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97 Seiten, Note: A-
Wall Street Journal Article
Five Forces Analysis
Level 2 Analysis
Level 3 Analysis
Macro-Environmental Forces, Economic Trends, Ethical Concerns
How competitors achieve their strategic position
Value minus Cost Comparison
Financial and Industry Ratio Comparison
Strategic Group Analysis
Threats and Opportunities Analysis
Summary of External Analysis
Organizational Structure, Controls, and Values
Strategic Position Definition
Resources & Capability Level
Analysis of the Effectiveness of the Strategy
Short-Term Recommendation #1: Happy Hour
Short-Term Recommendation #2: Nutritious Kids Meals
Short-Term Recommendation #3: Online Ordering System
Long-Term Recommendation #1: Franchise Buy-Back Program
Long-Term Recommendation #2: Franchise Discrimination
Long-Term Recommendation #3: New Delivery Service
Corporate Social Responsibility & Ethical Decision Making Practices
Abbildung in dieser Leseprobe nicht enthalten
Updated April 4, 2012, 11:49 a.m. ET
Burger King Expands Menu
Hamburger Chain Adds Salads and Fruit Smoothies to Draw New Customers
By IAN BERRY and MARK PETERS
Burger King unveiled a broad revamping of its U.S. menu Monday, expanding into salads and fruit smoothies to try to capture new customers and catch up to rival fast-food chains.
New Menu Items
- Garden Fresh Salads: BLT, Apple and Cranberry, Caesar
- Chicken Snack Wraps: Honey Mustard Crispy Chicken and Ranch Crispy Chicken
- Real Fruit Smoothies: Tropical Mango and Strawberry Banana
- Frappés: Mocha and Caramel
- Crispy Chicken Strips
Burger King Holdings Inc. slipped to third place in U.S. sales among burger giants last year, falling behind Wendy's Co. for the first time since Wendy's was founded in 1969, according to an analysis conducted for The Wall Street Journal by Technomic Inc. McDonald's Corp. continues to hold the No. 1 spot.
Burger King said the range of "better for you options" follows a yearlong study of every aspect of its business. Its new menu items also include frappés and crispy chicken strips. The $2.29 price for its 12-ounce smoothie is the same as McDonald's charges in downtown Chicago.
"We found that consumers wanted a broader range of menu options," Steve Wiborg, Burger King's North America president, said in a statement. The company was acquired in 2010 by New York-based private-equity firm 3G Capital Management in a deal valued at $4 billion.
The fast-food chain's move is seen as a shift away from a strategy focused on young males to one that looks to a broader customer base, including women, children and families.
In recent years, Burger King has struggled as young men have suffered from high unemployment. Meanwhile, McDonald's and other fast-food restaurants have expanded into beverages and snacks to capture a wide range of customers eating at different times during the day.
Burger King is "following a me-too strategy" said Darren Tristano, executive vice president of Technomic, a Chicago-based market-research firm.
Cooking Up a New Menu
Burger King is taking steps to stay competitive with other fast-food chains.
- Offering 'better for you options' on the menu
- New items include mocha and caramel frappés, crispy chicken strips and a honey mustard chicken snack wrap with fewer than 400 calories
- Expanding into salad and fruit smoothies, including mango and strawberry-banana smoothies made with low-fat yogurt
- Will launch new advertising campaign featuring Jay Leno, David Beckham, Mary J. Blige and Salma Hayek
- Updating its restaurants with digital menu boards, new employee uniforms and new packaging
Burger King said its new menu items represent the broadest expansion of its offerings in its 58-year history. In conjunction with the menu changes, Burger King will launch a new advertising campaign featuring comedian Jay Leno, soccer star David Beckham and singer Mary J. Blige, among others. A Spanish language ad will feature actress Salma Hayek.
It is also updating its restaurants as part of the shift, including adopting new digital menu boards, employee uniforms and packaging.
McDonald's has an advantage over competitors trying to revamp their menus because of its huge advertising budget, said David Tarantino, an analyst with Robert W. Baird & Co. But he added that if Burger King focuses on "evolving" the menu rather than changing it radically, the shift could succeed.
"I think all of the players are looking at ways they can compete more effectively with McDonald's," Mr. Tarantino said. He added that Burger King was already moving toward increasing the healthier options on its menu and revamping its restaurants before it went private, but not as aggressively.
Since its inception in 1953, Burger King (BK) has become one of the largest hamburger chains around the world today. Over 12,300 restaurants are open globally, providing more than 11 million daily guests with fast food dining and its signature product, the Whopper. Within the quick service restaurant (QSR) industry, BK has long been known as the second biggest hamburger chain in the U.S., following behind McDonald’s. But in 2011, for the first time, Wendy’s overtook BK in sales. This was a result of BK’s stagnant business and Wendy’s 9% increase in sales over the past five years. Additionally, non-burger restaurants (i.e., Subway and Taco Bell) made aggressive pushes to take more of the QSR market.
Purchased in 2010 by 3G Capital Management, BK became privately owned with a single business corporate strategy. Immediately, the new ownership group set out to make impactful company-wide changes. The first change was the elimination of the firm’s “King” mascot in 2011, which was seen as edgy and targeted towards young men in their teens and twenties. The new phase, which began earlier this year, consists of a drastic change in overall brand strategy to reposition BK as a broad and appealing restaurant in the QSR industry. To attract a wider audience, such as women and health-conscious customers, BK has added a significant amount of menu items including smoothies, coffee drinks, and salads. Furthermore, it has set out to remodel around 1,500 restaurants. In place of the previous mascot, BK has enlisted A-list celebrities (i.e., David Beckham and Selma Hayek) to advertise its products. Another strategy that they plan to implement is to sell almost all of its 1,300 corporate stores to franchise stores in an effort to protect itself from commodity-cost swings and fixed costs.
The financial forecasts of the move suggests a valuation range between $2.04 billion and $3.77 billion under a worst and best case scenario assumption. The firm’s last market cap was $2.24 billion in June 2010. Compared to its competitors, who had a significantly higher market cap increase after their changes, this may indicate that the strategy impact on the firm could potentially be minimal. If the outcome makes only a small and perhaps only a temporary impact financially, the concern for the future would be how Burger King will continue to maintain its market share and grow especially as it hopes to IPO in the near future. Despite the fact that Burger King’s overall value minus cost is currently small, relative to its major competitors, it has an aggressive profit margin percentage. As a result, Burger King may need to make changes to increase its small value minus price offering.
As the QSR industry grows steadily, there have been more firms trying to capture the market, but generally, the industry attractiveness is moderate. At a macro level, there are still some concerns that the industry must address. Globally, food supplies are being used up as emerging markets increase their demand, thus pushing up prices. Socially, obesity is becoming a problem in the U.S., with the media pointing to fast food restaurants as a primary cause. A result of this has been the government stepping in and passing more regulations on the practices of the fast food businesses and increasing pressure on the industry.
With significant competition from both current as well as fast-growing QSRs (i.e., Five Guys Burgers and Fries, Panera Bread, and Chipotle Mexican Grill), BK’s recent moves have been perceived as imitating the leader, McDonald’s, rather than differentiating the company. While it remains to be seen whether or not the strategy is enough to grow the business, a potential concern is whether 3G Capital Management is looking for long-term growth or settling for marginal growth in the short-term to fund their exit from the company by going back to a public entity.
The current strategy conveys that BK is in “catch-up” mode instead of trying to distinguish itself as a premier QSR. Considering both internal and external factors, the firm needs to win back and increase its customer base as the way to grow its business. To do this, some recommendations for BK in the short-term are to introduce a happy hour that includes an accommodating menu of new products, offer nutritious kid’s meals that are part of a healthy, balanced diet, and launch an online ordering system for customers to pre-order meals for pick-up. In the longer-term, we suggest BK buy out the highest performing franchises to gain additional streams of revenue, implement an incentive program to reward the best franchise stores, and start a high density delivery service.
BK operates in the QSR industry, which comprises of fast-food chains that have minimal table service and that are segmented into categories including burgers, sandwiches, chicken, pizza, Mexican, and Asian. BK is considered a large-scale franchise as opposed to mom-and-pop or regional restaurants. Our industry analysis is specifically focused on the U.S. domestic market and excludes the snack category segment of restaurants (i.e., Starbucks and Dunkin’ Donuts).Exhibit 1 illustrates BK’s industry ecosystem.
Level 1 Analysis
The Six Forces Analysis identifies competitive factors that shape the QSR industry and helps determine its strengths and weaknesses.Exhibit 2 contains a detailed Level 1 analysis of the industry in addition to a Level 2 score for the strength of each force.
Barriers to Entry
The threat of entry for a new business in the QSR industry is average. The significant factors of why the industry is not attractive are its unequal access to distribution channels and incumbent advantages. Existing QSRs already have saturated markets and locations, so there is difficulty in finding successful and high-potential sites. The more easily secured locations will most likely be in remote and less populated areas. Incumbent advantages are very important to the firms in the industry. Loyalty and brand preference play a large role in a customer’s mind when there are so many QSR options available. In addition, there are incumbent advantages in process efficiencies and sales data.
The industry is favorable to get into because of economies of scale, network effects, and customer switching costs. First, economies of scale could be obtained by purchasing supplies of food and beverage in bulk. Since there are few beverage and food suppliers in the industry, costs are relatively competitive. Secondly, network effects are strong in the QSR industry and can have a big impact on a firm’s success. If its products are good in a differentiated way, customers will spread the word. Finally, because all of the firms in the industry compete at similar price levels, there are no switching costs for customers. The overall score for the barriers to entry factor is 2.9. It is somewhat difficult for a new entrant to come in to the industry, but definitely still achievable.
Threat of Rivalry
The QSR industry category is dominated by the big players in the market. With McDonald’s being the undisputed leader in the industry, BK, Wendy’s, Sonic, and Jack in the Box round out the top five. These players take up a whopping 83% of the market share and thus increase the threat of rivalry considerably. Also, the industry did not grow significantly in the last year, so the pie as a whole is not getting bigger and the rivals that are already in the space will be extremely committed to keeping the share that they already have. However, there are still some factors that are causing the threat of rivalry to decrease in this industry. The concept of “franchising” helps to defray a lot of the capital costs for a new chain entrant and the fact that the industry did not grow in unit size all that much helps a new entrant because it would be able to keep up with small incremental growth (Exhibit 2). While there is definitely some space for competitors to enter into the market, the incumbents are really big and have been around for a long time. A new entrant would need to be extremely unique and efficient to stick around. The overall score for the threat of rivalry factor is 3.2, which shows that the established players in the industry pose a moderate threat.
The force from the buyer’s perspective is actually fairly benign. Since customers of QSRs are typically regular consumers, the buyer group does not have any concentration whatsoever. Also, there is no backward integration threat as consumers are usually not in any mood to be running their own QSR. As for price sensitivity, fast food is fairly cheap compared to the other expenses, thus the industry’s product does not have a large effect on other aspects of a buyers’ life. The only power that buyers wield would be their ability to switch from one provider to another without any switching costs. However, with all of the other factors put together, the buyers wield very little power in comparison. The overall score for buyer power is 2.35. Buyers are not much of a threat to new entrants.
The QSR industry relies on three groups of suppliers: suppliers for beverage products, suppliers for food products, and suppliers for labor. Suppliers for food products consist of everything used in products at a QSR location that is not a beverage.
The beverage supplier group is very strong. For larger portions of the QSR industry, this supplier group consists of only two players: Coca Cola and Pepsi. The concentration ratio is incredibly high, nearly 100% for these two players, giving the suppliers great power.[i] However, this supplier group is also heavily dependent on the industry for revenues. For example, McDonald’s is Coca Cola’s single largest customer.[ii] Also, this supplier group often locks the industry players into exclusive multi-year provider agreements, as seen with a recent Baja Fresh contract.[iii] As a result, switching costs are high. Beverage products are also highly differentiated between the suppliers through brand preference, despite supplier group brand preference being difficult to measure objectively.[iv]
The food products supplier group consists of many firms offering meat, produce, and other food products used in the production of final deliverable items, thus this supplier group is moderately strong. There are many more firms within the QSR industry than there are in the food products supplier group. For example, the suppliers for the different meat product types are moderately concentrated.Exhibit 3 shows that the top three suppliers of chicken, pork, and meat together hold over 50% of the market share in their respective product lines.[v]
These suppliers sell their food products to every channel of food consumptions, from full-service and quick QSRs, to grocery stores, to wholesale meat distributors, to food companies that process the raw inputs into final consumable products. The suppliers’ customer base is well diversified so it is not strategically dependent upon QSRs. However, QSRs occupy a large portion of meat consumption in the U.S.; therefore, the suppliers’ power due to strategic importance is moderate. Switching costs are dependent upon contract negotiations and supplier channels rather than significant technological investments or fundamental business structure; therefore, this power is moderate. Substitutes are nearly nonexistent from outside of the supplier group. In the example of meat products, a QSR either offers a beef burger and a chicken patty or they do not offer those products at all. There is a small amount of pressure coming from meat substitutes, such a vegan burgers. However, this pressure is minimal and relegated to niche shares of the market. The suppliers pose very little forward integration threat; the QSR industry is structured such that any supplier wishing to enter the market would simply begin as a new company separate from the supplier.
The labor supplier group is very weak. This group is primarily composed of unskilled manual laborers for operating store locations. A smaller portion also consists of moderately skilled basic laborers for managers, assistant managers, and shift supervisors. The smallest portion will usually consist of a corporate team at a central location to manage the overall infrastructure and long-term operations of the company, company-owned locations, and franchise locations. Unskilled labor has nearly zero concentration and there are many individuals available in every market that offers nearly the same exact labor product, allowing for no differentiation. Moreover, the labor supplier group is heavily dependent upon the industry for revenues. They are so dependent that portions of the supplier group are impacted by government regulation requiring minimum prices for this supplier group (minimum wage). Although costs for switching laborers are not insignificant, this does not prohibit high turnover in excess of 80%.[vi]
Few substitutes exist for the labor supplier group; the QSR industry will always rely on employing this supplier group. This is the lone strength for laborers and is partially a reason for industry factors such as minimum wage, existing. The laborers pose no forward integration threat. The overall score of the supplier power is 4 for beverage suppliers, 3 for food product suppliers, and 1 for labor suppliers. This represents decent strength for beverage suppliers, less strength for food product suppliers, and nearly nonexistent strength for labor product suppliers.
Threat of Substitutes
The threat of substitutes in the QSR industry is moderate. Many other substitutes exist in the form of casual or upscale restaurants. These include chain restaurants (i.e., Red Lobster, Applebee’s, and Olive Garden). In addition, consumers may decide that eating out altogether is not economical or not enjoyable, and that eating at home is more preferable. While the buyer’s propensity to substitute is moderately high, the price/performance of the substitutes is moderately low. QSRs are built around the concept of being low-cost, while eating out at casual or upscale restaurants can be costly. The overall score for threat of substitutes is 3.3 as there is a plethora of substitutes among the QSR firms.
Entertainment entities that can be promoted through the QSRs are the only real complements to the industry. Such items include movies, TV shows or cartoons, video games, and professional sports. Promotions are often in the form of toys, cups, bobble heads, and contests that help bring customers into the restaurants. The concentration of complements is low, since there are so many entities who might want to advertise their products/service. In addition, switching from one complement to another is done in an ad-hoc manner and costs to do so are minimal since most promotions run for a short duration. However, in general, they have low power in the industry.
The attractiveness of the overall QSR industry is moderate. The biggest concern for firms is the power that the beverage supplier group has over it. There is an extremely high concentration ratio for the supplier and almost no substitutes. Besides that, there are a few strong individual factors, such as low customer switching costs due to many substitute product options with similar pricing in the industry, as well as high commitment by rivals, which is due to the many firms in the industry that compete against each other even though they may not even serve similar products. Medium scores were given to a majority of the factors across the six forces.
Table 1 – Level 3 Analysis of Six Forces and Complements
illustration not visible in this excerpt
The general QSR market is growing globally and is expected to generate $252.9 billion of total revenue in 2011.[vii] Consumption and performance are estimated to accelerate even more as the middle-class rises in emerging markets (i.e., Latin America, Russia, India, and China).[viii] The issue with the global growth is that food supplies, such as grain, red meat, and dairy are becoming higher in demand beyond what is produced. With a leaner amount of supply, commodity prices are increasing. If this continues, the suppliers will gain additional power in the QSR industry, making it more unfavorable to get into. In an effort to combat higher prices, some fast-food companies have begun to locally source its supplies.
Obesity has become a hot topic in the U.S. “More than one-third of U.S. adults, or 35.7%, are obese”[ix] . As a result, many consumers are looking for healthier options. There is a general perception that fast-food is associated with being fattening and unhealthy, but many QSRs are beginning to expand their menus to offer healthier options, such as oatmeal and salads.[x] As the stigma of the QSR industry improves, consumption should hypothetically increase, opening up the opportunity for the firms to obtain new customers and expand the market.
Another social trend that has recently caused some controversy is the use of “pink slime” meat in the QSR industry. Pink slime, also known as lean finely textured beef (LFTB), is an inexpensive additive to beef products that contains beef trimmings of connective tissue and scraps. Because of the risk of salmonella and E.coli in the additive, it is treated with ammonia hydroxide to kill any bacteria. The United Stated Department of Agriculture states that the entire process is perfectly safe and that adding LFTB to ground beef does not make it any less safe to consume.[xi] But outrage from consumers has driven many firms in the QSR industry in abandoning its use. This has resulted in the increase of supplier prices, and therefore supplier power.
The QSR industry is not an industry that often sees technological advancements. Recently though, there has been a push for more automation in the form of self-service touch-screen kiosks and mechanical food preparation. For example, McDonald’s currently has 800 self-serve machines in their European stores[xii] . While this would reduce costs for QSRs, it would also indirectly improve inventory management. In addition, automation would provide a better experience for customers through convenience, speed, and ordering accuracy. There is a public concern that laborious jobs will be eliminated, which would result in less supplier power for the labor segment in the future.
As obesity increases in the U.S., more responsibility of poor nutrition is being put on QSRs and more legislation is being passed, forcing firms to help consumers with their dietary practices. In San Francisco, the Healthy Meals Incentive ordinance was passed in 2010, banning restaurants from including toys with meals that contained too much fat, calories, or sodium.[xiii] In South Los Angeles, there is a ban that does not allow new stand-alone QSRs to be within a half mile of each other.[xiv] At a nation-wide scale, there is a law requiring fast-food chains with at least twenty outlets to display their calorie content.[xv] Unfortunately for the industry, it looks like firms will be more regulated in the future, thus increasing the barriers to entry.
The QSR industry leans heavily on the minimum-wage labor force in the U.S. While there was a federal minimum wage hike to $7.25 in 2009, it is still a continuing issue. Many states have increased the rate beyond that, and both President Obama and Republican presidential candidate, Mitt Romney, both support further increases so wage rates keep up with inflation.[xvi] The ongoing topic of minimum wage rates in government increases the power for the labor supplier segment.
Ethics in the QSR industry is becoming a large concern with obesity rising in the U.S. The question many people are asking is if it is right for QSRs to deceptively market their food to kids by using toys as lures. Parents are the ones ultimately responsible for what their children eat, but products, such as McDonald’s Happy Meal, are bundled to include fries and a soda. There are healthy alternatives, but getting a child to switch from soda to milk or fries to apple slices is not easy.[xvii] This situation increases the power and threat of healthier substitutes.
Another ethical issue in the fast food industry is the prevalence of animal cruelty among the suppliers of fast food restaurants. Customers are concerned with how animals are being treated, and they want the QSR firms to be accountable from who they source their foods from. However, switching to humane food suppliers will increase costs, which will most likely be passed onto customers. QSRs will have to deal with balancing the benefits and costs of the concern moving forward.[xviii]
The QSR industry is unique in that the industry can fare better during a recession since consumers shift their spending from casual and higher-end restaurants to lower ones. QSR menus provide people with quick, affordable meals. In the first quarter of 2012 though, gross domestic product for the U.S. grew at 2.2%.[xix] The QSR industry has increased revenues in the past year due to the current economic recession and thus has improved the industry’s full potential for growth.
The two large demographic trends in the U.S. in the near future include the rapid growth of the Hispanic population to 16.3%[xx] and the Asian population to 17.3%[xxi] , as well as the emergent influence of Millennials. With the increase in Hispanic and Asian consumers, there is a drive in the QSR industry to provide more ethnically diverse foods that have bigger flavors.[xxii] This may motivate QSRs to offer a wider range of products to increase business. Otherwise, the threat of substitutes increases.
As targets shift from Baby Boomers to Millennials, the QSRs must adjust their marketing and branding. Millennials like customization and diversity, and they are health conscious. This will require QSRs to differentiate the products to a greater degree, giving more power to buyers.[xxiii]
As a firm in the QSR industry, BK faces a lot of competition for market share. With the myriad of different choices for consumers who want fast food, we narrowed the number down to the top 15 firms in the industry based on sales volume. The firms, along with their market share, are shown inExhibit 4, with BK coming in 3rd in the rankings. Focusing on just the burger segment of the QSR industry, BK comes in 2nd based on these financial numbers from 2010 (Exhibit 5).
There are a number of firms in the QSR industry that are substitutes and can be considered primary competitors. If we exclude the snack firms (i.e., Starbucks and Dunkin’ Donuts), the firms that would be in direct competition with BK would be Subway and three firms that belong to Yum Brands: Taco Bell, Pizza Hut, and KFC. These competitors are also chains that have a similar chain footprint - over 5,000 total units spread across the U.S.
Within the QSR industry, BK competes mainly in the burger segment, which focuses on hamburgers. BK has two main competitors in the segment: McDonald’s and Wendy’s.
Following Wendy’s, every other potential competitor has less than 5.5% of the QSR market as compared to BK’s 12.83%. We felt that firms with less than half of BK’s market share should not be considered a primary competitor.
All firms within the QSR industry are a single business at the corporate level. They focus exclusively on the QSR market with no plans to expand into other products or industries, and thus they would all be considered a single business.
Based on Porter’s generic strategies, firms focus on four different business level strategies: cost leadership, differentiation, cost focus, and differentiation focus. BK’s main competitors in this space are McDonald’s, Wendy’s, Subway, Taco Bell, KFC, and Pizza Hut.
McDonald’s Strategy: Broad Differentiation
McDonald’s is one of those rare companies that has been able to build a foundation on one strategy and utilize that foundation to build and expand into others. When McDonald’s was first turned into a chain 1954, it managed to completely standardize the operations of each franchise, allowing it to expand rapidly and effectively with low costs and consistent quality in each store, thus establishing a cost leadership strategy. However, it has redefined its strategy and is now focused on broad differentiation.
In recent years, McDonald’s has continued to refine its strategy and has gone with a number of differentiation strategies to set it apart. With the public push towards healthier eating, McDonald’s started to roll out menu choices that catered to those who were more health conscious with offerings of salads and a fruit and yogurt parfait. These rollouts have been successful as sales have been strong for these items.[xxiv] The company also began tapping into the market of those who wanted a more gourmet burger with the introduction of the Angus Burger[xxv] line. Finally, it made a push into the low-end coffee market and rode that to a net growth through the recent downturn in the economy.[xxvi]
Wendy’s Strategy: Narrow Differentiation
With McDonald’s being the juggernaut that it was and locking down the market for children, Wendy’s catered its offerings towards adults. It offered healthier items on its menu long before the recent health conscious craze came about, and always gave an option for consumers to substitute the standard fast food items for healthier alternatives. It became known as the “healthier fast food”.[xxvii] Another strategy that Wendy’s has newly focused on is differentiating itself through core menu changes for the adult market. For example, it offers skin-on, natural-cut fries, which is its biggest standout. However, some of its other menu modifications are just imitating what McDonald’s has already accomplished.
Subway Strategy: Narrow Cost Leadership
With burger joints saturating the market, Subway has led the way with a new breed of restaurant termed the “fast-casual” style. It differentiated itself from the other QSRs by offering healthier sandwiches as an alternative to the burgers and fries that are so ubiquitous. Its position was even more firmly cemented at the forefront of healthy fast eating with commercials featuring Jared, a consumer who attributed his loss of weight to Subway’s sandwiches. Subway also made it a point to sponsor various health-related events to continue to push its healthy eating message.[xxviii]
Subway has achieved a cost-focused position in the market through maintaining private control of the business operation to suppress operational costs and through narrow scoping of the product offerings. Its low cost of starting up has also enabled it to be the largest single brand restaurant in the world with a larger amount of stores than McDonald’s.[xxix]
Taco Bell Strategy: Broad Cost Leadership
The fact that Taco Bell serves Mexican food distinguishes it from the crowd in the QSR space since there are not many firms that target that market space. Also, with a “Why Pay More?” menu that features items that cost from $0.79 to $0.99, Taco Bell has positioned itself as a low-priced substitute for the other firms in the QSR industry.[xxx] It prepares all of its food beforehand in a centralized location, which leads to greater efficiencies and cost savings. Moreover, there is not much product customization, which makes Taco Bell more efficient.
Pizza Hut Strategy: Broad Differentiation
Pizza Hut has sought to set itself apart from the rest of the QSRs by emphasizing a shared experience with the people you go with. It achieved this experience by offering products like the 4-in-1 pizza that allowed consumers to eat pizza in a “family style” setting. It has also strategically positioned itself as a family pizzeria - a place where the entire family can go to enjoy a dinner out.[xxxi] Furthermore, Pizza Hut has managed to stay ahead of the other pizza restaurants with a combination of everyday value and unique bundles, and ended up being the best U.S. performer on a year-by-year basis for Yum! Brands.
KFC Strategy: Broad Cost Leadership
Similarly to Pizza Hut and Taco Bell, KFC has distanced itself from its QSR competitors by focusing on something different - chicken. To distinguish itself from the other chicken QSRs, KFC has continued to stress the originality and longevity of their recipe, as well as utilize a recent push on the freshness of their food.[xxxii] Even with this strategy, KFC is struggling to capitalize on its position in the U.S. It has really started to invest in operations to improve consistency across the franchise and to become more contemporary and relevant.
Exhibit 6 describes the various competitors as well as their value and cost drivers, resources, capabilities, and products. We felt that the resources would be best seen from the revenue and cash on-hand that each firm had at the start of 2012. We compared the data for McDonald’s[xxxiii] , Wendy’s from a variety[xxxiv] of[xxxv] sources[xxxvi] , Subway, Taco Bell, Pizza Hut, and KFC.[xxxvii]
Each of these companies has some cachet associated with being leaders in the QSR industry. Their individual brands are a big reason that consumers place value in their respective firms. The values of these brands are also found in things ranging from the quality of the food to the experience at each firm. As such, we’ve utilized Zagat survey’s to help us determine how each of these companies compares to each other. This value comparison can be seen inExhibit 12.
Given the rankings for each category, we summed up the scores (five points for first place and one point for fifth place) and divided them by the total points given to these QSR chains. This formed the basis for how we calculated the value for each of the competitors. To figure out the P-C part of the profile, we utilized margin data from the annual reports. Unfortunately, because Yum! Brands does not separate out its numbers among KFC, Taco Bell, and Pizza Hut, we included it as a competitor for the sake of this comparison. Subway was also not included in this comparison since its financial information could not be obtained. The costs for each of these competitors were generally limited to supplier costs. Labor was a minimal cost, but commodity food prices are the biggest cost driver across the board for all of the firms. Furthermore, we limited the financial data to those from company-owned stores. We felt that the ones owned by franchisees would have royalty payments weighing down their margins, and so we wanted stores with unadulterated numbers to use as a comparison.
According to the value minus cost (V-C) profiles of BK and its competitors, BK has achieved the lowest profit margin of 12% per store revenue. (Exhibit 13) In 2011, McDonald’s, the market leader in the fast food industry, gained a profit margin of over 20% per store revenue and attained $2.86 million sales per restaurant, thus doubling BK’s sales per restaurant. (Exhibit 14) In other words, BK’s profit from company-owned restaurant units is only a quarter of McDonald’s profit. Moreover, BK’s high franchise ratio of 90% significantly reduced its revenues, earning only 4% revenue from its franchisee sales. Conversely, McDonald’s has a healthier franchise ratio of 80%, and a 4% franchise fee on restaurant revenue. Although BK requires less upfront costs and incurs less risk to its cash flow, it further reduces its profitability in the long run in comparison to McDonald’s.
At a value minus price (V-P) level, BK remains one of consumers' favorite fast food chains. Based on the methodology mentioned in the Competitive Analysis section, McDonald’s ranked the highest at 49%. BK scored third place below Wendy's at 11.5%, which is one quarter of McDonald’s score and one-third of Wendy's score. (Exhibit 13)
In the QSR industry, firms are highly focused on operating metrics that measure restaurant locations (units) and sales relative to the total firm and each restaurant location. Annual Sales Growth (ASG) is vital to ensure a firm is keeping pace with or exceeding the nominal growth in the QSR industry. Next, Average Sales per Unit (ASPU) shows the firm’s ability to generate revenues from restaurant locations. Finally, Change in Units (CIU) gauges the overall health of a firm’s revenue stream by measuring the expansion or contraction of the total volume of restaurants. Aside from these operating metrics, firms must also concentrate on their financial metrics. QSRs are highly focused on employing physical restaurant assets to generate income, and most firms hold few key assets outside of their restaurant infrastructure. Therefore, Return on Assets (ROA) plays a key role when examining financial ratios. Right behind ROA is Return on Equity (ROE), ensuring that capital contributed by investors and owners is effectively implemented producing returns. Given the maturity of the QSR industry, financing is well established, and firms will want to keep an eye on their Current Ratio (CR) and their Debt to Asset Ratio (DAR) to ensure they receive optimal terms for restaurant expansions and upgrades.
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