This paper seeks to provide the loan officer with a brief analysis of the competitive environment of the fast-food industry by drawing a five-forces diagram and briefly discussing the nature and strength of the each of five forces in the said industry. This paper will use some information from McDonald’s and Wendy’s (MSN, 2009a, 2009 and 2009c), both of which belong to the fast-food industry.
Analysis and Discussion
This part applies Porter’s Five-Forces Model to determine the industry opportunities and threats (Porter,1980) in the fast-food industry. Opportunities are favorable conditions that could increase profitability of the players in the industry while threats are those that could lessen the said profitability for the same players. The strength of the forces is either describe as high or low in term of effect to players in the fast food industry. Appendix A summarizes each of strength and the explanations of each are the following:
Threat from new entrants (High) — There is high threat from new entrants in the fast-food industry because the industry is not basically capital intensive and thus economies of scale could not be easily availed off. Stores that deal with fast-food could easily come into the industry. This therefore makes it unfavorable to present industry players because more competition means lower profitability. Although the industry may be expected to grow, the growth could easily be eaten up by entry of new players thus causing profitability to drop.
Bargaining power of suppliers (High)– Bargaining power of suppliers may be considered high because there are numerous buyers or industry players in the fast-food industry from which these suppliers could sell. These sellers may include the suppliers of meat products which abound in the market. This situation can be considered as industry threat for the industry since suppliers could exert pressure on the price made with buyers making the fast-food enterprise somewhat hopelessly dependent.
The nature of the products or service being delivered which have short shelf life, thereby making the deliveries short of low volume and frequent, often within time within windows of just two hours. As there are increasing outlets of refreshing menus and food offering throughout the day, there is also increasing complexity of replenishment which may make the suppliers of the industry to have strong bargaining power.(MSN, 2009a). This must be the consequence of having big number of outlets having to get their source from wholesalers which own and manage stock or industry players may just have to source direct from suppliers who make deliveries to hundreds of high street outlets and tens of wholesale warehouses around the country every day (.(MSN, 2009a).
Bargaining power of buyers (High)– Bargaining power of buyers is believed to be high because there many customers which include the general public and there could be no switching cost at all to fast-food products. Almost every family or individual that uses food as part of basic need and there a wide array of choices from the market. Consumers could just eat at home or somewhere else within their budgets and taste to satisfy their needs and wants. This force is a threat to the industry as it could leave buyers shifting from one retailer to another.
Threat from substitute products (High)– Threat from substitute is high because the numbers of substitutes are high since fast-food products are closely allied with basic needs and wants which are less sensitive to recession.
Rivalry among Existing Firms (High)– There is a strong rivalry of among existing firms as would decline in the profitability of the players. This is therefore a threat for players as they compete for the market, they would have to increase cost and thereby reduce their profitability. Competitors include kiosks and fast food chains. There the likes of Wendy’s and Starbucks which have become global companies. These global companies could readily seek wider source of capital thus allowing them to have competitive advantage against local firms in the industry. Wendy’s falling profit and falling stock prices from latest information can be a sign of strong rivalry (The New York Times, 2009; MSN, 2009b)
As all of the forces are found to have become threats to the industry and the fast food owner must be able to present strategies that could withstand these threats and still earn some to be able to pay its loan to the bank. Given these industry threats the loan officer is advised to increase the interest rate more than the ordinary loan applicants for the loan if the said officer is made to grant loan for other consideration other than these threats. The additional interest is to compensate for other risks. If there are no other good reasons, the loan officer may also should the loan applied for because of the unfavorable external environment.
MSN (2009a) Form 10-K of McDonald’s. Web.
MSN (2009b) Stock Price Graph of Wendy’s. Web.
MSN (2009c), Latest financial ratios of MCD. Web.
Porter (1980) Competitive Strategy, Free Press, London, UK
The New York Times (2009) Today In Business: Wendy’s Profit Falls. Web.