Prospects and Growth of the Fast Food Industry

Tackling the blow of recession has not been easy for any industry. Its Attack was so strong that no industry has been able to save itself from its effects. If the hospitality industry is a measure of the wealthy and the rich people’s pockets then the news is very bad indeed. Many restaurants have went to the wall in the final quarter of 2008.The restaurants have been fighting with the reduction of corporate entertaining and the disposable income squeeze of consumers as well. Not only the restaurants and the hotels, but the pub industry has also been stroked by a number of factors over the past one decade and recession has put pressure on an already difficult trading environment.

In the words of a renowned chef Dawn Sweeny,” Creativity has always been a hallmark of professional chefs’ ‘So to survive the blow of recession and to manage this situation a Lot of established chefs are getting in to street vending of their creations more efficiently to people who could only dream in their mortar and brick buildings. Low overheads, low labour costs and mostly cash based business is win- win situation for many. These mobile kitchen vans are saving these brand names from dying. The big brand names are selling their franchises to the people who want to earn a good amount of money by investing at one time. These vans have everything you need in the kitchen including all kinds of appliances and raw material. This food is comparatively cheaper as the mobile kitchen cuts down on the over heads and the labour costs. Street food is becoming a way to indulge pre-recession tastes on post-recession budgets

At the same time recession in the US food industry has creating the new opportunity for the food sector in the US. In the recently released research report by RNCOS on ‘US Fast food market outlook 2010’even though there is gloomy economic condition in US, the fast food industry in US is growing rapidly because of inexpensive fast food and increasing number of working population. According to the report fast food market is expected to grow rapidly in the coming years and will cross the US$170 billion by the end of 2010. Because of economic downturn people has reduced their expenses of going for dinner in the restaurant and fast food for the launch. Instead of going in the restaurant they have started buying the food from street food vans which cost them less as compared to the restaurant food and they can save that much money in this recession time. This trend is becoming more common in the urban areas where the demand of pre-packed food and readymade food has increased because of the fast life of their people. This has become now new trend there because American people wants want to have food which can provide instant energy without wasting more time and they can also afford that. The new trend of franchising the existing brands to the mobile carts is look refreshing and a new concept in the States. Through the research will able to judge that ‘will this trend will continue even after the period of recession?’

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Street food is becoming very famous in the United States and till the date only small-scale outlets are driving the trend, but now large food maker have also started to enter the market to get on board with this new trend. The market research organization’s Culinary Trend Mapping Report from the Centre for Culinary Development (CCD) examined the booming street food trend, which has seen Americans reaching for a variety of convenient, portable and affordable foods, often with globally inspired flavours and eco-friendly preparation (foodnavigator-usa.com). In the recent time street food has become very popular due to “a confluence of larger social trends”, mainly because of the economic downturn and the corresponding need for more affordable foods, growing snacking habits, greater interest in ethnic flavours and in local, sustainable foods.

1.2 Purpose

This research attempts to contribute to the study of the current prospects and growth of the fast food industry on the wheel. The Food trucks in the NYC and other mobile food carts started by famous restaurants have been introduced. This research aims to find out what was the effect of recession on the food industry and how has it affected the consumer behaviour in this regard. The eating habits and the change in the actual income have affected the behaviour of the consumers and hence their frequency of dining out and their expenditure on food has been affected. So this research will throw light on this change as well. With the intention of exploring the possibility of the Food trucks endorsed by the restaurants that have seen a reduction in the number of customers due to recession, we will also study how these trucks are working and how do they cater to the needs of the people in the current situation. Whether the management and the way they are operating is different and how similar their ways of operations are.

In addition this research will study the advantages of the mobile food carts and if they can be a competition to the conventional style of dining and eating out. Or if these food trucks can add to the brand name of the existing restaurants and chains that have otherwise seen a decline in their business.

1.3 Development and structure of the research

This research paper was developed in five steps

1. Define research aim & topic

Discussion with supervisor and explore possible interests within designated discipline.

2. Gather relevant literatures

Begin investigation in existing literature to discover possible gap between academic research and reality.

3. Develop research structure

Construct content of study and plan accordingly.

4. Collect the data and Data analysis

Collect all required data from different secondary sources. Clear presentation of data in logical sequential arrangement and examine Validity of collected information

5. Develop conclusion from finding

Present conclusion of this research and provide recommendation for further research

CHAPTER- 2 Literature Review

2.1 Overview –

The chapter first begin by introduction of Food market in the USA and effects of recession on food market of USA then followed by the restaurant and fast food business in USA. Next consumer’s behaviour is discussed with respect to spending on the food. In the last section of this chapter significance of the mobile food van and its impact on the competition is discussed with respect to USA.

2.2 Restaurant and Fats food business in USA-

Restaurant companies generally work to identify them self as customer’s retailers and not as a manufacturing meals. Restaurants are primarily retailers of two consumer’s product time and customer’s experience (Muller, 1999). People went to the restaurants and fast food providers to save their time from making the food and to get satisfaction of their needs. Restaurant is vast business in USA where consumers are less concerned about the where meal is prepared, they only concerned about the how the food is delivered and how they feel after meal is completed. While the fast food service is totally different they always concerned about building consumer loyalty and market awareness. There is vast difference between restaurant business and fast food service providers. Stalk and Hout (1990) described future economic competition as being based on a company’s responsiveness to the time needs of its customer base. Currently, the restaurant industry accounts for four percent of the U.S. gross domestic product and is the nation’s second largest employer next to the Federal government (Dumagan and Hackett, 1995). In USA restaurant holders are paying more attention to the growing trend in the eating habits of the people. According to the report of the NRI 2001 they have noticed seventy five percent increases in the restaurant customers as compared to 2001 in 2003. Even the rise of the convenience food in last 10 years can be seen by the growth of the fast food chain in the United States. The main reason behind the increase demand of fast food is these meals are ready to eat on the go and ability to hold these food in hands and to eat according to the consumer’s freedom.

The main reason behind increased the growth of restaurant and fast food business is decreased in the food prices in the USA. Lakdawalla and Philipson (2002) attribute about 40% of the recent growth in weight to agricultural innovation that has lowered food prices

Mainly technological change has made huge contribution in decreased price of the food price which eventually provides opportunity to the restaurant and fast food service provider to offer the food at cheaper rate and increased their business growth. The analysis draws on data from the Bureau of Labour Statistics (BLS) between 1971 and 1974, the BLS food price in real terms increased from 1.012 to 1.134, an increase of 12.04%, followed by a decrease of 11.02% between the years of 1974 and 1986, when it reached a low of 1.009. This is reflective of the behaviour of food prices in that period of time (Food prices, 2007). Due to decreased in the food prices percentage of people has decreased and expenditure on the food away from the home increased and increased in working class people is also another reason for growth of the restaurant and fast food business. According to the survey data of the county business pattern number of restaurant provides full services increased to 213550 in 2006 from 193024 in 1998 and restaurant which not provide service like cafeteria and bar increased to 204311 in 2006 from 172695 in 1998. Data from the Census of Retail Trade highlight the steady increase in the number of full service and fast-food restaurants since the early 1970s; between 1972 and 1997, the number of restaurants per 10,000 population increased 61% from 884 to 1427 (Chou et al., 2004; Rashad et al., 2006).

In the rapid development of the restaurant and fast food business taking fist mover advantage through franchise has played very important role. The main of using franchise is to assemble resources making long chain and to get first mover advantage (Micheal, 2003). By giving franchise restaurant and fast food business try to create a premium on rapid expansion of geographic areas. In USA strategy adopted by restaurant and fast food business owner to expanding units rapidly through franchising has created superior outlet share which eventually lead them to have high market share and profitability. Therefore, franchising is one method of securing first mover advantage (Micheal, 2003). Franchising overcomes the moral hazard problem associated with the operation of a chain of dispersed units (Caves and Murphy, 1976; Rubin, 1978; Brickley and Dark, 1987). McDonald’s, a famous fast food supplier, opened its first franchised restaurant in the US in 1955. Now it has become a phenomenally successful enterprise in terms of financial growth, brand-name recognition, and worldwide expansion by using franchise concept aggressively. Currently fast food franchise in the United States generates income of more than $125 billion per year. According to latest numbers there are over 2000 fast food franchise in USA and more than 5,00,000 franchisor operated outlets in USA. McDonald’s, KFC, Pizza Hut and Subway are among the more popular fast food franchises worldwide that rake in millions of dollars per year in profits.

During the last four decade fast food industry has grown very speedily in American society. An industry that starts in south California has spread in every corner of the USA. Fast food is served not only at restaurants but also at stadium, airplanes, school and college in every part of the USA and it has brought the rapid change in the USA economy (Schlosser, 1998). Fast food business has overcome the restaurant business in last few years in USA and it has benefited from the demographic change, supplying the food at cheaper price and hiring people at lower rate of wage. One of the ironies of America’s fast-food industry is that a business so dedicated to conformity was founded by iconoclasts and self-made men, by entrepreneurs willing to defy conventional opinion (Schlosser, 1998). Now fast food has become the operating system of the today’s service industry in USA and it has created millions of job opportunity for the people in the country

 when the other businesses have been firing the workers.

2.3 Food Industry and the Recession

The Recession hits all parts of the food system, from the producer to the processor; from the grocer to the diner! (Mary Turck) Recent sales of the U. S. eating and drinking place industry have been lacklustre. It is difficult to pinpoint the exact reasons for this sluggishness, but the recent U. S. recession as well as 1986 modifications to U. S. tax law has to be considered factors (Stephen J.Hiemstra). This study aimed at finding out the factors related to the decline in the demand for the food service lately and to bring out the extent to which the eating and drinking place industry sales were declining due to this lack of demand. As it was difficult to pinpoint any single factor. Findings indicated that the decline in demand could be majorly explained by changes in prices, decrease in the income, and the drop in deductibility of restaurant food as a business expense.

The economic recession has hit the food industry as much as any other industry in the international market. Food being the prime necessity cannot be avoided and hence is a bigger pain for the consumer whose income has decreased due to the economic downturn. The rising petroleum prices have affected the cost of transportation for the seeds and the grains and have hence added to the cost of production making the food expensive for the ultimate consumer. The food prices have gone up with the increasing dairy and grain prices entering in to the year 2007.By the end of 2009 the economists announced the rising unemployment. As a result Restaurants were also hit as hard as any other industry as the consumer stopped dining out and spending on food as compared to earlier. Hence the cost of living was cut on the cost of eating and dining out. Nearly two third of the restaurant operators reported a decline in their business in the end of 2008 as compared to the sales in the year 2007 (National Restaurant Association).

Golden Gate Restaurant Association’s (GGRA) presented a study of the economics of the San Francisco Restaurant industry looking at the conditions of the food industry in the recession in the year 2002 and 2003.According to the reports the hotel occupancy in San Francisco was dropped by 20% and the average daily room rates came down by 16%.The city lost 80,000 jobs nearly 14% of the total city employment (Kent Sims). However with time, the economy of San Francisco has improved with respect to the conditions in 2002-03. But there are areas where it remains well below the level where it was in 2000. Over all the economy is smaller than what it was before recession. Hotel occupancy in 2004 was 4% above its low point in 2002, but still 20% lower than in 2000.

In 2005, the city driven US restaurants recovering from the recession in 2004 confronted the fact their customers were back again and their sales were back, but the profits did not come back. As the operating costs have raised at a greater pace than the gross margin on sales, despite the higher menu prices. According to a confidential survey conducted by GGRA (2006) the results mainly pointed out that half of the people considered San Francisco and other cities in the USA as the major culinary centre and half of the population also said that the stature of such cities as culinary centre is either diminishing or marking time. ‘Business at traditional business-lunch spots, including the Capital Grille, Morton’s, and McCormick & Schmick’s, is down dramatically’ this was reported by Chicago tribune in 2008.

These researches have shown that Recession is a hard time for food industry as well as more and more people are finding it tough to stay in one job and they want to change their job and add to their income. But even in Recession the people can’t avoid food so they started looking for cheaper options and the food industry tackled this by cutting out the middle man. This gave rise to the trend of fast food and the US fast food market started to rise. As people has started looking for less expensive. The Consumer expenditure on fast food rose sharply in these years, accounting for around 30% of total restaurant industry sales in 2008. With the busy life style, cost advantage and increasing demand of convenience food, the total fast food industry in the US is expected to grow at a CAGR of nearly 5% till 2010.(US fast food market outlook 2010, PR log press release). From the past few recent years McDonald’s, Burger King, and other fast food restaurants have been scooping up the customers. Both of the big burger chains are taking market share from competitors with higher price points, building on reputations for low prices and revamped dollar menus (Mary Turck).

The Recession has brought about a trend in the menu cycle of the food industry as well.( Stages of the Industry Life Cycle (1919-1988) H.G Parsal). The preferences have changed from the formal full course dinners to quick food which is better known as the fast food. There has been a growth in the fast food business in after the recession (Industry research journal). In the phase of recession, fast food sales in US have increased. This is due to the fact that fast food in the country is comparatively inexpensive than the traditional food and thus, more and more people are shifting to fast food in this economic crisis. Also, hamburger and the Rools are one of the most preferred food items in the country. This represents the growth of around 5% in 2009 over 2008, and the same trend is expected to be seen in the coming years also.

2.4 Consumer Behaviour in USA food industry-

Consumer behaviour is very important to know in any business to make it successful. It’s very important to take proper care of the issue like consumer’s like dislike their health issue and consumer satisfaction. Consumer behaviour potentially deals with all of the ways people may act in their role as consumers (Schiffman and Kanuk, 1991) and it also include to focus on behaviour related to searching, buying and using product and service in the market. Generally restaurant and fast food business providers divide consumers in the groups based on the geographic characteristics, common attitudes, and behaviour so that they can provide better services to them. Food industry is closely concerned with food choice and quality, but at the same time has long been considered to offer a rich meal experience to which many other factors contribute (Campbell-Smith, 1967). Every customer has different perspective to rate the service of the restaurant and fast food service. Customers rate the service on the basis of the food quality, service quality, ambience of the place, price of the food and facility provided by the restaurant and fast food providers like free home delivery. Becker-Suttle et al. (1994) and Williams et al. (1997), respectively, identify the dining preferences of older customers, and the factors that inhibit this group from using full service restaurants. Consumers behaviour is more important in service industry as if customers are not happy with the happy than it will become very difficult to sustain in the competition.

In the development of the restaurant and fast food business globalisation has played very major role with respect to food supplies, food habits, and population health and food consumption behaviour. In this fast developing world consumers have adopted to save time and get job done in time. Changes in working and social life of the people have played very important part in the very high growth of the food industry in USA. In social context, gradually the numbers of families where both parents are working are increasing worldwide (Stamoulis, Kostas G. et al., 2004). Due to busy schedule of the people they are getting less time to make food and eat at home so they are diverted to the restaurant and fast food more in the recent years. In recent years the living standard of the people of USA has also changed before few years they used to take dinner together with the family on the dining table now most of the family likes to sit against the TV and watching programme. Number of gathering programmes like birthday parties, anniversary parties has increased in last few years and people tend to arranged these parties in restaurants instead of at home which has also increased the demand of restaurant food in USA. This new trend has provide opportunities to the restaurant and fast food service business to offer varieties of the services to the people and which attracts more people to come to their place for the dinner and launch.

Increase in earning of the people has also contributed to the rapid development of the restaurant and fast food industry in USA. According to the research data Americans spent about $6 billion on fast food in 1970, they spent more than $110 billion in 2000. Americans now spend more money on fast food and restaurant instead on higher education and new cars. National restaurant association has reported that Americans are buying 5.8 times average per week form a restaurant and per person spending on restaurant food is $1078. Now a day’s consumers are giving more importance to the quality of the food with respect to the health safety. Henson and Traill define food safety as the inverse of food risk-the probability of not suffering some hazard from consuming a specific food (Henson & Traill, 1993). Consumer’s attitude towards food safety and practice related to it is more important for the restaurant and fast food service providers to take into consideration. Even government of USA has also formed very strict regulation and food policy which is necessary for the restaurant and fast food providers to follow. In May 1997, US President Clinton launched a National Food Safety initiative to enhance surveillance, improve risk assessment, inspection and compliance, educate the consumer and conduct important new research (Tent, 1999). Food quality awareness has made more responsible to the restaurant and fast food business towards people’s health issue and which has benefited them as they are offering low calorie food to the people.

Mc Donald has already implemented its strategy for the consumer preference since last many years. McDonald’s has pursued two strategies since 2003. To keep up with rapidly changing consumer preferences, demographics, and spending patterns, McDonald’s has introduced new items Premium Chicken sandwiches and the Angus Beef Burger and also doing campaigns to create more healthy foods like Premium Salads in USA. The strategy reflects the philosophy that novelty, as opposed to loyalty to traditional products, is the key determinant of sales in the fast food industry . In the recent years consumers have started to give more importance to the nutrition food and salads due to awareness of their health and increasing obesity. The growing epidemic of childhood overweight and obesity is a major public health concern. Currently 15% of US youth are overweight, a prevalence nearly twice as high in children and three times as high in adolescents compared to 1980 prevalence rates (Rockville, 2001).In USA size of the family has also played major role in development of the restaurant and fast food service and specially Hispanic American families. Hispanic purchasing power has influenced the marketplace. Hispanic shoppers spend more on food purchases because their families are usually larger. So consumer behaviour and consumer preference has played very vital role in the rapid growth of the fast food and restaurant business in the USA and they also got support from the economic development of the USA also.

Mobile food service: Dabbawalas in India to Food trucks in NYC

The origin of the Dabbawalas lunch delivery service dates back to the 1890s during the British Empire in India. Various people migrated from different parts of the India for work. Due to lack of canteens, the working class used to stay without eating lunch if they forgot to get it from their houses.. Invariably, lunch would not be ready when they left home for work. The taste of different communities was different; this could only be satisfied by a home cooked food. Recognizing the need, Mahadeo Havaji Bacche (Mahadeo), a migrant from North Maharashtra, 10 started the lunch delivery service. (Paul S Goodman ,2003)

This service started with around 100 dabbawalas (workers) and cost the client INR 2 per month. There are around 5,000 dabbawalas in Mumbai today delivering around 200,000 Tiffin-boxes amounting to 400,000 transactions every day – first delivering the Tiffin boxes and then delivering the empty boxes back home. (The Economic times 2008)Here nobody is an employer and none are employees. Each dabbawala considers himself a shareholder and entrepreneur .The entire system depends on teamwork and meticulous timing. Tiffin boxes are collected from homes between 7.00 am and 9.00 am, Various tiffin services also provide the service of cooked food and not just the transportation of the boxes. After the collection, these boxes are taken to the nearest railway station. various intermediary stations, they are hauled onto platforms and sorted out for area-wise distribution, so that a single Tiffin could change hands three to four times in the course of its daily journey..( Pradeep Thakkar,2005).

Even in the economic crisis, Dabbawalas have been serving and are providing a necessary and recession-proof service – as even in the tough economic times, people will always need lunch — the dabbawalas are a cooperative that can boast a business record of reliability that would have any operation salivating with envy.(Dean Irvine,nov 2008)In the year 2008, Forbes gave the six sigma efficiency title to these dabbawalas. This six sigma rating the dabbawalas that was received by Forbes magazine precipitated a rush of interest from management supply companies and the various business schools searching for the secrets of its success. The rating means that these dabbawalas have a 99.9 percent efficiency rate.(Dean Irvine,2008)The concept of providing the food to their workplaces, without any need of going to the restaurants and wasting the time that can be otherwise saved for working is very suitable for the working class people of today. This is why these dabbawalas are serving well in the time of recession and people find it much better to get their food from them than going out and eating.

The concept of mobile food service is not new to the countries outside India now. The Food trucks in the USA are the biggest example .The restaurant concept in the Country is going mobile! With the changing trends in the food and catering industry, the concept of moving food vans can be seen in the places like New York in the US.(Katherine Marginally., Dec 2009)

”Whether it’s because of the economy, cultural exchange, or plain demand, street food is making its culinary mark” (International Chefs congress) A young chef Josh Ozersky calls these food trucks as” one of the most definitive moments of this generation. It’s not a fad like pet rocks or hundred dollar burgers. It’s a great way for young chefs to get into the business without having a wealthy backer. ‘Recently the savvy entrepreneurs and the chefs are getting to the streets with their culinary training and experience. This is partially fuelled by recession and a changing trend which is more inclined towards casual dining. The chefs have found more adventure and satisfaction in Global Street food in respect to the factors, cuisine as well as the concept. The new wave of mobile food vans are proving that you don’t need a brick and mortar place for producing and providing high quality and high concept food for people.

Lunch trucks also called as food trucks are mobile food courts which sell food items at different locations. They reap more benefits than the restaurants which are stationary as they have very limited number of customer base which provides limited amount of revenue. They can also be called as restaurant on wheels. There are different lunch trucks available in the markets which are specifically targeted to cater to the needs of different varieties of food items. From the daily breakfast to the dinner, desserts to juices you have wide variety to choose from.(Yew Chin)

These trucks have more variety than any other stationary cafe or restaurant. From coffee to puddings, waffles to rolls and Indian curries to Arabic Falafel. They have it all. There are Coffee trucks, Snacks trucks, Dessert Trucks, Chinese food trucks and proper restaurant trucks that have a kitchen inside and have the same menu as in any other restaurant be in Indian or Italian. The cost of operating an established restaurant often handcuff’s one’s ability to go outside the box due to décor and tabletop package expense, high-end equipment in the kitchen that must be paid down and, in my case, our reputation as a classic historic inn which has a presumed menu style that pays the bills. The guerrilla trucks can much more easily think out of the box, since they are often serving out of a cardboard box.(Patrick Byrne,2009) Known for their profits, when compared with the stationary restaurants, these trucks have shown greater profit and a very good customer base. They provide the customers with good quality of food that they can afford. In return they get a loyal customer following in different locations that they plan to go around. As they move from one place to other, they have this opportunity to serve more people and with different menu options.

There are plenty of hurdles that are faced by these food trucks owner along with the profits.The Initial investment consists of the vehicle followed by the Kitchen and the appliances and accessories used there in. These vans also require a Mobile food service license from the government before they can start their business. There are issues of permissions which vary from city to city and mostly in cities like New York and Manhattan allowing these food vans is not difficult.(Emilly Bell ,Dec 2009)However these rest on wheels should pay attention to providing the food on proper health standards and conditions.(Patrick Byrne,2009)

The pedestrian snackers on the streets of Manhattan and Brooklyn are accustomed to mobile eateries, but these new gourmet food trucks take the street-food game to a higher level. Unlike dirty-water dog stands, which often stick to the same corner, these meals on wheels have the freedom of mobility, websites tracking their whereabouts, PR representation and specialized offerings such as restaurant-quality desserts, tacos and waffles. So just like the previously mentioned Dabbawalas of India Food trucks in the USA are popular among the people who want to save on their time and money. Because the obvious reason for the preference of these trucks by the consumers over the stationary restaurants is the low cost food that has the same quality and the ease of getting the food on the go. Also according to George Ebinger, (International House of pancakes),” It is unfair to its grossly unfair to allow trucks in close proximity to established businesses trying to make it in this economy. You can’t compete with a truck when it comes to pricing and service”

And for the Owners The obvious appeal of bringing your food into a truck or cart is the low overhead-there’s no rent, no getting a restaurant up to code, no large staff to pay. With the economic downturn, restaurateurs have struggled to find funding to open full-scale restaurants, said Tom Forte, an analyst at Telsey Advisory Group in New York City.(Laura Isenzee ,2009) Jerome Chang of New York’s Dessert Truck says that financially “we