Debriefing of KFC and Fast Food

KFC and the Fast Food Industry

Understanding Industry Structure

Prof. Marcus Hurt 2

Major Characteristics of the Fast Food Business (Industry)

Industry in maturityGrowth rate still holds at around 4%

Relatively concentratedFull-service and fast-food segments do 64% of food-service sales (2002)

However, 858,000 US restaurants and food outlets in 2002$400 billion industryScope of rivalry is global

Major chains pursue growth in foreign markets to overcome domestic maturityHowever outlets compete against other local restaurants

SegmentationType of foodStyle of consumption

Prof. Marcus Hurt 3

Industry Segments and Business Units

Different segments in the food industry may be considered businesses by a firm that is already in these businesses or thinking of going into these businesses by acquisition or developmentExample: Yum, which is made up of spin-offs by PepsiCo:

KFCTaco BellA & WPizza HurtLong John Silver’s

Prof. Marcus Hurt 4

Difference between Strategic Segmentation and Marketing Segmentation

Concerns the firm's activities as a wholeDivides activities into homogeneous groups based on:

technology, markets, competitors

Allows decisions on:acquisitions, developmentdivestiture

Stimulates medium or long-term change

Concerns one of firm's activitiesDivides up consumers into groups based on habits and behavioursAllows adapting products to consumers, targeting groups and defining marketing mixStimulates short and medium-term change

StrategicStrategic MarketingMarketing

Source: Ramantasou

Prof. Marcus Hurt 5

CustomerFunctions

CustomerGroups

Technologies

Based on Abell

Defining a Business -Segmentation

Prof. Marcus Hurt 6

Technologies

Based on Abell

CustomerFunctions

CustomerGroups

Defining a Business -Segmentation

Prof. Marcus Hurt 7

CustomerFunctions

CustomerFunctions

CustomerGroups

CustomerGroups

TechnologiesTechnologies

DistributionChannels

Substitutability

GeographicAreas

KSFs

CompetitorGroups

PossibleSegmentation

Criteria

Defining a Business - Segmentation

Prof. Marcus Hurt 8Technologies

ComputersB

usin

ess

Adm

inis

trat

ionCustomer

Functions

CustomerGroups

Engi

neer

s

Con

sum

ers

Scanner/Printers

Digital Cameras

Example of Multi-business Firm in Various Industry Segments

Example: HPExample: HP

Each business

may be an industry

Each business may have its own strategy

This is NOT marketing segmentation

Prof. Marcus Hurt 9

Food-Service Segments

Technologies

CustomerFunctions

Productcontent

Qui

ck

dini

ng

Div

ersi

tyD

inin

g

Soci

alev

ent

Counter & self-serviceTake-away

Full service

Chicken

Mexican

Hamburger

Grills

Sandwiches

Fine Cuisine

Prof. Marcus Hurt 10

PoliticalPolitical EconomicEconomic

SocialSocial TechnologicalTechnological

EDI technology makes JIT logistics possible & integrates industry and supplier networks

Greater disposable income for foods, beverages and lifestyle goodsGeneral trend to consolidation of industries

Government control of hygiene and food qualityNAFTA agreements

Accelerated pace of lifeSearch for diversity in life stylesIndependent life styles for family membersIncreased emphasis on healthy lifestyles

General Environment Factors: PEST Analysis


Horizontal Integration

Raw materialsmanufacture

Componentsmanufacture

Machinerymanufacture

Product/processresearch/design

Raw materialssupply

Machinerysupply

Financing

By-productsComplementary

products

Competitiveproducts

Backward Integration

Forward Integration

Distributionoutlets

Transport MarketingInformation

Repairs andservicing

Componentssupply

Manufacturer

Transport

UNDERSTANDING THE

INDUSTRIAL CHAIN


The Fast Food Industrial Chain

Food ServiceFood ServicePackagingPackaging

Retail StoresRetail Stores

DistributionDistribution

First SectorFirst SectorFood ProductionFood Production

BrandBrandMarketingMarketing

Wholesalers of Wholesalers of raw foodsraw foods

Menu Design &Menu Design &AssemblyAssembly

Second SectorSecond SectorEquipment and fixtures Equipment and fixtures

supplierssuppliers

Second SectorSecond SectorConsumables Consumables

supplierssuppliers

StoreStoreMarketingMarketing

The Fast Food Firm Level


Integration Choices









supplierssuppliers


supplierssuppliers


Company-owned stores like Starbucks










supplierssuppliers


supplierssuppliers


The Five Forces Model


Threat of Substitute Products

Threat of Substitute Products

Threat of New

Entrants

Threat of New

Entrants

Threat of New

Entrants

Rivalry Among Competing Firms

in Industry

Rivalry Among Competing Firms

in Industry

Bargaining Power of Buyers


Bargaining Power of Suppliers

Bargaining Power of Suppliers

The Five Forces Model of Competition


Intensity of Rivalry –Strong Competitive Force

High fixed costsLow customer switching costsDifferentiation does not create loyalty

CommoditizationCustomers seek to change

Maturity and slowing growthCompetitors are similar in size and resourcesConsiderable price competition

Five Forces Analysis


Illustration of High Fixed Costs in the Industry

Fast Food Businesses hold few current assets

They have high fixed costsProperty Plant and Equipment



Threat of Substitutes –Strong Competitive Force

Ready to eat meals for home consumptionFamily restaurantsFull-service, formal restaurants?

Not really a competitor, serves another purpose than just eating

Supermarket delisHome-cooked meals

(a substitute that is seriously declining in dining-out America but is still strong in other countries)



Threat of New Entrants –Moderately Strong Force

Slowing industry growth makes entry problematicThreat of price retaliationEstablished players enjoy high brand equityHigh fixed costs and need for economies of scaleHigh marketing costs and training costs for new stores or franchisesExperience curve is important barrier but can be overcome by hiring of skills from market

The propensity of final users to switch to other foods makes entry at the local level relatively easyCapital intensity can be bypassed by franchising after first store (restaurant)On foreign markets there may be little competitionMajor chains may encourage imitation by local chains better understanding local eating and consumption habits


Barriers to Entry Facilitators of Entry



Complex question: who are buyers in the Five Forces Model

Franchisees?Final consumers?




Bargaining Power of Buyers -Moderate to weak

Fast FoodChains

Fast FoodFast FoodChainsChains

FranchiseesFranchiseesFinal user Final user --

Food Food consumerconsumer

• Price sensitive• Propensity to switch• Low switching costs• Fragmented and

numerous

• Franchise costs weigh heavily in outlet production

• Very high switching costs• Not concentrated• No threat of backward

integration• Industry is crucial to quality

Brand Marketing to sell and maintain franchises


Bargaining Power of Suppliers – Relatively weak

Fast food industry is made up of large players that make volume purchases

Extremely important customer of food producersSuppliers are commodity providersSupplier industries are fragmentedThreat of backward integration by fast food firms is a real oneIndustry switching costs may be low



How does power translate?

Industry can impose low purchase pricesIndustry can force upstream suppliers to hold inventories ready and provide just-in-time deliveryIndustry can impose quality standardsIndustry can impose long payment terms



Example of Power of the Industry over its Suppliers

Fast Food Businesses are practically cash businesses

They can force suppliers to wait a long time for payment



Attractiveness of the IndustryAttractiveness Factors

Growth in dining outInternational expansionCross-segment menu broadening possibilitiesCo-branding and marketing opportunities

Unattractiveness FactorsConstant price competitionMaturity & Slow growthTrue differentiation difficultLines between segments are blurring because of cross-segment cannibalization

KenTacoHutMounting labor cost pressures

Summary: Industry remains attractive for major chainswith good experience curves, operational efficiency and good margins because of power over suppliers


KSFs in the Industry

Low costs and high operating efficiencyBroad product line and yet specializationQuality and hygieneGood franchisee relationshipsFunds to finance expansion and internationalizationGood marketing and advertising to attract repeat customers

Documents

Debriefing of KFC and Fast Food