cDonald’s

Industry
Analysis
Group 3
Chase Mueller Ashley Hoptay
Olivia Erwin Tanner Gilreath
Paige Stone Brandon Laviage
Anna Rendon
SIC Codes
 The fast food industry is categorized under:
 SIC 5812, Eating Places
 establishments primarily engaged in the retail sale of
prepared food and drinks for on-premise or immediate
consumption as well as caterers and industrial and
institutional food service establishments.
 Consists of seven different categories: dinner theaters, full-
service restaurants, limited-service restaurants, cafeterias,
snacks and nonalcoholic beverage bars, food service
contractors, and caterers.
NAICS Codes
 With the replacement of the SIC Codes, the
fast food industry is categorized under:
 NAICS 722211, Limited-Service Restaurants
 establishments primarily engaged in (1) providing food
services where patrons generally order or select items and
pay before eating or (2) selling a specialty snack or
nonalcoholic beverage for consumption on or near the
premises.
 Orders may be consumed on premises, carried out, or
delivered to the customers’ location such as pizza delivery.
History of Fast Food Industry
 1921 – White Castle is viewed as the beginning
of fast food
 Changed the public’s perception; gave hamburgers a
better reputation of quality and gave the image of
cleanliness through its use of “white”
 Rise of cars also gave rise to the industry
 Many restaurants utilized short-hand cooks, drive-ins,
and carhops to capitalize on the new craze that the
American people had with staying in the car and
eating.
History of Fast Food Industry
 1948 – Dick and Mac McDonald reopen their
restaurant, McDonald’s Famous Hamburgers,
after implementing the “Speedee Service
System”, which is synonymous with the
assembly line. Simplified operations.
 The McDonald brothers also switched from
dishes and glassware to paper and plastic to
increase efficiency.
History of Fast Food Industry
 Ray Kroc capitalized on the blue ocean that
the McDonald’s brothers created
 1955 – Ray Kroc opened the first
restaurant in the McDonald’s Corporation
 As other fast food restaurants opened in
the mid-1950s to the late-1960s, they
imitated and implemented the “Speedee
Service System”.
The Four Major Players
 McDonald’s is the leading global quick service
restaurant retailer as well as one of the world’s
most well-known and valuable brands.
 31,377 restaurants in 118 countries
 Franchisees operate 20,505 restaurants
 YUM! Brands Incorporated consists of KFC,
Pizza Hut, Taco Bell, Long John Silvers, and
A&W All-American Food Restaurants.
 35,000 restaurants in 100 countries and territories
 80% owned by independent franchise operators.
The Four Major Players
 Burger King Holdings, Incorporated
 Operates 11,565 restaurants in the United States, Canada,
Europe, the Middle East, Africa, the Asia Pacific, and Latin
America.
 10,205 are owned by franchisees.

 Wendy’s/Arby’s Group
 Operates about 10,000 restaurants in the United States and 21
countries.
 6,645 of them are Wendy’s, and 5,231 of all Wendy’s fast food
restaurants are franchised.
The Four Major Players
 Hedgehog Concept
 The fast food industry utilizes the hedgehog
concept of doing one thing really well: to serve
the most customers as possible in a given time
period.
 The four companies focus on speed, quality, and
convenience, and they keep these factors at the
forefront of their operations in every location.
The Four Major Players
 Hedgehog Concept
 One of the key success factors of the fast food
industry is uniformity, which has allowed the
companies to go global and exceed at their
endeavors.
 Offering the same service at every location gives
customers reassurance in the brand
 Ray Kroc was quoted as saying, “the organization
cannot trust the individual; the individual must trust
the organization.”
Chief Business and Economic
Characteristics
 Fast food restaurants represent one of the
largest segments of the food industry.
 In the United States alone, over 200,000
fast food restaurants are operated bringing
in $120 billion a year.
 Also known as quick service restaurants.
Chief Business and Economic
Characteristics
 Industry is made up
of international,
national, regional and
local chains
 Chains can be
corporate owned or
franchised
Chief Business and Economic
Characteristics
 Franchising:
 The fast food industry can contribute much of its
growth and success to franchising
 Why franchise?
 Franchisees are given the ability to leverage a well-known
brand name and benefit from the purchasing efficiencies and
operational expertise of the franchiser.
 Franchisers still hold the right to control operational
guidelines and quality adherence, and they also hold most of
the rights over menu offerings, hours of operation, pricing,
and store design. Gives the company the ability to grow.
Chief Business and Economic
Characteristics
 Franchising and McDonald’s:
 Kroc realized the company could be franchised
differently than others, which would help them grow
and attain profits.
 McDonald’s invested in real estate and rented the
property to its franchisees, which enabled the returns
to be much higher.
 Largest owner of retail property in the world
 Makes most of its profits from rent it receives from its
franchisees
Chief Business and Economic
Characteristics
 Convenience
 Volume-driven business so customer
convenience is key
 Located in high traffic areas
 Transaction speed is vital to ensure more
customers are served in a given amount of time
 Limited menus speed the food preparation
process and help with quality control by reducing
the amount of worker error
Chief Business and Economic
Characteristics
 Technology
 Used to maximize efficiency and effectiveness
 Double drive-thru windows – speed transaction time
 Inventory management/automated replenishment – important since
dealing with perishable items; saves time dealing with suppliers,
new equipment, and computerization
 New equipment - ovens that combine convection heat, air
impingement, and microwave energy to help cook the food faster
 Computerization – Point-of-Sale (POS) Systems and Express pay;
reduce ordering errors and cut down transaction time
Chief Business and Economic
Characteristics
 Technology and McDonald’s
 McDonald’s has been at the forefront of fast food
technology since the company opened
 Implemented E-ZPass, FasTrak, and FreedomPay
on top of Express Pay
 McDonald’s Philippines Help Desk Service
 Echelon’s LonWorks Technology
Chief Business and Economic
Characteristics
 Role of Government
 The government does not control profits or contracts of the industry,
but local, state, and federal governments have adopted laws and
regulations that involve various aspects of the restaurant business,
such as: •Advertising •Environment
•Franchising •Zoning
•Health •Employment
•Safety
 Legal and regulatory environment of the industry worldwide exposes
the companies to complex compliance, litigation, and other risks that
affect operations and increase the cost of doing business
 Developing markets also bring risks associated with new and untested
laws and judicial systems
Chief Business and Economic
Characteristics
 Role of Government: Intellectual Property
 Each company owns or is licensed to use
trademarks, service marks, patents, copyrights, trade
secrets, and other proprietary information that is
important to the company’s business.
 Depending on the jurisdiction, trademarks and
service marks are generally valid as long as they are
being used or are registered.
 However, patents, copyrights, and licenses only last
for various durations.
Chief Business and Economic
Characteristics
 Role of Government and McDonald’s
 The “McDonald’s” trademark and the “Golden
Arches” logo are imperative to the company’s
business and brand equity.
 The “Golden Arches” are now more widely
recognized than the Christian cross
 To protect its investments in foreign operations,
McDonald’s uses forward foreign exchange
contracts, foreign currency exchange agreements,
and foreign currency denominated debt
Chief Business and Economic
Characteristics
 Problems and Issues
 The fast food industry has taken a lot of heat for:
 Advertising to children – it sparks obesity at a young age
 Health concerns – taking the blame for people’s diet issues
and weight related diseases
 Environment – no federal laws or regulations; must follow
local laws; largest consumer of electricity in the American
retail sector; accounts for 20% of U.S. litter
 Employment concerns – largest private sector employer; do
not offer workers valuable life experience, the opportunity to
move up, safe working conditions, or satisfactory wages and
benefits
Chief Business and Economic
Characteristics
 Mass Production and Control of Suppliers
 Mass production is utilized to retain consistency
and uniformity in products
 Food is mass produced in a factory
 Since this process involves sending a large
amount of food through a factory in a short
amount of time, bacteria, viruses, and parasites
can contaminate a significant portion of the food
very easily and quickly
Chief Business and Economic
Characteristics
 Mass Production and Control of Suppliers
 A handful of corporations have an unprecedented
degree of power over the nation’s food supply.
 The vast purchasing power and demand for a
uniform product have encouraged fundamental
changes in how cattle are raised, slaughtered, and
processed, which has made the meatpacking
industry very dangerous for both its employees and
consumers of the product.
 Can induce deadly pathogens such as E. coli.
Chief Business and Economic
Characteristics
 Mass Production, Control of Suppliers and
McDonald’s
 Safety control through Echelon’s LonWorks
Technology
 Taken stands against the meatpacking industry
by only purchasing the meat that followed FDA
rules
Chief Business and Economic
Characteristics
 Competitive Environment
 All companies compete on the basis of quality of food and
quick service; therefore, differentiation is key
 Service, experience and brand name
 High levels of competition have caused bloody red oceans
in this industry
 Dollar menus and value meals
 Chains own about 88% of the market share causing
independents to go out of business much faster than the
national failure rate; rising threat of fast casual restaurants
is currently low
Chief Business and Economic
Characteristics
 Economic Factors: State of the economy
 The spending slowdown and high food and energy prices have
caused a slowdown in growth in the fast food industry
 In 2008, 55% of restaurant operators reported a same-store
sales decline
 Food and beverage inputs account for 33 cents for every dollar
of sales. With already low operating margins, a slight increase in
these costs can have an outsized effect on profitability.
 The bloody red oceans caused by price wars makes it difficult to
pass the rising costs to customers
Chief Business and Economic
Characteristics
 Economic Factors: State of the economy
 Explosive growth in foreign markets offset slowing
growth in the United States
 Prices are being cut in China, which is McDonald’s
and YUM! Brands largest market for growth
 However, the limited-service eating places are in
better shape than the full-service eating places.
 With the economic downturn, more people are cutting back
on how much they spend when eating out, and therefore,
are turning to fast food restaurants.
Chief Business and Economic
Characteristics
 Economic Factors: Market Growth
 Gaining new customers as consumers are looking for
the convenience of eating out and quality meals at
lower prices
 Due to China’s size and growth rate, it still remains an
attractive market
 Vast room for international growth as well as exploring
strategy canvases enables the industry to grow and
remain attractive
 McDonald’s utilizes research and development to cater to
international tastes and attain customers
Chief Business and Economic
Characteristics
 Strategy Canvases and McDonald’s
 McCafes – increase customer base and redefine
McDonald’s image
 Revamping stores in the United Kingdom to appeal to
businessmen/women and increase the experience of
all customers
 Constantly searching for ways to redefine its market
boundaries or to create blue oceans and attain a
larger market share as well as provide its customers
with more convenience and a better experience.
Social Factors
 Health Food
 New menu items
 Listing nutritional facts
 Corporate Social Responsibility
 Ronald McDonald House
 Dave Thomas Foundation
Social Factors
 Diversity
 Workers
 Pride 360˚
 “Going Green”
 Packaging
 Buildings
Technological Trends
 Wi-Fi
 15,000 McDonald’s
 Burger King, Wendy’s, Subway, Taco Bell
 Equipment
 Drive – Thru’s
 Outsourcing orders
 Time Clocks
Economic Factors
 Current Economic Status
 People want cheap food
 Minimum Wage
 High percent of workers make minimum wage
 Raise food prices
Political and Legal
 “Cheeseburger Bill”
 Prevent law suits
 State Issues
 California - ban on fast food
 International Issues
 Canada - calorie count
 Law Suits
Geographical Factors
 Globalization
 McDonalds - 60%
 Yum! Brands - 50%
 Convenient locations
 Way home from work
 Corner of block
 Malls, Supermarkets, Gas Stations
 McDonalds - Wal-Mart
 Little Caesars - K-Mart
Competitive Factors
 All other factors
 Social
 Technological
 Economic
 Political/Legal
 Geographical
 Predicting next move
5 Forces Model
 Rivalry Among Existing Firms
 Main Competitors
 McDonald's, Yum! Brands, Wendy’s, Burger King
 Total Industry Sales Growth
Industry Growth
9.85%
Percentage

8.42%
6.02%
2.16%

2005 2006 2007 2008

Year
5 Forces Model
 Concentration of Competitors
Market Share Percentage
Burger King Wendy's Yum Brands McDonalds

58.36% 59.09% 59.82% 59.80% 60.14%

Percentage

28.53% 27.93% 27.33% 27.36% 27.49%

7.46% 7.54% 7.18% 6.98% 6.47%
5.65% 5.44% 5.67% 5.86% 5.90%

2004 2005 2006 2007 2008

Year
5 Forces Model
 Differentiation
 Hard to separate each other because they offer
similar products
 So they compete on price
 McDonald’s able to dominate the market because of the
size of the company
 Switching Costs
 Hard to do, why?
 Real Estate, franchisees, and many employees
5 Forces Model
 Economies of Scale
 Efficiency
 R&D, New Technology
 Economies of Scope
 Learning from past experiences
 Example: Dollar Menu
5 Forces Model
 Threat of New Entrants
 Economies of Scale
Total Assets
McDonald's Yum Brands Burger King Wendy's
$29,989 $28,975 $29,392
$27,838
$25,525
Millions

$5,620 $5,696 $5,698 $6,368 $7,242

$2,458 $2,665 $2,723 $2,552 $2,517
$1,848 $1,846 $2,072 $2,060 $1,789

2004 2005 2006 2007 2008

Year
5 Force Model
 First Mover Advantage
 Get in while its early, and grasp suppliers and
consumers
 Legal Barriers
 Patents, trademarks, contracts, licenses, and
government regulations to limit new companies
5 Forces Model
 Threat of Substitute Products
 Relative Price and Performance
 Everyone produces the same products, need to
compete on price and convenience
 Buyers Willingness to Switch
 Brand performance, and high quality relationships
with customers
5 Forces Model
 Bargaining Power of Buyers
 Price Sensitivity
 Differentiation of products, and cost of switching to
another firm, easy in the fast food industry
 Relative Bargaining Power
 Real vs. Nominal buying power
 Customer Loyalty
5 Forces Model
 Bargaining Power of Suppliers
 Price Sensitivity
 Leverage over small suppliers
 Large Industry, companies name prices and
quantities
 Supplier relations and price breaks
 Strategic Alliances
Competitive Moves
 McDonalds
 is the industry leader and has been known as the industry trend
setter, yet it has not always been at the forefront on capitalizing
new niche markets
 They were the first to create and master the “speedee service
system “ also known as the assembly line
 They were also made the first strategic move of purchasing their
own land to rent to franchisees
 They were also the first to advertise with an character , which
strengthened their brand equity
Competitive Moves
 YUM! Brands
 Taco Bell
 The first fast food chain to offer free drink refills for
its customers
 Also created a 3 tier pricing strategy, offering
products at 79¢, 89¢, 99¢
 Also the first its menu completely trans-fat free
Competitive Moves
 KFC
 Was the first company to franchisee its
businesses
 Made the strategic move of offering home cooked
style meals, which included coleslaw, macaroni
and cheese, baked beans, and rice
 Burger King
 Was the first to emphasize customized order
with its “Have It Your Way “ campaign
Competitive Moves
 Wendy’s
 First to implement value menu, also referred to
as the dollar menu
 First to create a super bar which was their
concept of an all you can eat buffet
 First to introduce salads and grilled chicken
sandwiches
Next Competitive Moves
 McDonalds is seen as being the company who
will make the next strategic moves because of
their need to be at the forefront of the market
and remain the leader in the industry.
 Implementation of the McCafes to draw
customers from coffee shops
 First to respond to economic downturn by
lowering prices
Competitive Success
 Customers seek products that are readily
available and quickly delivered

 Major fast food players look across the

industry to understand the driving forces
behind the market’s competitive success,
so companies can capitalize on these
concepts
Industry’s Consistency Approach
 One of the biggest key success factors for the fast food
industry is their ability to offer consistent products and
services at every location
 Franchises and chain stores must reliably offer the
same product or service at numerous locations to build
customer loyalty
 YUM! Brands, Wendy’s, and Burger King all take the
same approach which has made them leading
competitors with McDonald’s
Icons
 Another driving force of the fast food industry has been its ability to
capture both young and old audiences
 Each leading competitor has easily recognizable icons that appeal
to its target audience, which in turn differentiates them from its
competitor
 These icons are easily recognizable and add to the experience
when eating and also create a positive attitude
Convenience
 Consumers look to quick services restaurants to
provide them with a quality meal that will fit into
the pace of their fast moving lifestyles
 The large number of locations within close
proximity to each other is ensure customer
convenience at every turn
 Many fast food chains can be spotted at
shopping centers, airports, gas stations
Franchising the Industry
 Franchising has played a key role in the
success and growth of the fast food industry
Inside Out Approach: Focusing on Quality
 McDonalds has taken an “inside out” approach to drive
sales, by improving its inside approaches of store
operations, product offerings, and customer experiences
McDonald’s Skillful Marketing: 5P’s
 People
 In order to ensure a friendlier and more customer focused support staff
the emphasize hospitality training known as the People Approach -
Respect, Commitment Enhancement, & Talent Management
 Products
 Incorporates uniform quality products and implemented the McDonald’s
Holistic Approach- High Quality Choices, Consumer Friendly Nutrition
Information, & Communicate Responsibly
 Place
 Each location is strategically analyzed based on demographics,
population, major roadways, and traffic that passes through the site to
find the best location
McDonald’s Skillful Marketing: 5P’s
 Price
 Allows customers to enjoy a quality meal without a hefty price
 Created the Value Menu (Dollar Menu) to get great food at bargain
prices
 Although McDonald’s is taking dollar menu items as a “loss leader”
adding to the menu such as large fries and a drink has allowed the
restaurant to be profitable
 Promotion
 Promotional character and symbols
 Subliminal Marketing
 Co-operative Marketing
 Traditional Advertising
Conclusion
 After analyzing the fast food industry’s history, growth, and current
success factors, one can conclude that it is safe to stay in this particular
industry.
 The fast food industry has seen substantial growth since its creation
through the proliferation of its chains through franchises. By franchising
the industry, chains have been able to rapidly expand and quickly capture
a large percentage of the market share at a cheaper cost to them.
 The major players in the fast food industry offer consistency and
convenience, which are two characteristics of commodities that people
search for because these needs have been instilled in people since they
were born.
Conclusion
 Some may argue that the industry is coming to a halt due to the
market saturation in the United States, but there is a lot of room for
growth nationally and internationally.
 The industry also does not need to worry about new threats
entering the market at this time because of the state of the
economy.
 McDonald’s understands the importance of brand awareness and
recognition, so it consistently spends the most on advertising, which
has solidified its position as one of the most well known brands in
the world.
Conclusion
 McDonald’s stands at the forefront of the fast food industry. Another
driving force that keeps the company locked in its position is the
large amount of capital that McDonald’s owns as well as its
influence with other industries.
 McDonald’s is the largest private real estate owner, and the
company employs about 1.6 million people worldwide, plus it is a
large purchaser of beef, poultry, pork, cheese, beverages, and
paper and packaging material.
 Therefore, the company is extremely vital to the industry as well as
the economy as a whole because its presence impacts jobs and the
success of other industries. This also reinforces the company’s and
the industry’s market strength and attractiveness.