The United States Fast-food Industry Free Essays

The United States fast-food industry is largely made up of Quick Serve Restaurants (QSR) that includes on-premises restaurants and drive-thrus. Off-premises dining  such as  take-out restaurants is  also  considered a QSR.  The fast-food  industry  includes  national and regional chains,  franchises, and independent contractors. We will write a custom essay sample on The United States Fast-food Industry or any similar topic only for you Order Now   The fast-food  industry  is  consumer  focused  and relies  heavily on  consumer   spending.  It is  estimated  that the  U.S. Fast  food  industry  is  worth 189.9 billion  dollars  and within the  next  2  years  could  exceed  220 billion dollars (Jaaskelainen  2018).   The  industry  has grown  steadily  in the  last  decade due to the  fact  that these restaurants offer convenient and affordable food options. Top 10 QSR’s in 2017 (Sales Based) * Data retrieved from QSR Magazine Website Companies in the fast-food industry fall under the market structure of perfect comp Market  structure  is  a  classification system  for the key traits of a  market.  The  characteristics  of perfect competition  include  a large  number of  buyers  and  sellers,  easy  entry to and exit from the market and  homogeneous  products.  Many fast-food franchises fit all or most of these characteristics. Porters Five Forces Threat of New Entrants The  threat  of  new  entrants to the  industry  is  high.  There  is  a  high  level of competition between new QSR’s and established fast food chains,  new  QSR  brands are unknown and advertising campaigns are expensive.  Social media, however, has provided a more affordable means of advertising and has allowed QSR’s to communicate with their consumers easily.  Popular fast-food chains also have established themselves and have the resources to react aggressively to competition through pricing and promotions to keep new entrants from entering the marketplace. However, it is not difficult for new entrants to overcome these barriers.  The fast-food industry is a low margin, high turnover industry and new entrants lack economies of scale unlike established QSR’s that have developed over time and can remain competitive.  Capital  requirements  may   prevent  some   competition  however initial  capital  and fixed costs  are  not a significant  battier  in this  industry  especially with franchising which encourages   new  entrants  into the  industry.  Cost disadvantages are, however, a significant barrier to entry since established companies already have the product technology, access to raw materials, favorable sites, advantages in the form of government subsidies as well as experience. Extreme  saturation and similarity  in product offerings  make  convenient locations essential for QSR’s. Government regulations  are more intense for the  larger  firms which  have  to  deal  with franchising  regulations.   Smaller   establishments   have  to  deal  with standard  regulations  such as  health  and  safety, zoning, sanitation, and building and do not  pose  a  large  threat  to  new  entrants. Threat of Substitutions The threat of substitutes is fairly high in the fast-food industry.  Substitutes are readily available, and food can be purchased almost anywhere.  The  convenience  of  fast  food  is  the value-adding component of the  service  which  reduces  the  threat  of  substitutes  however, many  companies  are  now  offering ready-meals as well as mail-order meal plans that ship  fresh  ingredients to the  customer  at relatively low prices.  The healthy options and convergence factors from these companies pose a high threat not only with the fast-food price but also on convenience. Bargaining Power of Customers Customer loyalty does not play an important role as it  does  in other  industries.  The fast-food industry is more focused on volume which keeps the customer bargaining power low. Bargaining Power of Suppliers The  bargaining  power of  suppliers  is  limited  in this  industry.  There  are  many  suppliers  to  choose  from and each chain  goes  through  a competitive bidding process to select their  suppliers.  It is easy to change isuppliers   should they  find  a  better  deal somewhere else. Competitive Rivalry The fast-food industry is  dominated  by many Quick Service Restaurant  (QSR)  chains including McDonald’s, Wendy’s, Burger King, Pizza Hut, Subway,  Arby’s, KFC and Taco Bell to  name  a few. Competition  is primarily cost-based with  firms  continuously investing in their  production  and service processes to undercut competitors.  Exit costs are low, and capacity is easily increased through franchising. State and Federal Regulations The U.S. Food and Drug Administration  (FDA)  is the primary agency responsible for developing public health regulations.  The  FDA  works to  ensure  the  safety  of the  food  in both franchised and small fast  food   establishments.  It is  required  by the  FDA  that all fast-food  workers  complete  a  food  handling course that   educates  workers  on food borne illnesses, cross-contamination,  required  cooking temperatures,   food  storage proper hand washing. The  FDA  has also implemented  menu   labeling   requirements.  All restaurants must display  nutritional  information including total calories, calories   from  fat,  sodium  levels and other  nutritional   data on  menus  and  menu  boards as well as on their websites  where  consumers  can  access  it. The National Salt Reduction Initiative (NSRI) has set voluntary targets for salt levels in an attempt to  reduce  sodium  in restaurant food.  Taco Bell and KFC have  reduced  sodium  in  line  with this  program.  NYC  requires  chain restaurants to post warning labels next to menu items containing high levels of  sodium. The Federal Trade Commisssion (FTC)  requires fast-food ads to be truthful and non-deceptive and they must back up claims with evidence.  In New York, The Bureau of Community Environmental Health and Food, Protection maintains the Sanitary Code for food service establishments.  The New York State Department of Health  requires   all  food   establishments to  have  a valid permit  in  order  to  operate. Recent Economic News The fast-food industry currently employs  3.8 million  people  however the  turn  over  rate  has   reached  an  average  of 150 %.  The  industry  is  experiencing  its  highest  turn over  rate  in 23 years says  Bloomberg analysts  reported in a recent article published by the Business Insider. Analysts   suggest  the significant decrease in  employee  retention  as  a  result  of  new  technology and the expectation   for  higher  productivity. Fast-food chains have made several technological advances such as implementing ordering kiosks.  While the  implementation  was  feared  by employees, fast-food chains  such as  McDonald’s  has  stated  that these  technologies  will not cause  layoffs  but will allow employees  to be  placed  in other  roles   and would  allow  for  a 5% to 6%  increase  in  sales  for 2018 and another 2% in 2019. According  to the  article, these  new  technologies are actually complicating their  jobs.  Due to  the  lack  of training.  Quick service restaurants  (QSR)  declined by one percent to 353,121 units in the fall 2017 censuses.  Fast-casual chains, which  are  a restaurant category under QSR, increased units by four  percent  to a total count of 25,118. The Bureau of Economic Analysis In the most recent  quarterly  report  issued by the Bureau of Economic Analysis, the U.S. personal  income  and disposable  personal  income  both increased 3% from the last  quarterly  report  in 2017.  The  report  suggests  that the  largest  contributor to the  increase  was  spending  on food services and  accommodations  (BEA, 2017). The United Sates Census Bureau The  chart  below from the Census Bureau shows the leading industries by the  number  of employees.  Based on the information provided limited service or fast-food restaurants have the most employees in the industry. * U.S. Census Bureau (2016) Federal Reserve Beige Book reports for most recent period (New York) According  to the Federal Reserves Beige Book reports economic activity in the Second District  (New York)  has continued to expand at a moderate pace since the last report.  The  labor market  has  stayed around the same numbers, while wage growth has mostly grown steady (Federal Reserve Bank).  Input  price  increases have  remained  the same, and consumer  price  inflation  was higher than earlier this year (Federal Reserve Bank). Bureau of Labor Statistics The  chart  below shows the States with the highest  deployment  levels in the restaurant industry including fast food.  New York ranks as the 4th largest in the United States. * Bureau of Labor Statistics, 2018 The Conference Board (consumer confidence) The latest Consumer Confidence Survey states  that â€Å"Consumer  confidence  has  increased  to its  highest  level since October 2000†Ã‚  (Consumer Confidence, 2018).  The  business  and labor market conditions improved  according  to the  survey  and consumer expectations  suggest  solid  economic growth throughout 2018.  The â€Å"historically high confidence levels should continue to support healthy consumer spending in the near-term†(Consumer Confidence, 2018). Specific industry news and reports In an  article  published  by the New York Times, the number of teenagers in the  workforce  has significantly decreased  from a  decade  ago (Abrams, 2017).  The following chart shows the large   increase in  restaurants  and the  decrease  in teenage workers ages 16-19. Chart retrieved from(Abrams, 2017) In a recent analysis by the Bureau of Labor Statistics education, interests have increased causing the decline in teenage workers (Abrams, 2017).  Turnover in the industry also a serious problem.  In 2017 the turnover rate reached 133% and it has  continued  to  rise (Abrams ;  Gebeloff, 2018). McDonald’s  released  that they would be  expanding  their tuition  reimbursement  plan.  They will now contribute $150 million to the  plan  over five  years  to benefit employees who are  employed  for at least 90  days  with the  company  (Abrams   Gebeloff, 2018). The fast-food  industry’s  growth  is sensitive when it  comes  to  changes  in consumer spending. In  times  of  recession, the  rise  of unemployment rates causes a  decline  in the consumer consumption of  fast  food.  It is not uncommon for fast-food chains to merge in order to gain a larger share of the market to increase profits.  When  consumer  spending  is higher they are more likely to  spend  money on  fast  food. Consumer  eating habits also play a role in the economic factors that affect the fast food industry.  Consumers have become more aware of the health issues associated with greasy and fatty fast-food options.  In order to keep up with consumers changing eating habits most fast food restaurants have added healthy food options such as grilled chicken, salads, yogurt and fruit to their menus to avoid the potential threat of losing Fast-food consumers. The fast food industry closed the 2017 year at 250 billion and is expected to grow 2.3% each year for the next five years for an overall total of 12% growth. The industry has adapted to consumers changing food preferences and their availability to eat. Many fast food chains have expanded their hours such as Taco Bell and McDonalds and others have also made breakfast menus available all day in order to reach out to a larger customer base. The use of kiosks and mobile phone ordering are becoming popular within the industry. These kiosks and apps provide a quicker and more efficient ordering process while cutting down the costs of labor. How to cite The United States Fast-food Industry, Papers