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Pizza: Restaurant ; Fast Food Industry Analysis

THE RESTAURANT & FAST FOOD INDUSTRY ANALYSIS OF THE PIZZA CHAIN SECTOR THE RESTAURANT INDUSTRY AND HISTORY Where and when did the fast food concept come into play? Consider the hamburger. While German immigrants brought the first Hamburg Style Steak to the United States in the early 19th century, the humble hamburger, White Castle, became the basis for a new kind of restaurant in 1916 called the fast food chain. J. Walter Anderson, who sold five-cent hamburgers with french-fries and colas, opened the oldest burger chain. Other restaurants followed and in 1948 brothers Richard and Maurice Mac McDonalds figured out a fresh approach that would produce fast food even faster. They eliminated waitresses and indoor tables from their hamburger stand, cut down on menus, streamlined food operations and lowered prices. Richard built the stand’s giant golden arches, which emerged through the roof. In 1954 Ray Kroc, a milk shake machine salesman, paid the brothers a visit and was overwhelmed by the volume of business the McDonald’s were serving up with bags of burgers and fries with factorylike efficiency. Kroc envisioned a string of establishments across the country. He made a deal with the McDonalds under which Kroc got the right to use their name and methods in franchising the concept. The brothers would get a bit more than a quarter of the 1.9% of the franchisees’ gross to be collected by Kroc. The McDonald’s concept spread like a brush fire and the rest is McHistory. Ray Kroc, who built the McDonald’s Corporation, and his belief that there was equal beauty in the expanding restaurant business, definitely envisioned the future of the fast food industry most accurately. INDUSTRY CHARACTERISTICS The restaurant industry is a classical mature industry with characteristics such as consolidations, acquisitions and divesture activity. Restaurant operators have found it easier to grow by acquisition rather than internal development. This is significant since acquiring companies do not have to perform a great deal of market analysis of a particular customer base or geographical market area. This industry is intensely competitive with respect to price, service, location and food quality. There are many well-established competitors with substantial financial and other available resources. Some competitors have been in existence for a substantially long time and some franchisees are established in good markets. It is extremely competitive for the consumers’ dollars. These restaurants not only compete with other restaurants, but other generic forms of competition; such as eat-at-home foods and supermarket deli take-out arrangements. The business is very capital intensive. It can cost approximately $1 million dollars to open a new fast food store and even more for traditional dining establishments. Most fast food chain restaurants are franchisee operated. The industry is segmented into two major categories: fast food and full-service restaurants. ENVIRONMENT & OVERVIEW OF THE MARKET Traditionally, restaurants (and hotels) have been among the most entrepreneurial of businesses in the sense that the barriers to entry are relatively weak or minor. Factors creating environmental changes were a result of the early 1970’s when dual-income families became the norm and generated more disposable income for eating out and leaving less time for cooking at home. The demographic shift, and the restaurant industry’s ability to deliver a consistent product, at a reasonable price, has created a generation of U. S. consumers who eat out. Restaurant sales have grown steadily throughout the 1990’s (about 5% in 1999). United States citizens spend nearly half of their food dollars eating out (approximately $350 billion each year). As an introduction to the overall restaurant industry, Graph 1 illustrates Percentage of Market Share Sales by Segment for the Top 100 Restaurants for 1998 and the Second 100 Market Sale Shares by Segment for 1998. 1998 aggregate Restaurant Sales totalled $123.6 and $16.6 billion for a combined total of $140.2 billion. Combined Pizza sales for the 200 chains, as a percentage to aggregate sales, represent 15.96% of market share, or $22.380 billion for pizza segment sales. GRAPH 1 GRAPH 2 Table 1 on Page 4 illustrates Pizza Chains Ranked by the number of U. S. Units for fiscal years ending 1998, 1997 and 1996. The four power players, in the pizza chain industry, dominant


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