KFC and the Fast

Food Industry
Understanding Industry
Structure
Major Characteristics of the
Fast Food Business (Industry)
„ Industry in maturity
… Growth rate still holds at around 4%
„ Relatively concentrated
… Full-service and fast-food segments do 64% of food-service sales
(2002)
„ However, 858,000 US restaurants and food outlets in 2002
„ $400 billion industry
„ Scope of rivalry is global
… Major chains pursue growth in foreign markets to overcome domestic
maturity
… However outlets compete against other local restaurants
„ Segmentation
… Type of food
… Style of consumption

Prof. Marcus Hurt 2

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 development
„ Example: Yum, which is made up of spin-offs by
PepsiCo:
… KFC
… Taco Bell
… A&W
… Pizza Hurt
… Long John Silver’s

Prof. Marcus Hurt 3

Difference between Strategic
Segmentation and Marketing Segmentation
Strategic
„ Concerns the firm's
activities as a whole
„ Divides activities into
homogeneous groups
based on:
… technology, markets,
competitors
„ Allows decisions on:
… acquisitions, development
… divestiture
„ Stimulates medium or
long-term change
Prof. Marcus Hurt
Marketing
„ Concerns one of firm's
activities
„ Divides up consumers
into groups based on
habits and behaviours
„ Allows adapting products
to consumers, targeting
groups and defining
marketing mix
„ Stimulates short and
medium-term change
Source: Ramantasou4
 Customer Defining a
Functions
Business -
Segmentation

Customer
Groups

Technologies

Prof. Marcus Hurt Based on Abell

5
 Customer
Functions
Defining a
Business -
Segmentation

Customer
Groups

Technologies

Prof. Marcus Hurt Based on Abell

6
 Customer
Customer
Defining a Business
Functions
Functions - Segmentation
Distribution
Geographic Channels
Areas

Customer
Customer
KSFs Possible Groups
Groups
Segmentation
Criteria

Competitor
Groups
Technologies
Technologies
Substitutability
Prof. Marcus Hurt 7
 Example of Multi-business Firm in
Various Industry Segments Each
business
Customer
Each business may be an

Administration
Functions

Consumers
may have its industry

Engineers
Business
own strategy

Computers
Customer
Scanner/Printers Groups
Digital Cameras

Example:
This is NOT marketing segmentation
HP
Technologies
Prof. Marcus Hurt 8
 Food-Service Segments
Customer
Functions

Diversity
Dining
dining
Quick

Social
event
Chicken
Counter & self-service Product
Take-away Mexican
content
Full service Hamburger

Grills
Sandwiches

Fine Cuisine
Technologies
Prof. Marcus Hurt 9
 General Environment Factors:
PEST Analysis
Political
Political Economic
Economic
„ Government control of „ Greater disposable income
hygiene and food quality for foods, beverages and
„ NAFTA agreements lifestyle goods
„ General trend to
„ Accelerated pace of life consolidation of industries
„ Search for diversity in life
styles „ EDI technology makes JIT
„ Independent life styles for logistics possible &
family members integrates industry and
„ Increased emphasis on supplier networks
healthy lifestyles

Social
Social Prof. Marcus Hurt Technological
Technological10
Backward Integration

Raw materials Components Machinery Product/process

manufacture manufacture manufacture research/design

UNDERSTANDING
Raw materials
supply
Components
supply
Machinery
supply
Financing

THE Transport

Horizontal Integration
INDUSTRIAL
Competitive
products
By-products Manufacturer
Complementary

CHAIN products

Forward Integration
Distribution Transport Marketing Repairs and
outlets Information servicing

Prof. Marcus Hurt 11

 First Sector
Food Production

Second Sector Wholesalers of Second Sector

Equipment and fixtures raw foods Consumables
suppliers suppliers

Food Service
Packaging
The Fast
Food Firm Menu Design & Brand
Level Assembly Marketing

The Fast Food Distribution

Industrial Chain
Retail Stores Store
Marketing

Prof. Marcus Hurt 12

Integration First Sector
Choices Food Production

Second Sector Wholesalers of Second Sector

Equipment and fixtures raw foods Consumables
suppliers suppliers

Food Service
Packaging

Menu Design & Brand

Assembly Marketing

Company-
Distribution
owned stores
like Starbucks
Retail Stores Store
Marketing

Prof. Marcus Hurt 13

 First Sector
Food Production

Second Sector Wholesalers of Second Sector

Equipment and fixtures raw foods Consumables
suppliers suppliers

Food Service
Packaging

Menu Design & Brand

Assembly Marketing

Distribution

Retail Stores
The Five
Store
Marketing
Forces
Model
Prof. Marcus Hurt 14
The Five Forces Model of
Competition Threat of
Threat of
New
New
Entrants
Entrants

Bargaining Rivalry Among Bargaining

Power of Competing Firms Power of
Suppliers in Industry Buyers

Threat of
Substitute
Products
Prof. Marcus Hurt 15
Intensity of Rivalry –
Strong Competitive Force Five Forces Analysis

„ High fixed costs

„ Low customer switching costs
„ Differentiation does not create loyalty
… Commoditization
… Customers seek to change
„ Maturity and slowing growth
„ Competitors are similar in size and resources
„ Considerable price competition

Prof. Marcus Hurt 16

 Illustration of High Fixed Costs
in the Industry Five Forces Analysis

Fast Food
Businesses hold
few current assets

They have high

fixed costs
Property Plant and
Equipment

Prof. Marcus Hurt 17

Threat of Substitutes –
Strong Competitive Force Five Forces Analysis

„ Ready to eat meals for home consumption

„ Family restaurants
„ Full-service, formal restaurants?
… Not really a competitor, serves another purpose than
just eating
„ Supermarket delis
„ Home-cooked meals
… (asubstitute that is seriously declining in dining-out
America but is still strong in other countries)

Prof. Marcus Hurt 18

Threat of New Entrants –
Moderately Strong Force
Barriers to Entry
„ Slowing industry growth makes
entry problematic
„ Threat of price retaliation
„ Established players enjoy high
brand equity
„ High fixed costs and need for
economies of scale
„ High marketing costs and
training costs for new stores or
franchises
„ Experience curve is important
barrier but can be overcome by
hiring of skills from market
Prof. Marcus Hurt
Five Forces Analysis
Facilitators of Entry
„ The propensity of final users to
switch to other foods makes
entry at the local level
relatively easy
„ Capital intensity can be
bypassed by franchising after
first store (restaurant)
„ On foreign markets there may
be little competition
„ Major chains may encourage
imitation by local chains better
understanding local eating and
consumption habits
19
Bargaining Power of Buyers
Five Forces Analysis

„ Complex question: who are buyers in the

Five Forces Model
… Franchisees?
… Final consumers?

Prof. Marcus Hurt 20

Bargaining Power of Buyers -
Moderate to weak Five Forces Analysis

Final user -
Fast Food Franchisees Food
Chains consumer

• Franchise costs weigh • Price sensitive

heavily in outlet production • Propensity to switch
Brand Marketing to
• Very high switching costssell and
• Low switching costs
• maintain franchises • Fragmented and
Not concentrated
• No threat of backward numerous
integration
• Industry is crucial to quality

Prof. Marcus Hurt 21

Bargaining Power of Suppliers
– Relatively weak Five Forces Analysis

„ Fast food industry is made up of large players

that make volume purchases
… Extremely important customer of food producers
„ Suppliers are commodity providers
„ Supplier industries are fragmented
„ Threat of backward integration by fast food firms
is a real one
„ Industry switching costs may be low

Prof. Marcus Hurt 22

How does power translate?
Five Forces Analysis

„ Industry can impose low purchase prices

„ Industry can force upstream suppliers to
hold inventories ready and provide just-in-
time delivery
„ Industry can impose quality standards
„ Industry can impose long payment terms

Prof. Marcus Hurt 23

 Example of Power of the Industry
over its Suppliers Five Forces Analysis

Fast Food
Businesses are
practically cash
businesses

They can force

suppliers to wait a
long time for
payment

Prof. Marcus Hurt 24

Attractiveness of the Industry
„ Attractiveness Factors „ Unattractiveness Factors
… Growth in dining out …
… International expansion …
… Cross-segment menu …
broadening possibilities …
… Co-branding and marketing
opportunities
…
Constant price competition
Maturity & Slow growth
True differentiation difficult
Lines between segments are
blurring because of cross-
segment cannibalization
„ KenTacoHut
Mounting labor cost
pressures

Summary: Industry remains attractive for major chains

with good experience curves, operational efficiency and
good margins because of power over suppliers
Prof. Marcus Hurt 25
KSFs in the Industry
„ Low costs and high operating efficiency
„ Broad product line and yet specialization
„ Quality and hygiene
„ Good franchisee relationships
„ Funds to finance expansion and
internationalization
„ Good marketing and advertising to attract repeat
customers

Prof. Marcus Hurt 26