The United States Fast-food Industry

Last Updated: 19 Apr 2023
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The United States fast-food industry is largely made up of Quick Serve Restaurants (QSR) that includes on-premises restaurants and drive-thrus. Off-premises dining such as take-out restaurants is also considered a QSR. The fast-food industry includes national and regional chains, franchises, and independent contractors. The fast-food industry is consumer focused and relies heavily on consumer  spending. It is estimated that the U.S. Fast food industry is worth 189.9 billion dollars and within the next 2 years could exceed 220 billion dollars (Jaaskelainen 2018).  The industry has grown steadily in the last decade due to the fact that these restaurants offer convenient and affordable food options.

Top 10 QSR's in 2017 (Sales Based)
* Data retrieved from QSR Magazine Website

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Companies in the fast-food industry fall under the market structure of perfect comp Market structure is a classification system for the key traits of a market. The characteristics of perfect competition include a large number of buyers and sellers, easy entry to and exit from the market and homogeneous products. Many fast-food franchises fit all or most of these characteristics.

Porters Five Forces

  • Threat of New Entrants

The threat of new entrants to the industry is high. There is a high level of competition between new QSR's and established fast food chains, new QSR brands are unknown and advertising campaigns are expensive. Social media, however, has provided a more affordable means of advertising and has allowed QSR's to communicate with their consumers easily. Popular fast-food chains also have established themselves and have the resources to react aggressively to competition through pricing and promotions to keep new entrants from entering the marketplace.

However, it is not difficult for new entrants to overcome these barriers. The fast-food industry is a low margin, high turnover industry and new entrants lack economies of scale unlike established QSR's that have developed over time and can remain competitive. Capital requirements may  prevent some  competition however initial capital and fixed costs are not a significant battier in this industry especially with franchising which encourages  new entrants into the industry. Cost disadvantages are, however, a significant barrier to entry since established companies already have the product technology, access to raw materials, favorable sites, advantages in the form of government subsidies as well as experience.

Extreme saturation and similarity in product offerings make convenient locations essential for QSR's. Government regulations are more intense for the larger firms which have to deal with franchising regulations.  Smaller  establishments  have to deal with standard regulations such as health and safety, zoning, sanitation, and building and do not pose a large threat to new entrants.

  • Threat of Substitutions

The threat of substitutes is fairly high in the fast-food industry. Substitutes are readily available, and food can be purchased almost anywhere. The convenience of fast food is the value-adding component of the service which reduces the threat of substitutes however, many companies are now offering ready-meals as well as mail-order meal plans that ship fresh ingredients to the customer at relatively low prices. The healthy options and convergence factors from these companies pose a high threat not only with the fast-food price but also on convenience.

  • Bargaining Power of Customers

Customer loyalty does not play an important role as it does in other industries. The fast-food industry is more focused on volume which keeps the customer bargaining power low.

  • Bargaining Power of Suppliers

The bargaining power of suppliers is limited in this industry. There are many suppliers to choose from and each chain goes through a competitive bidding process to select their suppliers. It is easy to change isuppliers  should they find a better deal somewhere else.

  • Competitive Rivalry

The fast-food industry is dominated by many Quick Service Restaurant (QSR) chains including McDonald's, Wendy's, Burger King, Pizza Hut, Subway, Arby's, KFC and Taco Bell to name a few. Competition is primarily cost-based with firms continuously investing in their production and service processes to undercut competitors. Exit costs are low, and capacity is easily increased through franchising.

State and Federal Regulations

The U.S. Food and Drug Administration (FDA) is the primary agency responsible for developing public health regulations. The FDA works to ensure the safety of the food in both franchised and small fast food  establishments. It is required by the FDA that all fast-food workers complete a food handling course that  educates workers on food borne illnesses, cross-contamination, required cooking temperatures,  food storage proper hand washing.

The FDA has also implemented menu  labeling  requirements. All restaurants must display nutritional information including total calories, calories  from fat, sodium levels and other nutritional  data on menus and menu boards as well as on their websites where consumers can access it.

The National Salt Reduction Initiative (NSRI) has set voluntary targets for salt levels in an attempt to reduce sodium in restaurant food. Taco Bell and KFC have reduced sodium in line with this program. NYC requires chain restaurants to post warning labels next to menu items containing high levels of sodium.

The Federal Trade Commisssion (FTC) requires fast-food ads to be truthful and non-deceptive and they must back up claims with evidence. In New York, The Bureau of Community Environmental Health and Food, Protection maintains the Sanitary Code for food service establishments. The New York State Department of Health requires  all food  establishments to have a valid permit in order to operate.

Recent Economic News

The fast-food industry currently employs 3.8 million people however the turn over rate has  reached an average of 150 %. The industry is experiencing its highest turn over rate in 23 years says Bloomberg analysts reported in a recent article published by the Business Insider. Analysts  suggest the significant decrease in employee retention as a result of new technology and the expectation  for higher productivity.

Fast-food chains have made several technological advances such as implementing ordering kiosks. While the implementation was feared by employees, fast-food chains such as McDonald's has stated that these technologies will not cause layoffs but will allow employees to be placed in other roles  and would allow for a 5% to 6% increase in sales for 2018 and another 2% in 2019.

According to the article, these new technologies are actually complicating their jobs. Due to the lack of training. Quick service restaurants (QSR) declined by one percent to 353,121 units in the fall 2017 censuses. Fast-casual chains, which are a restaurant category under QSR, increased units by four percent to a total count of 25,118.

The Bureau of Economic Analysis

In the most recent quarterly report issued by the Bureau of Economic Analysis, the U.S. personal income and disposable personal income both increased 3% from the last quarterly report in 2017. The report suggests that the largest contributor to the increase was spending on food services and accommodations (BEA, 2017).
The United Sates Census Bureau

The chart below from the Census Bureau shows the leading industries by the number of employees. Based on the information provided limited service or fast-food restaurants have the most employees in the industry.

* U.S. Census Bureau (2016)

Federal Reserve Beige Book reports for most recent period (New York)

According to the Federal Reserves Beige Book reports economic activity in the Second District (New York) has continued to expand at a moderate pace since the last report. The labor market has stayed around the same numbers, while wage growth has mostly grown steady (Federal Reserve Bank). Input price increases have remained the same, and consumer price inflation was higher than earlier this year (Federal Reserve Bank).

Bureau of Labor Statistics

The chart below shows the States with the highest deployment levels in the restaurant industry including fast food. New York ranks as the 4th largest in the United States.

* Bureau of Labor Statistics, 2018

The Conference Board (consumer confidence)

The latest Consumer Confidence Survey states that "Consumer confidence has increased to its highest level since October 2000" (Consumer Confidence, 2018). The business and labor market conditions improved according to the survey and consumer expectations suggest solid economic growth throughout 2018. The "historically high confidence levels should continue to support healthy consumer spending in the near-term"(Consumer Confidence, 2018).

Specific industry news and reports

In an article published by the New York Times, the number of teenagers in the workforce has significantly decreased from a decade ago (Abrams, 2017). The following chart shows the large  increase in restaurants and the decrease in teenage workers ages 16-19.

Chart retrieved from(Abrams, 2017)

In a recent analysis by the Bureau of Labor Statistics education, interests have increased causing the decline in teenage workers (Abrams, 2017). Turnover in the industry also a serious problem. In 2017 the turnover rate reached 133% and it has continued to rise (Abrams ; Gebeloff, 2018). McDonald's released that they would be expanding their tuition reimbursement plan. They will now contribute $150 million to the plan over five years to benefit employees who are employed for at least 90 days with the company (Abrams & Gebeloff, 2018).

The fast-food industry's growth is sensitive when it comes to changes in consumer spending. In times of recession, the rise of unemployment rates causes a decline in the consumer consumption of fast food. It is not uncommon for fast-food chains to merge in order to gain a larger share of the market to increase profits. When consumer spending is higher they are more likely to spend money on fast food.

Consumer eating habits also play a role in the economic factors that affect the fast food industry. Consumers have become more aware of the health issues associated with greasy and fatty fast-food options. In order to keep up with consumers changing eating habits most fast food restaurants have added healthy food options such as grilled chicken, salads, yogurt and fruit to their menus to avoid the potential threat of losing Fast-food consumers.

The fast food industry closed the 2017 year at 250 billion and is expected to grow 2.3% each year for the next five years for an overall total of 12% growth. The industry has adapted to consumers changing food preferences and their availability to eat. Many fast food chains have expanded their hours such as Taco Bell and McDonalds and others have also made breakfast menus available all day in order to reach out to a larger customer base. The use of kiosks and mobile phone ordering are becoming popular within the industry. These kiosks and apps provide a quicker and more efficient ordering process while cutting down the costs of labor.

Cite this Page

The United States Fast-food Industry. (2018, Aug 26). Retrieved from https://phdessay.com/the-united-states-fast-food-industry/

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