Porter’s Five Forces: Applied To Fast Food Restaurants Industry with Real World Examples

Porter’s Five Forces was developed by Michael Porter, a professor at Harvard Business School. The analysis is used to understand the competitive environment of an industry by examining five key factors: the threat of new entrants, bargaining power of suppliers, bargaining power of buyers, threat of substitute products, and intensity of competitive rivalry.

This analysis is useful for businesses as it provides a framework for understanding the competitive landscape of their industry. By examining each of the five forces, businesses can identify potential risks and opportunities, and develop strategies to succeed in the market.

The fast food industry is a very known industry to us. This refers to the food service sector that focuses on providing quick and convenient meals to customers. It typically includes well-known chains such as McDonald’s, Burger King, KFC, Subway, and many others. These leading fast-food restaurants have their own reputation for unique menu offerings, efficient service, and low-cost meals.

The fast food industry is highly competitive. There are global, regional, and local many reputed food chains competing for market share. Competitive factors include pricing, menu variety, brand recognition, customer service, store locations, and advertising. Fast food chains usually continuously invest in marketing campaigns, promotions, and product innovation to attract and retain customers.

By using Porter’s Five Forces analysis, we can gain a better understanding of the competitive environment in this industry. Following is a detailed description of each force aligned with the Fast Food Restaurants Industry.

1. The Threat of New Entrants

This force refers to the ease or difficulty with which new companies can enter the market. High barriers to entry, such as high capital requirements, regulatory restrictions, and economies of scale, can make it difficult for new companies to enter the market. In contrast, low barriers to entry, such as low startup costs, easy access to technology, and low regulatory restrictions, can make it easier for new companies to enter the market.

The fast food industry has moderate barriers to entry. It requires considerable capital for initial setup, real estate, and marketing to establish a fast-food restaurant so that new players can enter the market. However, existing fast food chains benefit from economies of scale, strong brand recognition, established supply chains, and customer loyalty. These factors act as barriers for new entrants and can make it challenging for them to compete effectively.

As an example, McDonald’s faced failure in the Bolivian market for various reasons. One main reason is that McDonald’s faced competition from local eateries and street vendors that offered affordable, freshly prepared meals reflecting Bolivian tastes. You can read the case study by wearedrew.co on why McDonalds failed in Bolivian market.

2. The Bargaining Power of Suppliers

This force refers to the power that suppliers have over the industry. Suppliers can exert power by controlling the supply of critical inputs, charging high prices, or limiting the quality of their products.

Suppliers in the fast food industry typically have limited power. The key inputs such as food ingredients, packaging materials, and equipment are widely available from multiple suppliers. However, suppliers may exert some influence regarding quality, delivery, and pricing, especially for unique or proprietary ingredients. Fast food chains often negotiate favorable contracts with suppliers to maintain control over costs and ensure consistent supply.

On 2018, the Global Fast Food Chain Gient, Kentucky Fried Chicken (KFC) has been forced to close many of its 900 UK branches due to spply issue. The fast-food giant, in a press release stated; “We’ve brought a new delivery partner onboard, but they’ve had a couple of teething problems – getting fresh chicken out to 900 restaurants across the country is pretty complex!”. Source: Supply chain failure closes more than half of KFC fast-food outlets – by thebci.org.

3. The Bargaining Power of Buyers

This force refers to the power that buyers have over the industry. Buyers can exert power by demanding low prices, high quality, or other favorable terms. In industries where buyers have many options or where the products are not highly differentiated, buyers have more power.

Buyer power is relatively high in the fast food industry. Customers have many options and can easily switch between fast food chains based on price, menu preferences, and convenience. Customers are price-sensitive and often seek value for their money. Additionally, customers now have increased access to nutritional information and are increasingly demanding healthier food options, which influences the industry’s offerings.

Burger King, Subway, Quiznos, Boston Market, and Steak ‘n Shake brands have slowly been falling out of favor with customers for years in America, a trend which is now more obvious thanks to mass store closures and plummeting sales numbers. You can read about this more: 5 Major Fast-Food Chains Falling Out of Favor With Customers by eatthis.com.

4. The Threat of Substitute Products or Services

This force refers to the threat of substitutes, or alternative products or services that can fulfill the same customer need. The availability of substitutes can limit the pricing power of companies in the industry, as customers can choose to switch to substitutes if prices become too high.

The fast food industry faces a significant threat from substitute products. Consumers have various alternatives, including other types of restaurants, home-cooked meals, meal delivery services, and healthier options. Changing consumer preferences towards healthier eating habits and increasing awareness of the environmental impact of fast food can drive customers to seek substitute products, posing a challenge to traditional fast food chains.

5. The Intensity of Competitive Rivalry

This force refers to the intensity of competition among existing companies in the industry. The level of competition depends on factors such as the number of competitors, the level of differentiation, and the degree of price competition. High levels of competition can lead to lower prices, reduced profitability, and higher marketing costs.

The fast food industry is characterized by intense competition. There are numerous well-established global brands, regional chains, and independent local fast food restaurants. Competitive factors include pricing strategies, menu variety, brand recognition, customer service, and location. Fast food companies constantly strive to attract customers and increase market share through aggressive marketing campaigns and product innovation.

Read More: 15 Major Fast Food Failures by cnbc.com

Key Takeaways

In summary, Porter’s Five Forces analysis highlights the highly competitive environment of the Fast Food industry, with limited opportunities for new entrants and high bargaining power for suppliers. Foo chains must focus on customer loyalty and effective cost management to maintain profitability in this challenging industry.

It’s important to note that the analysis of Porter’s Five Forces should be conducted using industry-specific data, market research, and insights from industry reports to get a comprehensive understanding of the fast food restaurant industry dynamics.

Challenges of the Fast Food Restaurants Industry

One of the main challenges for the fast food industry is the increasing demand for healthier food options. Consumers are becoming more health-conscious and are actively seeking out alternatives to traditional fast food meals. This shift in consumer preferences has prompted fast food chains to introduce healthier menu items, reduce artificial ingredients, and provide nutritional information to meet evolving customer demands.

Additionally, the industry faces scrutiny regarding its impact on public health. Concerns about the nutritional content of fast food, particularly its contribution to obesity and related health issues, have led to increased regulatory oversight and public awareness. Fast food chains are under pressure to address these concerns through menu modifications, transparency in labeling, and promoting healthier choices.

The fast food industry also faces challenges related to labor and employment practices. There have been ongoing discussions about minimum wage laws, working conditions, and employee benefits within the industry. Fast food companies are increasingly being held accountable for fair wages, employee rights, and diversity and inclusion initiatives.

Furthermore, the industry must adapt to evolving consumer expectations and technological advancements. The rise of delivery platforms, mobile ordering apps, and self-service kiosks has reshaped the customer experience and created new challenges and opportunities for fast-food chains. Staying relevant and providing seamless and convenient ordering options is crucial to meet the changing needs of customers.

Overall, while the fast food industry remains highly competitive, it also faces significant challenges related to health concerns, labor practices, and meeting evolving consumer demands. Adapting to these challenges requires continuous innovation, embracing healthier options, and keeping pace with technology to maintain a competitive edge.

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