Industry Overview:
This industry analysis is based on Limited Service Restaurants, which has the NAICS code of 722513. Limited service restaurants are generally restaurants at which customers pay for their food before eating. The purchases can be done on site, taken out or be delivered to the customers. This industry excludes snack, non-alcoholic beverage bars, cafeterias, buffets and full service restaurants. Although drinking places has a NAICS code of 722410, some limited service restaurants provide alcoholic beverages in combination with their food and therefore, this industry analysis includes limited service restaurants that offer alcoholic beverages. This industry can be divided into multiple categories, as it not only consists of quick service restaurants such as McDonalds’s and Five Guys, but also fast casual restaurants such as Moe’s Southwest Grill, Chipotle and Wild Fig. According to Statista, the limited service restaurant business is worth approximately 198.9 billion U.S dollars and is expected to increase to 223 billion dollars by the year 2020. United States claims the largest limited service restaurant industry in the world where many of its franchises have gone global and therefore, this industry analysis would mostly cover the limited service restaurants business in the United States. According to my research of the limited service restaurants, I have come to the conclusion that the threat of new entrants is low, bargaining power of customers is moderate, the bargaining power of suppliers is moderate, the threat of substitutes is high and the rivalry among the existing limited service restaurants is high. An interesting fact about this industry is that since limited service restaurants faces four disadvantages and one advantage, unless the restaurant offers a unique product that attracts all the customers, creates a huge brand loyalty and provides a high profit, the restaurant would soon run of business.
Threat of New Entrants:
The limited service restaurant business consists of many businesses big and small. When analyzing the threat of new entrants, one must look at the barriers of entry, which consists of economies of scale, product differentiation, regulations and cost disadvantages. As mentioned, this industry consists of many large businesses such as McDonald that has a brand worth of $104.42 Billion. A business like McDonalds has economies of scale where higher production will produce savings in cost. Whereas, a new entrant will have to face learning curve and due to the intense rivalry, the new entrant might not be able to recover the loss for a long period. On the other hand, product differentiation is a barrier that some believe can easily be overcome and some sources such as MARS and Harvard Business Review believe it is a barrier that requires new entrants to heavily spend to overcome brand identification and customer loyalties of other businesses. U.S Food and Drug Administration (FDA) is one of the primary federal agencies that is responsible for public health regulations. Regulations placed by the FDA include completing a food-handling course, food preparation surfaces under going a regular cleanup routine, food storage instructions and displaying of the nutritional information on its products. On the other side, government also limits entry to this industry by requiring license and limits on access to raw material. These regulations often affect a business’s operations in a negative way and tend to create an unfavorable attraction for new entrants. A new entrant might have to face cost disadvantages since previous entrants have already received advantages from the effects of the learning curve such as access to raw materials, favorable locations and product technology. In conclusion, limited service restaurants consist of high barriers to entry, which creates low threat of new entrants.
Bargaining Power of Customers:
According to Hoover’s Fast Food and Quick service Restaurant Report, Fast food restaurants make up one of the largest food industry segments consisting of more than 200,000 restaurants in the United States. Many sources believe that because there are so many buyers in this industry, it gives buyers a low bargaining power as they don’t purchase in large quantities and neither do they negotiate on the price. Whereas, after my research I believe that the bargaining power of buyers is not actually low but moderate. According to Business Insights Essentials, in 2010 an increase in health awareness among customers spread which showed the negative health effects caused by fast food. This created trouble for the industry and pushed limited services restaurants to offer healthier choices in their menu. Buyers also face a zero switching cost when they decided to eat at a different place. Because there are so many options to choose from, buyers can select any other limited service restaurant that fits their criteria. For example. If price of a hamburger increases at Burger King, customers can easily go to McDonald’s without any switching cost. Therefore, because buyers have almost zero switching cost and customers’ opinions influence the sales of this industry such as the trend of healthy eating, we believe customers have high bargaining power but because one of the cons is that there is a huge population and its dilutes the effect of a few people choosing to act differently or eat at another limited service restaurant, we can conclude that the bargaining power of buyers is not low but moderate.
Bargaining Power of Suppliers:
Suppliers are a major resource for limited service restaurants as they supply restaurants with most of the resources needed to functionally run the business. Throughout this research, I kept coming across sources that mentioned suppliers having a low bargaining power. Whereas, after researching more about how the limited service restaurant industry relies on it’s suppliers and the effect the suppliers have on their buyers seems a lot like a moderate effect then low. Firstly, lets talk about why is it that suppliers have a low bargaining power. The main suppliers for the limited service restaurant are dairy produce, dough and meat vendors. Because there are so many suppliers for these products, there is a lack of product differentiation for these products and buyers can switch to other suppliers. Buyers always have the option to do backward integration such as starting their own farm, which are a threat of new entrants as well as threat to the bargaining power of buyers for supplier’s industry. Some limited service restaurants have a huge brand name such as McDonalds, Five Guys and Chick-Fil-A and for suppliers to have these huge names as their buyers’ increases their brand name since they can market that to attract brand loyal customers. However, suppliers do have a lot of powers when it comes to bargaining. Firstly, it is not easy for any businesses to do backward integration, as it requires a lot of time, resource and knowledge of the new industry. For a business to do backward integration, we are looking at a learning curve where first several years will cost a lot for the business in order to learn the new tactics of that industry. Second, suppliers can have a business strategy of increasing their price or reducing the availability of their products in order to pressure the buyers. An article on Business Source Complete called, “Managing Risk”, mentions how KFC in order to cut cost switched their suppliers from Bidvest to DHL and this poorly managed relationship led KFC to lose weeks of revenue and also took a hit on its reputation which takes a long time to build. This example shows how much potential suppliers have on making sure your business is running. Hence, these businesses face a switching cost when they switch from one supplier to another and often-poor relationship between suppliers can push suppliers to forward integration. Also, limited suppliers provide the quality and service a business is looking for and have to accept the bargaining power of the suppliers. In conclusion, I believe suppliers have a moderate bargaining power.
Threat of Substitutes:
Substitutes are often unrecognized immediately since it’s a threat from outside the industry. Limited service restaurants face a high threat of substitutes products. According the U.S. Convenience Store Count, The convenience store count in the U.S. increased up to 0.3% from last year and as of December 31, 2017, there were 154,958 stores. The major threat limited service restaurants face is the growing convenience store industry since many stores offer similar products such as pizza, hot dogs, egg rolls and several beverage options. Also, full service restaurants and food carts now offer similar products such as French fries, hot dog, pizza, sandwich and burger. According to Statista, the U.S. frozen food market has changed tremendously in the last decade, with improved quality and taste as well as increase in sales. When consumers are at the grocery shop or at a convenience store purchasing other items, they prefer to pick up ready to eat meals or frozen food from there since they are already there and its more convenient for them. A downfall that this industry faces is the zero dollars switching cost for buyers. If there is no switching cost for buyers than there is a more chance that they will explore more options or purchase from another place they find attractive. There are many reasons why a customer might need to purchase a substitute. Firstly, economically thinking, if the price of a good increases, the demand for the substitute will increase. If the price of the substitute is more reasonable than there is higher chance for costumers to switch to the substitute. If consumers want to start saving their income, they would prefer purchasing frozen food options as it provides better quality, more options and bigger portions. Second, if consumers find the quality of the substitute better or due to a trend if a substitute were performing better, consumers would switch to that substitute. Hence, this industry faces a high threat from substitutes from different other industries.
Rivalry Among the Existing Limited Service Restaurants:
This is an industry where their rivalries are on every block of its existence. Every business is competing neck to neck to increase their market share and improve their profit margins since there are several big players that dominate market share. For a business to be more appealing to the customers, there are many tactics that are used such as product differentiation, changes to the menu, product introduction, price competition and advertising. Often one can see one business using a successful menu item off competitors and putting it on their own menu. For example, McDonald’s Southern Style Chicken has three ingredients, fried chicken breast with pickles on a buttered bun. These are the same exact ingredients that make up Chick-Fil-A’s famous standard chicken sandwich. Also, to increase brand loyalty competitors expand to different regions and even different countries. They open more restaurants and expand in hope to increase their sales. Limited service restaurants face a high fixed cost and therefore, need to sell high volumes in order to recover their cost. Therefore, competition arises more when selling high volumes is very important in order to stay as a top competitor. Competitors try to sell menu items for a cheap price and try to make it a popular item on the market. For example, Wendy’s 4 for $4 or McDonald’s 2 for $5 are just a few example of how businesses take the risk of providing cheap menu items to increase sales. Many limited service restaurants now offer a mobile app with coupons and online ordering. According to data from Delotitte Digital, 40% of customers prefer to order online since it cuts their wait time, 26% of customers purchase more than what they would have in-sore and about 80% customers are interested in receiving discounts and special offers. When a consumer looks through the app and finds better deals at another restaurant, they prefer to purchase from there. This also increases competition between the businesses, as not only do they have to compete with each other but with the fast growing technology. In conclusion, rivalry among the limited service restaurants is high.
SWOT:
Strengths:
This industry offers the quickest serving time among other food industries. Customers face cost saving as they are offered products for cheaper prices compared to other restaurants. Therefore, limited service restaurants are very popular among less financially stable customers. Franchises are able to locally adapt food menus according to local customers taste. Since customers are moving towards healthier eating, restaurants are now offering healthier options in their menu such as salads, wraps and grilled chicken and pricing them higher than their other products.
Weaknesses:
Customers are moving towards healthier options and most of the food offered by limited service restaurants increases BMI due to high fat concentration and therefore has high health risk. Limited service restaurant is known for serving unhealthy meals so even when it serves healthy options, it doesn’t get the sales it should. When business decide to develop a new product to offer in their menu, it takes a long time and usually, theses restaurants do not change their menu items that often.
Opportunities:
Many limited service restaurants expand their franchises to other regions and even go international to increase profit margins and increase brand loyalty. Foreign markets offer opportunities for these businesses to grow fast if they come in with a plan and understand the market and customer preferences. For example, McDonald offers shrimp burgers in South Korea as it fits customers taste there. There are many options these business can try to attract customers. For example, many limited service restaurants are offering fast delivery options by partnering with delivery businesses for example Grubhub. By offering Apps that allow customers to order their food as well as pay through it cuts time for customers and the employees which is convenient for both sides since many customers prefer to purchase where there is less wait time.
Threats:
Due to increase in convenience stores offering similar products and grocery stores offering variety of frozen and ready to eat meals, there is a huge threat limited service restaurants face from these substitutes. This industry is very competitive and is forced to keep their prices low in order to attract customers. Government rules and regulations are very strong in this industry and hygiene is often audited through a surprise visit. Consumer awareness towards food quality and health concerns increases threat of loss in sales.