The Fast-food Industry: McDonald’s, Burger King, Wendy’s, Hardee’s and White Castle
The Hamburger Industry: franchising, market conduct, marketing strategies of competing parties. Challenges confronting in the fast-food industry. Conflicts between franchisers and franchisees. Consumer behavior. The main role of management, its changes.
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Russian Presidential Academy of National Economy and Public Administration
Faculty of Real Estate Management
The Fast-food Industry: McDonald's, Burger King, Wendy's, Hardee's and White Castle
The last decade of the 20th century is as critical as it is unique. It is critical because of the extreme prevalence of environmental and technological change affecting the structure of the food industry. The course that these changes follow and the end results during the 1990s will lend direction for the early decades of the 21st century. This decade in history is unique because sophisticated technological changes along with social changes have created many more opportunities for firms to develop differential advantages. Differential advantages are the unique characteristics in a firm's marketing strategy that cause consumers to purchase its product and not the competitor's. A differential advantage is the foundation of a firm's performance in competitive markets.
Key components have been identified for ensuring the success of food marketers. These components include: innovation, target-market segmentation and image, physical environmental resources, and human resources. In considering the successes, failures, and mistakes of food marketers, the challenge is to distinguish whether successful food marketers received high grades using all of the components or success was determined by using some of the variables in an exceedingly original manner. Correspondingly, it would be interesting to distinguish if failure or mistakes can be attributed to either the lack of use of all components or just the ineffective use of some components.
How the management of these components brings to a successful exchange between a firm and its customers is the central focus of this course paper. The process of writing this course paper required analysis of marketing successes and mistakes in the chosen part of food industry Ї the hamburger industry. Emphasis is on how to adapt key components in a volatile economic environment. The result is an approach to marketing management that should prove beneficial to executives and marketing students.
The current course paper is divided into two chapters, both subdivided into subchapters. The first chapter includes an overview of the hamburger industry Ї description of franchising used in this industry, market conduct and history and marketing strategies of the main parties, that is McDonald's, Burger King, Wendy's, Hardee's and White Castle. The second chapter describes the challenges faced by the hamburger industry in the past decades Ї such as problems between franchisers and franchisees, changing consumer behaviour, etc, Ї and changes that were undertaken or should be undertaken with the decisions of managers.
The gap between successful, failing, and merely surviving food organizations is widening each day. The point is that food marketers live in a world of constant change. Adjustments to the world of change and anticipation of change are vital in order for food marketing operations to progress smoothly. This course paper provides a starting point for obtaining more appropriate insights in order to understand the complexities and interrelationships of the hamburger industry marketing. Hopefully, these insights will prevent mistakes and allow companies in the hamburger industry to take greater advantage of market opportunities.
The main conclusions and the list of references are provided at the end of the course paper.
1. The Hamburger Industry
The hamburger industry over the years has reacted to a changing environment, which is vital for future success. Along with adaptation, the factor of management vision must be present. A proactive rather than a reactive management style is essential for the 21st century. The hamburger industry will be under attack by other sectors of the fast-food industry, such as pizza, ethnic food and family mid-price establishments.
In considering the successes and failures in the hamburger industry, many mistakes have been made, and the organizations that remain viable are only those that were able to make constant adjustments with such variables as innovation, target-market segmentation and image, physical environmental resources and human resources. These organizations are McDonald's, Burger King, Wendy's, Hardee's and White Castle.
Thereby, the valid points influencing the hamburger industry Ї franchising, market conduct and the history and marketing strategies of the main parties Ї must be considered.
Although franchising in the fast-food industry has attracted considerable attention since the 1960s, the concept actually began in 1851 when the Singer Company established franchised sewing machine outlets. Franchising was also introduced by General Motors in 1893 and by Rexall in 1902. As franchising has evolved, even major producers and suppliers have entered this exciting industry.
There have been a number of favorable consequences of franchising for the economic environment. Franchising greatly increased the opportunities for individuals to become independent business people. Franchise businesses in the past have had lower failure rates than other types of business. Economic concentration decreases by providing a viable alternative to completely integrated vertical chains. Minority-group members are provided with opportunities to own their own businesses. Consumers are able to buy standardized products and services.
The unfavorable consequences of franchising include the fact that it can constitute an anticompetitive system of distribution. To illustrate, it is very difficult for an independent individual to compete with such fast-food chain as McDonald's. Franchise agreements are one-sided in favor of protecting the prerogatives of franchisers, and some franchisers may employ questionable techniques in selling franchises.
A larger and growing percentage of retail sales volume is conducted through franchise systems in the fast-food industry. Organizations such as McDonald's, Wendy's own some retail units, but they usually franchise the majority of their units to help obtain wider market coverage. Franchisees are expected to conform to standardized contractual rules and regulations and to pay compensation for the privilege of using the franchise name. The franchiser provides some or all of the following services:
including lease negotiations;
aid in equipment purchasing;
financial assistance in the establishment of the business;
an exclusive territory;
the goodwill and identification of a known corporate name.
In return, the parent organization or franchiser receives from the franchisee an initial franchise fee, an operating fee based on gross sales, rental or lease fees for facilities and equipment and management fees for rendered services and assistance.
Three decision trends loom large for the 21st century. First of all, the menus for many fast-food establishments have been broadened. The fundamental concept of profit through volume is still appropriate, and there are attempts to be first in new menu additions. Second, although many consumers desire healthy food, the fast-food customer may say one thing and do another. Salad bars have been introduced by many fast-food organizations. One trend as we move toward the future will be to experiment with the introduction of healthier food. Second, more educated consumers will demonstrate concern over their children's eating habits and food preparation, and a low-fat healthy diet will become more appealing. Third, fast food will become more available. Business organizations operating restaurants for employees will desire fast-food organizations to assume a greater part of the task of feeding employees. Fast-food chains are located in airport, bus and railway terminals and in large department stores and supermarkets. School districts have solicited requests from fast-food organizations to service their needs. The institutional and corporate markets may demand ever greater menu diversification.
A franchise system allocates resources and coordinates product and marketing activities to make a greater market impact and to obtain operational economies of scale, which are more difficult for the independent business person to achieve. The capital and entrepreneurial spirit of the franchisee is combined with the strength of an established, more experienced franchiser organization. An important advantage in becoming a franchisee is the program of research and development that is designed to improve the product or the service.
Failure in the fast-food industry has occurred as the result of ineffective relationships with franchisees. Mistakes were made in selection of locations, diminishing the impact of physical resources. As competitive threats intensify from pizza, ethnic food and family mid-price establishments, the hamburger industry will become more cost conscious. Already, McDonald's, once known for its successful franchise relationships, is experiencing disagreement in its organization. Indeed, there are ominous dark clouds on the horizon for the hamburger industry.
1.2 Market conduct
The initial decision by Ray Kroc of McDonald's that a large consumer segment would be very receptive to eating hamburgers in a clean and wholesome environment was an exciting innovation. The hamburger industry, comprised of McDonald's, Burger King, Wendy's and Hardee's has become an American institution. This American institution has spread overseas and become a valuable export. But the hamburger industry no longer innovates the way it did years ago.
The fast-food industry is in the maturity phase of the retail life cycle. Market maturity is marked by intense competition and therefore must be carefully managed. There is more attention to costs and customer service and less attention to new-product introduction versus refining existing ones. Maturity is brought on by the entry of a great many competitors, but by serving new markets, decline can be either postponed or avoided.
The fast-food hamburger industry is moving toward more diversified menus, including salad bars, poultry, roast beef, baked potatoes and ice cream. Breakfast has become an attractive growth market. A shift to ethnic foods such as tacos and burritos is increasing. Significant development of foreign markets will continue during the next decade. Europe and Canada continue to be attractive markets for fast-food organizations, and South America and Asia are deemed potential high-growth markets. Hamburger organizations, which have experienced tremendous growth over the past two decades, have reached a plateau as a result of both direct and indirect competition in the United States. Convenience stores, gasoline stations and supermarkets are just some of the places where the consumer can purchase a hamburger. However, the most rapidly growing fast-food category is Mexican. Ethnic foods from Asia and Italian favorites are other growth areas.
The issue of maintaining fast customer service and satisfaction in a maturing industry that has broadened its menu offerings must be considered. Additional items such as fish, or chicken, or pizza slow customer service. The very real challenge of maintaining high customer-service standards confronts the fast-food industry. Not only is the quality of menu items an important consideration, but also issues of ecology and nutrition have pushed their way to the forefront.
Fast-food operations have been successful because their focus has been a narrow product range, an emphasis on division of labor, standardization of tasks and extensive short-interval measurement of performance levels. Sales of non-hamburger fast foods have grown, while sales for the hamburger industry have remained constant.
A shift in consumer preference that could have an impact on fast-food restaurant sales is the trend toward eating healthier foods. Consumer awareness of proper diet and nutrition is reflected in menu selections and, ultimately, in the cost of a meal. Sales of salads, pasta, baked potatoes and `lighter foods' have increased at the expense of meat entrees.
Overall market conduct has been directed toward emphasizing time savings, value and convenience. One way to satisfy consumers with time constraints is to offer delivery service, and this has been done by pizza establishments. Free delivery especially targets the double-income family, which is time oriented. The importance of value has been reflected in low prices. Hamburger organizations have stressed value meals. By comparison based upon price and quantity of food, the competition has found the value appeal hard to beat.
1.3 Marketing strategies of competing parties
Strategy is marketplace driven. The objective is to develop a competitive advantage in creating value for customers. A competitive differential may stem from precisely serving a target market or from some adjustment to the use of product or to promotion, price, or distribution strategies. These strategies may develop through the planning process or through functional departments of the firm. Frequently, environmental forces drive competitors to develop strategies to combat varying intensities of competition.
The mass market for the fast-food industry is large and diverse in its tastes and preferences. Marketers desiring to serve the mass market aim to be all things to all people with a single, undifferentiated marketing program. In most product markets, however, it is likely that undifferentiated marketing will cause some consumer needs and wants to go unsatisfied. To better serve diverse customer preferences and to potentially strengthen their competitive position through more focused efforts, marketers in the hamburger industry usually employ market-segmentation and product-differentiation strategies, mix them or develop unique strategies.
Following this, it's necessary to consider the history and strategies of main parties: McDonald's, Burger King, Wendy's, Hardee's and White Castle.
McDonald's: A Pioneer in Image Development
McDonald's was founded in 1955 by Ray Kroc, a salesman of malted-milk machines, who observed that one of his customers, a hamburger restaurant operated by Maurice and Richard McDonald, had developed the concept of the assembly-line hamburger with French fries. There was also a large sign in front of the restaurant displaying two golden arches. Kroc became enchanted with this fast-food concept and talked the McDonald brothers into allowing him to sell the franchise rights nationwide. By 1961 there were some 228 franchise units, and Ray Kroc had completely bought out the McDonald's brothers' interests.
Quality, service, and cleanliness served as the basic goals for the system. The system also stressed physical standardization. While the hamburger industry in the 1950s had a reputation for slovenly conditions, Kroc emphasized clean surroundings, including personnel, equipment, and, most conspicuously, rest rooms.
McDonald's situated itself in suburban locations, cultivating the vast population movement of the late 1950s and 1960s. In contrast, many fast-food firms chose to remain in the central cities and ignored suburban growth. In the 1970s, McDonald's expanded into the cities and into some small towns.
In 1968, McDonald's established Hamburger University, which was to serve as a teaching and training model for the hamburger industry. The success of this learning center is attributed to the teaching of the standardized procedures that are vital to a successful operation. All franchisees must attend and also receive retraining at specified time intervals.
High volume, low prices, and a concentration on low costs have characterized the successful operation of McDonald's. The willingness to innovate, for example, by offering breakfast, has been another important pattern for the successful organization. The golden arches, a wholesome environment, low prices, and fast, quality service are all factors in image development and success.
The guiding objective of McDonald's is to shift from a focus only on individual store sales and profits to a focus on market share. According to McDonald's, increasing market share means adding more store units in order to increase the number of transactions per capita in its market. As a result of this objective, the number of per-capita transactions varies proportionately with penetration into a particular market. Consequently, competitors will stay out of that specific market and would have the net impact of precluding competition. Costs and the impact of diminishing returns can be easily overlooked in the haste to preclude competition. Overexpansion is an important factor in the decline of organizations, and it remains to be seen if there are already too many McDonald's units. A yellow waving light is flashing for the future.
McDonald's has successfully used a differentiated market segmentation strategy by targeting the family unit, and particularly children, with their `happy meals' and low prices. McDonald's has traditionally offered lower prices than other hamburger chains, thus winning the patronage of larger families. The location of its outlets has been instrumental in making McDonald's very successful. It was the first hamburger chain to expand into the suburbs and into the crowded downtown areas of large urban cities.
McDonald's marketing strategy has focused upon menu diversification, site location extension, improving public relations and price discounts in a recessional period. In the 1980s and early 1990s, McDonald's introduced the chicken biscuit sandwich, McNuggets, prepackaged salads, McRib and breakfast burritos. The McChicken sandwich which was also introduced during this period was a failure. McDonald's decision to open new retail outlets in airports and hospitals have proven to be successful. Its promotional message has advanced goodwill with the annual Charity Christmas Parade in Chicago and its Ronald McDonald House exposure. McDonald's has worked with school administrators to promote reading programs among children. [2, p.49]
Burger King: Second Best
Burger King was founded in 1954 by entrepreneurs who believed there was a consumer demand for hamburger restaurants that would serve reasonably priced quality food quickly and in attractive, clean environments. Currently, Burger King is the second-largest fast-food hamburger restaurant in the United States, with more than 7,000 retail units.
Burger King has been beset with problems since the late 1970s caused by management changes, strategy modifications, and ineffective advertising campaigns. An attempt to broaden menu offerings with pizza and veal parmigiana sandwiches has also been unsuccessful. Burger King, however, has had some success with its salad bars.
Burger King, like McDonald's, targets the family market, and also like McDonald's, has segmented the adult market by serving breakfast. Burger King is considered a clone of McDonald's, with only slight differences that set them apart. Consequently, Burger King is vulnerable to competitive attacks by Hardee's, which is aggressively leaving its small-town base. Burger King broils its burgers, uses promotional campaigns to its advantage, and has developed new location formats.
Burger King's marketing strategy concentrated on product differentiation in the 1980s by offering a more diversified menu. Chicken Fingers, Chicken Tenders, Fish Tenders and a salad bar were introduced. Burger King was the first hamburger chain to cater to nutritional trends by publishing a guide that included information on the calorie, fat, salt and protein content of menu items. Efforts were made to attract new market segments by including broiled chicken on the menu and by offering HaЁagen-Dazs icecream bars. Promotional efforts were weak, and Burger King's advertising campaigns appeared to have missed their mark in many instances. Burger King, with its market share at its peak in 1985 at 8.7 percent, had a number of promotional campaign flops. The ``Search for Herb'' campaign concentrated on an eccentric nerd and unfortunately associated the Burger King image with a ``nerdy'' personality. In 1988, the promotional campaign focused on flame broiling, but the message was confusing and demonstrated bad humor and poor acting. The ``BK Tee Vee'' promotion featured MTV personality Don Cortese and targeted teenage males. Unfortunately, parents and others found the commercials irritating.
Since the middle 1980s, Burger King has had difficulty developing a distinct target market and image that can compete with its competition. Many customers think of Burger King as second to McDonald's. Wendy's and Hardee's were successful in developing their own separate and distinct target markets. Burger King now has about a 6 percent market share, which is only slightly ahead of the 4.5 percent market shares of Hardee's and Wendy's. However, both Hardee's and Wendy's sales are increasing more rapidly than Burger King's. McDonald's remains supreme in the hamburger industry, with approximately a 15 percent market share. Burger King has been further hampered by an inefficient franchise system that was finally, in 1977, entirely remade based on the McDonald's model and took some time to successfully implement.
Burger King has successfully introduced a number of innovations to the hamburger industry, but more recently innovations have been in response to innovations by competitors. An early innovation was the continuous-chain broiler, which gave fast-food customers an alternative to the fried hamburger. Burger King also pioneered drive-through window service and provided inside sit-down eating for what had previously been all take-out food. However, in 1983, Burger King introduced a salad bar in response to Wendy's salad bar and a one-third-pound hamburger in response to other chains that increased the size of their hamburgers. Burger King has located on military bases, but with base closings and reductions in force, this move may not be advantageous. Burger King has also located itself in Woolworth retail stores, but Woolworth stores have fallen upon hard times. Burger King did not introduce its Kid Club until 1990. It seems to exist in a shadow of McDonald's. [2, p.50]
Wendy's: The Innovator
Wendy's was founded in 1969 by R. David Thomas, who was previously a regional operations director for Kentucky Fried Chicken and a vice president of operations at Arthur Treacher's Fish and Chips. Thomas's marketing strategy development was greatly influenced by Colonel Harlan Sanders, the founder of Kentucky Fried Chicken. Wendy's now has over 4,000 units operating in the United States.
Wendy's differentiates its offerings through product quality. Wendy's hamburgers contain 100 percent ground beef broiled on a grill, and its chicken sandwich is made from a skinless breast of chicken. Wendy's was the first hamburger chain to offer a salad bar and baked potatoes. Wendy's offers the most diverse menu compared to McDonald's and Burger King, and has the largest proportion of female customers.
When Thomas first opened his restaurants, Wendy's depended upon word-of-mouth communication to spread the word about high-quality food, friendly service, and a pleasant dining atmosphere. As the chain developed, Wendy's in 1973 turned to local television and radio advertising, and in 1977, Wendy's turned to national televised commercials. In 1981, R. David Thomas was featured in the company's national advertising campaigns, which emphasized a personalized appeal to customers. In 1984, Wendy's achieved sales success with its ``Where's the beef?'' television-ad campaign that rocked the ad world and became a household phrase. Its interior decor, with Tiffany-style lamps, bentwood chairs, and carpeting, is geared to please discriminating customers.
Wendy's marketing strategy has focused on market-segmentation strategies. Wendy's in the late 1980s experimented with appealing to the family, weekend and dinner markets. Moreover, drive-through restaurants and take-out menus were added. Wendy's positioned itself as a hamburger chain at the higher end of the fast-food spectrum. Because of the recession in the early 1990s and Wendy's desire to broaden its customer base, low-priced, value-oriented menu items were launched. In an effort to further segment the market, a Wendy's `kids' meal' was added; it consists of a smaller hamburger, smaller order of French fries and a small soft drink. Another new item added was the taco salad, which capitalized on consumer interest in ethnic food, a growing, viable market that other hamburger chains have largely ignored. Higher-priced hamburgers of high quality are the core of Wendy's marketing strategy. [1, p.48]
Hardee's: Small-Town Market Segmentation
Wilbur Hardee opened the first unit of his restaurant chain in 1961. This first restaurant served as a prototype for many others. An outstanding feature was a water-purifying system that floated away grease and kept the charcoal free from impurities. This was one of the few broilers of this type operating in the United States at that time.
In 1962, Hardee's formed its own manufacturing and distribution group, now known as Fast Food Merchandisers, which services nearly all of its retail outlets. Vertical integration became an important characteristic of the Hardee system; a bakery operation, a food-processing firm and a construction company was acquired in 1967. Five years later a 200-unit hamburger chain in the Midwest, Sandy's, merged with Hardee's. In 1981 Imasco Ltd., a Canadian conglomerate, purchased Hardee's and was able to better finance future expansion. Consequently, in 1982, more than 700 restaurants of the Burger Chef organization were acquired from General Foods. The Burger Chef acquisition gave Hardee's a Midwestern orientation, but Hardee's was still focused on developing retail units in small towns. The objective was to serve markets not dominated by such chains as McDonald's and Burger King. Hardee's also acquired Roy Rogers, and now has over 3,200 units. In 1997, Carl's Jr., a California chain, acquired Hardee's.
The marketing strategy of Hardee's has focused upon expansion through acquisition. In 1982, Hardee's acquired Burger Chef's 650 units from General Foods Corporation, giving the firm market coverage in the Midwest. In 1990 Hardee's added to its 3,110-unit chain some 650 stores from the Roy Rogers chain in key markets such as Washington, D.C., Baltimore, Philadelphia and New York City, making Hardee's the number three hamburger chain just ahead of Wendy's and expanding its southern base. The strength of Hardee's in the breakfast market, which represents about 30 percent of sales, complemented Roy Rogers's success with dinner items, such as fried chicken, thus broadening the chain's customer base.
Although the Roy Rogers acquisition was synergistically sound, Hardee's encountered difficulty in convincing Roy Rogers's 287 franchisees to convert into Hardee's outlets. Market research conducted after the acquisition confirmed that consumers in the Northeast-where Hardee's had no brand recognition-preferred the Roy Rogers name and wanted it back. Consequently, in 1982 Roy Rogers was relaunched as its own chain, and those 363 company-owned Roy Rogers outlets that had been converted to Hardee's were switched back.
The Roy Rogers conversion failure and plunging profits-from $118 million in 1989 to $40 million in 1991-contributed to Hardee's decision to scale back plans to turn the regional chain into a nationwide fast-food company. Finally, Hardee's decided to sell its Roy Rogers outlets. Overexpansion and the failure to develop a burger to compete with the McDonald's Big Mac and the Burger King Whopper are blamed, among other reasons for difficulties. Menu diversification with fried chicken may have blurred Hardee's image with consumers.
Hardee's was a victim of overexpansion, lack of product innovation, and lack of aggressive public relations. Hardee's had failed to position its image and product offerings to distinguish its offerings from the competitors. [1, p.50]
White Castle: Fierce Brand Loyalty
White Castle was established in 1921 and is generally considered the original fast-food hamburger chain. Its loyal patrons are sometimes referred to as part of a fanatic cult. White Castle has preferred not to franchise and retains complete control and ownership of its units. White Castle is a small chain with 300 units situated in ten states.
Wider market coverage was achieved through mail-order and telemarketing operations and the sale of packages of its hamburgers and cheeseburgers in the frozen-food sections of supermarkets.
Each hamburger contains a square beef patty with five holes punched in it for faster frying, a pickle and a dollop of grilled onions wrapped in a plain, white-bread bun. Singer Frank Sinatra once had White Castle ship him frozen hamburgers at a concert site. White Castle avoids franchising and features expansion without taking on additional debt. These characteristics have spelled success.
White Castle's marketing strategy is unique among the hamburger chains in that direct mail is used to reach a broader customer base. Some market segments are intensely loyal and place orders by mail, since White Castle does not have retail outlets situated nationally. White Castle uses as a product preparation method the steaming of hamburgers, which is unique in the hamburger industry. This preparation method produces a much easier-to-eat and more moist product, which is especially preferred by children.
By early 1996, White Castle had 300 retail outlets in only ten states, but its average sales per unit is the highest in the industry, exceeding even that of McDonald's. Supermarket distribution has been another marketing strategy employed by this chain. White Castle has established itself as a small but innovative leader in the hamburger industry, one that has survived in an industry populated by financially stronger hamburger chains. [2, p.51]
So, each restaurant uses that strategy which is consistent with company's goals and helps to satisfy the needs of target market. To sum up, the above strategies include: a differentiated market segmentation strategy from McDonald's, a product-differentiation strategy from Burger King, a market-segmentation strategy from Wendy's, an expansion through acquisition strategy from Hardee's, and a direct mail and supermarket distribution strategy from White Castle.
The market structure of the fast-food industry has been one of continuous changes. Drive-through restaurants have increased market share, but this small segment will probably stabilize. Mid-price family dining will take away some market share from the fast-food industry. Continued innovation related to menu planning and catering to health concerns will be required in the future. If costs are controlled effectively, further inroads into the fast-food industry will be made.
2. Challenges confronting the hamburger industry
Challenges confronting the fast-food industry threaten its balance. Burger King and Wendy's are taking away the market share of McDonald's, and indirect competitors have improved their marketing strategies and products so that hamburgers are no longer supreme. McDonald's, once referred to as the `golden arches', is now cited by some as the `fallen arches'. To make matters worse, a deep-discount program called Campaign 55, failed. Taste tests demonstrate that consumers like Burger King hamburgers more than McDonald's and that Wendy's has a better menu. 
Consumers seem to like Starbucks for coffee and bagels in the morning and are patronizing Boston Market more for dinner. Furthermore, supermarkets and food stores with take-out meals are taking away significant market share from the hamburger industry.
Mid-price family restaurants are providing growing competition for hamburger chains. Prices at these mid-price establishments average no more than three or four dollars more than at most fast-food outlets. Moreover, surroundings are comfortable and attractive, and there is table service.
It is anticipated that baby boomers, two-income couples and the increasingly older population will patronize these mid-price restaurants, and that will damage hamburger establishments. Steak houses have also made inroads into the hamburger industry by selling burgers.
As a result, franchisees are in rebellion, besides consumer tastes are changing.
2.1 Conflicts between franchisers and franchisees
Tensions do arise between franchisers and franchisees. Since the franchisee is not an employee but an independent owner, franchiser controls can be viewed as too rigid. The franchise agreement frequently contains a buy-back point, and franchisees might fear that the franchiser will exercise this option because of higher profit potential. Another source of conflict is that restrictions on product purchases might cause franchisees to believe that franchisers are charging higher prices and that product assortment is too limited.
Many franchisers own a number of their outlets, and some of these units compete with those owned by franchisees. Efforts are made to avoid the problem of dual distribution, but these attempts are not always successful. Moreover, the reaction to field services and operating controls is not always positive. Franchisers have tended to rely on field representation to reconcile any differences, but these field representatives are not only responsible for field service and liaison with franchisees, but also must recruit additional franchisees. Consequently, franchisees may complain that field representatives pay too little attention to franchisees' management problems.
Potential negative franchiser actions include agreement termination, the reduction of promotional and sales support, insufficient territorial protection and poor business practices. McDonald's dominates the fast-food industry, so its standardized, routine practices can be rigidly enforced. This may not be so true with franchiser-franchisee relationships in other industries.
Franchisees of McDonald's are not only cranky but mad. Franchisees are cranky because profit margins are eroding and Campaign 55 failed. Since McDonald's reduced the price of its flagship burger to 55 cents, sales actually fell. Franchisees explained this by the fact that consumers were confused by the rule that french fries and a soft drink must be purchased to qualify for the cheaper sandwich. Many franchisees predicted that Campaign 55 would not do well and tried to prevent it, so now they believe that the company disregarded their valuable input.  And franchisees are mad because the McDonald's expansion program has infringed upon trading areas, and established franchises are competing with new McDonald's units.
Besides that, bottom-up marketing has hit some snags in the McDonald organization. Bottom-up planning involves assembling information from field personnel relating to products, operations, timetables and objectives. Despite a system of regional managers, information was difficult to transmit back to headquarters because of numerous management layers in the corporate structure. A more effective policy was to combine bottom-up with top-down marketing planning, with senior executives establishing overall objectives and policy, and sales, advertising and product personnel establishing plans for implementing the policy. What was needed by McDonald's was an integrated operational plan.
McDonald's is still McDonald's, with one of the most powerful brands in the United States, but it must confront the reality of having direct and indirect competitors. The indirect competitors are the supermarkets, pizza restaurants and mid-price restaurants which provide varied menus at moderate prices.
Burger King increased its share of the adult fast-food audience with advertisements that its Whopper outweighed McDonald's Big Mac; it also introduced a grilled chicken sandwich years before McDonald's. Wendy's continues to offer everyday value and diversify its products without engaging in a price war.
Meanwhile, Hardee's has fallen upon hard times. Hardee's last served its charcoal-broiled burger in 1985, switching to fried, a change that may have caused its downward trend. The charcoal-broiled burger was part of Hardee's image, and that image was altered. Consumers who are health conscious might be more comfortable eating at Burger King or Wendy's.
Some amount of conflict can be constructive, since it can lead to a more dynamic adaptation to a changing environment. On the other hand, too much conflict is dysfunctional. The problem is not one of eliminating conflict but of managing it better.
2.2 Consumer behaviour
In addition, consumer eating habits changed noticeably in the 1980s. There is now more concern about health and about fat and sodium content of foods. Moreover, adults are monitoring their weight. Consumption of poultry products such as chicken and turkey has increased, while consumption of red meats has declined. Lean meats with lower cholesterol content are a significant consumer preference. The method of food preparation-whether food is broiled or fried - has become another concern.
As a result of consumer interest in the nutritional and caloric value of foods, McDonald's has reduced the sodium content in its foods about 15 percent since 1983. [1, p.27] Moreover, vegetable shortening is now used to fry its chicken and fish. Wendy's offers baked potatoes as an alternative to French fries, and both Burger King and Wendy's maintain extensive salad bars, while McDonald's offers prepackaged salads.
There is a danger that consumers will say one thing and do another. Consumers demonstrated little enthusiasm for Hardee's low-fat burger, called Lean One, and for McDonald's McLean Deluxe burger. Although chicken is a popular menu entry, a number of chains have had poor results in selling it to consumers. A customer orientation requires the company to define real customer needs.
Aging baby boomers now in their forties and more established financially, are demanding higher-quality and higher-priced entries in the fast-food industry. Many baby boomers are part of double-income families, which eat out more frequently and desire to upgrade their restaurant selection. The hamburger industry, confronted with slow growth and the competition from family restaurants, has diversified its menu. Some hamburger chains have added salad bars, and nearly all offer some varieties of chicken, roast beef and fish. The hamburger industry has switched from beef tallow to 100 percent vegetable oil in the preparation of fries.
Some consumers, because of small children or for other reasons, find it more convenient to eat at home. Take-out and home-delivery services have rapidly emerged in the fast-food industry and seized market share away from the hamburger industry. Pizza restaurants have used home delivery as a competitive strategy. Chinese restaurants have also stressed their take-out food service. Even supermarkets have tried to compete, offering take-out food service, sandwiches, and salads.
One might theorize that when consumers eat out they desire to indulge themselves. However, it would be a mistake for the fast-food chains to discontinue testing healthful entrees. The baby boomers are growing older, and this trend in itself may make consumers more health conscious.
2.3 Managing changes
hamburger industry franchiser franchise
Success comes when managers act on their organizations' specific capabilities and advantages. Today's managers need to look beyond financial statements to ensure profitability. A strategy that is proclaimed and then not executed is worse than no strategy. Essentially, the role of management is to manage changes that might affect its organizations. Increasingly, a proactive rather than a reactive approach to events is welcomed. In order to accomplish these objectives, organizations need to understand past history and practices so that mistakes can be avoided. Managers must determine what they can do either differently or better than the competition. Facing intense competition, marketers are confronting different types of challenges and need to understand difficulties and interrelationships in changing economic environment.
Many of the triumphs and blunders of the hamburger industry come from the native nature of franchising.
Also, there must be a high degree of brand identity and loyalty to strict operational and quality standards. McDonald's has met these two criteria, and this basically accounts for its phenomenal success.
The lessons learned from successes and failures in the hamburger industry must be considered.
First of all, organizational concentration is vital for segmenting markets. Hardee's concentrated its operation in small towns in regional locations, thus avoiding direct competition with McDonald's in its early stage. Strong market identification can be promoted and rigid operational controls implemented if the organization can group its forces in smaller geographical areas.
Secondly, high product quality and diversification is essential in a mature market. Service is still tied to customer satisfaction. Services such as order filling, preparation and speed of generating a final product must be standardized and controlled from unit to unit. In this way services maintain high standards in all locations and a quality image can be maintained.
Then, in the hamburger industry social movements dictate strategies. The social and cultural trend toward better nutrition has had a deep impact on menu changes, generating the addition of salads and potatoes. Wendy's has had huge success in targeting the female market with the introduction of baked potatoes. This social movement has also had an impact on cooking methods. Fast-food organizations selling pasta and some types of oriental food have prospered.
Following this, continuous experimentation and long-term planning are necessary to maintain success. Store size and convenience in schools, corporate restaurants and other sites will need continuous monitoring. An important reason was that franchisees complained that a growing number of new products were created not so much to improve their businesses as to provide the franchiser with higher profit margins. Moreover, franchisees had no assurance that higher advertising fees would be returned to local markets. Continuous experimentation is necessary for growth, but the total organization ought to operate in harmony to be successful.
The competitive structure in the industry must be understood. McDonald's and Wendy's have achieved success with their price strategies. McDonald's has distinguished itself with superior customer service and product consistency while offering low prices and high value to consumers. It has also chosen to target families and children. Its distinctive golden arches constitute a symbolic trademark and are memorable. One possible warning is that as the baby boomers mature they may become less inclined toward fried hamburgers and more favorably disposed to broiled hamburgers. Wendy's has offered a high-price strategy, product differentiation and such services that have been viewed by an adult market as distinctive. Hardee's has not developed a clear strategy and as a result, has experienced below-average performance in the industry. Burger King appears to have followed a strategy of being second best, as a close market follower of McDonald's. White Castle has used a unique strategy in the product offering, cultivating a very small and distinct market with unusual services.
The hamburger industry is oversaturated with competitors, and unless there is careful planning, a shakeout is on the horizon. Even supermarkets with take-out foods are eroding the market share of the hamburger industry. This shakeout will particularly strike the hamburger segment, with ethnic food and casual dining organizations the winners.
If the hamburger industry with its franchise system is willing to succeed, there must be clear lines of communication and standardized operating procedures.
A distinctive work has been done to understand how food marketers use key components such as innovation, image and target-market segmentation, the physical environment and human resources.
At this point, the market positions of all participants described in the current course paper have become clearer. McDonald's remains the leader of the hamburger industry due to image identification, with its golden arches and its trade character Ronald McDonald, wholesome environment, low prices and fast, quality service. Burger King, the first to provide drive-through window service and inside sit-down eating, is the second best even with good menu diversification because of lack of innovation, introducing new products only in respond to competitors. Wendy's and Hardee's divide the remaining market share. Wendy's higher-priced hamburgers of high quality enticed the adult market concerned about healthy food. Hardee's target-market segmentation and overexpansion made it recognizable and desirable in small towns. White castle showed the whole new way of selling hamburgers and became a significant competitor.
Besides, the main challenges confronting the hamburger industry have been announced. They include fierce competition between hamburger and non-hamburger establishments, health and dietary changes during the last decades, maturing population and raising popularity of family restaurants and take-out food. In response, managers of hamburger establishments propose a list of future actions, including maintaining low price strategies and cost-focus approach, value approach strategies and fast, superior custom service, as well as broadening menus and being proactive with new product innovations in order to distinguish from competitors. All the emerging trends must be considered immediately Ї the response to consumer concerns for healthy food and sodium content of foods was slow. Finally, there always must be absolutely clear lines of relations between franchisers and franchisees.
The fundamentals for sustaining competitive dominance in the hamburger industry are identified. It is hoped that managers and students, by focusing in particular on these fundamentals, will now be equipped with a more powerful tool for duplicating success and avoiding failure.
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3. Michman R.D., Mazze E.M. The food industry wars: marketing triumphs and blunders. Washington: Quorum Books, 1998.
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5. Oxford Dictionary of Business and Management. New York: Oxford University Press Inc, 2009.
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