The UK Restaurant Market : YUM! Brand

“It is useless to tell a river to stop running; the best thing is to learn how to swim in the direction it is flowing.”

Anonymous

Preface

According to the Deloitte^[1]’s reports “Leadership for Growth” and “Marketing in 3D”, one third of chief financial officers do not believe that marketing is crucial to devising strategy. (Economic Times, 2008)

Except that, Peter Drucker once stated that “Marketing is the distinguishing, unique function of the business.^[2]" (Forbes, 2006); hence, marketing should be viewed as an investment rather than an expense.

Nowadays, while a looming global Recession is arousing fears in the whole business world, these different perceptions of effectiveness are present as ever; thus, particularly at this time, (it is) meeting the budget opposed to gaining market share.

This report, focusing on the Restaurant Industry, will illustrate how an effective Strategic market planning or rather “maintaining a strategic fit between the firm’s goals and capabilities and its changing market opportunities” (Kotler, Armstrong, Saunders, & Wong, 2005 p.49) can help to identify and take advantage of environmental changes while still being committed to budgets and long term plans.

The Market

The UK Restaurant market, as defined in the Keynote’s Restaurant report^[3] (2008), is an £13.25bn marketplace with 26,675 enterprises employing circa 637,000 people (1.8 million people including the whole catering sector).

The sector is characterized mainly by the presence of small operators; however, big multinationals and private equity groups hold a larger market share. (Keynote, 2008)

McDonald’s Restaurants Ltd is the market leader with a turnover^[4] of £1,098.0 m; its nearest competitor is Yum! Restaurants Europe Ltd, owner of the Pizza Hut and KFC brands, which with 1325 outlets is the largest in the sector. (Keynote, 2008)

Other important operators in the industry are Whitbread’s, leader of pub-restaurants sector and owner of the Costa Coffee chain; Tragus Group (Strada, Caffe Rouge) owned by the largest private equity group, Blackstone; Gondola Group Ltd (Pizza Express) and The Restaurant Group PLC. (Keynote, 2008)

In the past four years (2004-08) the Restaurant Industry has recorded a growth (at the current price) of 10.2 %; Pub-Restaurant and Italian/Pizza sectors have increased by 22.8% and 18.6% while the fast-food sector has seen a decrease of 6.7% since 2004. (Keynote, 2008)^[5]

Fig.1

According to the “Pizza & Pasta Restaurant” Report (Mintel, 2008), an increasing affluence (UK GDP in the 2003-07 period + 6.%; Keynote, 2008)^, has been the main factor behind the growth, so that “eating out” is regarded as an “affordable part of today’s lifestyle instead of an occasional treat”.

The Industry is very competitive and presents very high barriers of entry (economies of scale, access to supply and distribution channels) at a national level, which are exacerbated by the presence of many multinationals operating in UK (such as McDonald’s, Yum! Brands).

In a wider competitive context, “eating out” competes with the whole Leisure sector (holidays, clothes) to grab the largest share of consumer’s expenditure.

Internally, the major threats come from take-away outlets, home-delivery chains (such as Domino’s) and supermarkets selling own-label pizzas and ready meals (Mintel, 2008; Keynote, 2008)

After a continuous growth, rising commodities costs and a tough trading environment have set the condition for a “Shake-out” of the Industry (The Industry Life Cycle cited in Johnson, Scholes and Whittington, 2008 p.68); indeed, as noted in the “Restaurant” Report (Mintel, 2008), a decline in profitability could also result in high-profile casualties^[6].

However, albeit the Industry will eventually reach a Maturity stage as “barriers will tend to increase...and market share and cost (margins) will be key to survival” (Johnson et al, 2006 p.68), a progress to a Decline Stage is very unlikely since demand, as predicted by the Keynote Report (2008), will probably stay strong due to social factors^[7].

Such key-drivers for changes^[8] will possibly set the background for a Re-Development of the Industry in UK, as “Differentiation of the Offer” and “Innovation of the Service” are both identified by the Keynote (2008) and Mintel (2008) reports as necessary to succeed.

The Market

The UK Restaurant market, as defined in the Keynote’s Restaurant report^[9] (2008), is an £13.25bn marketplace with 26,675 enterprises employing circa 637,000 people (1.8 million people including the whole catering sector).

The sector is characterized mainly by the presence of small operators; however, big multinationals and private equity groups hold a larger market share. (Keynote, 2008)

McDonald’s Restaurants Ltd is the market leader with a turnover^[10] of £1,098.0 m; its nearest competitor is Yum! Restaurants Europe Ltd, owner of the Pizza Hut and KFC brands, which with 1325 outlets is the largest in the sector. (Keynote, 2008)

Other important operators in the industry are Whitbread’s, leader of pub-restaurants sector and owner of the Costa Coffee chain; Tragus Group (Strada, Caffe Rouge) owned by the largest private equity group, Blackstone; Gondola Group Ltd (Pizza Express) and The Restaurant Group PLC. (Keynote, 2008)

In the past four years (2004-08) the Restaurant Industry has recorded a growth (at the current price) of 10.2 %; Pub-Restaurant and Italian/Pizza sectors have increased by 22.8% and 18.6% while the fast-food sector has seen a decrease of 6.7% since 2004. (Keynote, 2008)^[11]

Fig.2

According to the “Pizza & Pasta Restaurant” Report (Mintel, 2008), an increasing affluence (UK GDP in the 2003-07 period + 6.%; Keynote, 2008)^, has been the main factor behind the growth, so that “eating out” is regarded as an “affordable part of today’s lifestyle instead of an occasional treat”.

The Industry is very competitive and presents very high barriers of entry (economies of scale, access to supply and distribution channels) at a national level, which are exacerbated by the presence of many multinationals operating in UK (such as McDonald’s, Yum! Brands).

In a wider competitive context, “eating out” competes with the whole Leisure sector (holidays, clothes) to grab the largest share of consumer’s expenditure.

Internally, the major threats come from take-away outlets, home-delivery chains (such as Domino’s) and supermarkets selling own-label pizzas and ready meals (Mintel, 2008; Keynote, 2008)

After a continuous growth, rising commodities costs and a tough trading environment have set the condition for a “Shake-out” of the Industry (The Industry Life Cycle cited in Johnson, Scholes and Whittington, 2008 p.68); indeed, as noted in the “Restaurant” Report (Mintel, 2008), a decline in profitability could also result in high-profile casualties^[12].

However, albeit the Industry will eventually reach a Maturity stage as “barriers will tend to increase...and market share and cost (margins) will be key to survival” (Johnson et al, 2006 p.68), a progress to a Decline Stage is very unlikely since demand, as predicted by the Keynote Report (2008), will probably stay strong due to social factors^[13].

Such key-drivers for changes^[14] will possibly set the background for a Re-Development of the Industry in UK, as “Differentiation of the Offer” and “Innovation of the Service” are both identified by the Keynote (2008) and Mintel (2008) reports as necessary to succeed.

 “Putting a YUM on customer’s face around the world”

Yum! Brands Inc., the world's largest restaurant company, is an American-based company with more than 35,000 restaurants in more than 110 countries and territories (Yum website, 2008) and in UK operates with Yum! Restaurants Europe Ltd.

Its brand portfolio comprises Pizza Hut, Kentucky Fried Chicken (KFC), Taco Bell, A&W All American Food and Long John Silver's. (Yum, 2008)

The group, pursue an aggressive growth strategy in term of geographical coverage (primarily in China), aiming for a long-term return for shareholder value. (Yum, 2008)

The “Customer Mania” programme epitomise a “customer-oriented culture” that consider “rewarding the staff” as the key to deliver results and achieve 100% customer satisfaction.

“We know that if we put the customer first in everything we do, then we're running great restaurants”. (CEO David Novak cited in Yum! Annual Report, 2008)

In 2006, the last financial year available, the European subsidiary registered a fall of the combined sales of Pizza Hut and KFC of 44.51%, continuing a negative trend started in 2004; however, the group oversaw a rise of pre-tax profits of nearly 5% after a disastrous 2005 which saw a 63.77% decrease. (Keynote, 2008)

Applying the Ansoff model (cited in Doyle and Stern, 2006 p.96) to analyse the firm’s recent results (Appendix II); it appears that the group’s responses to declining sales (continuing in 2007 with Pizza Hut UK recording pre-tax losses of £6,133.000; Keynote, 2008) has failed to improve the business consistently.

On the contrary, Yum! China^[15] has reported an outstanding success^[16]; an achievement due to a strategy focused on adapting to local tastes and lifestyles.

“Pizza Hut is the cheapest of the cheapest restaurants in the United States, but in China, Pizza Hut is seen as a classy, upscale place for dining." (Shaun Rein^[17] cited in International Herald Tribune, 2008)

Consequently, while investing heavily in Asia, in Europe and US, its business model is showing signs of “leader’s complacency in a hypercompetitive industry”. (Johnson et al, 2006 p.69)

The Pasta Hut experiment (see Appendix III) is finally dealing with this contradiction; especially as increasing competition^[18] in China and a predicted slowdown of that market^[19] is threatening the efficacy of the (expansionistic) strategy.

Thus, a new approach in Europe, adapted to the changed environment, could ultimately hedge the potential risk of overexposure on the Asian market.

The Macro Environment

“Survival and fit depend upon the adaptability of the organisation and management’s ability to match strategy to this changing world” (Doyle, 2006 p.22)

Currently, two major macro-environmental changes are re-defining the Restaurant Industry: an environmental shock characterised by financial events (the “credit crunch”) and the creation of new market segments driven by a general healthier lifestyle.

“Businesses do not have to be wiped out by an economic downturn or caught short in a boom....they can take advantage of changes in an economic environment” (Kotler et al, 2005, p. 104)

The most severe crisis since the 1930 Great Depression^[20] will undoubtedly affect the global trading environment for the next few years.

The restaurants market is actually suffering from the crisis, “which is making consumers think twice about paying for restaurant meals with credit cards”, as noted in the “Restaurant” Report (Mintel, 2008).

However, while Prezzo Plc warns of "an extended period of more challenging conditions”^[21], and is putting on hold further expansion plans; it appears that the whole fast-food sector is going to benefit from downtrading consumers.

"People who can't afford to go to mid-priced restaurants but still want to go out - we've benefited from that" (Burger King CEO John Chidsey cited in Reuters, 2008)

Therefore, the economic downturn that is hitting the world economy, although painful, is presenting a perfect strategic window to be used to advantage if Yum! Brands is to improve its position and increase its market share; in fact the brand’s

association with reasonable priced food could appeal to budgeting consumers^[22].

However, as consumers are spending downmarket, they have not lost their appetite and interest in eating well. In fact, the recent cultural shift toward a healthier lifestyle has motivated an increasing attention to the dangers of an unbalanced diet; a trend fuelled particularly by the mainstream media and government action. (Mintel, 2008)

Mounting concerns about obesity^[23] have put the fast food chains under intense scrutiny. McDonald’s, as market leader and prominent example of such culture, has been the main target of criticism for its menu; consequently, also Yum! Brand has been persuaded to make some of its existing recipes healthier, in line with Food Standards Agency (FSA) guidelines. (The Independent, 2008)

However, in the long term the challenge is to win back disaffected customers, therefore the Pasta Hut test represents the biggest and toughest challenge for the group in UK to overcome its association with junk food.

In this direction and across all the business units, the implementation of healthier dishes as well as a “buy-back ownership” programme started in US (Yum!, 2008), seems to confirm a process of “re-appropriation” of the brand in order to strength the group’s “transformational” course, necessary to stay ahead of the competition and keep the firm in sync with the macro-environment.

The Competitive Environment: Strategic Group Analysis

“Strategy is an essential part of any effective business plan. By using an effective competitive strategy, a company finds its industry niche and learns about its customers” (Porter M. cited in Emerald, 2006)

The diagram in Fig. 2 represents a strategic map of the Restaurant Industry in UK in terms of extent of product diversity (scope of the organisation’s activities) and the type of service offered (resource commitment).

The extent of product diversity is variable important to the restaurant industry since key social trends have highlighted an increasing demand for innovative foods due to a characteristic “British acceptance of foreign cuisines and willingness to try something new”. (Keynote, 2008)

However, while there is a growing demand for simple and quick services (due to a rising UK full-time working population), the same consumers are also asking for added “values” such as “restaurant experience” and better quality of the food. (Mintel, 2008)

Therefore, the type of service refers to the product/service offered to fulfil these consumers’ needs and wants; it represents the best instrument to differentiate the organisation within the industry (market sector) and it also mirrors the firm’s cost position^[24].

The resulting strategic group including McDonald, Burger King and Yum! Brand can be identified, according to the Bowman’s Strategy Clock model, (Johnson et al, 2006 pp. 224-5) as group focusing on an unattractive market segment (Fast Food) pursuing a low price strategy or rather “seek to achieve a lower price than competitors whilst maintaining similarly perceived product or service benefits to those offered by competitors” (Johnson et al, 2006 pp. 224-5)

Indeed, Yum Brand Inc. as member of this group enjoys a position hardly attainable by members of others strategic groups, due to ““mobility barriers” (see Figure 3) that often involves a cost of entry that effectively gives a cost advantage over potential entrants.

Hence, this membership has allowed the firm to concentrate on a successful expansion strategy, to develop new markets (e.g. China), finance massive marketing campaigns^[25]and to take part in aggressive price-wars with its group rivals.

On the other hand, the pitfall is a reduction of the profit margins (due to price-wars) being compounded by a recent rise food prices.

However, important social and economic environment changes are providing opportunities to fill new strategic spaces.

Actually, while the current economic slowdown should strengthen the low-cost strategic group, the fact that consumers are going to downtrade to an extent never seen before will mean that many are likely not to go out at all; hence, a possible rise of the demand for home-delivery, though influenced by a healthier lifestyle trend and an interest in foreign cuisine

The “Facebook” application (see Appendix III) goes in this direction but the “Pizza Hut”   menus is limited only to Pizza^[26], reflecting therefore a short term objective to gain a larger market share in the younger segment of the market.

On the other hand, the Pasta Hut “makeover”, although, will probably generate a lot of curiosity (a PR stunt? ask N.Christie in Marketing Week; 16/10/08), it indicate an intent to improve the “customer experience” and differentiate the offer, profiting of the difficulties of “Italian Style” Restaurant groups, which, being mostly owned by private equity group, have been hit by the “credit crisis” more than others. (FT, 2008)

Thus, the key for the group in the present and future climate is to change and adapt in line with the marketing environment. Hence, whether it's changing the menus or changing the target customer base, the key to maximising the business is to fully understand the market.

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[1] Deloitte Touche Tohmatsu (also branded as Deloitte) is one of the largest professional services firms in the world and one of the Big Four auditors, along with PricewaterhouseCoopers, Ernst & Young, and KPMG. (www.deloitte.com)

[2] “The business enterprise has two--and only two--basic functions: marketing and innovation. Marketing and innovation produce results; all the rest are costs.(Drucker cited in Forbes, 2006)

[3] The report defines restaurants as eating places that supply meals or food for consumption on the premises by UK consumers, except roadside catering and contract catering.

[4] At the end of 2006 financial year

[5] The same report forecasts a growth of 22.5% between 2009 and 2013; however with the UK economy heading towards a Recession this projection is likely to be revised downward.

[6] “The result is that there will be several high-profile casualties as the growth that was servicing debts evaporates and companies are unable to meet their obligations”. (Mintel: Restaurant, 2008)

[7] Necessities (time-poor workers), willingness to try new food and  an higher sophistication of the consumer’s taste are mentioned  by all three report consulted: Restaurant 2008 (Keynote) Pizza &Pasta Restaurant 2008 and Restaurant  2008 (Mintel) as the factors supporting  future demand

[8] Key Drivers for changes are environmental factors that are likely to have an high impact on the success or failure of strategy. (Johnson et al, 2006 p.56)

[9] The report defines restaurants as eating places that supply meals or food for consumption on the premises by UK consumers, except roadside catering and contract catering.

[10] At the end of 2006 financial year

[11] The same report forecasts a growth of 22.5% between 2009 and 2013; however with the UK economy heading towards a Recession this projection is likely to be revised downward.

[12] “The result is that there will be several high-profile casualties as the growth that was servicing debts evaporates and companies are unable to meet their obligations”. (Mintel: Restaurant, 2008)

[13] Necessities (time-poor workers), willingness to try new food and  an higher sophistication of the consumer’s taste are mentioned  by all three report consulted: Restaurant 2008 (Keynote) Pizza &Pasta Restaurant 2008 and Restaurant  2008 (Mintel) as the factors supporting  future demand

[14] Key Drivers for changes are environmental factors that are likely to have an high impact on the success or failure of strategy. (Johnson et al, 2006 p.56)

[15] The Yum! China Division (includes mainland China, Thailand and KFC Taiwan).

[16] Five year average annual growth rate of over 25% ( Yum, 2008)

[17] Managing director of the China Market Research Group

[18]Burger King joins McDonald’s and Yum! In China announcing plans to open between 250 and 300 outlets over the next five years ( The Economist, 2008)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

[19]  “China slowdown: after years of boom, powerhouse sends world a warning” (The Guardian, 2008)

[20] “An once-in-a-lifetime crisis, and possibly the largest financial crisis of its kind in human history”.( Charlie Bean, deputy governor of the Bank of England cited in The Times Online, 2008)

[21] In September 2008  the group reported a 39 per cent fall in first-half pre-tax profits, while Tragus, said like-for-like sales increased 3.4 per cent in the 12 months to May 25, compared with a 9.7 per cent increase seen the year before. (FT, 2008)

[22] "We are better suited than most to perform even in times of economic turmoil” (Novak D. cited in Forbes,2008)

[23] Today's figures from Diabetes UK show five million people are registered as obese by their GPs, up from 4.8 million in 2006-07 ,( The Independent, 2008)

[24] Indeed, a quick-service restaurant often offers simple menus with ordinary foods that can easily obtained on the wholesale market and consequently be low-priced. On the other hand, fine-dining restaurants tend to offer rare dishes that require a more expensive preparation. 

[25] Yum Brand has spent in UK in 2008 a combined £35,626,000 with the Pizza Hut and KFC brands

[26] And KFC obviously only to chicken

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