Monopolistic Competition in Fast Food Business - Essay Example

As one knows from microeconomic theory, industries in the market might differ in the types of the competition. The main elements of the pure competition in the industry are the following: 1) Many buyers and sellers; 2) Identical products: 3) Sufficient knowledge; 4) Relatively free possibility to enter the industry. 1 In spite of the fact that pure competition is not frequently encountered in practice, several industries such as agriculture, might fit into the description of the model mentioned. The market situation in the industry where sellers provide the customers with almost identical, but not homogenous products is called "monopolistic competition". 2Products differentiation as well as non price competition is the most important feature of the monopolistic competition. As the companies provide almost identical products, competition in the industry centers not only on the price of the products but on other factors as well. Such factors as quality of the products, their promotion and advertising as well as other elements that are not directly related to the price play important part in the industry with monopolistic competition. The purpose of this paper is to examine the extent to which the competition in the fast food industry fits the description of "monopolistic competition "as well evaluate how major fast food chains compete in the industry and what challenges they currently face. It is clear that fast food industry is one of the most competitive industries in the USA. Most of the fast food chains provide their customers with almost identical menus (especially two largest rival companies - Burger King and McDonalds), it is relatively easy for the company to enter the market of the fast food; in spite of the fact that domestic market is saturated fast food industry is still regarded as one of the fastest growing industries in the world. In the USA, consumers spent more than 100 billion dollars on the fast food in the year 2000, and according to the information provided by National Restaurant Association, the sales in 2006 might reach the new record level of 142 billion dollars (though this is less that the level exhibited by full service restaurants- 173 billion dollars). According to many observers fast food restaurants have been recently under competitive pressure from fast casual restaurants that provide their customers with food of higher quality at the reasonable price. 3 Product differentiation in the fast food industry. There are many fast food chains in the USA, and most of them provide the customers with almost identical products. There is a slight difference in cooking process between Big Mac provided by Mc Donald's and King Supreme, relatively new product of Burger King. Neither the menu of Wendy International (with standard set of hamburgers and chicken salads) differs in any significant aspect from the menu provided by two largest national fast food chains-McDonalds and Burger King. In order to succeed in the market the companies have to promote and advertise their products as successful advertisement campaign might create some "virtual "differences among the products; they also should stay abreast of the latest changes in the market. These differences are usually created through advertisement and are very important in the industry of "monopolistic competition". With the increased health consciousness among the consumers of the fast food chains, new advertisements campaigns conducted by the chains are aimed to convince the consumers that the food is healthier. This is usually done by including more salads in the menus of the chains. For instance John Schuessler, a chairman of Wendy's chain claimed that it poorly performance in 2004, might have been caused by the steps taken by competitors that included salads to their menus.4 Other commentators however claimed that poor advertisement campaign and inability of the chain to adapt to the new challenges were the main reasons of the poor results that the company showed. Apart from adding salads other chains are trying include more vegetarian or low fat products in their menus. For instance Burger King added BK Veggie, to its menu as well as low fat mayonnaise. Burger King tried to advertise its Burger Veggie (the first vegetable burger in the industry) as a suitable healthy alternative to meat burger. It is made of vegetables and nuts and according to the information provided by the company it had three times less fat as the most famous and popular product of the chain -Whopper. Meantime, McDonalds has been evincing interest to the British sandwich chains Pret A Manger (apparently this step was the response to the fact that the number of the restaurants of sandwich chain Subway had passed the number of McDonald's outlets in 2001).5 It also started selling McDonalds sandwich in several restaurants around the country. On the other hand, several other new chains are attempting to win competitors by adding bigger burgers to their menus; as one can see on the one hand new healthier food has been provided by the chains; on the other hand new products have been added for those people who are less health conscious. However the healthy food strategy might bring some benefits as once the customer, who has not thought that these particular chains are healthy, has been lured to the restaurant by the healthy product advertisement he might reassess the menu of the chain altogether. Even when the company advertises its typical burger products that are clearly not aimed at the health conscious people, it nevertheless should pay closest attention to the perception that its advertisement creates. For instance, in 2002, Burger King hired famous blues musician B.B King to promote its new "King Supreme" (double beef burger); however it created unfavorable impression among targeted customers as B.B King was diabetic and was even taking, at the time of the campaign, blood sugar test in the advertisements campaign of another company that treats diabetes.6 Many fast food chains were considering some diet options as well. For instance due to the slowdown of sales, such new options as diet plates as well as more vegetarian option were being discussed. Apart from the increased demand on the part of the customers, industry also faced the threat of lawsuit from those customers who had some severe health problems due to the high consumption of the food coked at the fast food restaurants. 7 Apart from the competition in the market of the industry among traditional fast food chains, many fast casual outlets such as Baja Fresh Mexican and Panda Express that provide their customers with fast service and the products of higher quality have been quite successfully competing in the market and even have been able to attract some of the customers of fast food chains. 8 Non price competition in the fast food industry. All fast food chains are trying to lure new customers and keep steadfast ones by providing their customers not only with new products but with new services as well. For instance McDonalds was the first food chain that introduced several innovative services. It was the first fast food company that started serving breakfast in 1973, it also was the pioneer in providing the consumers - drivers of the cars with drive through window service9; whereas Burger King was the first company that introduced children play grounds around its restaurants. In today's highly competitive environment, fast food chains are bound to be just as much competitive to survive in the industry. Mc Donald's introduced in 2002, new system that allowed the customers to purchase products by credit card.10 According to the representatives of the company new system reduces the time devoted to one customer. New system allowed customers to pay for the order by credit card without signing it. New system was the part of the campaign, aimed to increase the quality of the food that the restaurant provided. High speed credit card payment system was an indispensable element of the campaign. Several other fast food companies followed the suit. Subway conducted highly aggressive campaign by installing identical technology at several outlets of the country. Jack in the Box Inc also established the system that allowed the customers to pay by the credit cards. Some other fast food chains such as Burger King, KFC and Yum Brands either had started to provide or tested similar systems. Apart from convenience this system had other important benefits: several frequent -flier miles had been added to the customers who were using this system, moreover the implementation of this method of payment reduced the number of people who were staying in queue to purchase the food, as the operations with credit cards are much quicker than with cash. All this allows McDonalds to serve more clients within a definite amount of time; this factor is crucial for the largest fast food company in the USA as it is aimed to serve one customer within 90 seconds. The process mentioned initially had been delayed by McDonalds due to the fears that it would slow rather than expedite the process; however with new improved card processing technology it managed to introduce this system. Apart from introducing new card credit systems, many new and existing fast food chains are struggling to find suitable premises for their restaurants. With the high density of fast food chains in the country, many fast food companies had to hire scouts in order to evaluate and pinpoint new sites for the restaurants. Moreover the companies had to conduct more detailed analysis of the geographical area (with more emphasis on the demographic and other data). However, even in the choosing of geographical area the companies are trying not to forget about healthy conscious customers. For instance when the new company Arbys was choosing new place for its outlets, it paid closest attention to the income status of the neighborhood as representatives of the company thought that in the neighborhoods with high incomes, live more health conscious people. So apart from the customers the chains are also competing for existing and new locations where it would be possible to built new outlets. High density in the industry are due to the fact that many outlets have been built in close proximity to the homes of the customers as in views of many marketing specialists the customers are very lazy and will not go several additional steps to purchase products that fast food chains provide. 11 Traditionally entry condition in the market of the fast food has been relatively easy. Economies of scale as well as capital requirements have not been great. However, the market in its current form is highly competitive (and is widely regarded as saturated) and it might be difficult to enter it due to the high level of the competition, unless new chain develops some ingenious strategy or innovative products that will distinguish it from other competitors. Moreover, each new company has to compete with existing giants in the markets such as McDonalds and Burger King, yet new companies are more flexible in terms of the services and the products that they might provide. Due to the factors mentioned, fast casual restaurants have been relatively successful in the USA. It was partly due to the fact that they manage to provide their customers with relative cheap price and high quality food. Apart fromm that, the customers have tired from burger meal and would like to purchase new products with new tastes. Bigger players in the markets are forced either to create their own kind of fast casual fare or to buy existing fast casual fare outlets. Undoubtedly, large companies have more advertising possibilities and marketing opportunities to promote their products and services in the market. Several companies such as McDonalds tried to develop joint ventures with such fast casual chains as Fazoli in Kentucky and even claimed that it intended to buy it. Apart from cooperating with Fazlois McDonalds also had stakes with more than thousand non burger companies in the world. Actually according to the Eric Schlosser, author of "Fast food nation" there are too many burgers and pizzas and too little room for the expansion, so McDonalds had to devise new strategy in order to survive in the 21st century. If the fast food chains mange to surmount challenges that they currently face they will be able to expand their businesses and maintain domestic fast food industry as one of the competitive and innovative in the world. Works cited. 1) Monopolistic competition, < http://william-king.www.drexel.edu/top/Prin/txt/Imch/MC1.html> 2) Campbell R. McConnell, Economics, McGraw-Hil Book Co, 1987, p.912. 3) Fast Food 4) Kate MacArthur Wendy's winged by surging rivals. Advertising Age. (Midwest region edition). Chicago: Oct 25, 2004.Vol.75. 5) ELIZABETH LEE, BUILDING A BETTER BURGER: Where's the beef BK Veggie part of fast- food evolution, The Atlanta Journal - Constitution. Atlanta, Ga.: Mar 18, 2002. 6) Suzanne Vranica, New Burger King Shop Hits the Grill --- With Change of Ownership, Franchisees' Expectations Will Put Heat on Deutsch, Wall Street Journal, Aug 15, 2002. 7) Andrew Dolbeck, A quick taste of the fast food industry, Weekly Corporate Growth Report, Nov 11, 2002. 8) Searching for Fresh Options; Restaurants: 'Fast-casual' chains are small but growing quickly, spurring fast-food giants to upgrade menus or gobble up upstart rivals, Los Angeles Times, May 3, 2002. 9) McDonalds, Encyclopedia Encarta 2004. 10) Shirley Leung and Ron Lieber, The New Menu Option At McDonald's: Plastic --- Fast-Food Giant Will Allow Customers to Use Credit Cards; Earning Miles With Your Fries, Wall Street Journal, Nov 26, 2002 11) Shirley Leung, Where's the Beef A Glutted Market Leaves Food Chains Hungry for Sites; Finding Spots for New Outlets Takes Heaps of Research And an Eye for Details; Hint: Move Next to Wal-Mart, Wall Street Journal, Oct 1, 2003 Read More