Below is my take on 5 forces for QSR. The QSR analysis has to factor in location-specific competitive advantages which a broad 5-forces approach can often miss out. Localization of competitive advantages is Bruce Greenwald's significant contribution to understanding competition. Another key element to be factored in is food regulation (esp. beverages licenses).
a. Supplier Power - There are two kinds of supplier power. While basic raw materials are agri-commodities and chefs/waiters, there is another major supplier for QSR. The real estate provider. The success of a QSR is significantly dependent on the location. It is widely known that chains like McDonald's use Cluster Analysis based on demographics to pick the locations where they want to open outlets. Consider McD's outside Andheri (W) Railway Station (don't know if it is still there !) or Starbucks outside Santa Cruz airport. Contrast this with the old generation south indian restaurants in Matunga.
Typically, malls and real estate providers work on a variable model based on % of revenues. So even if one's revenues grow, the drain to the real estate provider can be significant. Unless the QSR owner owns the real estate this can be a drain on profits.
So the path to success in QSR would depend on having great real estate ownership and a stroke of luck to have your location grow in footfalls. A great example if KAMAT on Bangalore-Mysore route.
b. Buyer Power - While in general one can assume that there is buyer power, depending on localized situations there can be little or no buyer power. Consider Indian chains like Copper Chimney or Saravana Bhavan in Middle East or East Africa. Expats (like me!) often would drive out for food or order in food from such restaurants paying a premium. Location and brand recall/trust matters !
c. Competitive rivalry - again, if the locality (geographic or customer-segment) is picked well (and if the QSR chain owners are smart about it), one can face little or no harm from competition both in terms of price or market share. KAMAT on Bangalore-Mysore highway is a classic example. Over the last decade several restaurants have opened up - some right opposite KAMAT and possibly serving similar menu. Since traffic too has been growing, KAMAT hasn't been impacted.
d. Barriers to entry - Except for basic regulatory clearances, the barriers to entry are usually minimal. However, incumbents who have strong brand recall (leading to customer lock-in), economies of scale (in terms of centralized procurements a la McD's or centralized kitchens like most larger chains) and supplier advantages (such as owned estates like Café Coffee Day {not implying anything stock-specific} or Starbucks {emerging from Tata Coffee / TGB relationships}) can be difficult to unseat. Note that customers tend to attach a lot of value to prior experiences with the brand. Given the above, new entrants would need to spend a lot on great customer experience to build a brand. The location of the QSR should offer convenience as well.
e. Threat of substitutes - This again is subject to location. KAMAT is again a great example. Due to its location, it is the first restaurant for anyone driving from Bangalore to Mysore in the morning. The next 'best' substitute is Kadambam which is at least a further 40 minute drive down the road. So Kamat generally sees 4-5x the number of footfalls as Kadambam.
To conclude, in its 'Ten Tests of Strategy', McKinsey recommends that one should dissect any industry into 30-40 segments {I am speaking from the perspective of corporate strategy practitioners. Retail investors may not need such fine-slicing.}
A broad brush application of 5-forces could be a general starting point - but one can prima facie reject an industry in this analysis. But a deeper analysis often shows the existence of several 'sustainably profitable' niches. QSR is an industry that requires fine segmentation and application of local context to the analysis. If the players have done their strategies right, the barriers to entry are significantly high in this industry to allow incumbents to:
a. Retain market shares and
b. Enjoy high returns on capital employed
a. Supplier Power - There are two kinds of supplier power. While basic raw materials are agri-commodities and chefs/waiters, there is another major supplier for QSR. The real estate provider. The success of a QSR is significantly dependent on the location. It is widely known that chains like McDonald's use Cluster Analysis based on demographics to pick the locations where they want to open outlets. Consider McD's outside Andheri (W) Railway Station (don't know if it is still there !) or Starbucks outside Santa Cruz airport. Contrast this with the old generation south indian restaurants in Matunga.
Typically, malls and real estate providers work on a variable model based on % of revenues. So even if one's revenues grow, the drain to the real estate provider can be significant. Unless the QSR owner owns the real estate this can be a drain on profits.
So the path to success in QSR would depend on having great real estate ownership and a stroke of luck to have your location grow in footfalls. A great example if KAMAT on Bangalore-Mysore route.
b. Buyer Power - While in general one can assume that there is buyer power, depending on localized situations there can be little or no buyer power. Consider Indian chains like Copper Chimney or Saravana Bhavan in Middle East or East Africa. Expats (like me!) often would drive out for food or order in food from such restaurants paying a premium. Location and brand recall/trust matters !
c. Competitive rivalry - again, if the locality (geographic or customer-segment) is picked well (and if the QSR chain owners are smart about it), one can face little or no harm from competition both in terms of price or market share. KAMAT on Bangalore-Mysore highway is a classic example. Over the last decade several restaurants have opened up - some right opposite KAMAT and possibly serving similar menu. Since traffic too has been growing, KAMAT hasn't been impacted.
d. Barriers to entry - Except for basic regulatory clearances, the barriers to entry are usually minimal. However, incumbents who have strong brand recall (leading to customer lock-in), economies of scale (in terms of centralized procurements a la McD's or centralized kitchens like most larger chains) and supplier advantages (such as owned estates like Café Coffee Day {not implying anything stock-specific} or Starbucks {emerging from Tata Coffee / TGB relationships}) can be difficult to unseat. Note that customers tend to attach a lot of value to prior experiences with the brand. Given the above, new entrants would need to spend a lot on great customer experience to build a brand. The location of the QSR should offer convenience as well.
e. Threat of substitutes - This again is subject to location. KAMAT is again a great example. Due to its location, it is the first restaurant for anyone driving from Bangalore to Mysore in the morning. The next 'best' substitute is Kadambam which is at least a further 40 minute drive down the road. So Kamat generally sees 4-5x the number of footfalls as Kadambam.
To conclude, in its 'Ten Tests of Strategy', McKinsey recommends that one should dissect any industry into 30-40 segments {I am speaking from the perspective of corporate strategy practitioners. Retail investors may not need such fine-slicing.}
A broad brush application of 5-forces could be a general starting point - but one can prima facie reject an industry in this analysis. But a deeper analysis often shows the existence of several 'sustainably profitable' niches. QSR is an industry that requires fine segmentation and application of local context to the analysis. If the players have done their strategies right, the barriers to entry are significantly high in this industry to allow incumbents to:
a. Retain market shares and
b. Enjoy high returns on capital employed
Comments
Post a Comment