Challenges in the Competitive Fast Food Market

Company Background

Five Guys is an American fast casual restaurant established in 1986 and whose main focus is on French fries, hot dogs and hamburgers. The restaurant was founded Janie and Jerry Murrel. The original Five Guys were Jerry and Ben, Chad, Matt, Jim who were the couple’s sons. Two years later, the couple had a fifth son Tyler, who is part of the current Five Guys today. All the sons are today involved in the management of the restaurants' activities, Chad oversees training, Tyler runs the bakery, and selection of franchises is done by Ben, WHILE Jim and Matt are involved in travelling across the country and visiting stores (FIVE GUYS, 2018). The first Five Guys restaurant was in Arlington`s Westmont shopping centre. This however closed in favour of another location in Alexandria. The restaurant's headquarters are found in Lorton, Virginia.

The company began franchising in early 2003 and this is what marked the beginning of a period of rapid expansion (Welch, 2010). Within a year and a half, up to 300 permits had been sold for franchised locations. As of 2016, across the globe, there were over 1500 Five Guys locations being developed. In 2010, in the United States, the company was observed to be the fastest growing fast food chain. An increase in sales of 32.8% was recorded between 2010 and 2011 for the company (Lingle, 2016).

Industry Background

Over the past five years, the Global Fast Food Restaurants industry has managed to grow and this is despite being affected by the increased awareness in societies of the health risks that come with diets that are high in sugar, salt and fat and a global economy that has been weakening continuously. Attempts made by the industry to respond to changes in the preferences of consumers have to a large extent also supported the growth of revenue. It is forecasted that moving forward to 2022, the industry will continue to surge forward (Talwar, 2018). Food restaurants across the globe will benefit with the improvements in the global economy and as the spending of consumers on small luxuries like eating out increases.

Restaurants, where patrons pay for quick-service food products before proceeding to eat, make up the fast food industry. There exists different options for consumption of purchases, on-site consumption, take-outs or delivery to customers' doors. Gross revenue is usually gotten from stores owned by the company and those that are franchised.in calculating the total industry revenue, franchise fees are not factored. Most of the establishments in the industry are also involved in the sale of beverages like sodas, juice and water but no alcohol. Main industry products include French fries, burgers, snacks, sandwiches, chicken and Pizza (Janssen et al., 2018).

Key Challenges Faced by Five Guys

Competition from other fast food restaurants is a major challenge facing five guys. Across the world, one of the most competitive industries is the fast food industry and the level of rivalry has been observed to intensify with the implementation of strategies for expansion (Wiere, 2012). Five Guys and all other brands in the business are continuously struggling to differentiate themselves from their competitors and this has been observed to increase the level of existing rivalry and competition in the market.

Another challenge is the increasing awareness among human beings and their shifting preference for food items deemed to be healthy. Fast foods and unhealthy foods are synonymous and Five Guys is no exception. Lately, people have been observed to be more health and diet conscious and they achieve this by switching to healthier food options and entirely avoiding fast foods (Burke, 2018). On their website, Men`s Health magazine stated that meals from Five Guys are largely considered to be unhealthy. For example, they state that a double patty burger contains 20g of saturated fat and 700 calories. French fries produced by Five Guys were also ranked as some of the unhealthiest by the same magazine, stating that they contain up to 1500 calories (Men’s Health, 2013). In the 2010 list of unhealthy foods by the Centre for Science in the Public interest, bacon cheeseburgers produced by Five Guys were listed. The Five Guys website in 2015 stated that a large order of fries contains up to 1,314 calories while a bacon cheeseburger contains 930 calories. Time Magazine also added an order of French fries from Five Guys containing 1,464 calories in their “Top 10 Worst Fast Food Meal” list.

Internal Analysis

By 2012, Five Guys had opened over 1200 locations in the United States and even in Canada. In July 2013, the first location outside America was opened in London on Long Acre in Covent Garden. Today, the chain has 27 restaurants that are in operation across the UK. Additionally, Five Guys also has locations in the Middle East and has continued to expand in Europe. In 2017, Five GUYS ventures into Germany opening two restaurants, one in Essen and one in Frankfurt (Burke, 2018).

The products offered by Five Guys are valuable. They are however not rare because there are other food restaurants that have established themselves in Italy like MacDonald’s. Their products are definitely difficult to imitate. To gain a sustained competitive advantage, Five Guys will have to establish itself in areas where there is rareness of burgers and fries. The firm is very well organised to capture value.

As of 2016, Five Guys had 1500 locations across the globe, with a net revenue of US$831.95 million, an operating income of US$ 92.94 million, a net income of US$ 57.68 million, total assets accruing to US$ 393.29 million, a total equity of US$ 244.48 million, and around 15,000 employees. The culture at five guys is very fast paced. It can be a very fun and exciting work culture. Usually, there are at least five employees working at a time in any of the Five Guys restaurants and with the right mind-set, working there can be fun.

External Analysis

Micro-Environmental Analysis using Porter`s Five Forces Analysis

Suppliers Bargaining Power

High levels of competition among suppliers is actually good for Five Guys as it will act to reduce prices to producers. High levels of competition amount the suppliers will have a positive impact on the operations of Five Guys which is also positive, which is a plus to its value. A decrease in costs will be brought about by the qualitative factor. In addition, whenever it is easy to switch suppliers, the bargaining power of the suppliers is reduced. The operations of Five Guys will be positively impacted by low supplier switching costs.

Customers Bargaining Power

Five Guys will be positively affected by low dependency on distributors. The bargaining power of distributors is lowered when the dependency on produce is low. Five Guys will also gain positively from inelasticity of demand. Whenever buyers are not very sensitive to prices, there is a big likelihood that prices will always increase and the products will still be purchased by the buyers.

Intensity of Existing Rivalry

When the revenue in industries is growing fast, there is a high possibility that the competition will be low and this is as a result of the growth of the total industry size. Growth in industries whose growth is slow can only be achieved through the stealing of the competitor’s market share. Five Guys will be positively impacted by fast growth of the industry. Additionally, Five Guys could also benefit from fewer competitors because that implies that the firms competing for the same resources and customers is lower.

Threat of Substitutes

Five Guys need to work on improving their products so as to make the products and other services of other fast food restaurants inferior and of a lower quality. Lower qualities of substitute products would reduce the chances of a customer leaving. Substantial product differentiation is also very important because whenever services and products are very different, there is a low probability that customers would find services and products that are comparable and that can meet their demands.

Threat of New Competitors

When the networks of distribution are weak, moving around of goods becomes more expensive and as a result, some of the goods end up not even reaching the end customers. Five Guys would be positively impacted by the expense of building a network of distribution that is strong. Five Guys has a strong brand name which is a plus for it as it seeks to venture into Italy.

Macro Environmental Analysis using PESTLE Analysis

Political

The goal of Five Guys is to sell the best quality burgers possible. Five Guys needs to comply with the food safety regulations set by the Italian government. In Italy, issues of food safety are normally adjudicated by directives and regulations of the European Union. The government of Italy`s ministry of health and the administrative/legislative bodies in Italy are usually responsible for the implementation of the food safety rules. According to these regulations, operators of food businesses are usually responsible for ensuring the safety of food. The official controls that ensure compliance with the regulations along the food chain are usually carried out at the local level by veterinary services on foods of animal origin and by health departments.

The UVAC authority body of Italy administers random controls on foods that have been introduced into Italy from other places through the veterinary services of the health department (Carli, 2018). There are other authorities like Polizia Annonaria, Guardia di Finanza, NAS and Guardia Forestali that perform hygiene and other similar checks. Establishments are often inspected for the same purpose by the authorities without proper coordination which most of the times brings about frustration and confusion among food businesses who always ask for more efficiency and less bureaucracy.

Economic

Average consumer fast-food spending in Italy has increased and this is despite the 2008 global recession which led to lowered consumer confidence everywhere in the world. The increase in fast food spending can be attributed to the low cost and convenience of fast food restaurants. Today, consumers even though consumers are still looking for the convenience of eating out, they are drawn to fast foods low prices when compared to table-service restaurants. In Italy, fast food sales are expected to continuously increase in the coming period of five years in both transaction terms and value, with consumers in Italy increasing their spending in the area. Innovation and diversification are the keys to success in the fast food industry in Italy which is rather competitive.

It is expected that chain fast food operators will continue performing better in comparison to players who are independent in the coming years (Shokri et al., 2014). Chain fast food operators benefit from structured organisations which over the years have been observed to be stronger and stronger entrepreneurial spirits.

Italian consumers have been changing their attitudes towards dinner, which is largely considered as a good occasion for trying out new foods and experimenting and innovating new dishes so that they can replicate them in their homes (Fast Food in Italy, 2018). As such, fast food restaurant consumers are looking for added value increasingly with the potential of making a difference. Over time, it is expected that the wellness and health trend will continue to impact the fast food industry. It is also expected that there will be an increase in the number of fast food players who operate in franchising and this is especially putting into consideration that there exists a strong sense of globalisation in the area. Additionally, the development of Italian franchising abroad has been noted to be a good opportunity for exporters of Italian fast foods which are renown across the globe.

Social

Many players in the fast food industry have been forced by increasing awareness amongst consumers on healthy lifestyles to offer selections that are healthier in their menus. Normally, this includes offering salads and options that are low in calories alongside burgers and displaying their nutritional content with prominence. The fast-food industry has for some time now been heavily criticised for including toys within meals meant for children as a means of targeting the young children.

Ethnic fast foods have also been on the rise putting into consideration that new cuisines and tastes are widely appreciated by a large number of consumers who are always looking forward to trying out dishes and foods that are innovative (Fusco et al., 2015).

Technological

As the familiarity of consumers with new technologies increases, channels like social media websites are continuously being used by fast-food firms for engagement with their customers. In other parts of the world, Five Guys partnered with mobile developer GoMobo to give its patrons a chance of placing orders using their mobile phones.

Environmental

There has been increasing pressure in Italy by the government and lobbyists on fast-food restaurants to become greener. In 2012, Five Guys announced that it had joined Biotane`s Green Team, an organisation dedicated to recycling the cooking oil used in the restaurants into Biodiesel, a clean-burning alternative. Bio-diesel is a substitute for petroleum diesel which is clean-burning, renewable and domestically produced (Green Team, 2018). Use of biodiesel as a vehicle fuel provides safety benefits, improves public health and increases energy security. In line with this agreement, Five Guys was to donate all its used cooking oil to the green team so that they can do their part in keeping the environment a little greener. Increased environmental awareness among consumers provides Five Guys with an opportunity of positioning itself as green and as such gaining the customer's loyalty. The Italian government has taken actions to combat waste of food by rolling out complex government recordkeeping requirements and rules that bar the sharing of food.

Legislation

It is necessary that Five Guys complies with country-specific legislation and regulations. These legislations and regulations include taxation, opening hours and employment regulations like National Minimum Wage regulations. It is good to note that there are specific parts of Italy where there are bans on different food items. For example, there is a ban in Florence against the sale of foreign foods, Verona has banned ethnic foods while Venice has banned the opening of new fast food restaurants with a specific focus on kebab shops aimed at preserving the traditions and decorum of Italy (Linnekin, 2017). In addition, the concern by authorities on childhood obesity has increased and as such regulations on the targeting of children have been tightened.

Competitive Strategies

There are two generic strategies that Five Guys can use while penetrating the Italian market for competitive advantage: broad differentiation and cost leadership. The cost leadership strategy involves minimisation of costs, which leads to prices that are lower (Avant, 2018). This strategy can be applied through process standardization so as to minimise costs based on prevention of errors and economies of scale (Tanwar, 2013). Reducing operating costs is one strategic financial objective based on this strategy. This will help the restaurant cut on its costs of operation and consequently, Five Guys will be able to offer products at prices that are lower. Through the strategy of cost leadership, Five Guys will be able to sustain the market leadership it will establish

They can also use a broad differentiation strategy whereby, they will be required to come up with characteristics that are unique so that their business can be differentiated from other restaurants businesses. A strategic objective that is based on this generic strategy for the competition is for Five Guys to use such differentiation for attracting new customers especially in Italy where there is a high possibility that there are already established restaurants there in existence (Mack, 2018).

Strategic Directions

Five guys should adopt the diversification strategy so as to expand its operations. This can either be achieved through adding the products and services it offers or through introducing a new production stage to their already existent business. Through diversifying its operations, five guys will be capable of venturing into new lines of business that are different from the operations it currently partakes. In the case they decide on a venture that is directly related to the lines of business already in existence, this shall be known as concentric diversification. On the other hand, in the event that there exists no common thread of strategic fit between the old lines of business and the new ones, this will be referred to as conglomerate diversification. In this case, there exists no relationship between the old business and the new one (Rothaermel, 2015).

For Five Guys Burgers and Fries, concentric diversification would with no doubt be the most effective and efficient. Such a kind of diversification would be aimed at achieving strategic fit. With strategic fit, an organisation is normally in a better position of achieving synergy. Synergy is normally the ability of an organizations parts to achieve total effectiveness that is greater together than would be experienced in the events summation of the efforts of the two firms was done. Combination of firm’s complementary financial, marketing, management and operating efforts leads to synergy. Five Guys could be able to achieve synergy through national distribution and advertising. Acquisition would be another effective means of achieving growth. The most common form of acquisition is whereby a company is bought by another one, either with stock, cash or even a combination of both. Acquisitions are also normally aimed at creating synergy, regardless of the structure. This synergy is intended at making the resulting company’s value greater when compared to its original parts. Though strategically acquiring another company, Five Guys Burgers and Fries could put itself in a position of achieving economies of scale, enhanced visibility in the market and efficiencies. Through acquisition, the client base of a company can also be increased, help increase the value of shareholders and even add new markets among a variety of other wider benefits (Cartwright and Cooper, 2014). A growth strategic path like this is normally attractive to owners of businesses that are closely held and which have strong and thriving companies. Through acquisition, such companies are capable of expanding their capabilities and external offerings. For some, acquisitions even provide access to additional talent, which is quite a good thing especially in the service industry, where innovation is always key.

Before Five Guys Burgers and Fries positions itself to acquire another company, there are several important criteria it should put into consideration;

Five Guys Burgers and Fries needs to be prosperous – because Five Guys is a company that is solid financially and which has proven track record of success, it is actually in a very good position of taking advantage of acquisition.

Having a solid business model is necessary- a strategic plan that is capable of identifying the needs of acquisition should be capable of reflecting this. a company should also be focused on what it does best and that should be left to unify the corporate vision and structure (Arikan and Stulz, 2016). This would even allow the company some level of flexibility within such a focus such that a company is capable of adapting with changes in the market and with the rise of opportunities for acquisition.

A company must also have a strong team for corporate management – it will be necessary for Five Guys Burgers and Fries to surround itself with a strong team for management; executives with a good knowledge of the industry and who is capable of enforcing the corporate culture of the company both externally and internally.

Proper access to capital – it will also be important for Five Guys to have a good access to capital and the borrowing capacity that is necessary for completing an acquisition.

Conclusions and Recommendations

The goal of Five Guys is to sell the best quality burgers possible. It is forecasted that moving forward to 2022, the fast food industry will continue to surge forward and this is despite being affected by the increased awareness in societies of the health risks that come with diets that are high in sugar, salt and fat and a global economy that has been weakening continuously. Average consumer fast-food spending in Italy has increased and this is despite the 2008 global recession which led to lowered consumer confidence everywhere in the world as such, Five Guys needs to comply with the food safety regulations set by the Italian government. The future is certainly very bright for Five Guys should they venture into the Italian market.

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