YUM! Business Case Study

Index of contents

1 Industry Analysis
1.1 Primary Driving Forces of the U.S. Fast Food Industry
1.2 Porter’s Five Forces Model
1.3 Fast Food Industry’s Attractiveness and Key Success Factors

2 Business Strategy Analysis
2.1 SWOT Analysis
2.2 KFC’s and Pizza Hut’s Positioning and Competitive Advantages

3 Franchising Strategy Analysis

4 International Business Strategy

Bibliography

1 Industry Analysis

1.1 Primary Driving Forces of the U.S. Fast Food Industry

The American fast food preparation and presentation model created a strong cultural and collective identity. The model has provided the consumers with uniformity and repeated experience. This phenomenon is called the `McDonaldisation' of the US society that has embraced the all American meal throughout the globe. People want quick and convenient meals; they do not want to spend a lot of time preparing meals, traveling to pick up meals, or waiting for meals in restaurants. As a result, consumers rely on fast food. Knowing this, fast food providers are coming up with new ways to market their products that save time for consumers. For example, McDonald's locates its outlets inside Wal-Mart stores across the United States, and also in Chevron and Amoco service stations. These arrangements are becoming more common in the fast food industry. Consumers can combine meal­time with time engaged in other activities, such as shopping, work, or travel. This idea shapes the growth strategies of most firms in the industry. The most significant driving force is the inexorable movement towards bigness and concentration of power in the hands of fewer and fewer firms at almost every point in the fast food sector. Other driving forces can be seen in the changing structure of American families as more women entered the work force, increasing globalization of the food system, the environmental movement and equity concerns. On the other hand, women are the driving force behind the fast food industry into another direction. Women's attitude towards health and food content has put pressure on the fast food industry to alter their product mix.

However, the great success of the traditional fast food outlet is potentially beginning to lose its pull factor. It is believed that the actual fast food sector is in transition from a traditional selling of burgers to the pre­eminent arrival of a fast casual food industry.

The driving force for change has been a number of issues that raise questions to scrutinise the fast food companies, such as the link of regular fast food ingestion to obesity, chains showing operating loss for the first time in their history and the forced closure of outlets. This is reflected on McDonald's facing a lawsuit from an overweight teenager who felt it was the company to blame for her condition. The food giant has also closed down outlets worldwide.

1.2 Porter’s Five Forces Model

Competitive Rivalry

While the fast food sector has long been regarded as competitive, the level of rivalry only intensifies. Numerous chains are expanding: multi-unit development deals are being inked left, right, and center. Brands like Subway, Krispy Kreme, Camille's Sidewalk Café, Cosi Inc, Whataburger, Papa Murphy's, Moes Southwest Grills and Bob's Big Boy are all on the expansion trail. Meanwhile, a number of incumbant chains and their franchisees are struggling to return positive results on existing operations. One well-known example is Burger King where one high profile multi-unit franchisee went bankrupt, and improved sales and profits are vital in turning other franchisees and the franchisor operation around.

New Entrants

The threat of new entrants is low. There are high capital requirements for doing business in the fast food industry since franchises are high fixed cost investments that require economies of scale in order to be profitable. There is existing brand loyalty to existing companies, who have been in the market since decades, while other fast food incumbents have already obtained the most favorable store locations. These existing competitors are also more likely to have stronger supplier relationships, which allow them to enjoy cost advantages that new entrants cannot. Additionally, entrants are unlikely to have the same access to financial intermediaries.

Buyers

Customers generally have relatively moderate to strong bargaining power in the fast food market. This stems from some important characteristics of the market:

- The fast food industry comprises a large number of small operators
- The industry operates with high fixed costs,
- The fast food product (within defined market segments) is largely undifferentiated and can be replaced by substitutes
- Switching to an alternative product type of fast food or an alternative outlet is relatively simple and is not related to high costs,
- Consumer tend to be price-sensitive,
- Consumer can produce the product themselves if they wanted
- Fast food is not of strategic importance for the customer

Suppliers

Fast food operators typically do not run their own supply chains. 75% of outlets source via a wholesaler, which owns and manages stock; or via suppliers direct. Suppliers make deliveries to hundreds of high street outlets and tens of wholesale warehouses around the country every day. Given this situation, the larger wholesalers have considerable market power vis-à-vis an independent fast food outlet. Moreover, the wholesale market is characterised to a much greater degree than is the retail side of the industry by concentration. The market is more dominated by a few large suppliers rather than a fragmented source of supply. On the other hand, smaller outlets do have a range of substitutes for the particular input and the switching costs from one supplier to another are not high. Also, wholesalers and ingredient manufacturers are not looking to integrate forward in this market.

Substitutes

The treat of substitute products is high in the fast food market, mainly because within defined segments of the market products it is relatively easy to introduce a new variant of fast food (e.g. new sandwich filling, new type of burger) and because fast food always faces competition from home cooked foods.

1.3 Fast Food Industry’s Attractiveness and Key Success Factors

The United States economy is becoming increasingly service­oriented, and over the past several decades, the foodservice industries that offer the highest levels of convenience have been rewarded with strong sales growth. In the face of rising incomes and increasingly hectic work schedules, a nearly insatiable demand for convenience will continue to drive fast food sales. Firms will strive to find ways to make their products even more accessible. Many fast food outlets now have two or more drive­through windows, and most firms have only scratched the surface when it comes to outlets or other alternative points of distribution. Miniaturized outlets, even vending machines, offering hot fast food meals might one day be as common in public buildings as soft­drink machines are today. Even if incomes stagnate or attitudes change, consumers are unlikely to return to meal preparation at home on a large scale. Several studies have found not only a dramatic nationwide decline in time allocated to at­home meal preparation, but also a sharp decline in cooking knowledge, especially among young consumers. This suggests that even if consumers choose to spend more time at home, for family or other reasons, much of the meal preparation will still occur elsewhere. The market for Home Meal Replacements should remain strong, and firms that successfully mimic the quality and variety of home prepared meals will excel. Many more table service restaurants, which traditionally focus on full­service inhouse dining, will likely try to capture part of this market by offering take­out, and possibly experimenting with home delivery.

The value of consumer time, as well as the demand for consistent, high­quality food products, will continue to shape the food industry. Fast food, once considered a novelty, has become an increasingly significant part of the American diet. The role of convenience in this dietary shift cannot be over­emphasized, and the future growth of the rest of the foodservice industry will be driven in large part by its ability to find new ways to save consumers' time.

2 Business Strategy Analysis

2.1 SWOT Analysis

Strengths

Yum! Brands is the world’s largest restaurant company with about 33,000 restaurants in more than 100 countries and territories. Four of the company’s restaurant brands - KFC, Pizza Hut, Taco Bell and Long John Silver’s - are the global leaders of the chicken, pizza, Mexican-style food and quick-service seafood categories respectively. KFC has about a 46% market share in the US chicken QSR (quick segment restaurant) segment. As of 2004, Pizza Hut was the leader in the US pizza QSR segment, with a 16% market share. Taco Bell has a 64% market share in the US Mexican QSR segment. Leading market position gives the company a strong hold within the industry.

[...]