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Strategic Marketing Project Group Pi

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Strategic Marketing Project Group Pi

  1. 1. STRATEGIC MARKETING<br />PROJECT REPORT<br />Group -π<br />NameStudent IDNandita DhirFT11136Murli KrishnanFT11237MuruganandanFT11335Pankaj AswalFT11243Nitin GuptaFT11339Nikhil CherianFT11139Nikhil KhedekarFT11241<br />U-CURVE Analysis of Fast Food Industry in US<br />The United States has the largest fast food industry in the world, and American fast food restaurants are located in over 100 countries. Approximately 2 million U.S. workers are employed in the areas of food preparation and food servicing including fast food in the USA. Fast food restaurants represent one of the largest segments of the food industry with over 200,000 restaurants and $120B in sales in the U.S. alone. Here in this analysis we have taken 24 companies and plotted their revenue and return on equity. U-Curve is plotted in X-Y axis. X-axis is the Size and Y-axis is the return on investment (ROI). The X-axis will be determined by revenue and Y-axis is determined using return on equity from the share market. <br />CompanyRevenue (in millions)Net Income / RevenuePizza Inn41.52%Nathas Famous53.77%Brazil Fast Food corp6012%MTY Food Group6323%Caribou coffee company2833%Krispy Kreme doughnuts3573%Sonic5514%Papa Johns international11204%Panera Bread Company 1,3536%CKE Restaurants 1,4193%Chipotle Mexican Grill1,740.009%Jack in the Box 2,4715%Burger King Holdings2,5378%Tim Hortons262013%Brinker International 3,6212%Darden Restaurants7,2185%Starbuck’s 9,7754%Yum! Brands10,83610%McDonald's22,74520%<br />International players such as McDonald's (MCD) and Yum! Brands (YUM) have had the most success as explosive growth in emerging markets has offset rising costs and a U.S. slowdown. Other companies like Sonic and Domino's have turned to new marketing campaigns and product innovation to boost growth and profitability.<br />The important aspect of U-curve is irrespective of any industry, any time period the markets remain U. This fundamental nature of business function in society helps industries to analyze and observe their current position and adopt strategies to move along the nature of the curve. The movement of one firm will affect the movement of another firm but effectively the curve remains same.<br />BCG Matrix<br />The BCG matrix (aka Boston Consulting Group analysis) is a chart that had been created by Bruce Henderson for the Boston Consulting Group in 1968 to help corporations with analyzing their business units or product lines. This helps the company allocate resources and is used as an analytical tool in brand marketing, product management, strategic management, and portfolio analysis.<br />QuadrantsDescriptionCash CowsCash cows are units with high market share in a slow-growing industry. These units typically generate cash in excess of the amount of cash needed to maintain the business.DogsDogs or more charitably called pets, are units with low market share in a mature, slow-growing industry. Question MarksQuestion marks are growing rapidly and thus consume large amounts of cash, but because they have low market shares they do not generate much cash.StarsStars are units with a high market share in a fast-growing industry. The hope is that stars become the next cash cows. When growth slows, stars become cash cows if they have been able to maintain their category leadership.<br />As a particular industry matures and its growth slows, all business units become either cash cows or dogs. The natural cycle for most business units is that they start as question marks, and then turn into stars. Eventually the market stops growing thus the business unit becomes a cash cow. At the end of the cycle the cash cow turns into a dog.<br />Global Fast food industry<br />In 2009, the global fast food market grew by 4.8% and reached a value of 102.4 billion and a volume of 80.3 billion transactions. In India alone the fast food industry is growing by 41% a year. Mc Donald continues to be the largest operator in this segment.<br />McDonald's is located in 126 countries and on 6 continents and operates over 31,000 restaurants worldwide. There are numerous other fast food restaurants located all over the world. Burger King has more than 11,100 restaurants in more than 65 countries. KFC is located in 25 countries. Subway is one of the fastest growing franchises in the world with approximately 39,129 restaurants in 90 countries as of May 2009. Pizza Hut is located in 97 countries, with 100 locations in China. Taco Bell has 278 restaurants located in 12 countries besides the United States.<br />McDonalds Revenues<br />Mc Donald’s BCG matrix<br />Porter’s Five Forces Analysis of Fast Food Industry <br />1) Threat of New Entrants – Weighted Score - 2<br />a) Low Entry Barriers – Score – 2<br />Low Capital Requirements - McDonald's is located in 126 countries and on 6 continents and operates over 31,000 restaurants worldwide. To maintain its brand equity, it has to spend huge amounts of mass advertisements - No (0)<br /> Low Switching Costs (buyer) – Since it is a commodity product, switching cost are low - Yes (1)<br /> Low Economies of Scale – McDonalds has backward integrated in supply chain. McCain produces material which is further processed by McDonald’s outlets. McCain Plant serves many outlets. No (0)<br />Low Product Differentiation –Since it commodity product, product differentiation is low - Yes – (1)<br /> Easy Channel Access – This industry required robust distribution networks - No (0)<br />b) High Exit Barrier – Score -2<br />High Fixed Costs (labor agreements, maintaining capabilities for spare parts, etc.) – Fixed cost are comparatively less than in other industries such as steel - No (0)<br />Specialized Assets (low liquidation values, high costs of transfer / conversion) – McDonalds does not use specialized assets -No (0)<br /> Strategic Interrelationships (between SBUs, shared facilities, etc.) - McDonald basically targets families. Various SBU’s thus focus on different members of families -Yes (1)<br /> Government and Social restrictions – Yes (1)<br />2) Supplier Power – Weighted Score - 1<br /> Large Suppliers – Supplier are fragmented & moreover suppliers are small players - No (0)<br /> Supplier industry is more concentrated – No (0)<br /> Suppliers’ Products are Critical (to firm’s products) –Yes (1)<br /> High Switching Costs – Switching cost is not high for commodity products- No (0)<br />Suppliers can integrate (forward) – Supplier cannot forward integrate in this chain. But McDonalds has backward integrated. McCain is subsidiary of McDonalds which produces raw material for outlets. No (0)<br />3) Industry Rivalry - Weighted Score -2<br />No Industry Leader – McDonalds has been an Industry Leader – Yes(1)<br />Many Competitors – It is a fiercely competitive market – Yes (1)<br />High Fixed costs – No (0)<br />High Exit Barriers – Low because of franchise model -No (0)<br />Slow Industry Growth – Fast food industry grew well even in recession -No (0)<br />Low Product Differentiation – Commodity Products - Yes (1)<br />Capacity Augmented in Large Increments – No (0)<br />4) Buyer Power - Weighted Score - 3<br />Buyers are Knowledgeable – Buyer is young people mostly for whom McDonalds is a hangout place. So buyers does not really search for information on pricing, value addition as done by corporate buyers - No (0)<br />Large Purchases – Purchases are one time meals - No (0)<br />Firm’s product is a Commodity – Yes (1)<br />Low Switching Costs (buyer) – Buyer can easily switch to other players without incurring cost -Yes (1)<br />Several Suppliers – KFC, Burger King, Subway & many more directly compete with McDonalds -Yes (1)<br />Buyers can integrate (backward) – Buyer cannot integrate backwards because of huge Brand equity building efforts required - No (0)<br />5) Threat of Substitutes - Weighted Score- 3<br />Substitute Products – Substitute products can be anything which can be taken as snacks. Some of the major substitutes are Pizza, Pasta, Chaat & so on - Yes (1)<br />Substitute Technologies – No (0)<br />Substitute Industries – Substitute industries can be from organized sector of from unorganized sector -Yes (1)<br />SupplierPower (1)Threat of Substitutes(3)Market ValueThreat ofNew Entrants (2)Buyer Power(3)IndustryRivalry(2)<br />McDonald’s Burger Value Chain Analysis<br />Step 1- To identify all the players in the value addition process<br /><ul><li>Raw materials Suppliers
  2. 2. Chicken related products (chicken patties)
  3. 3. Other non-vegetarian items(Beef, pork, mutton, fish)
  4. 4. Vegetable based products (vegetable patties and nuggets, French fries)
  5. 5. Cheese supplier (a local dairy)
  6. 6. Distribution centers (Responsible for procurement, quality control and delivery to the restaurants)
  7. 7. Franchisee Owners (Restaurants) - Equip the restaurant at their own expenses
  8. 8. Kitchen equipment
  9. 9. Lighting
  10. 10. Signage and decor
  11. 11. Seating
  12. 12. Logistics(Freight carriers for transportation of raw materials to distribution centers)</li></ul> Step 2- To describe the value chain by finding the value added at each step in the chain <br />McDonald’s has appropriately created a franchisee system where it locates, develops, and constructs the restaurant under its own direction based on nationwide development plan, which is responsive to changing demographics, customer convenience, and competitions. It retains control of the restaurant facilities it has developed. <br />Franchisee (restaurants) -The franchise agreement allows a franchisee to operate a specific McDonald’s restaurant, according to McDonald’s standards, for a period of 20 years. Franchisees are required to make initial cash investment of $ 150,000 for a 20-year franchising agreement and pay a regular royalty fee @ 12.5% of the gross sales to McDonald’s. As a franchisee, one has to agree to work within the McDonald’s system. The franchisees are expected to devote their full time and best possible efforts to the day-to-day operation of the business. They are required to equip the restaurant at their own expense with kitchen equipment, lighting, signage, seating and décor. To maintain uniformity, franchisees must use McDonald’s specifications:<br />Formulae and specifications for menu items.<br />Methods of operation, inventory control, bookkeeping, accounting and marketing<br />Trademarks and service marks <br />Concepts for restaurant design, signage, and equipment layout.<br />McDonald’s establishes close relationships with local suppliers to ensure the highest quality fresh ingredients that go into McDonald’s products. It has established an extensive ‘cold chain’ distribution system in India to ensure that the products that arrive at the restaurant from suppliers all over India are absolutely fresh. All products undergo about 20 different quality checks before they are served. It has pioneered the cold chain management system wherein the freshness, crispness and nutritional value of vegetables and processed products are retained. It involves procurement, warehousing, transportation and retailing of perishable food products all under controlled temperatures.<br />Raw material vendors- McDonald’s and its supplier partner, like McCain Foods Pvt Ltd., work closely with farmers in local areas to develop process-grade varieties of vegetables. It also forms joint ventures with some suppliers for the chicken and vegetable range of products. It enables vendors to set up hi-tech refrigeration plants for manufacture of frozen food at temperatures as low as - 350 C. This is vital to ensure that the frozen food retains it freshness for a long time and the ‘cold chain’ is maintained. The frozen product is immediately moved to cold storage rooms. Also keeping cultural sensitivities in mind, processing lines are absolutely segregated and utmost care is taken to ensure that the vegetable products do not mix with the non-vegetarian products. For sourcing cheese, it normally ties up with local dairies, which have a dedicated quality program for milk procurement. It requires significant investments in setting up bulk coolers at all milk collection centers.<br />Distribution Centers - McDonald’s ties up with local companies for setting up distribution centers for the restaurants. These companies coordinate the cold chain activities and operate distribution centers (DCs) for McDonald’s restaurants. The DCs are responsible for procurement, quality control and delivery to the restaurants. The DCs have focused all their resources to meet McDonald’s expectation of Cold, Clean and On-Time Delivery’ and play a very vital role in maintaining the integrity of the products throughout the entire ‘cold chain’. Ranging from liquid products to lettuce, the DC receives items from different parts of the country. These items are stored in rooms with different temperature zones and are finally dispatched to the McDonald’s restaurants on the basis of their requirements. The centers have both cold and dry storage facilities with capability from room temperature to frozen state.<br />Freight Carriers (Logistics) – Companies like DHL, Air Freight handle Mc Donald’s logistics requirements. They transport the raw materials from the suppliers to the distribution centers and also deliver the products from DCs to the restaurants. They are working cohesively to ensure that the final product reaches the customer consistently each time and every time. At their level, every care is taken to guard against any interruptions in the cold chain, which can break the link and have a detrimental effect on the quality of the product. <br />Step 3- To allocate revenue earned by each player in the value chain starting backwards (end consumer being the last player)<br />Mc Donald’s revenue (Franchisee model) - $ 150,000 for a 20-year franchising agreement and a regular royalty fee @ 12.5% of the gross sales.<br />Franchisee – On an average, a franchisee owner retains about 27.5% of the gross revenue generated by selling a hamburger.<br />Raw Materials cost – For some items, such as beverages, food costs are only 20 percent of the price of the item and for other items like hamburgers, food costs comprise 45 percent of the sale price. The average food costs can be estimated at around 32% of the retail price of the meal. <br />Distribution centers – The companies that operate the distribution centers normally enter into a tie-up with McDonald’s and retain share as per the fixed %age in the JV agreement. The revenue earned by these companies in the value chain varies from 20-22 % of the retail price.<br />Freight Carriers – As per the industry average, around 7% of the gross revenue can be allocated to the logistics companies.<br />Relationship Marketing <br />It is that form of marketing, developed from the direct response marketing campaigns which emphasizes customer retention & satisfaction, rather than a dominant focus on sales transactions.<br />It recognizes long term value of customer relationships & extends communications beyond intrusive advertising & sales promotional messages. With the opening of more communication channels & platforms like internet & mobile, it has continued to evolve & move forward. It’s a combination of search optimization & Strategic content, PR, Social media & Application development. Similar to CRM, Relationship Marketing is a broadly recognized, widely-implemented strategy for managing & nurturing a company’s interactions with clients & sales prospects. But ultimately a question arises as to – ‘What does the customer really want?’<br />In the case of McDonald’s- Burgers served at one outlet would taste the same at other outlets as well. But that is not the prime reason why customers prefer McDonalds. It is the convenience & price that attract customers, especially in a price-sensitive market like India. According to a study, price and convenience overcome a fair amount of bad service and rude clerks or salespeople. McDonalds has both price & convenience as its strong attributes.<br />Satisfaction<br />Relationship marketing relies upon the communication and acquisition of consumer requirements solely from existing customers in a mutually beneficial exchange usually involving permission for contact by the customer through an "opt-in" system. McDonalds has a lot of word-of-mouth referral through families as well as youngsters who are the existing customers.<br />Retention<br />A key principle of relationship marketing is the retention of customers through varying means and practices to ensure repeated trade from preexisting customers by satisfying requirements above those of competing companies through a mutually beneficial relationship. Prompt service & convenience at a great price are the strong attributes of McDonalds, which retains their existing customers.<br />Bibliography<br /><ul><li>http://www.aboutmcdonalds.com/etc/medialib/aboutMcDonalds/investor_relations0.Par.6540.File.dat/McD_2009_AR_Final_032910.pdf
  13. 13. http://minority-health.pitt.edu/archive/00000469/01/Fast_Food,_Race-Ethnicity,and_Income.pdf
  14. 14. http://www.researchandmarkets.com/
  15. 15. http://www.bbc.co.uk/worldservice/specials/1616_fastfood/
  16. 16. http://www.bl.uk/reshelp/pdfs/fast_food_and_snacks_industry.pdf
  17. 17. http://www.oup.com/us/companion.websites/9780195307191/6Ch2/?view=usa
  18. 18. http://money.cnn.com/magazines/fortune/fortune_archive/1994/10/17/79847/index.htm

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