HOW A FRANCHISE CAN SUCCEED IN A COMPETITIVE FAST INDUSTRY: A CASE STUDY

Bela Florenthal, Ph.D., William Paterson University Manar Awad, M.Sc. Student, Birzeit University Giuliana Andreopoulos, Ph.D., William Paterson University John Malindretos, Ph.D., William Paterson University INTRODUCTION

Owners of Burger King (BK) Franchise have 2 struggling locations. The owners are looking to grow the revenue of their two struggling locations and remain competitive in the changing landscape. To help with the above objectives, the case presents information regarding: ✴Analysis of the fast food industry, particularly: Industry trends The burger industry Competing fast food options Fast casual competitors Competitive convenience stores ✴Analysis of millennials’ preferences, in particular Food consumption Purchases via digital and mobile technology INTRODUCTION (CONT.)

Additional information is provided regarding the BK and franchise’s operation. Specifically, the case provides information regarding: ✴BK operation ✴Operation of the 2 stores in terms of: Traffic, Customers, and Competition Reviews and Customer Satisfaction Use of Technology Stores’ Revenues, Costs, and Profits THE FAST FOOD INDUSTRY

Industry Trends ✴The fast food industry is a $570 billion industry worldwide in 2017 with $245 billion in the showing an annual growth rate of 3.2% between 2012 and 2017 in the United States ✴Dominated by 3 companies: McDonald’s, , and Yum! Brands, Inc. (including KFC, Hut, and Bell) ✴The top 5 brands account for over 40% of the market share in the US ✴ Fast food has long been the most favored choice of food for US consumers with 34% of children who fast food every day THE FAST FOOD INDUSTRY

The Burger Industry ✴ fast food largely dominate the market account for 30% of US -service restaurant sales in 2016 57% of consumers’ eat on a weekly basis ✴Top leaders in the burger industry are McDonald’s, Wendy’s, and Burger King ✴McDonald’s has the leading position in the industry, however, the company has been losing market share to Wendy’s and Burger King ✴ The main concern for the burger industry, and fast food in general, is that US consumers are becoming more health conscious. Hamburger sales growth has slowed in recent years, and industry watchers speculate that this growth has peaked. THE FAST FOOD INDUSTRY

Competing Fast Food Options ✴Competing fast food industry products include: pizza, pasta (1.9% annual growth rate between 2011 and 2016) (2.8% annual growth between 2011 and 2016) Mexican ( 3% annual growth rate between 2011 and 2016) and Asian food (500% increase of restaurants between 1999 and 2015, 135% in the US) Fast Casual Competitors ✴They pride themselves on offering higher quality food than do fast food chains. ✴ The most notable examples of fast casual food include Chipotle, , Jimmy John’s, , , and Chick-fil-A. ✴Between 2014 and 2015 alone, fast casual restaurants had a 10.4% ($33.4 billion) growth in revenue. THE FAST FOOD INDUSTRY

Competitive Convenience Stores ✴Convenience stores are a $204 billion industry in 2017, with 7- Eleven’s having the largest market share. ✴The industry roughly doubled in size over the last three decades, with annual growth’s slowing down to less than 1% between 2012 and 2017. Building a Competitive Advantage ✴Fast casual outlet sales increased 10.5% in 2014, whereas fast food chain sales increased only 6.1% during the same year. ✴ Both McDonald’s and Burger King have raced to diversify their menu options to keep up with competitors. ✴Fast food chains also have attempted to compete with up-and-coming fast casual operators by including healthier options on their menus. MILLENNIALS AS A TARGET MARKET OF THE FAST FOOD INDUSTRY

Millennials are changing the restaurant game, affecting greatly the fast food and fast casual industries. Food Consumption ✴Millennials eat out much more often than do previous generations, making them a prime target of most segments. 53% eat out at least once per week and comprise 51% of fast casual consumers Millennials reportedly prefer convenience stores at twice the rate as fast casual restaurants. ✴The fast food establishments are scrambling to attract Millennials McDonald’s, does not rank among the top ten restaurant chains preferred by Millennials Purchases via Digital and Mobile Technology ✴ has one of the most convenient mobile apps in the industry, with 46% of delivery orders’ coming from digital channels. ✴Taco Bell has seen 20% higher average-per-order sale from the use of this innovation. ✴ is also part of Yum! Brand’s mission of convenience. It derives 46% of its sales from digital channels and saw an 18% increase in spending on the average pizza order in 2015. BURGER KING OPERATION AND FRANCHISEES R. & K. J.’S BACKGROUND

BK Operation ✴The company’s revenue began to slowly decline in 2009, and it saw a massive decrease in 2013, with revenues of $1.15 billion, down from $1.97 billion in 2012. ✴The little technological innovation that Burger King uses, such as online ordering and a mobile app, is common practice among its competitors. ✴Burger King offers its franchisees three methods of ownership: individually/owner-operated, entity, and corporate. Burger King specifies everything from required products to be sold, offered menu items, and food preparation methods to customer service and delivery (if authorized). There are many limitations and difficulties that come with being a franchisee. • To start, there is a large initial franchise fee of $50,000 for a 20-year agreement under Burger King. • Then, the franchisee must account for location costs, and acquiring and improving the desired real estate could cost over $2 million. • There are also royalty fees (4.5% of gross sales). • The franchisor requires all raw materials be purchased from the same supplier. BURGER KING OPERATION AND FRANCHISEES R. & K. J.’S BACKGROUND

Franchisees R. &K. J.’s Background & Operation ✴The R. & K. J. franchise operates several Burger King establishments. ✴The R. & K. J. franchise has seen great success with stores located in urban areas however, it is struggling financially with stores located in suburban areas. ✴Store A and Store B, are a major concern. It has become increasingly difficult to attract new customers and to operate at a comfortable profit. Store A & Store B ✴Trafc & Customers Both Burger King franchise locations are situated in high-traffic areas. Despite the stores’ ideal locations, store traffic is light. Both Burger King stores are located in suburban areas, making it challenging to attract middle- and upper-middle class customers who prefer healthier meal options Nevertheless, stores in both areas have the potential to attract younger customers (a university and many schools are close by). There are many businesses that surround both stores. BURGER KING OPERATION AND FRANCHISEES R. & K. J.’S BACKGROUND (CONT.)

Store A & Store B ✴Competition High competition in both areas is also a concern. • Store A has seven direct competitors within a 2-mile radius that offer healthier options and direct substitutes for Burger King’s items. • Store B also faces considerable competition; there are nine competitors within a one-mile radius. ✴Reviews Store A does not have many online reviews. • The 19 on Google, 18 of which were within the past year, score it a 2.8/5, and the six on Yelp over the past five years give a 2.5/5. Store B performs very poorly in terms of online reviews. • Its eight Yelp reviews over the past six years give it a 2/5, while its 22 Google reviews over the past five years score it a 2.5/5. BURGER KING OPERATION AND FRANCHISEES R. & K. J.’S BACKGROUND (CONT.)

Store A & Store B ✴Customer Satisfaction The American Customer Satisfaction Index for Limited-Service Restaurants places Burger King at the lower end of the index, with a score of 76. A customer satisfaction survey was conducted for Store A, with 36 students of a nearby university at which 70% of participants were between the ages of 18 and 30. • Participants preferred McDonald’s’ and ’s to Burger King, at 58% and 64%, respectively. Store B was praised for location convenience, flavor, and price in an online survey of 13 participants. Customer dissatisfaction included food quality and customer service. BURGER KING OPERATION AND FRANCHISEES R. & K. J.’S BACKGROUND (CONT.)

Store A & Store B ✴Use of Technology Online and mobile ordering has become an important tool for many food service operators. • 34% of participants in a 2016 survey on restaurant technology indicated that they order food once per month via smartphone • Discounts and special offers appear to be a top priority for consumers 80% of US restaurant goers would like to receive them, and 49% of Millennials view them as among the most important feature of a restaurant’s website franchises do not fare well in this segment. • Store A has old soda machines and no online ordering services. Store B has no method of mobile payment or online interaction with customers. BURGER KING OPERATION AND FRANCHISEES R. & K. J.’S BACKGROUND (CONT.)

Store A & Store B ✴Stores’ Revenues, Costs, and Profits The business is barely making its debt payments and lacks liquidity. The franchise as a whole and both stores are in poor financial health. • Store A saw a 5.57% decrease in revenue between 2015 and 2016. As a result, the gross profit declined by 4.56% from 2015 to 2016. • Store B managed to increase revenues by 2.63% and decrease the cost of goods sold by 5% between 2015 and 2016, increasing gross profit by 25%. Net profit also increased during this period but only by about 17% due to the high increase in expenses. STORES’ REVENUES, COSTS, AND PROFITS

Store A Store B

$1,400.00

$1,050.00

$700.00

$350.00

$0.00

-$350.00

Revenue 2015 Revenue 2016 Net Profit 2015 Net Profit 2016 Gross Profit 2015 Gross Profit 2016 TEACHING DIRECTIONS

Developing Competitive Advantage ✴SWOT Analysis ✴Porter’s Five Forces Analysis Segmentation, Targeting, & Positioning ✴Millennials ✴Employees of local businesses Consumer Behavior ✴The purchase process & use of technology ✴Promotions & use of technology ✴Customer relation management - reviews & customer satisfaction Q & A