Chick-Fil-A in 2016
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Chick-fil-A in 2016 Joyce L. Meyer A.J. Strickland The University of Alabama The University of Alabama “I’d like to be remembered as one who kept my priorities in the right order. We live in a changing world, but we need to be reminded that the important things have not changed, and the important things will not change if we keep our priorities in proper order.” Chick‐fil‐A founder Truett Cathy spoke these words, bringing his personal and business philosophy to life. Many years later, President Dan Cathy pondered his father’s words as he met with his advisory board. In the midst of lawsuits regarding hiring policies and acts of discrimination, Cathy knew it was time to look at the history of Chick‐fil‐A and compare it with the present day world‐view of the company. Dan Cathy was strong in his religious beliefs, which set the foundation for Chick‐fil‐A’s business practices, but was starting to question their role in a modern‐day business setting. His father, Truett Cathy, outlined many of these beliefs, including closing Chick‐fil‐A restaurants on Sundays, in Exhibit One. Despite his father’s firm belief of basing business on Biblical principles, Dan Cathy and his advisory board began to discuss the legality and constitutionality of many of these key issues involving the fusion of religion and business. THE QUICK SERVICE INDUSTRY A quick serve restaurant (QSR), also commonly referred to as a fast food restaurant, is defined as a specific type of restaurant characterized by fast food cuisine and minimal table service. The term fast food more specifically refers to food that can be prepared and served quickly, a term first recognized by Merriam‐Webster dictionaries in 1951 with the opening of Jack‐in‐the‐Box chain restaurants. The quick serve industry commonly served food that included burgers, chicken, pizza, sandwiches, Mexican, Asian, and seafood. The United States market for fast food recession slowed the growth, as the increase from 2007 to 2009 accounted for 39.2 percent of the global fast was only 3.0 percent, but it recovered quickly. In the same food’s market value in 2016. In the United time span, 2009-2011, transactions grew 12.7 percent to reach States, the market for fast food dropped 0.6 a value of nearly 46 billion. percent in 2009, but has since grown by an average of 2.4 percent to its current standing of The chicken segment of the fast food, or quick service, industry $228 billion. While revenues were growing, the accounted for 22 percent of the fast food market with $12.85 number of transactions was also growing. The billion in revenue in 2007. Nearly a decade later, the chicken segment holds only 10 percent of the $228.2 billion Demand For Fast Food fast food market. Between 2005 and 2009, the chicken Buyers of fast food demanded quick service, tasty segment grew from $14.5 billion to $16.1 billion. The food, and low prices. They were typically lunch chicken segment was the slowest growing segment customers, people on‐the‐go, or late‐night diners. of the industry averaging only a 6 percent segment Because there was virtually no cost to the buyer to growth rate in the years leading up to the recession. choose among restaurants, restaurants attempted to The top three competitors in the chicken segment drive demand through differentiation. Companies included KFC, Chick‐fil‐A, and Popeye’s. With attempted to drive demand to their restaurant by combined revenues of $12,415.8 (in millions) in 2014, adding new menu options, additional operating hours, they represented 71 percent of the total revenues of meal incentives, and contests. They also diversified this segment. their products through the range of food offered. Some players offered food in multiple segments, such Today, Chick-fil-A leads the race for revenue and has as chicken, beef, and fish, while others focused only for five years now as KFC cannot reverse its downward in one segment. Because brand recognition was so trend. At $2.434 billion, Popeyes trails KFC, $4.200 vital to the success of restaurants, heavy advertising billion, by a large margin. The gap created by Chick- campaigns were launched in an attempt to drive fil-A is strong as its revenues reached $5.782 as of demand to a particular restaurant. Buyers were also 2014. The growth of Chick-fil-A put it above Pizza very price sensitive, which forced the restaurants to Hut, the biggest pizza brand in the country. keep their prices low; however, charging low prices could diminish profitability. Since survival in the Going forward, as forecasted by the Federal Reserve, industry was heavily dependent upon profitability, the United States economy can expect continued it became crucial that fast food restaurants keep gradual rates of improvement in the unemployment their operating costs down. Demand was decreased rate and GDP growth, along with a subdued rate of when consumers decided to utilize alternative dining inflation. 2014 unemployment estimates are projected options, such as dine‐in restaurants or home cooking. to fall below 7% in 2014, and then continue to taper The advantage that fast food had over alternatives downward in 2015. GDP, on the other hand, is was that it was more convenient. It was also typically expected to grow at least 2.9% in 2014 and 2015, and more attractively priced; however, dine‐in restaurants inflation is expected to remain very low through 2015. were beginning to challenge fast food restaurants on price by offering price cuts for lunch and late‐ So, not only is the employment rate still significantly night specials. Demand was also affected by the elevated from pre-recession levels, but among those possibility of new entrants. Most operations were run currently employed, a higher percentage are working as franchises, which did not require a large capital part time—for much less money. To place this in outlay. This increased the likelihood that rivals could perspective, some 27.4 million employed adults were enter the industry and intensify competition. Most working part time in July 2013, compared to 23.5 potential threats were deterred by entry barriers, such million in August 2007. Meanwhile, from July 2007 to as retaliation by existing players, low revenue growth July 2013, the number of full-time employed dropped rates, and lack of brand strength; however, there was a from 123.2 million to 117.7 million. strong possibility that entrants could grow quickly and intensify rivalry. This phenomenon helps explain the limited-service restaurant industry’s continued heavy reliance on value pricing—even while the unemployment rate has Suppliers to the Industry improved, many of the newly employed must subsist Suppliers to the fast food industry supplied food, on part-time wages. This, in turn, creates reliance on packaging, equipment, and labor. The two major US what we have termed “extreme affordability” when suppliers, US Foodservice and Sysco, had substantial using limited-service restaurants, boosting sales of market share and supplied many customers; therefore, menu items on the “value menus” that proliferated they were not dependent upon any individual fast food during the recession and remain a core component of player or chain of restaurants. Because the fast food many QSR menus. industry was labor‐intensive, players were dependent upon employees to carry out the day‐ to‐day separately and charge one dollar per item. By having operations of the restaurant. Employees were typically the items listed separately, consumers were more likely uneducated and low‐ skilled, so they demanded low to purchase multiple items and would actually end up salaries; however, minimum wage legislation regulated spending more; however, since they were only paying the amount that employees were required to be one dollar per item, it was a perceived value. Thus, it paid, so restaurants had little control over employee was considered a win for both sides. compensation. Recent Trends in the Fast Food Key Competitive Capabilities in the Industry Fast Food Industry Fast food brands were among the most recognizable Health brands in the world. Americans spent more money Because of the fat content and typical portion sizes, each year on fast food than on music, movies, books, fast food was considered the unhealthiest of all food and magazines combined. Because brand recognition options. By the late 1990s, the entire industry came was key to raising awareness and building brand under scrutiny as the party to blame for America’s loyalty, the industry’s major players ensured that weight battle. The claim was that fast food restaurants brands were not only found on packaging and signage, did not give consumers healthy dining choices. The but also found on billboards, print advertisement, food served in a fast food restaurant was full of highly and television commercials. Key players invested processed ingredients and additives that enhanced the countless amounts of money seeking to find ways to flavor and helped preserve the shelf life of the food. target children as young as two years old, in an effort It did not contain healthy calories that gave lasting to build brand loyalty at a young age. By offering toys energy, but rather, fulfilled a temporary craving. with meals, major quick serve restaurants ensured that these children wanted to come back from their first Fast food had been linked to obesity‐related diseases, experience eating there. As a result of the race to build such as heart disease and diabetes, and was also found brand loyalty, key players also engaged in advertising to contain pesticides. As Americans, specifically the campaigns that enticed buyers into restaurants and new generation of millennials, became more health kept the brand recognizable.