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Competition breeds sales for fast food industry?

02-Mar-2004

Location, location, location : the three most important factors when opening up a fast food business. And one to learn from competitors. With the fast food industry a major client for food ingredients companies, a new study sheds light on the evolution of this convenience food phenomenon.

According to new research funded by the ESRC , the UK Economic and Social Research Council, competitors like to sit snugly beside each other.

"One surprise is how unconcerned these big organisations appear to be about the impact of competition on their outlets. It is remarkable how closely they locate to each other in shopping districts," said the study leader Professor Michael Waterson at the University of Warwick.

 

At a time when there is increasing interest in the fast food industry, his research provides an insight into how, where and why these restaurants and take-away outlets appear in the streets of Britain.

 

He found that the US hamburger chains McDonalds and Burger King both use the rival presence to revise their expectations of market size upwards.

 

The study revealed a strong London and south-east of England bias to the spread of the fast food chains and restaurants studied. For example, McDonalds had been in the UK for 13 years before it opened a site in Scotland. But overall, the spread is surprisingly slow.

 

The The study analysed the pattern of development of the McDonalds chain from when it started in the UK in 1974 until 1990 with the aim to assess the probability of one of its outlets opening in any particular local authority district where it was not already based.

 

Findings from the study revealed that the larger the population in an area, the sooner a McDonalds would be opened, though with this effect tailing off as population increases.

 

In addition, the number of outlets the company had in neighbouring districts had a strong, positive impact on how soon a new one might open, indicating economies of scale and the effects of local experience and knowledge.

 

Examining the interaction between McDonalds and Burger King in how they developed their outlets the study - that looked at the period between 1991 and 1995 - found, not so surprisingly, that characteristics of the district had an impact on decisions, so that for both chains, aggregate business rateable value - a measure of economic activity - made opening up more likely. For McDonald's, a high proportion of pensioners in an area reduced those chances.

 

The study writes that in all areas where McDonalds has more outlets, there are positive and significant marginal effects for Burger King. So the company is consistently more likely to develop outlets where McDonalds is larger than itself than where there is no presence of either firm.

 

At the same time, McDonalds are more likely to grow in areas where they or Burger King are already present.

 

"Notwithstanding the importance of competition in markets with a small number of key players, watching and learning from rivals seems to be of overriding importance when it comes to deciding on a new location," added Professor Waterson, lead author of the report 'The Spread of Fast Food Outlets in the UK.'

 

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