The Identification of the Effects of Globalisation on the Fast-Food Industry Essay

Oxford Brookes University Research and Analysis Report The identification of the effects of globalisation on the Fast-food Industry By: Meekaal Ali September 2001 Words 4850 Contents page no. 1. Introduction 3 2. Information Gathering 5 3. Identification and analysis of information 7 4. Conclusion 16Appendix A- References and Bibliography 18 Appendix B- Fast-food Industry operating results 20 Appendix C- System wide Restaurants of McDonalds and TRICON Global 21 Appendix D- IT budget division of the Food and Beverage Industry 22 1.

Introduction 1 Topic chosen and its context This report will identify the impact of globalisation on the fast food industry.I will be looking at the factors that influence the industry as a whole and make special reference to Pakistan while exploring the Asian/Pacific economies. The aspect of globalisation will be mainly financial and economic though all factors will be taken into account while explaining the fast food phenomenon. I will identify the variables that have caused the expansion of fast food into becoming a multi billion-dollar industry over the last two decades and describe the implication of present and future technological developments.The term Globalisation is normally used to describe the state of multi lateral economic relations in the world today.

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Globalisation can be defined as the ‘increasing internationalisation of the production, distribution and marketing of goods and services’ (Harris 1993). The increasing availability of capital through international markets has fuelled the process of foreign direct investment; this coupled with advances in computing and communications technology has resulted in multinational enterprises such as McDonalds and TRICON Global.These two companies will represent the industry trends in this report. I will analyse my findings within the context of Porter’s Five Force Model and the PEST analysis. 1. Reasons to chose topic The world today is moving toward a society where national borders are becoming increasingly irrelevant as capital markets integrate. As an accountant, I wanted to research the reasons behind this phenomenon. In the future accounting standards and reporting frameworks will have to be devised keeping the geographical diversity of operations in mind.

To be prepared for this inevitable and rapidly approaching economic environment I wanted to understand the underlying causes and gain an appreciation of the factors that fuel the pace, scale and scope of globalisation. No where can the effect of this ongoing trend be felt more clearly than within the fast food industry. Even in an emerging economy like Pakistan that has yet to catch up with the full scale global integration of capital markets, companies like McDonald’s, Pizza Hut and KFC have shown their presence, paving the way for others to follow.With the emergence of these multinational concerns in South Asian economies, national industries have had to rethink their strategies and improve their operating environment. Laws regarding safety, health and environmental standards that are either nonexistent or in infantile stages, have to now be formed and implemented if the domestic industry wants to compete with the Multi-National Corporations (MNCs).

Another reason for having chosen this topic is that no research has so far been carried out regarding globalisation and its effects on the industry at any private or governmental level in Pakistan.This made my report all the more challenging and one of its kind. I also wanted to learn how pioneering visionaries such as Ray Kroc founder of McDonald’s, made fast food into a way of life for most developed nations while simultaneously building a multi billion-dollar industry.

2. Aims and objectives • To discuss the factors of globalisation and reasons for the growth of the Fast-food industry. • To learn how brands such as McDonald’s, Pizza Hut, KFC and Taco Bell are created and sustained. Use of Porters five force model, (barriers to new entrants, threat of substitutes, bargaining power of suppliers and customers and rivalry among existing businesses) and PEST analysis (political, economic, social and technological) to help identify the effects on the industry. • The use of the models to gauge the effects of the expanding food service industry on knowledge management, skill development, infrastructure development, risk diversification, outsourcing and research and development in the fast food industry.

The identification of the impact of technological innovations and the implications of e-business and online ordering for the food service industry. • To find out whether comparable accounting frameworks and corporate laws for international companies are adequate or is there a need to create and improve them. • To identify the opportunities created by MNCs for existing businesses. • To identify the operating environment of Pakistan and other developing nations that creates problems for MNCs. • Concluding with the positive or negative impact of globalisation on the Fast-food industry with reference to Pakistan. . 4 Executive Summary This report identifies the factors of globalisation that influence the financial, operational and marketing sectors of the Fast-food Industry by using Porter’s competitive five forces and the PEST analysis (political, economic, social and technological). The report was written in order to gain an insight into the present state and future direction of the Fast-food industry.

The methods chosen for this study were mainly secondary in nature, with the World Wide Web providing most of the facts and figures.However an interview with the financial controller of McDonald’s Lahore division, facilitated in the understanding of the inadequate conditions that international franchises confront in developing markets. The paper focuses primarily on Fast-food companies that invest in foreign markets and shows how they adapt to the domestic environment in a process called localisation, in order to be successful. It also notes how technological applications and effective brand development can help local and international franchises to further expand their outlets.It was concluded that the comprehension of and adaptation to the process of globalisation, assisted in the growth of the industry. 2.

Information Gathering A variety of sources were used in this report mainly due to the choice of topic which required widespread industry facts rather than being focused on a specific organization. 2. 1 Sources used and reasons for their use The research carried out can be divided into two classifications- primary research and secondary research.The latter proved much more expedient and valuable as a source of information for the report because first hand data proved difficult and time consuming to collect. A) Secondary Research Secondary research consisted of the following- • Reading newspaper articles, journals and books on globalisation to gain a background understanding of the process in its entirety before applying the findings onto a single industry. • Review of business sections in newspapers to remain up to date on the latest economic trends. The Economist nd Business review further facilitated the writer’s comprehension of globalisation with regard to the food services industry.

• BPP text books for ACCA and articles from the Students Accountant (ACCA) provided a databank for all accounting viewpoints that need to be taken into consideration while exploring financial and economic effects on an integrating global market. • The World Wide Web provided the greatest access to specific industry information. Searching for relevant material proved harder than expected, as little was available on the impact of globalisation on the fast food industry.This was peculiar because one of the most visible icons of globalisation is the emergence of brand names such as Pizza Hut and McDonalds in all developed and developing nations. However websites such as the www.

globalist. com, www. just-food.

com, www. fastfoodlink. co.

uk, provided various outlooks on the present and future states of the restaurant service industry that guided the writer to explore and identify the factors driving the global food industry. B) Primary Research • An interview with Mr. S.

M Iqbal the Finance Controller of McDonalds Lahore Division (Pakistan).After this meeting a clearer perspective of how the company operates in the existing environment and how it plans to further the growth of fast food restaurants in Pakistan was achieved, though requests for annual reports and other specific financial material were denied. • A meeting with the head of marketing affairs of Pizza Hut Lahore that proved futile in extracting relevant data as he too was not prepared to share company financial data. 2. 2 Description of methods used to gather information Electronic Research was facilitated by the Internet through search engines such as Google, Ask Jeeves, MSN and Lycos.These led to websites that provided further links to other sites ultimately leading to data that was critical in the evaluation of the factors of globalisation. The Internet also gave the means to send out e-mails to various organisations when trying to access their annual reports. Both TRICON Global and McDonald Corporation were kind enough to direct the writer toward the links that held the financial data needed for this research.

Traditional research accompanied the aforementioned methods. This included sorting out useful data from general statistics found in books, magazines and accounting journals.Most material was subscribed to, but some was obtained through a university library (i. e. The Lahore University of Management Sciences).

As a result of these sources, an enormous amount of information on globalisation as a whole was collected, however not specifically regarding fast food. Therefore to evaluate the effects on the fast food industry the writer had to rely on fast food industry facts and project them onto the various areas of influence, for example, advertising and marketing, food regulation, foreign penetration and multi branding strategies 3. Identification and Analysis of Information . 1 The growth of the Fast-food industry Our economies are becoming increasingly global and one of the most prominent representatives of this new world order is the Fast-food Industry. One of the first industries to venture internationally, these companies realised the profit potential of untapped markets in emerging economies as well as the developed world. These companies by maintaining quality standards and providing quick and efficient services achieved a consumer base that put its trust in their products regardless of logistics, thereby helping to expand their operations world wide.Globalisation has played its role in shaping this industry. In fact it has been the corner stone of success for the major players today.

Equity and foreign exchange market integration made capital mobile, furthermore capital flows and Foreign Direct Investment (FDI) was used by fast-food industries in the form of Multi-National companies (MNCs) to deliver exponential global growth to their investors. Technological advances and progressive financial services have also featured in the growth of the industry.Additionally, awareness through print and electronic media has led to the adaptation of local tastes and culture providing the Multi-National Corporation the opportunity and incentive to cater to these changing consumer markets. 3.

2 Factors affecting the growth of the Fast-food industry • The managerial vision of pioneering fast-food industrialists to create brand names and have a global presence through a relentless expansion operation. An increase in the number of office workers with greater disposable incomes increased the need for quick service restaurants. Shorter lunch breaks have led to the need for ‘convenience foods’. As busy lifestyles and single parent families are reducing the time available for home food preparation. (Fast food facts 2001online). • A key driver affecting annual sales growth is store expansion by the leading fast-food brands (Fast food facts 2001online). Fast-food companies have recognized the potential in international markets where local restaurants are not providing the variety that they have to offer at affordable prices to consumers. Extensive marketing and advertising techniques are employed to build customer loyalty in the growing markets.

• The economic position of various countries also effects growth, which is the ‘size and wealth of their markets and the prosperity and efficiency of their productive bases’ (BPP 2000). 3. 3 A general analysis of McDonald’s Corporation and TRICON Global in the International environment Leading the way in fast-food franchises is McDonald’s Corporation and TRICON Global. The latter comprises the worldwide operations of KFC, Pizza Hut and Taco Bell.

The trends, statistics, financial information and future expectations of the Fast-food industry will be based on these two companies. Financial McDonalds as we know it today, was the creation of Ray Kroc. ‘He revolutionised the American restaurant industry by imposing discipline on the production of hamburgers, french fries and milk shakes. By developing a sophisticated operating and delivery system, he insured that the french fries the customer bought in Topeka would be the same as that bought in New York City.

In short he put the burger on the assembly and the profits began to flow’ (John 1996).To date McDonald’s commands more than 29,000 restaurants in 121 countries, ranks 138th in Fortune 500 magazine and rang up sales worth 14 billion dollars in 2000 (Hoover 2001). TRICON Global became an independent, publicly owned company in 1997(Annual report TRICON 2000). It now operates 30,182 restaurants around the world in more than 100 countries and territories and ranks 263rd in Fortune 500 magazine (Hoover 2001). ‘TRICON’s three brands, KFC, Pizza Hut and Taco Bell, are global leaders of the chicken, pizza and Mexican restaurant categories, respectively.

TRICON’s global system sales totalled more than $7 billion in the year 2000. Reflecting the broad geographic consumer appeal of TRICON’s concepts, over 43% of TRICON’s International restaurants are located in Asia/Pacific, followed by the Americas (Canada, the Caribbean, Latin America and South America) with 21%, Europe/South Africa with 25%, and Greater China with 11%(Annual report TRICON 2000) For detailed information regarding Industry operations see Appendix B To view System wide units in the United States and international markets see Appendix C.A.

Operational International expansion is essential in today’s growing economy and the Fast-food industry relies heavily on increasing the number of restaurants in new markets. To do this successfully however depends on building reliable supplier networks and a gradual change to using local supplies. Not only does this provide employment opportunities for locals but it provides them with an international market to cater to, for example, according to Mr. S. M.

Iqbal, the concept of ‘good practices’ (personal communication, August 0th, 2001) at McDonald’s means that when a supplier is approved in any part of the world, he can then supply to all of McDonald’s outlets. Operations at all franchise, partnership and joint venture outlets are assessed regularly by the parent company and where the appraisals are not satisfactory despite effective marketing and menu development, restaurants are closed down. B.

Marketing ‘Brands are the tools with which companies seek to build and retain customer loyalty’ (The Economist 2001) and therefore companies invest a great deal of money and effort to create and maintain these images.Close to 30 billion a year is spent on advertising by the Fast-food industry (fast food facts 2001). As a result companies’ brand names are often the most valuable assets the organization has. Brands are created to achieve the following • They act as a form of product differentiation. In the Fast-food industry that means the product that is to be sold should look, taste and offer an image that would satisfy a consumer segment such as the Kiddie meals offered by McDonalds to entice the younger market sector.

Branding leads to more acceptability by retailers and consumers. When these brands are used to enter new markets and countries it is very easy for companies to build a network of supply chains due to the goodwill behind their products. • It reduces the importance of price differentials between goods. This is beneficial only in international markets, where price is an important determinant is marketing strategies. • Other products can be added to the brand range to capitalize on existing goodwill, which is termed as brand extension policy (Purcell 2001).Fast-food companies constantly add new products to their menus to provide a variety and change.

However the focus remains on their old brands, which are reinvented at times to cater to local tastes. TRICON Global has a distinct advantage in this area as it has devised a strategy of multi branding in a world where image and good marketing is essential for success. Operating three brands, the company makes them available for one another, which provides customers and families with divergent tastes a variety of menus to choose from. These restaurants generate more cash flow per unit than single-brand facilities’ (TRICON Global 2001). 3. 4 Effects of Globalisation on the Fast-food Industry with selected references to Pakistan A.

Porters model Porter’s five forces influence the competition in an industry and collectively determine the profit potential of the industry as a whole. (BPP 2000) 1. Barriers to new entrants • Brands-‘A strong brand can raise prices and barriers to entry because it requires expensive advertising and good marketing’ (The Economist 2001).Competition in international markets usually comes from few and small local chains that have neither the resources nor the variety that the multinational brands bring to the consumers, which makes it very difficult for the local businessmen to compete. • Multi branding- KFC, Pizza Hut and Taco Bell have realised the potential in synergy of brand names. Through collective expansion they are able to reach a far greater market and cater to numerous preferences.They now operate 30,000 sales units in over a hundred countries which is more than any other fast-food company (Appendix C).

• Buy out competition- Existing fast-food restaurants in local markets find it hard to cope with the resources of the MNCs and end up being bought out by the MNCs who want to eliminate all competition. • Impenetrability- Consumers become accustomed to certain tastes that leading brands offer them and this makes it difficult for other fast-food restaurants to compete with in their respective markets. The ingredients for KFC’s recipe are a secret to date. Economies of scale- As fast-food chains grow, they create a network of suppliers and distributors that provide them material in bulk and at cheaper costs. This makes it difficult for new entrepreneurs without scale economies to compete. • Credibility- Leading fast-food chains have earned a reputation on their quick, clean, efficient services and consistent market growth and development to be profitable investments. High entrance costs therefore prevent newcomers from entering the stock markets.

2. Bargaining power of suppliers • Differentiated product- In the case of McDonald’s Pakistan as Mr.S. M Iqbal, Financial Controller for the Lahore division recounts (personal communication, August 20th, 2001), “the company needed a high quality bakery to supply them with buns for their hamburgers; as this was unavailable they had to ask a local bakery to install the required machinery to bake specification buns”.

This makes the supplier a monopolist in the field and makes the organization dependant on the supplier. • Suppliers can exert pressure for higher prices usually when the supplier’s products are of importance to the customer’s business (BPP 2000).A term in McDonalds as quoted by Mr.

S M Iqbal is “good practices”. These are specific ways of carrying out routine tasks in the organisation and to maintain these standards a good supply chain is essential which makes the customer more vulnerable to the suppliers who provide them with quality products. • Other customers- The expansion of fast-food chains creates the need for local suppliers to follow rigorous quality standards at the behest of multi national chains. This makes them more attractive to buyers in the local markets. 3.

Bargaining power of customers Satisfaction of want- The utility that consumers derive from Quick Service Restaurants is an important determinant in their bargaining power because fast-food restaurants need their customers to return again and again. Therefore customer satisfaction drives sales figures. • Number of customers- Customer loyalty and numbers differ from country to country. While European and American markets call it fast-food, in emerging economies it is considered fine dining as the cost of eating out is a large proportion of the per capita income.Therefore the consumer is not as large as that of developed nations. 4.

Rivalry amongst existing competitors • Market Growth- at present the average growth for the fast-food industry sales is 6 % (TRICON Global 2000), which is lower than other industry growths but for the food and beverage industry is a healthy figure; hence rivalry is limited especially in international markets where competition is low. • Marketing tactics- Brand awareness is essential to the growth of fast food chains and in order to build that, the industry spends over 30 billion dollars annually on advertising.McDonalds considers it’s ‘Big Mac’ an icon within the organisation and as Mr. S M Iqbal points out (personal communication, August 20th, 2001) “a lot of money is spent promoting and maintaining the brand in a certain way”. 5. Threat of substitutes • Other international entrants-Due to the complexity of operating quick service restaurants, competition from MNCs is limited. • Existing restaurateurs – Substitutes depend on local tastes and customs and global corporations need to be sensitive to national culture and prices in order to be successful.

B. PEST analysis Economic and Financial effects • Capital market indicators for strong performance are share value and market capitalisation and the Euro monitor forecasts(Euro Monitor 2000) that the market for quick service restaurants (QSR) will increase by 30. 4% in constant value terms over 1999-2004 to reach sales worth 92,020 million by the end of the forecast period. • An investment in a developing market like Pakistan generates employment opportunities for locals as well as knowledge development for workers in the industry.Employees are trained regularly and updated on new practices adopted by the organisation. Existing restaurants benefit from an improvement in industry standards. • Currency exchange rates impact profit margins and global concerns have to minimise this risk by using forward exchange contracts and other hedges. Social and Cultural effects • Dining out patterns change as a result of effective advertising by fast-food corporations on recipient markets.

This is clear as ‘QSR’s benefited from consumers trading down from full service restaurants’ (Euro Monitor 2000). Fast-food Corporations are held increasingly accountable for social responsibility. With 200 Ronald McDonald House of Charities (RMHC’s) in 200 countries, McDonald’s ranked number one in social responsibility in Fortune magazine’s 2000 listing of America’s most admired companies. • For existing fast-food businesses, global corporations help introduce concepts of timeliness, cleanliness and reliability of service.

Technological effects • The implications of e-business on the Fast-food Industry are immense as more consumers gain access to the internet and online ordering becomes a worldwide feature.Already local fast-food chains (Salt n Pepper) in Pakistan have started selling through portals like www. pakfree. com. • ‘Globalization is helping to increase real incomes throughout the world with new jobs being created in poorer countries as new technologies create more dynamic local economies’(Joseph and John 2000) • Companies are investing in point-of-sale (POS) systems and ordering software applications (Gohn 2001) to manage supplier and transportation networks of perishable goods efficiently. Appendix D shows how the food and beverage industry is dividing its IT budget. ‘International security has taken added dimensions as the information revolution has “super-empowered” individuals throughout the world by providing easier access to technology’ (Joseph and John 2000). The Fast-food Industry has felt the need to improve online transaction security to encourage consumers to use credit cards for purchases.

Political and Legal effects • The expansion of the Fast-food Industry into new markets has been the basis for issuing new laws regarding labour, logistics, restaurant sizing, hygiene, Styrofoam controls, franchising developments and venture regulations by many commercial and governmental organisations. At present McDonalds Pakistan reports in U. S. GAAP as well as local accounting standards.

This creates complexity and variations in reporting. ‘For the long term, some form of global cooperation must evolve with international accounting standards for multinational corporations’ (Joseph and John 2000). This will stabilize capital flows through different economic cycles.

4. Presentation of findings The central ethos of globalisation is free trade, open markets and tariff reductions.Hence the potential for investment opportunities in developing economies like Pakistan has its limitations. Lack of trade agreements, weak infrastructure and a growing debt burden combine to make the markets volatile to fluctuations in exchange rates, making it difficult for companies like TRICON Global and McDonald’s to remain profitable. However these companies follow an aggressive expansion policy in developing markets and attract consumers with their fashionable image, western style food and hygiene standards, especially compared to local street stalls.Joint ventures and partnerships are common in these countries as it minimises the risk of adverse foreign exchange movements. Moreover fast-food was the most dynamic sector between 1995-99, with growth of 7. 8% in value terms and 55.

5% in unit terms despite the financial crisis in much of the Asian/Pacific region (Euro monitor 2000) The reason global fast-food brands are successful in expanding their outlets, is their cultural sensitivity, localisation and menu diversification for international markets.Growth seems reasonably certain for 2001 though factors such as growing health awareness and child obesity could weaken sales. Another key development in the QSR sector due to increasing cultural interaction is the growth of Indian and Chinese takeaway food. 5. Conclusion Globalisation has been under way for decades though only recently it has seen a fundamental transformation of the world economies. So far only a few industries can be termed as truly global and one of them is the Fast-food industry.

The deliberate effort of Ray Kroc founder of McDonald’s Corporation, to redefine fast-food as an international industry, led many predominantly local industries to rethink their strategies and spheres of influence. Now as security and foreign exchange markets continue to integrate, as the dependence of economies on each other multiplies and as technological innovations bring down communication and transaction costs, capital becomes easier to raise at international levels.Consequently global markets have become very attractive as every sector of the economy realises the profit potential of untapped consumer bases. These factors drive the pace and scales of globalisation and at the same time provide incentive for other economic sectors to join the global arena and add to a growing world GDP.

Furthermore they lead to new ways and means of combining existing resources into creating new opportunities for developed as well as developing nations. Globalisation affects a wide spectrum of the economic and social life of a nation.It changes its trading patterns, technological hardware and software, means and modes of communication, cultural patterns, rate of employment and living standards. All of these aspects can be seen in the development of the fast-food industry. What started out in the late fifties as an American trend, grew into an international phenomenon as people the world over took to eating hamburgers and french fries as a normal part of their lives.

It was fast, it was convenient and above all it was predictable.Seeing the success of restaurant services in world wide markets, many other brands such as KFC, Pizza Hut and Taco Bell followed McDonald’s lead. To date the expansion of sales units is ongoing and the total market capitalisation of the Fast-food industry is expected to be worth 92 billion dollars by the end of 2004. The reason behind the Industry’s success in capturing international markets is in the importance given to recognising the natural direction of globalisation and its subsequent effects i.

e. he assimilation of economies, cultures and technologies and the need to respond to them with new ways of marketing, financing and delegating resources. The commitment of the McDonald Corporation to local ownership, local employees, and to local supply sources is an obvious example to think global and act global. However international operations do face a series of complications while expanding into new markets, one of them being the need to minimise risk and lessen the exposure of foreign investments.To that end global fast-food corporations try to hedge foreign denominated cash flows and where possible finance projects and purchase goods and services in local currencies. The instrument of expansion has been mainly franchising though legislation in some countries require joint ventures or partnerships. Globalisation has a two way effect; one on the companies that venture outside their national boundaries and the other on the local industry of recipient economies.

For international fast-food corporations, factors that influence operations vary according to the markets they invest in.In Europe for example, it is necessary for companies to be prepared for the euro conversion and have due consideration for EU directives on industry standards, wages and safety. On the other hand the main concern in Asian/Pacific economies is the political and economic instability.

However factors such as prices, consumer preferences, demographic trends, legislation, governmental regulations and accounting policies and practices are important determinants of fast-food demand in every market. The country specifics vary widely, but the overriding principle seems to be that of local integration and adaptation.The other effect of globalisation is on the local Fast-food Industry which benefits in learning from its global counterpart about talent development, skill improvement and knowledge dissemination regarding fast-food services; this generates job opportunities not only within the industry but also in connected supplier networks. Another significant feature of globalisation is the technological progress that has created new avenues of marketing and selling, boosting sales revenues and increasing the relative value of all forms of intangible assets like brands, goodwill, intellectual property and software.The effect of globalisation on recipient economies of foreign investment is also substantial. More so in developing countries like Pakistan, where the Fast-food Industry is in its infancy and the need to protect the local entrepreneur while simultaneously encouraging foreign investments is a difficult job. Growth in its markets is slow largely due to lack of financial liberalisation and Pakistan will have to change its macro economic policies in order to realise the full potential of globalisation.In conclusion, one can deduce from the report that the effect of globalisation on the Fast-food Industry as a whole has been predominantly positive with no finding suggesting otherwise.

An understanding of the effects of globalisation and sensitivity to its various spheres of influence has profited the industry. At present other than the infrastructural limitations of markets, nothing will prevent the relentless expansion of sales units worldwide. The challenge facing the industry now lies in managing a complex network of relationships and competing in an environment that offers virtually an infinite scope of opportunity. ReferencesAnnual Report TRICON Global (2000) Available from: http://www. triconglobal. com [August 16th 2001] BPP (2000) ‘Management and Strategy’.

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