This essay aims to evaluate the fast food industry by considering the market in which it works, the competition, the pricing strategy, the differentiation in its products and its R&D and promoting efforts alongside the comparison with the economic theory describing the industry nature with the real-life practice. While the worldwide economy has been turbulent for various industries, the fast food industry has not been gigantically influenced. Indeed, even with the society winding up more mindful of the health risks that come with eating unhealthy food, the overall industry has continued to ascend in the past years. I think fast food industry is a quickly developing market that its nature can relate to the economic theory with the real-life practice considering two well-known fast food companies which are McDonald's and Burger King. The conclusion will be at the end to highlight the findings and establish own rationale in connection to the essay's aim.
Moving on to the characteristics of the fast food industry, they are known to provide quick service to the customers (Xaxx, 2017). There should not be too much waiting for the food and beverages to be served. Setting up efficient and standardised kitchens are ways that McDonald's became so successful in this competitive industry (Xaxx, 2017). Fast food has always been about convenience (Xaxx, 2017). To be a successful fast food chain, an outlet should be located in a high traffic area. Relating this to McDonald's and Burger King, they are usually located in shopping malls and petrol stations because these are the places where customers tend to turn out (Xaxx, 2017). Besides that, there are plenty of fast food options available in the market such as McDonald's, Burger King, KFC and etc. These variations give the consumer the options to choose based on their own personal preference but McDonald's is the most popular option that consumer opt to choose for the past years which makes it the leader in the industry. Another characteristic is that they are consistent. They offer standardised meal across the globe (Xaxx, 2017). Fans of fast food like predictability and they want to know exactly what they are going to get and by providing consistency, a business reassures customers that nothing has changed (Xaxx, 2017). Their signs, logos and slogans are recognisable around the world.
Furthermore, fast food industry is a highly competitive and dominated by large companies (Suttle, 2017). Fast food restaurants are known to have high presence through both company-owned restaurants and franchised restaurants across the globe (Suttle, 2017). McDonald's restaurants remained the leader in fast food compared to Burger King due the rise in the pace of life of the urban population and their requirement for inexpensive and faster options for their meals (Suttle, 2017). McDonald's is the world's leading global fast food service retailer with over 36,000 locations in over 100 countries (McDonalds, 2017). More than 80% of McDonald's restaurants worldwide are owned and operated by independent local business men and women (McDonalds, 2017).
Corresponding to this is the market share of the of the real-life examples of fast food restaurants which are McDonald's and Burger King. The US is the largest market in the McDonald's System in terms of number of restaurants, revenues and operating income (McDonald's, 2017). They have a unique and powerful field organisational structure that when optimised, give them a significant competitive advantage and holds the largest and most diverse geographical segment spanning over 80 markets across parts of Asia, Europe, Middle East & Africa and Latin America and also markets with potential to operate under a largely franchised model (McDonald's, 2017). McDonald's was the most valuable fast food brand in the world with an estimated brand value of about 97.7 billion US dollars while burger king holds an estimated brand value of 5.116 billion US dollars (Dollars, 2017). This is mostly driven by consumer tastes and personal income. Research has said that the revenue of McDonald's worldwide is 26.62 billion US dollars and this comprised of on-premises restaurants and drive-through, the rest consists of off-premise dining and cafeterias (Dollars, 2017). McDonald's is home to about 60% of the world's population and represents about one third of global GDP growth (McDonalds, 2017). It is safe to say that McDonald's holds the largest market share in the fast food industry.
In addition, we have assumed the firm sets a uniform value which is the same for all purchases and which is the same regardless how many units of the product each consumer buys (Brown et al., n.d). Fast food industry is categorised under second-degree price discrimination meaning the cost per output relies upon the quantity of units purchased but not on the character of the purchaser (Lipcynski, 2013). Discounts for bundling purchases are a common example of it as in a group of items are sold as a single unit at a discounted price (Brown et al., n.d). For instance, McDonald's and Burger King have their value meals that come together with a drink and fries and they sell it at a discounted price rather than having them individually. This also reduces heterogeneous demands that extract maximum consumer surplus (Brown et al., n.d) The second pricing strategy takes two forms which are bulk and versioning (Brown et al., n.d). Fast food chains offer bulk food discounting in the forms of larger sizes or quantities of their foods. Typical bulk discounts include the small, medium and large drinks/fries also the varieties amount of chicken nuggets (Brown et al., n.d). Another aspect is versioning. The fast food chain offers a small set of food choices with several different versions of each choice (Brown et al., n.d). One example is the standard chicken sandwich which may come in a regular version or in a premium chicken sandwich version. For example, at Burger King, the Chicken Royale and Bacon Cheese Chicken Royale are diverse renditions of a fundamentally the same feast, however Chicken Royale is cheaper than Bacon Cheese Chicken Royale due to not having additional ingredients such as bacon and cheese (Burger King, 2017). Implying such versioning techniques, fast food restaurants are able to second degree price discriminate by allowing different consumers to self-select into pricing groups according to their inclinations (Brown et al., n.d).
Let's turn now into product differentiation of fast food industry. Effective differentiation is critical in building a strong business especially in a highly competitive market like fast food (Kokemuller, 2017). Since fast food restaurants provide products and services that are similar in terms of overall quality but offer different combinations of characteristics, it is a horizontal product differentiation. Product differentiation allows firms to reduce the competition in prices and firms are able to earn high profits, particularly when the transportation cost is high (Xaxx, 2017). McDonald's and Burger King are fast food chains that are both similar and different in their own way. Those products are differentiated by taste quality, it revolves around impacting advertisements backed by a great product for example Burger King stresses the quality of its flame-broiled burgers in its advertisements (Kokemuller, 2017). Given that the company's price points are higher than those offered by others, it is critical that customers believe the taste quality exceeds the quality of less expensive competitors (Kokemuller, 2017). The next factor is efficiency (Kokemuller, 2017). It is a strategy used by McDonalds as the company routinely locates restaurants just off of highway exits or in well-travelled business districts and McDonald's also stresses its fast ordering process including indicating the typical service time on the cash registers in busier restaurants (Kokemuller, 2017). McDonald's offers good customer service such they provide plenty of drive-through with fast service while Burger King doesn't and that makes McDonald's more convenient and a leading fast food restaurant in the industry.
Fast food restaurants use many advertising techniques to reach customers of all ages (Brooks, 2017). Also, because this is a mature market, combative advertising is commonly used to shift consumer preferences toward the advertising firm, but does not expand the category demand (Brown et al., n.d). Some fast food chains also utilise informative advertising which reduces consumers' search costs but it can have pro-competitive consequences if prices are advertised because consumers become more price sensitive (Brown et al., n.d). Analysing their efforts, fast food restaurants use musical influences to attract customers with their advertising which often feature actors and musicians to promote the products (Brooks, 2017). Another approach is by using direct mail to send customers promotions for their products (Brooks, 2017). They offer everything from buy one-get-one-free item to discounts on menu items (Brooks, 2017). Burger King and McDonald's both use these approaches to attract customers but McDonald's has seen to be more successful in doing that because they smartly differentiate by providing a free toy in their kids' meal that seem to attract majority kids to incline towards buying them and some people even comeback until they have all the collectibles (Suttle, 2017). Fast food companies also use social responsibility marketing to convince consumers can buy their affordable products without compromising their values (Scott, n.d).
Next is analysing the externalities. Externality occurs when an activity directly affects the welfare of third parties in a way that is outside the market price mechanism (Belleflamme and Peitz, 2016). Easy and quick fast food products have become more popular in the busy lifestyle and consequently, the waste amount created in the fast food industries increased hence contributed to a negative externality (Oches, 2010). As McDonald's has seen being the most acknowledge fast food chain, it is likely to produce large amount of waste every day (Thogersen, 1996). However, they managed to find ways to enhance the environment performance in terms of waste management (Thogersen, 1996). Quinn (2009) mentioned that McDonald's has partnered with Environmental Defense Fund (EDF) to replace the polystyrene foam by using paper based-wraps in order to reduce the waste volume in the waste management process. Another initiative is that proper disposal waste programs have been carried out as McDonald's in the UK recently has a trial tested out on an alternative method of disposal, which converting the food waste to energy (Aarnio and Hamalainen, 2008). The senior vice president for McDonald's UK & Northern Europe state that converting waste to energy is encouraging that has already reduced the environmental impact in the area by 48% and significant step on achieving zero waste to landfill (Baker, 2009).
Looking now into the market structure, fast food industry considered to be a monopolistic competition. It is an industry where there is an expansive number of purchases and venders (Lipczynski, 2013). Firms act freely of each other and seek to boost their own profit. There are no boundaries to entry as the items are homogenous. The quantity of firms in the industry are extensive for instance McDonald's, KFC, Burger King and etc. Although products in a monopolistic competition market are similar, each firm differentiates their products through attributes such as pricing strategies, brand name and location (Sault et al., 2003). In an effort to differentiate their products from competitors, each firm is attempting to create a loyal customer base (Sault et al., 2003). Customer devotion gives the firm some impact over the market in that it can raise prices without losing all of their customers (Sault et al., 2003). As an example, if McDonald's raise the price of their burgers, some of their customers will start eating at Burger King while others will stay steadfast at McDonald's. Market entry for this type for market structure is low (Varian, 2010). Another characteristic is that they encounter a downward sloping demand curve (Philpott, 2017). As price increases, quantity demanded will decrease. They also have a highly elastic demand curve, but not perfectly elastic (Philpott, 2017). Elasticity is the degree of responsiveness to a change in price and being elastic means that McDonalds' customers are quite sensitive to price changes made to the burgers as they need to compete with other fast food brands such as Burger King and KFC (Philpott, 2017). Firms in monopolistic competition market experience inverse relationship between price and quantity.
In conclusion, accessing a market structure for a fast food industry can be confusing as the industry can both be considered as a monopolistic competition or an oligopoly. The distinction between these two market structures is the size and market control of these firms on the basis of a number of competitors in the industry (Waqar, 2016). Monopolistic competition has many firms in the industry while oligopoly has few firms (Lipczynki, 2013). Geographical area is also a factor that distinguishes both market structures (Waqar, 2017). It is possible that a particular industry falls into a category of oligopoly market if it lies in a small city and a monopolistic competition if it has a presence in a large city (Waqar, 2016). This is because small city has more restricted alternatives that are available compared to a large city where there are numerous choices available (Waqar, 2016). Lastly, being a global industry, I think that fast food industry belongs to a monopolistic competition rather than oligopoly as there are a lot of options available in the market that each firm has their own marketing strategy and mostly well-known.
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