Strategic Analysis of the Uk Fast Food Industry
Business and Management Strategy BAM6012 A Strategic and Competitive Analysis of the UK’s Fast Food Industry Executive Summary The food industry in the UK is a multi-billion pound industry that is mainly dominated by a few competitors such as McDonalds, Burger King, KFC and Subway. Most of the food sold in these fast food restaurants is unhealthy, which is becoming a huge concern as there are many people dying of obesity and other health related problems. This is one of the key social factors facing the fast food market at the moment.
The fast food industry is a ‘red ocean’ as it is already well defined where rivalry is intense. It is also a perfectly competitive industry as the barriers to entry are low and there are many rivals each with similar products. Information about any of the competitors is freely available. The industry does have a few characteristics of an oligopolistic industry too as there is a couple of companies that have the main market share and have power over the buyers and suppliers.
The main features that influence a firm’s ability to compete and gain profitability depend on who their main competition is. For example there are different strategic groups in the industry such as McDonalds and Burger King who compete at the top of the industry and single privately owned fast food retailer that compete on a much lower level with much smaller budgets. The customer requirements are very low in this industry as a lot of the products sold by different firms are very similar; however the requirement of a cheap and fast meal is always at the top of their needs.
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Any potential strategy to increase profitability within the industry will need to be assessed properly and to realise the risks involved and other potential threats to it.
Introduction
This report aims to give a strategic and competitive analysis of the UK’s fast food industry. It will cover the main structural features of the industry that influence competition and profitability. The report will give an overview of the whole industry rather than just one company within it.
I shall also aim to analyse the industry attractiveness showing why possible companies would like to enter the marketplace. Another aim of the report is to analyse the competition and customer requirements in order to identify opportunities to gain a competitive advantage within the industry. The final aim of the report is to develop possible strategies to influence and improve on profitability. Whilst developing a strategy, the difficulties and risks involved in using these strategies will be covered. History of the fast food industry in the UK
The UK has embraced a lot of different types of fast food over the years, ranging from pizza to burgers, kebabs to Chinese, curry to fish & chips and healthy offerings. There is a lot of competition in the market at present with high profile companies such as McDonalds, Subway, Burger King, and KFC, not to mention the amount of privately owned single store fast food outlets. Current market conditions The value of the fast food market in the UK grew by 3. 3% in 2011 to reach a total value of $7,860. 3 million. The forecast for the market value is set to increase to $9,147 million by 2016.
This is an increase of 16. 4% by 2011. Transactions in the fast food market also grew in 2011 by 1% to reach a total volume of 2,785. 2 million transactions. The market volume is set to increase by 6. 8% by 2016 to a total of 2,975. 4 million transactions. Fast Food Industry Profile: The United Kingdom’ 2012, Fast Food Industry Profile: United Kingdom, pg 1-35, Business Source Premier, EBSCO host, viewed [25/11/2012] PESTLE analysis “PESTLE analysis will help to capture understanding about aspects of the context by using the prompts political, economic, sociological, technological, legal and environmental.
It is a technique that facilitates a wide scan of the context and actual or potential factors that would affect objectives if left unmanaged. ” (Webster-Murray, R. 2010. pg. 88)
Political factors
There is an increasing amount of pressure from the government to encourage people to eat healthier as the number of deaths relating to obesity and an unhealthy lifestyle is on the increase year after year. * The government can allocate grants to business start-ups to try and promote fair competition within the marketplace. There is speculation over the government introducing a new ‘fat tax’ on fast food served over a counter. This will add on another 20% to the current price in taxes. Economic factors Consumers will have less disposable income with the current economic climate and therefore may be less likely to spend money on fast food as it may be seen as a luxury. Exchange rates may affect profitability on the business if they are sourcing materials (all the ingredients used to create their food) from outside the UK. Unemployment levels are high at the moment in the UK which means there will be even more consumers without the money to purchase fast food. The current unemployment rate currently sits at 7. 8%. The inflation rate is at 2. 2% currently in the UK. This does not pose a problem as businesses will not be phased by this to invest more and grow. Sociocultural factors The current social trend of eating healthy and having a healthy lifestyle is pushing customers away from eating at fast food restaurants. With London just hosting the Olympic Games in the summer of 2012 then a lot of people are trying to start a much healthier diet and lifestyle for themselves, therefore cutting back on the amount of fast food they currently eat. The high standard of education in the UK means that children are more aware and knowledgeable about the health implications that arise from eating fast food. With the current fast paced lifestyle that a lot of consumers have, it is easy for them to just pick up food at a fast food outlet rather than cook for themselves.
This shows that fast food can be seen as convenient. Companies must try and add value to their brand by being reasonably priced and of an equal quality in relation to the price. Consumers already have a large variety of choice within the fast food market therefore a menu should also offer a lot of choice so that the customer can be satisfied and their ever changing taste can be satisfied too. The fast paced lifestyle of consumers means that the service of fast food must also match that and be quick too. Healthy options must be made available as to encourage a balanced diet.
Technological factors Fast food companies now have a wide range of tools available to them in order to promote their brand and products. Different ways they can do this is through the use of TV, radio, internet, direct mail, interactive billboards and many other options. Companies can now use the internet not just to promote their brand but also to take orders and let the customer make transactions. This can be helpful to lower the cost of using employees. Technological advances mean it is easier for a company to keep track of stock levels and also take orders in store.
This minimises the risk of human error. Environmental factors Companies in the fast food industry now need to monitor the amount of waste they dispose of as there is a lot of emphasis now on cutting down the amount of waste and turning it into recyclable and reusable products. Businesses are now turning to recyclable packing. The amount of energy that is consumed in the process of making the fast food and where all the energy comes from to power a fast food outlet. Can be seen as a good ethical policy to use or create off shore wind farms that power outlets. Legal factors Have to stick to a law that means they cannot mislead consumers on the nutritional value of their products. Companies have to abide by certain health and safety laws for both the employees and the customers. Other laws that a business will have follow are laws on employment, fair competition and food hygiene. Through the use of a PESTLE analysis we can see that there are many factors that affect the UK’s fast food industry. Most of these factors arise in the sociocultural section as it is here that the fast food industry gains most of its unwanted attention.
This is mainly down to the fact that the foods served by the companies are mainly unhealthy, carrying lots of calories, salt and sugars. Porters Five Forces Model In 1980, Michael Porter came up with a model that identified five forces that have an influence on an industry. This model “focuses on five forces that shape competition within an industry:
(1) the risk of entry by potential competitors:
(2) the intensity of rivalry among established companies within an industry:
(3) the bargaining power of buyers:
(4) the bargaining power of suppliers:
(5) the closeness of substitutes to an industry’s products. (Hill, C. W. L, Jones, G. L. 2010, pg. 42)
Threat of New Entrants
Low barriers to entry mean that it is easy for a company to start up a business in the fast food industry. However would be unable to compete directly with the large organisations already in the market. Easy for a new entrant to differentiate their product and atmosphere of the outlet (shop). Once a good location is found then it could ensure the success of a new entrant. Could be possible to dominate the market in a certain location. Capital investment is not too high or out of reach for most individuals. Bargaining Power of Suppliers Companies in the fast food industry could change their suppliers quite easily as there are a lot of suppliers that would be happy to receive the amount of revenue they could gain from using such a large company as Burger King or McDonalds.
The larger companies in the fast food industry have a lot of bargaining power over their suppliers as they could make up a very large proportion of the suppliers revenue, if not all of it. Bargaining Power of Buyers Due to the sheer volume of customers that purchase fast food, the bargaining power of the buyer is low. For example, a customer could barter with a butcher’s market stall about the price of meat whereas they could not walk into a Subway store and negotiate the price of a sandwich down to their preferred amount. The price shown is the price that will be paid. * Only bargaining power the customer has is the lack of switching costs. A customer could purchase from a McDonalds instead of Subway without costing them anything.
Threat of substitutes The threat of substitute products is very high as firstly the lack of switching costs means that a customer could change preferences and purchase from another company immediately as long as it fitted their standard of quality and price. The market is currently flooded with products that are all very similar (McDonalds burgers are in theory the same as Burger King) therefore a new product could arise and sell particularly well as long as it had a good taste and quality. Rivalry among Existing Firms Rivalry is high in the current market as top firms such as McDonalds and Burger King compete for the highest market share.
Due to the sheer size of these companies they can spend heavily on advertising and use aggressive tactics to ensure success. * Constant funds are being ploughed into advertising to try and promote not just the products companies offer but also to try and promote their brand. For example, McDonalds now tries to show more on the ethical side of the company saying that all of their ingredients are sourced locally. Through the use of Porter’s Five Forces model, we can see that the threat of substitutes, rivalry among existing firms and threat of new entrants to the market are moderate to high.
Whereas the bargaining power of both suppliers and buyers are relatively low. This shows that the companies in the market currently have a lot of power. Industry attractiveness Massive industry worth $7,860. 3 billion. Huge volume of transactions at 2,785. 2 billion. Small market share can still mean high revenue. Possibility to create a large and global company similar to that of McDonalds. Possibility to run a franchise business model. Has a very broad market segment. Could be a good industry in a recession as consumers cut down spending on eating at more expensive restaurants. Industry is predicted to continue growing. Opportunities There are many opportunities and threats that arise from the use of the PESTLE analysis and Porter Five Forces model such as:
1. Due to the current unemployment rate of 7. 8% this means that large companies such as McDonalds could use this to their advantage and open a number of new stores to create new jobs and in turn create more revenue for the industry. This could enhance the image of the industry as it is helping the nation out by creating jobs in this time of economic downturn. . As consumers have less disposable income then they will be less likely to eat out at more expensive restaurants and may turn to fast food outlets as they are cheaper. This is a great opportunity to advertise heavily on a menu that is less expensive than the normal menu. For example creating a meal that only costs the consumer ?
2. This should attract a lot of potential customers to spend more in the fast food industry.
3. Differentiate the industry by offering healthier foods on a whole to gain the interest of the health conscious consumers.
This would increase the volume of the industry. Threats 1. If an outbreak of foot and mouth disease or BSE (mad cow disease) were to arise then consumers would not be purchasing any type of beef which would mean a downturn in the amount of revenue gained by the fast food industry. Any type of negative feedback from the media would shine an unwanted spotlight on the fast food industry. For example, if someone were to find a hair in their burger at a fast food outlet then it might influence customers to eat elsewhere.
Strategies to influence industry structure and improve industry profitability Create new menus that will offer healthy food to the consumer. This will engage with a new target audience and therefore enhance the volume of transactions the industry already has. The amount of revenue earned by the industry will also increase. This will lead to new competitors in the market place offering a different product type and increase the amount of competition amongst the already competing firms. Companies could vertically integrate in order to gain control over the production of the ingredients that it needs to create the foods.
This would be risky for some businesses as the vast majority of their expertise is in the retailing of fast food. Conclusion Overall, the fast food industry is a highly competitive industry that is dominated by a few main players. The main features that influence competition are the changing tastes of the customer and their willingness to try other fast food outlets. Profitability is not only based now on the products that a company sells but also the way in which the customer perceives the ethical values of a company.
Although the requirements of a customer needing a cheap meal at a fast pace is still high on their agenda of needs. For a company to survive and improve upon its current position in the marketplace it should think about different strategies such as growth (new products or different areas) differentiation and vertical integration.
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