and have little threat from new players. Exiting chains have developed themselves and are recognized by the consistency in their goods and services. New brands struggle to receive recognition as advertising and promotions heavily effect revenue especially in the beginning stages of entrance. The increase in social media gives these firms the ability to advertise socially. However, diminishing advertising costs, which is a threat of a new entry that would hurt the industry is very low. Even though the industry has close to no barriers, the development of existing companies are still stronger than new players. (Datamoniter, 2014).

Major chains could possibly be effected by the nations current health kick. Consumers are beginning to expect more than just quickness within the industry and ultimately resulting to different outlets to do so. In the marketplace today, the Quick Service Restaurant Industry is more threatened by substitutes such as grocery stores, convenience stores, and mass retail chains rather than a new quick service restaurant entering into the competition (Kell, 2016).


Substitutes are a large concern for the companies in the Quick Service Restaurant Industry. Threats can come from a multitude of fields in this market such as the growing number of casual-dining consumers, healthier and higher quality food alternatives, and grocery stores.

In regards to restaurants that produce burgers, they tend to have a slow amount of growth in the industry. This, coupled with similar menu items, leads to a fair amount of rivalry between firms. Profitability then becomes difficult for all competing businesses. In recent history “the ‘better burger' trend, which includes operators such as Five Guys, In-N-Out Burger, and other places with emphasis on food quality and customizable burgers, has been the best performing part of (the burger) segment over the past five years” (Alvarez, 2016).

Although McDonalds is at the apex of the industry earning $25.41 billion last year, the rise of supermarkets and grocery stores are growing at a rate of 1.4% over the past five years in the U.S. (Hurley, 2016). Also, NPD Group claims that in-store dining and take-out of prepared foods from grocers have grown 30%, since 2008 (Kell, 2016). Since consumers are able to purchase and cook healthier and cheaper foods, grocery stores pose a threat to the Quick Service Restaurant Industry as a smart alternative.

25

Figure 15

Threat of New Entry Threat of Substitution

Figure 16

Politics affects the way that quick service restaurants are able to operate. With new social trends emerging, such as the recent health initiative and the minimum wage issue, and with the political landscape changing in response to these trends, quick service restaurants need to keep an eye on political trends in order to anticipate and react to changes. These changes can have an effect on their costs and other day to day operations. The politics that affect QSRs changes based on market locations, so they must understand the political landscape of the areas where they operate or are thinking about operating in.

Minimum wage laws are an issue that affects a restaurant’s labor costs. In this case, quick service restaurants, who employ a large number of workers at minimum wage, are troubled daily by the changes in their operations. The federal minimum wage within the United States is only $7.25, however it differs from state to state. Areas with higher costs of living are seeing an increase in the minimum wage, such as in New York City, where the minimum wage will be raised to $15, by 2018 (Legislatures, 2016). Also, minimum wage differs across the

world. For example, the minimum wage in the UK is 6.70 pounds, or $8.80 USD. This difference in minimum wage can have a large affect on the overall operating costs because, in 2014, the QSR Industry spent 25.4% of its total costs on labor (Statista, 2016).

The Food and Drug Administration (FDA) as well as other local and federal agencies have an impact on quick service restaurants. They introduce laws and other regulations that set parameters for what quick service restaurants can and cannot do. This ranges anywhere from how clean their restaurants must be to how they present their menus. The FDA now requires quick service restaurants to display their nutritional information. The calorie count must be visible on the menu, and other nutritional information must be available somewhere else (FDA, 2015). This sort of regulation is what QSRs need to be ready to adapt to. They must allocate the resources necessary to present this information correctly, and many other regulations will require the allocation of resources in order to successfully comply.

Appendix B: PESTLE Analysis

26

Figure 17


Politics Politics (cont.)

The Quick Service Restaurant Industry withholds a prominent role in the Nation’s economy. The industry’s economic health is now a leading indicator of the nation’s overall economic health, and industry growth is a significant factor in the nation’s economic outlook. Quick service restaurants take up 80% of the Food Service Industry and globally generate over $570 billion in revenue yearly (Franchisehelp, 2016).

In years’ prior, the Quick Service Restaurant Industry upholds better during economic downfalls as consumers result to cheaper options when on a budget. Numerous factors, including a slight economic drop, have surfaced concerns for the industry. Being that China consumes one-third of the global economy, their current increase in globalization and reliance for foreign trade could have an effect on the U.S. economy, which would cause concerns for stock markets globally. The U.S. Stock Market has recently taken a hit following the Brexit announcement, but has maintained to remain above opening numbers (Mintel, 2016).

The Quick Service Industry is affected by these global issues in regards to consumer spending. Even though the industry is known for low-priced items, consumers tend to not be active during economic hardships.

The industry’s market has not diminished enough to have an effect yet but many are concerned. World Bank has lowered its Global Growth Estimates for 2016 after obstacles have come to light. Many factors such as slow job growth and an increase in gas prices could be indications of a slowing economy. Along with that, an election year will most likely cause a decline in consumer confidence index (CCI) and a fluctuation in the U.S economy (Mintel, 2016). The Quick Service Industry is changing as a whole and has a growing complex for healthier eating. Ultimately, the market’s forecast highlights a link between a positive economy and healthy food choices.


27

Economy Continued pressure from environmental enthusiasts, and governments around the globe have forced the Quick Service Restaurant Industry to start thinking more “green”. Every year large fast food chains are creating initiatives to become more environmentally friendly hoping to grab customer loyalty. With the rise of obesity and people becoming more health conscious, quick service restaurants must deal with the challenges to improve the image of their industry. With this in mind, eco-friendly strategies are being practiced (Gartenstein, 2016). At 49%, fast food items are the biggest source of litter in the U.S. Over the years, quick service restaurants are creating initiatives to reduce this amount of waste (Cheeseman, 2011). Massive improvements have been made throughout the industry to cut down on waste and implement recycling to respond to eco friendly consumers. In UK, Starbucks, one of the world's most popular coffee chains, developed the “frugal cup,” which is made from 100% paper. This paper cup initiative has led to a pledge to substantially increase paper cup recycling rates in 2020. This pledge has been signed by other leading chains, such as McDonalds (Lexis Nexis, 2016).

The Quick Service Restaurant Industry has taken steps to “go green”, but they can still improve substantially. How fast they improve will be driven by how adamant fast food craving consumers become about this industry's effect on the environment.

Environment

33%

29%

28%

6% 2% 2%

Littering in the U.S.

Fast Food Paper Aluminum Glass Plastic Other

Figure 18

Sources: IBISworld

The Quick Service Restaurant Industry has a market that differs around the world. For that reason, the industry must keep current on the trends and desires of their customers. A recent trend is the gradual shift towards healthier eating by the average consumer. Customers around the world are becoming more conscious about their food options wanting to know ingredients, sourcing, and preparation methods for their food. This reveals a shift on how brands market themselves in order to stay competitive in the Industry (Janssen, 2016). The Healthy Eating Index explains that the intense customer demand for healthier menu items will force restaurants in the quick service restaurant industry to phase out unhealthy ingredients found in their food, contributing to a global shift in consumer diets (IBISWORLD, 2016).

Another factor that is trending is the aesthetic modernization of quick service restaurants. It is human nature for the consumer to be drawn towards something attractive to the eye. Therefore, companies are transforming all over the world to conform to the elevated experience that their customers desire. These new innovative dining experience makes the consumer feel sophisticated, as well as the quality of their food being more nutritious (Loewe, 2015).

The continuously growing media outlets is a trend that is influencing the quick service restaurant industry more than ever. Fast food documentaries are exposing the dangers and real processes of fast food preparation. After the debut of Fast Food Nation in 2015, McDonalds experienced a 2.3% drop globally in its Fall quarter demonstrating the shift of demand towards a healthier food culture by the consumer (Passport, 2015).

On the contrary, the rise of social media is being adopted by multiple quick service restaurants in order to develop a customer fan base. The highest revenue quick service restaurants had the strongest social media presence, while the revenues of the companies with a low social media presence suffered sufficiently (Mergent, 2016).


Source: Mergent, 2016

28

Table 2

Social Social (cont.)

The Quick Service Restaurant Industry is a market that changes daily. To be at the forefront of competitors, a business must be able to adapt to the natural changes in society. Since the inception of social media, the market has continued to grow at an even faster rate. For instance, in a graph displaying the revenue of the QSR Industry in the United States shows a $44 billion increase from 2002-2015 (Statista, 2016, p. 6). The inception of social media came into play circa 2000 and took the industry by storm. For those companies competing to be the industry leader, it is imperative that they upgrade their technology or otherwise meet their impending demise.

Where there was once a barrier of information available to the public, there is now a plethora. Consumers access to information has grown tenfold, which is both helpful and hurtful to companies in the QSR Industry. An example of recent innovation using the current tidal wave of new technology is the influx of mobile ordering systems. Some companies have begun “preparing in-house systems and giving consumers the option to order takeout through their mobile devices – something that will essentially become mandatory in today’s on-demand society” (Hanson, 2016, p. 72). Aside from pizza chains such as Pizza Hut and Domino’s, the fast food companies Chipotle, Starbucks, and McDonald’s have begun incorporating the use of mobile ordering and have seen almost instant success. Faster customer turnover rates spawning from upgraded technological practices results in an increase in a company’s efficiency and sales.

Just like any other industry, the Quick Service Restaurant Industry has regulations, guidelines, and laws it must abide by to ensure fairness and safety to all patrons involved. The Quick Service Restaurant Industry provides products that are consumed, and therefore must follow Food Code Regulations made by the Food and Drug Administrations (FDA) (IBISWORLD, 2016). Recently, the FDA is working on the gradual phase out of trans fat, since it is linked to health illnesses such as heart disease. Legal regulations in the Quick Service Restaurant Industry also include employment laws. In the United States, fast food employees are low skilled workers, requiring them only to be paid minimum wage and receiving employee benefit regulations. (IBISWORLD, 2016).

The Affordable Care Act (AFA) ensures that companies with fifty or more employees who individually work thirty or more hours in one week are granted healthcare coverage or the company is infracted with a fine (IBIS, WORLD 2016). However, this has a low impact on the Quick Service Restaurant Industry because these companies do not individually employ a large enough staff to meet the quota of the AFA. Franchising laws are made in the United States at a federal and state level and are governed by the Federal Trade Commission (FTC) (IBISWORLD, 2016). The FTC identifies the three components of a franchise as having a trademark to distribute goods and services under, has control of the franchises operation, and pays a fee to the franchisor of at least $500 (IBISWORLD, 2016).


29

Technology Legal

Business Model Canvas: McDonald’sAppendix C: Business M

odel Canvas: McDonald’s

Cost Structure

(numbers in millions) 2015 2014 2013Company-operated Restaurant Expenses

$13,976.9 $15,288.3 $15,578.6

Franchised Restaurants-occupancy Expenses

$1,646.9 $1697.3 $1,624.4

Channels(numbers in millions)

2015 2014 2013

Sales from Company Operated Restaurants

$16,488.3 $18,169.0 $18,874.2

Revenue from Franchised Restaurants

$8,924.7 $9,272.0 $9,231.5

Total Revenues

$25,413.0 $27,441.3 $28,105.7

Value Proposition- Performance Value

Proposition- Value of speed and

availability - Inexpensive

Key Activities- Franchising- Production of food- Ronald McDonald House - Involvement with other

philanthropic organizations

Key Partners- Large system of

suppliers

Key Recourses- Brand image and

recognition- High operating cash- Market Share

32%

31%

25%

12%

% of Revenue by on Market

U.S. Market

International Lead Market

High Growth Market

Foundational Market

Revenue Streams- U.S. Market – United

States- International Leads

Market – Established markets with developed economies

- High Growth Market – China, Russia, Korea, Poland, Italy, Spain, the Netherlands, and Switzerland

- Foundational Markets – 80 markets across Asia, Europe, Middle East, Africa, and Latin America

Customer Relationships- Brand Loyalty - Limited interaction within

restaurant - Repeat customers through

promotions

Customer Segments- Mass Market- Middle income/Working class

and below- Family 30

Table 4

Table 3

Figure 19

Source: McDonald’s Corporation Annual Report, 2015.

Source: McDonald’s Corporation Annual Report, 2015

Source: McDonalds, 2016

Key Partners Value Propositions

Customer Segment Cost Structure

Key Activities

Customer Relationships

Key Resources

Channels

Revenue Streams

Appendix E: Business Model Canvas: Yum

! Brands Inc.

• Worldwide leader in emerging markets• Benefits and compensations towards in

employees, including health and fitness• Aon Hewitt Top Companies for Leaders in

North America• Diversity and culture • Franchising is key • China business • Non-profits such as World Hunger Relief

• Worldwide leader in emerging markets• Benefits and compensations towards

employees (health and fitness training)• Diversity and culture • Franchising • Non-profits such as World Hunger Relief• Promotional strategies • Giving back to the community • Environmental friendly

• Green buildings, paper packaging, waste, water efficiency

• Mass Market• Worldwide consumers ( more than 130

countries)

• Real estate• Non-profits, marketing and advertising • Labor cost• Occupancy cost • Food, beverage and packaging cost

• Strong relationship with consumers • Loyalty with offering different food

segment options • Focus on ”wellbeing” • Attracted by different promotions

• Social Media• Programs across the world that unlock

individual talent, inspire growth in each other and foster both business and personal development

• Volunteerism, donations• Non-profits

•Apply for Yum! Self-Certification in our portal •Minority-Owned Business Enterprise (MBE) •Woman-Owned Business Enterprise (WBE) •Lesbian, Gay, Bisexual and/or Transgender Owned Business Enterprise (LGBTBE) •Business Enterprise Owned by People with Disabilities (BEPD) •Veteran-Owned Business Enterprise (VBE) •Disabled Veteran-Owned Business Enterprise (DVBE) •Small Business Administration

• Raw materials • Employees• Suppliers • Brand image• Real estate

Business Model Canvas: Yum! Brands

31

Table 5

Appendix D: Business Model Canvas: Chipotle M

exican Grill

Key Partners• Millions of farmers• Close relationship with suppliers, who

come from farms

Key Activities

Cost Structure

Customer Segment

Value Propositions

Channels

Revenue Streams

Key Resources

Customer Relationships

• Importance of culture and environment• Better for you• Food With Integrity • Menu and Food Preparation • Quick service with fast casual quality • Marketing and promotional strategy • Do not franchise • Sustainability

• Followers of health movement • People in the U.S, Canada, France,

England, and Germany• Millennial’s

• Restaurant team/ 59,330 employee’s expenses

• Marketing and promotional expenses• Food, beverage, and packaging cost• Occupancy cost

• Food With Integrity to boost brand• Marketing/advertising• Staying intact with Food and Safety

Regulations

• Raw Materials • Suppliers• Employee and managing team

• Strong relationships with environment and health, benefit consumers

• Unpopular relationship with consumers because of E. Coli illness• Lost trust in light of food safety

incident• Must keep customers informed

with promotions and customer benefits

• Supplier relationships deliver a competitive advantage

• Social media• Locations in the U.S, Canada, France,

England, and Germany

Business Model Canvas: Chipotle Mexican Grill

Year ended December 31(dollars in millions)

2015 2014 2013 % Increase (Decrease)

2015 over 2014

% Increase (Decrease)

2014 over 2013

Revenue $4,501.2 $4,108.3 $3,214.6 9.6% 27.8%

Average Restaurant Sales $2.424 $2.472 $2.169 (1.9%) 14.0%

Comparable restaurant sales increase

0.2% 16.8% 5.6%

Number of restaurants as of the end of the period

2,010 1,783 1,595 12.7% 11.8%

Number of restaurants opened in the period, net of relocations

227 188 185

32

Table 6

Appendix E: China and India Financials

India Disposable Income

China Disposable Income

Figure 20

Figure 21

33

Appendix F : China and India Financials for Companies

U.S International Leads Market High Growth Markets Foundational Markets$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

$9,000

$10,000

McDonald's Revenue by Market(dollars in millions)

2013 2014 2015

Figure 22

China

India

0 500 1000 1500 2000 2500

Numer of McDonald's Locations in China and India

KFC

Pizza Hut

0 1000 2000 3000 4000 5000 6000

Number of Yum! Brands Restaurants in China and India

India China

Figure 23

Figure 24Source: Statista, 2016



34

Appendix G : Third-Party Delivery Services Statistics

35

Figure 25

Source: RocketInternet

Appendix H: Company Financial RatiosCompany Financials

Return on Equity (ROE) – Return on Equity is a ratio that helps measure a companies profitability. This ratio shows how many dollars of profit a company generates with each dollar of equity. As of June 30, 2016, McDonald’s had a ROE of 77.26%, Yum had 175.10%, and Chipotle was at 10.80%

Yum Chipotle McDonald's0.00%

20.00%40.00%60.00%80.00%

100.00%120.00%140.00%160.00%180.00%200.00%

54.22%22.93% 35.04%

47.70%25.63% 32.35%

175.10%

10.80%

77.26%

Return on Equity

2014 2015 2016

Profit Margin – Profit margin is a percentage that shows how much revenue from sales exceeds the costs. This is another statistic that is used to judge a company’s profitability. As of June 30, 2016, McDonald’s profit margin was 17.44%, Yum! was at 11.27% and Chipotle was ay 2.56%. This percentage shows how good a company is at controlling their costs.

Yum McDonald's

-20-10

01020304050

1.40 0.962.17 1.70

-13.79

40.64

Debt to Equity Ratio

2014 2015 2016

Figure 27 Source: Ycharts, 2016

Yum Chipotle McDonald's0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

10.32% 10.50%

19.31%

7.57%11.71%

18.50%

11.27%

2.56%

17.44%

Profit Margin

2014 2015 2016

Debt to Equity Ratio – Debt to equity ration is a ratio used to measure the financial leveraging of a company. This ratio shows how much debt a company is using to finance its operations in relation to equity. As of June 30, 2016, McDonald’s had a ratio of 40.64, Yum! was at -13.79, and Chipotle had no data for this ratio. McDonald’s ratio is at a higher level than previous years because their new business strategy includes increasing their financial leverage.

Figure 26

Figure 28

36

Fall 2016 PM101 Team 5 P1 Final Report

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