Five Forces Fast Food
Buyer Power Conclusion questions: 1)To what extent do individual buyers have the ability to negotiate low purchase prices with typical firms in this industry? a. Answer- Consumers can’t negotiate prices with fast food restaurants. However, there is a large degree of internal rivalry in the industry, with a very strong cross-price elasticity present in the industry. This encourages low prices due to a strong degree of substitution and gives consumers back some power. 2)To what extent do purchase prices differ from those that would prevail in a market with a large number of fragmented buyers in which buyers act as price takers? . Answer- In the fast food industry, buyers are price takers and have no venue or option to negotiate prices. The buyers are extremely fragmented and there is no way for them to organize in order to ask for lower prices. Specific questions: 1)Is buyers’ industry more concentrated than the industry it purchases from? a. (Current) No, fast food buyers are a huge group of 76,751, 638 people using the most recent census data. According to a CBS news report in 2009, at least ? of all Americans eat at least one “fast-food” meal every day.
And Americans will spend over $110 billion on fast food more than they’ll spend on movies, books, magazines, newspapers, videos, and recorded music combined . The number of suppliers to the fast food industry is approximately XX . This showcases that the buyers of fast-food are a very diverse group, with very little formal organization. b. (Future) It would be nearly impossible for individual consumers to mass together to place all their orders in at the same time to generate a block of buying power. If something like that could happen, it would be through second-party purchasers who deliver fast food to workplaces for consumers.
Based on trends in Columbus, GA for concierge services, it’s not feasible for unconcentrated markets to have second-party bulk buyers (the only Columbus concierge service quickly went out of business after only several weeks of operation). 2)Do buyers purchase in large volumes? a. (Current) Buyers purchase in relatively small volumes. Of the 76 million Americans that buy at least one fast food meal a day, the total amount spent annually per person ranges from $500-$1000 annually, with slight variations by state according to a 2011 survey done by Yahoo! finance .
The average amount spent per fast food transaction is only $5 , meaning that buyers purchase in very small volumes but do so very often. b. (Future) It’s highly unlikely that consumers would be able to purchase fast food in a significant volume unless through a second-party seller. 2A) Does a buyer’s purchase volume represent a large fraction of the typical seller’s sales revenue? c. (Current) McDonald’s, the nation’s largest fast food chain, has sales of over $23. 67 million per day in the United States. The number nine fast food restaurant in America, Kentucky Fried Chicken earned $1. 45 million daily .
Utilizing the daily sales of McDonald’s and dividing it by the average amount spent on a fast food transaction, it indicates that over 4. 7 million people buy fast food daily, which means that individual buyers are statistically insignificant to the total seller’s sales revenue. d. (Future) It’s highly unlikely that consumers would be able to purchase fast food in a significant volume to affect the total sales volume of a fast food company unless through a second-party seller. 3)Can buyers find substitutes for industry’s product? a. (Current) Yes. Fast-food is convenient way for millions of Americans to eat, but it’s not the only way to eat.
Substitutes for convenient meals include home-made food, ready-made food at grocery stores (pre-made meals at Fresh Market or Publix), take-out orders made from restaurants (Chili’s to go) or numerous other mobile food sources (energy bars, meal replacement bars). b. (Future) Consumers will have increasing options for convenient meals without having to eat fast food. Sales of ready-made items in the Chicago area have increased already 7-10% over the past year and large grocery stores, specifically Whole Foods and Fresh Market, have made ready-made food items a staple of their grocery stores.
Whole Foods has expanded to 304 markets since 1980, and a bulk of that expansion happened post-1995. Other stores, such as Fresh-Direct, Fairway Market, Zabar’s, Citarella, and Balducci’s have all jumped on the train of providing ready-made food and will likely continue to be viable substitutes for fast food . 4)Do firms in industry make relationship-specific investments to support transactions with specific buyers? a. (Current) Fast food companies direct a large percentage of their marketing efforts towards children, especially minority children (under the age of 17).
The fast food industry spent more than $4. 2 billion in 2009 on TV advertising, radio, magazines, outdoor advertising, and other media. According to the same study, McDonald’s and KFC specifically targeted African American youth with TV advertising, websites, and banner ads and African American teens viewed 75% more TV ads for McDonald’s and KFC compared to white teens . a. (Future) Although marketing might change, consumers already have a relationship with the fast food industry and will continue to be loyal consumers.
There has been an increase in activist groups that have targeted the fast food industry’s marketing techniques (Children’s Food and Beverage Advertising Initiative, the White House Task Force on Child Obesity and the Danone Initiative). They’ve claimed that Ronald McDonald is a major culprit in encouraging children to crave fast food and have targeted other “children-friendly” advertising techniques. McDonald’s, and Burger King are the latest to submit to the CFBAI’s calls to stop advertising unhealthy eating choices.
The results are that fast food restaurants are offering healthy options, such as carrots and fresh fruit with their meals, but they’ve already reached a significant proportion of the US population who have already established fast food as a predominant food supply . 5)Is price elasticity of demand of buyer’s product high or low? a. (Current) According to an Arizona State University study, buying fast food appears to be habitual. Although there are numerous industry-internal substitutes, fast food consumers are loyal consumers.
The demand for fast food is nearly inelastic, but has a strong cross-price elasticity throughout the industry, which shows the effectiveness of promotions and price cuts. The result is that price cuts and promotions have a destructive effect on revenue throughout the industry, but are an effective way to increase market share . b. (Future) Depending on the effectiveness of national campaigns that target the fast food industry specifically and the other industry substitutes (ready-made meals, restaurant take-out), price elasticity could drastically increase.
By introducing relatively cheap alternatives to fast food that are similar in convenience, fast food companies could have to compete on both price and quality with other industries. 6)Do buyers pose credible threat of backward integration? a. (Current) Backwards integration is complicated for the fast food industry. The product that fast food companies sell is not a raw material, but consumers do purchase individual fast food restaurants. Consumers own the majority of individual McDonald’s locations (approximately 65% of all stores) and 90% of all Burger King Restaurants are owned by individual franchisees .
Consumers likely don’t purchase restaurants in order to ensure a more reliable or cost-effective supply of inputs, but rather do so as an investment opportunity. b. (Future) Statistics are plentiful that show that franchisees earn very little compared to the amount of work that is necessary to make a restaurant function. According to a study by Newsweek, the average franchisee logs 60-90 hours a week and only makes an average of $60,000, which equates to roughly $13 an hour . It’s likely that in today’s slumping economy, consumers will unlikely to have the $200,000-$500,000 necessary to purchase a franchise and earn such a small salary. )Does product represent significant fraction of cost in buyer’s business? a. (Current) No, an individual fast food purchase does not represent a significant portion of the buyer’s salary. According to the most recent US census, the median income in the United States is nearly $50,000 . This means that the average fast food purchase ($5) represents 1/10,000 of their annual income. b. (Future) Moderate job growth is expected to continue, especially with the upcoming election. It’s likely that more consumers will have slightly more money, but have become habitually tied to the convenience and affordability of fast food.
Regardless, the cost of fast food will still represent only an insignificant fraction of their total annual income 8)Are prices in the market negotiated between buyers and sellers on each individual transaction, or do sellers post a “take it or leave it” price that applies to all transaction? a. (Current) Prices aren’t negotiated in the fast food industry. Buyers have no negotiating capabilities and either pay the set price or leave the restaurant. b. (Future) It’s extremely unlikely that fast food restaurants will ever introduce a “name your own price” campaign or ever give consumers any flexibility with prices.