Executive Summary

Industry and macro-environmental analyses of the international restaurant industry provides an overview of the industry and reveals the conditions that impact competitiveness and profitability of the industry’s players. The industry is split in two sectors: full-service restaurants (FSR) and limited-service restaurants (LSR). FSRs typically have a wait-staff; LSRs do not have wait-staff. The top five countries, in terms of total number of foodservice outlets, are: China, India, Brazil, Japan, and the US. The industry is of low concentration. Combined, the top industry players make up less than 3% of total global industry revenues. In terms of size, 2013 global sales were $2.6T, up 4.9%. The 2013 global labor force was 62.4M employees, up 2.4%.

In accordance with Porter’s Five Forces framework, the forces that shape competition in the restaurant industry have a moderate to high impact on competitiveness. There is a moderate threat of new entrants and a high threat of substitutes. Buyers have a high degree of bargaining power and suppliers have a moderate degree of bargaining power. The restaurant industry is highly competitive and experiences intense rivalry. In terms of macro-environmental factors, emerging markets around the world over are having an impact on how restaurants execute strategy both domestically and abroad. The growth of the middle class in emerging markets, such as China and India, presents a new demographic and an opportunity for quality growth in an industry that is simultaneously experiencing levels of maturity in the US and European markets.

Internal analyses of the industry’s top players yields an in depth look into McDonald’s, Yum Brands, Burger King, and Darden Restaurants. McDonald’s is the industry leader in terms of revenues with $89B in 2013 systemwide sales, more than double of nearest competitor Yum Brands’ systemwide sales of $40B. Yum Brands is the industry leader in terms of total number of restaurants with 40,311 stores, leading McDonald’s 35,429 stores. Burger King is now the third largest restaurant in the industry, trailing McDonald’s and Yum Brands, after the recent August 26 merger with Tim Hortons. Combined systemwide sales for the new company are $23B and the company now has over 18,000 restaurants in over 100 countries. Darden Restaurants is the industry leader in the FSR category with 2013 systemwide sales of $8.6B and a total of 2,138 restaurants.

All of the aforementioned companies utilize a system of both company-operated and franchisee operated stores; all in varying degrees of implementation. Burger King is nearly 100% franchisee operated, while McDonald’s and Yum Brands are 80% and 78% franchisee operated, respectively. Darden Restaurants, on the other hand, are all company operated. Starboard Value, an activist investor that owns 8.8% of Darden stock released a 300 page proposal on how to fix Darden which included a plan to franchise the company’s brands. In October 2014, Starboard, a New York based hedge fund, convinced shareholders to oust the entire board of directors at Darden and the company decided to elect all of the hedge fund’s nominees to the board. The likelihood that Darden Restaurants will follow the likes of McDonald’s, Yum Brands and Burger King in terms of operating structure is highly likely. For all of the reported companies, revenues are comprised of sales at company-operated stores and fees collected from franchisees and licensees. Sales and expenses incurred at franchisee operated stores are not reported as a portion of the company’s operations. The exception is systemwide sales which includes sales from all stores.

A financial trend analysis of the top four companies in the international restaurant industry yields a reliable cross-comparative for the companies. Yum Brands leads the pack with the highest return on invested capital and highest asset turnover ratio. McDonald’s leads the pack in terms of profit margins, earnings per share and market share. Burger King proves to be the most liquid of the bunch and its current ratio is trending upwards. Darden Restaurants trails McDonald’s and Yum Brands on all accounts. A complete competitive profile, utilizing external and internal critical success factors, further exposes Darden as the underperformer of the group. Despite Darden’s current lagging performance, Darden has strengths that can be translated into a competitive advantage for the firm. Development of the company’s strategic position follows. A SWOT analysis based on internal and external factor evaluation matrices (IFE and EFE) provide a reliable baseline of Darden’s strengths and weaknesses as well as their opportunities and threats. According to the IFE, the greatest strength Darden possesses is its wide variety of brands that appeal to diverse demographic groups. Of its portfolio of brands, LongHorn is the strongest and is positioned as an industry leader within the Steakhouse Restaurants segment. The company’s major weakness is price pressure from competitors, particularly with its Olive Garden brand. The EFE reveals success of other American restaurants globally as Darden’s biggest opportunity and the demand for unique fusion meals as the greatest threat.

Tools used for strategy formulation include the SWOT Analysis, Porter’s Competitive Matrix, ADL Matrix Portfolio Analysis, Value Chain Analysis, and the VRIO Framework Analysis. Use of the IFE and EFE as points of reference and the aforementioned strategy formulating tools result in ultimately two alternative strategies: (1) Domestic market penetration with franchised units for all brands and (2) International market penetration with company-operated LongHorn Steakhouse restaurants. Evaluation of the two alternatives using a Quantitative Strategic Planning Matrix (QSPM) yields the recommended strategy of international market penetration with company-operated LongHorn Steakhouse restaurants.

In terms of implementation, Critical Success Factor (CSF) analysis reveals China and India as the most suitable markets for LongHorn expansion due in part to the countries’ GDP and restaurant revenue growth rates. By 2020, India is set to become the world’s youngest country. Many in the Indian middle class, and especially the younger generation, equate meat-eating with a cosmopolitan attitude and a certain level of education. LongHorn Steakhouse’s Texan-styled American food should fare well with both China and India’s middle class. In terms of evaluation, success of LongHorn’s international expansion strategy is expected to be fully realized by year three where it is projected the company will be fully operational and profitable with a .01% market share gain.

In the event the company fails in China and/or India, the contingency plan is to refocus its international expansion efforts in Brazil and Japan where there is already some brand recognition cultivated through existing partnerships with franchise operators. There is, however, a high degree of confidence LongHorn will succeed in China and India because the recommended strategy leverages Darden’s competitive advantages of an extensive supply chain network, popular American food fare and a strong core brand with proven best practices already cultivated domestically.
Table of Contents Executive Summary 2 Introduction: International Restaurant Industry 11 Industry Size 12 Industry Labor Force 13 Industry Structure 14 Multinational Chained Restaurants 15 Industry Profitability 15 Life cycle 16 Porter’s Five Forces 17 Threat of New Entrants: Moderate 18 Barriers to entry 18 Bargaining Power of Suppliers: Moderate 21 Bargaining Power of Buyers: High 24 Threat of Substitutes: High 26 Rivalry among Existing Competitors: High 30 Intensity of rivalry 30 Exit barriers 31 Price competition 32 Industry Analysis Recap 33 Introduction: Macro Environmental Analysis 34 Technological 34 Technology Awareness 35 Social Media 37 Research and Development 38 Technology as a Barrier to Entry 38 Automation 39 Technological Effect on Costs 39 Legal 40 Labor Laws 40 Food Safety 41 Political 42 Tax and Tariffs 42 Trade Restrictions in various global countries: 43 Political Stability 44 Environmental Performance 45 Regulatory 45 Business Regulations 45 Equipment Regulations 46 Social-cultural 46 Cultural trends 46 Health Considerations 47 Lifestyle 48 Safety/Health Concerns 49 Demographics 50 Income level 50 Consumer Profiles 51 Living Standards 52 Culture and tradition 53 Economics 53 Economic Pressures 53 Economic Growth 54 Employment 55 Raw Materials 56 Interest rates 57 Foreign Exchange Rates 57 Inflation 58 Foreign Direct Investment 58 Macro Environmental Factors-Section Recap 59 Existing conditions 59 External Factor Evaluation (EFE) Matrix 61 Conclusion 61 Internal Analysis: Comparison of Top Tier Firms 62 Darden Restaurants Inc. 62 History 62 Mission 63 Structure 63 Development 64 Strategic Operations 66 Finance/Accounting 71 Information Technology 73 Human Resources 74 Supply Chain 77 Marketing 79 Promotion 79 Price 80 Product 80 Place 80 Government and Community Affairs 81 Burger King 82 History 82 Mission 83 Structure 84 Development and Franchising 85 Finance 87 Operations 88 Marketing 89 Price 89 Products 90 Promotion 90 Place 90 Human Resources 91 Supply Chain/Distribution 92 McDonald’s 92 History 92 Mission 93 Structure 94 Finance 95 Operations 98 Supply Chain 101 Development and Franchising 103 Marketing 105 Product 105 Place 105 Price 106 Promotion 106 Human Resources 107 Technology 109 Sustainability & Philanthropy 110 Legal 111 Yum Brands 112 History 112 Mission 113 Structure 114 Finance 115 Operations 119 Human Resources 124 Public Affairs 126 Legal/Franchise Policy 128 Marketing 128 Price 129 Product 129 Place 130 Promotion 131 Financial Trend Analysis 133 Strengths and Weaknesses 140 Internal Analysis of each firm-Section Recap 142 Introduction: Strategy Planning, Implementation and Evaluation 142 Competitive Profile Matrix 143 Critical Success Factors 144 Financial Position 144 Marketing and Advertising 144 Global Expansion 144 Efficient Operation 144 Market Share 145 Threat from Foreign Markets 145 Efficient Supply Chain 145 Price Competitiveness 145 Franchising 145 Economic Recession 145 Brand Diversification 145 Trends in Eating Habits 146 External Factor Evaluation 146 EFE Conditions 146 EFE Threats 147 Internal Factor Evaluation 148 IFE Strengths 149 IFE Weaknesses 150 SWOT Analysis 151 SO Strategies 152 WO Strategies 154 ST Strategies 155 WT Strategies 155 Porters Competitive Matrix 156 Cost Leadership (Broad Target) 157 Differentiation (Broad Target) 157 Cost Focus (Narrow Target) 157 Focus Differentiation (Narrow Target) 158 ADL Matrix Portfolio Analysis 158 ADL Strategy Formulation 160 Strategy: Olive Garden - Turnaround 161 Strategy: LongHorn Steakhouse – Growth Strategy 163 Strategy: SRG – Equity carve-out (partial spinoff) 163 ADL Strategy Recap 164 Value Chain Analysis 164 VRIO Framework - Value, Rareness, Imitability, Organization Analysis 166 Strategy Selections 168 Quantitative Strategic Planning Matrix-QSPM 170 Strategy Implementation 172 Critical Success Factors 172 China 173 India 174 Benchmarking Success 181 Evaluation 183 Balanced Scorecard 183 Contingency Plan 185 Conclusion 186

Table of Figures Figure 1: Total Global Foodservice Sales 12 Figure 2: LSR and FSR as a % of total US foodservices sales 13 Figure 3: Global market share of top industry players 14 Figure 4: ROIC for McDonald’s, Yum, Starbucks & Darden 16 Figure 5: Industry Life Cycles 17 Figure 6: Porter’s Five Forces 18 Figure 7: Darden Restaurant Suppliers 22 Figure 8: Share of the Food Dollar 25 Figure 9: US Food Dollar (2012) 26 Figure 10: FAH and AFH expenditures in the US 27 Figure 11: FAH and AFH expenditures in the US 27 Figure 12: Global snack market outside of the US 28 Figure 13: Restaurant Sales Growth in 2014 (projected) 31 Figure 14: Technology in the Restaurant Industry 36 Figure 15: Rank of top 10 companies in social media interaction 37 Figure 16: Min. Wage of Selected Countries 40 Figure 17: Political Stability Index for Selected Countries 44 Figure 18: EPI for Selected Countries 45 Figure 19: Increasing trend of food away from home consumption 49 Figure 20: Growth of Middle Class in US, China, and India 50 Figure 21: Growth of Disposal Income in China 51 Figure 22: Growth of Disposable Income in India 51 Figure 23: Major Regions of Restaurant Industry 2013 54 Figure 24: Growth in Restaurant Industry Employment 55 Figure 25: Darden Revenue by Brand 63 Figure 26: Overview of Darden's Real Estate 65 Figure 27: Darden´s SG&A costs over 10 years 66 Figure 28: Darden’s Annual Profit Margins (%) 66 Figure 29: Darden´s Same-Store-Sales & Guest Count Growth & Avg. Check per Guest 67 Figure 30: Darden’s Annual Revenue 68 Figure 31: Darden's Annual Net Income 68 Figure 32: Darden Operating Costs as Percent of Revenue 69 Figure 33: Darden’s Annual Return on Equity (ROE) % 69 Figure 34: Darden’s priorities for value creation 70 Figure 35: Darden’s Annual Return on Invested Capital (ROIC) 71 Figure 36: Darden AUVs Compared to Peers 72 Figure 37: Darden’s Annual EPS 73 Figure 38: Darden employees’ demographic information 75 Figure 39: Darden employee ratings 76 Figure 40: A snapshot of Darden´s supply chain 77 Figure 41: A snapshot of Darden´s supply chain 78 Figure 42: Darden and Peers´ Restaurant Cost Breakdown 79 Figure 43: Distribution of BK restaurants globally 84 Figure 44: Distribution of BK revenues globally 84 Figure 45: BK revenue and revenue growth (%) trend 87 Figure 46: BK Income and Profit Margin (%) trend 87 Figure 47: BKW EPS Trend 87 Figure 48: BKW ROA and ROI 3-year Trend 89 Figure 49: McDonald’s Revenue by Geography 94 Figure 50: McDonald's Revenues and Growth % 95 Figure 51: McDonald's Annual ROIC % 96 Figure 52: McDonald’s Income and Profit Margin% 97 Figure 53: McDonald’s EPS 98 Figure 54: McDonald’s 5P’s ‘Plan to Win’ Concept 99 Figure 55: McDonald’s Comparable Store Sales by Region 100 Figure 56: McDonald’s Annual ROE % 101 Figure 57: McDonald’s Supply Chain 102 Figure 58: McDonald’s Asset Turnover 104 Figure 59: McDonald’s Employee Demographics 107 Figure 60: McDonald’s Employee Satisfaction 107 Figure 61: McDonald’s Upcoming Goals 110 Figure 62: Yum Brands Revenues by Geography 115 Figure 63: Yum NEO Target Bonus vs Actual 116 Figure 64: Yum Brands Total Number of Units Each Year 117 Figure 65: Yum Brands Annual Return on Invested Capital 117 Figure 66: Yum Brands Return on Equity 118 Figure 67: Yum Brands Annual Return on Assets 118 Figure 68: Yum Brands Same-Store Sales Growth 119 Figure 69: Yum Brands Annual Gross Margins 120 Figure 70: Yum Brands Annual Operating Margins 120 Figure 71: Yum Brands Annual Net Profit Margin % 121 Figure 72: Yum Brands Annual Worldwide Restaurant Margins 122 Figure 73: Yum Fixed-assets & Total Assets Turnover 123 Figure 74: Yum Brands Annual Free Cash Flow Growth % YOY 123 Figure 75: Yum in China. Impact of negative publicity on same-store sales 126 Figure 76: Chinese social media response to KFCs “Half-Price Bucket” promotion 132 Figure 77: Comparative Revenue Growth 2007 – 2013 133 Figure 78: Comparative Profit Margins 2004 - 2013 134 Figure 79: Comparative Current Ratio 2004 – 2013 135 Figure 80: Comparative Return on Investment 2010 - 2013 136 Figure 81: Comparative Return on Assets 2010 – 2013 137 Figure 82: Comparative Property, Plant, and Equipment Turnover 2010 – 2013 138 Figure 83: Comparative Earnings per Share 2004 - 2013 139 Figure 84: Customer Interest in Digital Amenities 154 Figure 85: ADL Matrix key 159 Figure 86: Critical Success Factors, Missions & Goals 172

Table of Tables Table 1: Full-service and Limited-service Restaurants Defined 11 Table 2: Global Restaurants Industry Category Segmentation 13 Table 3: Total Number of Consumer Foodservice Outlets: Top 15 Countries 14 Table 4: Top 15 countries for chains, % of total sales and outlets 15 Table 5: Restaurant Business Value Chain 21 Table 6: Corporate Tax Rates of Selected Countries 42 Table 7: Tariffs of Selected Countries 43 Table 8: # of Procedures, Time, and Cost to Open a Business in Selected Countries 46 Table 9: # of Employees and Outlets for Select Countries 56 Table 10: External Factors Evaluation (EFE) Matrix 61 Table 11: Darden Restaurant Units Globally 64 Table 12: Burger King Restaurant Units Globally 85 Table 13: Burger King vs. McDonald's Pricing 89 Table 14: McDonald’s Owned and Franchised Restaurant Counts and Sales 104 Table 15: Yum Brands Restaurant Units Globally 114 Table 16: Yum Brands System Sales Growth Performance Measures 119 Table 17: Yum and Limited-Service Restaurant American Customer Satisfaction Index 125 Table 18: Internal Factor Evaluation (IFE) 141 Table 19: Competitive Profile Matrix 143 Table 20: External Factor Evaluation (EFE) Matrix 146 Table 21: Internal Factor Evaluation (IFE) Matrix 149 Table 22: SWOT Analysis 152 Table 23: Revenues and Growth Rates of Select Countries 153 Table 24: Porter’s Competitive Matrix 156 Table 25: Darden Restaurants Business Strength Assessment by Concept 159 Table 26: Darden Restaurants ADL Matrix 161 Table 27: Darden Value Chain Analysis 164 Table 28: VRIO Framework 166 Table 29: Suggested strategies for Darden Restaurants 168 Table 30: QSPM for Darden Restaurants 171 Table 31: Current and forecasted GDP and restaurant revenues for select countries 173 Table 32: China Facts 173 Table 33: India Facts 174 Table 34: LongHorn forecasted statement of earnings from China operations 182 Table 35: LongHorn forecasted statement of earnings from India operations 183 Table 36: Balanced Scorecard 184

Introduction: International Restaurant Industry

The restaurant industry is split into two sectors: Full Service Restaurants (FSR) and Limited Service Restaurants (LSR). NAICS codes are 722551 (FSR) and 722513 (LSR), SIC 5812. FSRs are establishments with broad menus along with table, counter and/or booth service and a wait staff. These establishments offer meals and snacks for immediate consumption primarily on premise. LSRs are establishments whose patrons order or select items and pay before eating. The FSR and LSR segments can be further broken down in the following manner:

Table [ 1 ]: Full-service and Limited-service Restaurants Defined FULL SERVICE RESTAURANTS (FSR) | | Definition | Examples | Fine Dining | A full-service establishment where alcohol is served. The average check if greater than $50. It has a dinner emphasis and is also known as a “White Table Cloth Restaurant” | Chain: Ruth’s Chris SteakhouseIndependent: Palm Restaurant | Upscale Casual Dining | A full-service restaurant where alcohol is served. The average check is between $20 and $50. Day-parts are lunch and dinner, with an adult focus and upscale contemporary décor. | Chain: McCormick and Schmick’sIndependent: Carmine’s | Traditional, Casual Dining | A full-service restaurant with full bar service. It has focus on lunch and dinner. The average check is between $10 and $25. | Chain: T.G.I. FridaysIndependent: Old Ebbitt Grill | Café, Family-style, Diner | A full-service restaurant with limited or no alcohol service. The average check is between $6 and $12. | Chain: Denny’sIndependent: Richie’s Real American Diner | LIMITED SERVICE RESTAURANTS (LSR) | Quick/Fast Casual | A limited-service restaurant. The average check is between $7 and $10. The food is innovative, suited to sophisticated tastes and is prepared to order with fresh (or perceived as fresh) ingredients. The interior is more upscale than a typical fast food establishment. | Chain: Panera BreadIndependent: Blaze Pizza | Quick Service (QSR), Fast Food, Snacks | A limited-service restaurant. The average check is under $7. These are traditional “fast-food” restaurants. | Chain: McDonald’sIndependent: Cook Out | Coffee Shops, Tea Houses | A small restaurant in which coffee, tea, and light meals are served. | Chain: StarbucksIndependent: Star Lounge | Smoothie, Juice | A small establishment that prepares and serves blended drinks consisting of fruit juice, whole fruit and ice/water, as well as an assortment of juices. | Chain: Jamba JuiceIndependent: Ziggy’s Juice Bar | Self Service Restaurants | A cafeteria style establishment in which the customer does the work rather than being waited on. | Chain: Pret A MangerIndependent: Valois | Buffet Restaurants | An establishment that prepares and serves meals for immediate consumption using cafeteria-style serving equipment. Patrons select from food and drink items on display in a continuous cafeteria line. | Chain: Golden CorralIndependent: Super Buffet | [ 1 ]. Adapted from CHD Expert: Excellence in Global Foodservice Information: Segments Definition.
Industry Size

The restaurant industry is global in nature. The locations in which it operates can be broken down into six regions: US-Canada, Latin America, Western Europe, Middle East-Africa, Eastern Europe, and Asia-Pacific. Global sales in 2013 were roughly $2.6T, up 4.9%. Projections are $3.5T by the end of 2016. In the US, 2014 restaurant industry sales projections totaled $683.4B.

Figure [ 1 ]: Total Global Foodservice Sales | | [ 2 ]. From 2013 International Top 25: Mapping Opportunity. (2013). In Nation’s Restaurant News. |

The Asia-Pacific region accounts for 46.6% of the global restaurants industry value. The Americas, Europe, and Middle East and Africa account for 34.1%, 17.9%, and 1.3%, respectively. In the Asia-Pacific region, China accounts for 47.6% of the industry value. Japan accounts for 25%, India 11.8%, South Korea 7.0%, and the rest of Asia-Pacific accounts for 8.5%.

Globally, restaurants and cafes, or otherwise full-service restaurants, account for $1.4T, or 53.8% of the industry’s total value. The fast food segment accounts for $561.9B, or 21.8% of the industry.

Table [ 2 ]: Global Restaurants Industry Category Segmentation Global restaurants industry category segmentation: $ billion, 2013 | Category | 2013 | % | Restaurants & Cafes | 1,387.9 | 53.8% | Fast Food | 561.9 | 21.8% | Drinking Places | 209.4 | 8.1% | Other | 419.1 | 16.3% | Total | 2,578.3 | 100% | [ 3 ]. From Marketline, Restaurant Industry Profile: Global.

Domestically, the largest segments of the restaurant industry are quick service, fast casual, casual dining, and family dining. Limited-service foodservice sales, including the quick-service and fast casual restaurant sectors, are estimated at $173.8B or 27.3% of total foodservice sales. Full service restaurant sales, including family-dining and casual-dining restaurants that include table service and alcohol offerings, are estimated at $201.5B or 31.6% of total foodservice sales.

Figure [ 2 ]: LSR and FSR as a % of total US foodservices sales LSR and FSR as a percentage of total US foodservice sales | LSR % of total US sales | | FSR % of total US sales | | [ 4 ]. Adapted from Nation’s Restaurant News. (2014). Segments: Quick Service and Full Service.

Industry Labor Force

In the US alone, the restaurant industry employs 13.5M people. That is about one in ten working Americans. The US restaurant industry labor force accounts for 21.6% of the total global restaurant labor force. Globally, in 2013, the restaurant industry reached a volume of 62.4M employees, an increase of 2.4%.
Industry Structure

The global restaurant industry has six leading competitors: McDonald’s Corporation, Doctor’s Associates, Inc. (Subway), Starbucks Coffee Company, Yum Brands, Inc., Burger King Corporation, and Darden Concepts, Inc. based on sales revenue. However, given the high fragmentation and low concentration of the industry, even the industry leaders make up a very small percentage of total industry revenues.

Figure [ 3 ]: Global market share of top industry players Percentage of Total Global Industry Revenues (2013) | 1.09%
McDonalds
1.09%
McDonalds
| 0.70%
SUBWAY
0.70%
SUBWAY
| 0.57%
Starbucks
0.57%
Starbucks
| 0.50%
YUM
0.50%
YUM
| 0.33%
Darden
0.33%
Darden
| [ 5 ]. Data calculated using revenues reported in the Global Industry Profile and the company’s Annual Reports

Table 3 lists the top 15 countries with the most consumer foodservice outlets dating from 2003-2009. The list is ranked according to 2009 number of outlets. The final column lists the percentage change in outlets from 2003-2009. The leading countries: China, India, Brazil, Japan, and the US all show positive growth with the exception of Japan which shows a -8.4% change.

Table [ 3 ]: Total Number of Consumer Foodservice Outlets: Top 15 Countries Total Number of Consumer Foodservice Outlets 2003-2009: Top 15 Countries | | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | % change ‘03-‘09 | China | 3,315,735 | 3,702,529 | 4,171,078 | 4,612,142 | 4,963,808 | 5,300,936 | 5,572,974 | 68.1 | India | 1,017,917 | 1,135,878 | 1,267,338 | 1,393,708 | 1,513,065 | 1,628,969 | 1,748,003 | 71.7 | Brazil | 821,225 | 842,063 | 862,509 | 878,459 | 895,806 | 915,609 | 931,017 | 13.4 | Japan | 826,673 | 818,179 | 813,620 | 807,743 | 794,773 | 778,429 | 757,249 | -8.4 | USA | 550,243 | 563,587 | 577,384 | 589,214 | 600,849 | 602,315 | 604,717 | 9.9 | Mexico | 540,951 | 549,671 | 566,282 | 581,525 | 613,275 | 634,828 | 592,175 | 9.5 | So. Korea | 562,652 | 574,173 | 585,080 | 581,190 | 594,126 | 586,160 | 576,975 | 2.5 | Vietnam | 419,107 | 445,927 | 471,477 | 496,757 | 514,891 | 528,629 | 536,206 | 27.9 | Italy | 261,827 | 271,324 | 280,944 | 299,208 | 305,376 | 309,866 | 307,697 | 17.5 | Spain | 240,827 | 252,468 | 250,331 | 253,449 | 256,270 | 257,897 | 247,331 | 2.7 | Indonesia | 161,350 | 167,587 | 174,892 | 181,397 | 188,074 | 191,856 | 194,896 | 20.8 | Taiwan | 165,019 | 168,886 | 174,150 | 179,186 | 183,282 | 185,568 | 186,774 | 13.2 | UK | 166,726 | 169,234 | 171,414 | 173,786 | 173,676 | 169,750 | 165,845 | -0.5 | Germany | 173,931 | 171,030 | 169,549 | 169,306 | 166,978 | 164,954 | 162,592 | -6.5 | France | 152,201 | 153,020 | 152,939 | 152,792 | 152,843 | 150,855 | 145,509 | -4.4 | [ 6 ]. Table recreated and reconfigured using data reported in Euromonitor International. (2011). Who Eats Out Where.
The Chinese restaurant industry had total revenues of $572.4B in 2013, representing a compound annual growth rate (CAGR) of 16% between 2009 and 2013. The Japanese and Indian markets grew with CAGR of 0.1% and 19.7% respectively, over the same period, to reach respective values of $300.8B and $142.3B in 2013.

Multinational Chained Restaurants

“Formula businesses”, otherwise known as “chains” in the context of restaurants, are known for standardized menus, ingredients, food preparation, décor, uniforms, or similar standardized features. The chain format is popular amongst restaurant industry leaders.

Table [ 4 ]: Top 15 countries for chains, % of total sales and outlets | Top 15 countries ranked according to chains as a % of total sales: 2009 | Top 15 countries ranked according to chains as a % of total outlets: 2009 | USA | 51.9 | USA | 36.9 | Japan | 43.6 | Taiwan | 34.3 | UK | 38.7 | UK | 30.2 | Taiwan | 34.2 | Japan | 19.2 | Germany | 30.7 | So. Korea | 17.6 | So. Korea | 30.6 | Germany | 8.3 | France | 26.8 | Indonesia | 6.2 | Mexico | 13.0 | France | 5.7 | China | 7.8 | Mexico | 3.9 | Italy | 6.5 | Spain | 2.9 | Indonesia | 6.4 | Italy | 1.6 | Spain | 5.1 | Brazil | 1.3 | Brazil | 5.0 | China | 1.2 | India | 1.9 | India | 0.4 | Vietnam | 1.1 | Vietnam | 0.3 | [ 7 ]. Tables recreated and reconfigured using data reported in Euromonitor International. (2011). Who Eats Out Where |

Despite high industry revenues ranked in by industry goliaths such as McDonald’s, Yum Brands, Starbucks, and Subway, the chain format that these firms utilize appear as a much smaller percentage of restaurants in the larger restaurant markets, such as China, India, and Brazil in terms of outlets.

Sales from chained restaurants also take up a much smaller percentage of total sales in the larger markets.

This is significant because it indicates less rivalry for multinational chains in large markets like China and India.

Industry Profitability With many firms and similar but differentiated products, the restaurant industry exhibits near perfect competition. Figure 4 charts industry profitability for four major industry players, namely Starbucks, Yum Brands, McDonald’s, and Darden Restaurants. Starbucks’ dramatic drop in ROIC was the result of a recent legal settlement of $2.8B with Kraft Foods for breach of contract. Currently Starbucks’ shareholders are suing the company for $2.8B in damages.

Figure 4: ROIC for McDonald’s, Yum, Starbucks & Darden | | [ 8 ]. Chart data sourced from companies’ annual reports. ROIC calculated as (EBIT-Dividends)/Total Capital |

Life cycle Domestically, the industry life cycle for LSRs and FSRs, such as quick-service restaurants and casual restaurants, is in its maturity phase. There is very little growth domestically and most major firms are finding ways to grow through overseas expansion. Price competition is rampant and there is significant consolidation, the most recent being Burger King and Tim Horton’s.

It is forecasted over the 5 years to 2018, industry value added (IVA), which measures an industry's contribution to U.S. gross domestic product (GDP), is expected to grow at an average rate of 2.1% per year. U.S. GDP is also expected to grow at an annualized rate of 2.1%, showing the restaurant industry is growing at a long-term rate in line with overall economic growth.
Therefore, the restaurant industry exhibits the key features of a mature industry.

Figure [ 5 ]: Industry Life Cycles | | [ 9 ]. Sourced from Mazzone & Associates 2013 Restaurant Report |

However, as significant market and consumer changes occur with increased demands for healthy foods and choices; industry participants may enjoy an opportunity to capitalize on a new growing market therefore reentering the life cycle and preserving domestic market share. Others, to escape the domestic saturated market, have found new life overseas and continue to enjoy quality growth.

Porter’s Five Forces

The Porter’s Five Forces framework yielded results indicative of a highly competitive industry. All five forces proved to be of moderate to high importance for firms operating in the international restaurant industry.

Figure [ 6 ]: Porter’s Five Forces | | [ 10 ]. Template adapted and sourced from Flickr | Greg Emmerich |

Threat of New Entrants: Moderate Barriers to entry
Supply-side economies of scale (moderate)
Industry incumbents have a big advantage in terms of supply-side scaled economies. Their large production volume allow them to command better terms from suppliers resulting in lower wholesale prices not traditionally available to industry newcomers. The results are lower costs per unit. The price of a hamburger the market allows the retailer to charge, for example, and the costs per unit of said hamburger, results in a higher profit margin differential from competitors who cannot command such terms. The larger restaurant retailers generally turn out having higher profit margins by comparison as a result.

Although the supply-side barrier to entry may deter industry newcomers, it is worth noting that it is still possible for newcomers to be competitive despite such supply-side scaled economies of large industry incumbents. Many industry newcomers circumvent this barrier by differentiating and/or competing on the basis of quality, thereby commanding higher prices from consumers. Branding and positioning as a premium good, as well as catering to niche markets, are possibilities available to newcomers that make this barrier less of a hurdle.

In places like Hong Kong, the supply-side economies of scale may prove to be more of a barrier since it is home to the world cheapest Michelin Star restaurant, Tim Ho Wan. At this Chinese dim sum restaurant, most dishes cost between HK$10 and HK$24 (about $1.30 to $3 USD), with one outlier being the double boiled bird's nest dessert at HK$48 (about $3 USD). High quality in this market is therefore still achieved at a value to customers.

Demand-side benefits of scale (low)
The demand-side of scale leaves very little advantage to industry incumbents. Despite the number of customers willing to frequent an establishment, it does not always follow that the market would dictate higher prices. McDonald’s for instance, the world’s largest fast food retailer, services the most number of customers yet competes on the basis of costs. However, when a customer is not patronizing an establishment for convenience but rather as a social activity, the popularity of the establishment may justify the premium paid for the product.

The fragmented nature of the restaurant industry gives customers a myriad of choices. This allows newcomers the opportunity to compete on the basis of differentiation, amongst other factors. Regardless of how big industry Goliaths like McDonald’s are, industry newcomers can still gain market share by adding value to customers. Newcomers can capitalize on the inherent flexibility that comes with being small by better fulfilling customer wants and needs and more quickly responding to market changes.

Customer switching costs (moderate)
Customers do not endure costs in the traditional sense when switching from dining at one establishment to another. Customers do however endure opportunity costs in relation to customer loyalty programs. Dining at one establishment may mean forgoing the opportunity to accumulate loyalty points at another establishment. The Octopus Card, a stored value smartcard traditionally used in Hong Kong for contactless transit purchases, has extended its usefulness to use as a payment mechanism in other venues including McDonald’s, Starbucks, and 7-Eleven. Users can benefit from the Octopus Rewards Program by earning points to later use for additional purchases at participating retailers. At 7M transactions daily, 25% can be attributed to non-transit purchases. Of US loyalty-program participants, 58% said they are likely to decide on a restaurant based on where they earn rewards. Ninety-six percent reported having visited a restaurant whose loyalty club they belong to within the past six months.

Capital requirements (high)
The restaurant industry is a capital intensive business. Industry incumbents have an advantage over newcomers especially if the incumbent has a strong cash position. A strong cash position gives the mature restaurants the ability to build out and expand. It also gives the incumbent an advantage in first mover approaches into other areas. In this case, industry newcomers will still be playing catch-up. Fixed facilities require land acquisition or large lease agreements. For industry newcomers, capital will likely go to expenditures such as construction/renovation, wages, marketing, commercial kitchen equipment and beginning inventory all before the doors of the restaurant open. Once opened, working capital will still be needed until the restaurant reaches profitability.

Failure rates also play a part in lenders’ decisions to fund such ventures. In past studies, the three-year cumulative restaurant failure rate for a franchised chain was 57.2%. For independent restaurants, the failure rate was 61.4%. Capital requirements are therefore a major deterrent for new entrants into the industry.

Incumbency advantages independent of size (high)
Many restaurants have leveraged their successful operations to enter into strategic alliances with organizations that further boost their exposure, revenues, and subsequent competitiveness. In one of its efforts to compete with Yum Brands China, the largest fast food retailer in China with more than 4,000 KFC restaurants, McDonald’s, with nearly 2,000 restaurants in China, entered into a strategic alliance with Sinopec Petrochemical.,, McDonald’s pushed to setup drive-thru restaurants in China in a bid to cash in on a rapid rise in car ownership in the world’s second-largest market for automobiles. The largest oil company in China with over 30,000 petrol stations, Sinopec fueled McDonald’s plan to open 150 drive-thru restaurants in China. The service stations now provide a fresh new experience for customers who can buy takeaways and add gas without getting out of their automobile. As a new entrant into the industry, benefits from such alliances and strategic partnerships can be difficult to replicate.

The cumulative experience in industry incumbents leads to increased efficiencies, especially pertaining to research and development efforts geared towards localization of brands. KFC, owned by American Yum Brands Inc., owes much of its success to its flexible business strategy designed specifically for the Chinese market - for Chinese customers. Unless a company makes a sufficient commitment to China and is prepared to invest the necessary funds to research and develop localized products and services, its China unit will operate at a disadvantage to their local competitors.

Restrictive government policy (low)
Restrictive government policies in the form of regulated licensing do not constitute a barrier to entry in the sense that all restaurants have to be properly licensed. Although the tedium that is inherent in fulfilling the requirements may serve as a tempting deterrent, the playing field is relatively leveled in this respect as it relates to the restaurant industry.

Bargaining Power of Suppliers: Moderate
The threat of suppliers is moderate. Between the supplier and the restaurant exists a symbiotic relationship. The two are mutually beneficial and detrimental to each other based on the set of actions and mistakes of the other. The top level restaurants in the industry have de-integrated their supply chain operations but still exert a high degree of control over the product supplied by way of imposing strict standards and performing third-party audits of suppliers.

The business value chain of the restaurant industry can be broken down into the following three major subdivisions:

Table [ 5 ]: Restaurant Business Value Chain FARMING | This industry is involved in the production and collection of raw agricultural commodities. Example: seed producer Monsanto | PROCESSING | This industry involves the processing of raw food commodities into forms that can be easily distributed and sold to consumers. Example: meat processor OSI Group | DISTRIBUTION | The final stage of the value chain involves the distribution of finished or near-finished food products to consumers. Example: Full and limited service restaurants | [ 11 ]. Table sourced from IMAP: Food and Beverage Industry Global Report (2010).

Concentration Power: LOW Figure [ 7 ]: Darden Restaurant Suppliers | | [ 12 ]. Darden Restaurants’ Sourcing Highlights. |
The supplier industry is of low concentration. The power of the suppliers, or lack thereof, in the international restaurant industry affects firms differently. For some restaurants, the ability to choose from numerous suppliers weakens the suppliers’ position thereby making their threat relatively low. Such is the case for Darden Restaurants, which buys from approximately 2,000 suppliers internationally. However, McDonald’s nearly sources much of its food products from mainly four major suppliers: OSI Group (meat), Burnbrae Farms (eggs), JR Simplot (potatoes), and Cargill for all of the above and more. For firms like McDonald’s, the power of suppliers is relatively high and presents a double conundrum. For example, the relationship that exists between McDonald’s and OSI Group is one spanning nearly 60 years. There are synergies that have been cultivated throughout that time that give the firm a competitive advantage but those synergies are not easily replicated if a change in supplier is needed.

Switching Costs Power: MODERATE
Given the numerous amount of suppliers, restaurants have the ability to pit suppliers against each other for competitive bids. In theory, this severely weakens the suppliers’ power within the industry. However, the most recent food scare in China is demonstrative of the difficulties that exist when a change in supplier is needed. OSI Group, a supplier to McDonald’s, Yum Brands, and Starbucks amongst others, faced a scandal in China that rocked the industry. The company’s Chinese subsidiary, Shanghai Husi Foods, was found selling expired product which sent shock waves throughout China and eroded consumer confidence in the product. As a result, McDonald’s sales fell 14.5% in the region. The company attributes the decline to the recent food scare and supplier issues. Yum Brands sales are expected to fall 13%. McDonald’s’ representatives spoke out in condemnation of the findings, claiming having been misled by OSI’s Shanghai Husi Food officials and vowed to find a new meat supplier for the region. However, after releasing that statement, McDonald’s later recanted in favor of not walking away from the issue but rather staying committed to resolving the issue. Yum Brands vow to seek legal action to recoup damages. Although a temporary supplier was brought in to supplement demand, the relationship was never really severed. This situation is illustrative of the direct relationship and high dependency between restaurant and supplier. For restaurants that serve a standardized product across units like McDonald’s, there is a higher degree of risk associated with the unknown inherit in switching to new suppliers.

Differentiation Power: HIGH
Given the low concentration of suppliers in the markets, many suppliers regain power by differentiation. They offer food processor services such as contract manufacturing, packaging, and supply chain management. Many restaurants purchase directly from suppliers that have integrated the agricultural and processing aspects of the value chain. Often, such integration results in a more consistent product. Independent Purchasing Cooperative Inc. (IPC) has one customer – Subway. IPC is responsible for procuring food, packaging, equipment, technology and services for subway restaurants in North America through negotiating price, supply and distribution terms. Unaterra is the global IPC equivalent maximizing Subway’s purchasing power in Europe (EIPC), Australasia (IPCA), Latin America (LAC), and the Middle East (MEIPC). The middleman position they play between Subway and its needed inputs makes IPC/Unaterra both supplier and buyer in the market. The position they are in puts the bargaining power at a high between them and Subway. End suppliers are not so fortunate. Their position is weak matched against the negotiating position of IPC/Unaterra.
“We deliver on a promise to devote our every resource to your ongoing success. Just as your growth and profitability are determined by your customers, our future lies in yours.”

-US Chemicals Corporation, Reinhart Foodservice 2013 Supplier of the Year
“We deliver on a promise to devote our every resource to your ongoing success. Just as your growth and profitability are determined by your customers, our future lies in yours.”

-US Chemicals Corporation, Reinhart Foodservice 2013 Supplier of the Year
Dependence Power: MODERATE
Suppliers in the industry are highly dependent on the revenues generated therein. The high reliance on the industry incentivizes suppliers to protect the industry through reasonable pricing and assisting in activities such as research and development. The restaurants in the industry are just as dependent on the supplier which incentivizes firms to invest in the suppliers’ success. For example, Vista Processed Foods Pvt. Ltd., a supplier of chicken and vegetable range of products in India was extended technical and financial support from both OSI Industries and McDonald’s to enable Vista to set up world-class infrastructure and support service. As a result Vista Processed Foods is now a name to reckon within the industry.

Substitute Power: HIGH
There are no viable substitutes for what this supplier group provides. This gives the supplier group a high degree of power. Given the complex set of activities in which suppliers engage and their propensity to differentiate, it would not be cost efficient for restaurants to integrate the supplier operations or to seek suppliers that provide the services independently.

Integration Power: LOW
There are no credible threats for suppliers to enter the restaurant market.

Bargaining Power of Buyers: High

The following factors measure the buyers’ negotiating leverage. A determination is made as to whether the threat is low, moderate or high for restaurants in the industry. Following is an analysis of the industry buyers’ price sensitivity, where the threat to restaurants is measured in the same fashion as low, moderate or high.

Number of buyers: threat level LOW
The power of buyers based on the population of the buyer group is low. In fact, there are no particular buyer groups in the industry that restaurants rely solely on as a source of sales. Restaurants generally have a broad spectrum of consumers. There are also no large buyer group organizations that are dedicated to pressuring price reductions through negotiating leverage relative to restaurants. Additionally, since buyers interact with restaurants on an individual level as opposed to a larger buyer group, their purchases are in amounts too low to impact the restaurants operations thereby lessening their buyer power. The exception is for smaller locally run, sometimes family owned, restaurants that rely on a small group of customers. However, it is worth noting that buyer’s in particular demographic groups will exhibit similar purchasing patterns. Therefore a substantial change in the demographic can have an impact on restaurant sales if the demographic group is highly populated and the change is directly related to the purchase of restaurant meals.

Degree of differentiation: threat level MODERATE
Restaurants in the industry generally differentiate their product offerings, thereby making it difficult for buyers to find an equivalent product. In general, buyers would play vendors against each other if they could find an equivalent product. However, this threat is moderate because although the product offerings at restaurants are not standardized, they are very similar making it easy to replace, for example, one hamburger with one of comparable value. The McDonald’s Big Mac is not the same as Burger King’s Whopper, but they are similar enough to make it very easy to substitute one for the other if one was priced out of the market. Restaurant experience is a more comparable factor than product offering. Buyers can find a similar restaurant experience between two quick service restaurants. Buyers can find a similar experience between two casual dining restaurants. Buyers can find a similar experience between two formal dining restaurants. Given the similarities, restaurants aim to differentiate their buyers’ experiences to overcome the similarities in product offerings and to remain competitive and lessen buyer power.

Switching costs: threat level HIGH
Buyers face little to no switching costs making this threat high for restaurants in the industry. One caveat however, is the growing prevalence of customer loyalty programs. Approximately 30% of restaurant operators offer frequent-diner programs to their customers in order to increase patronage and loyalty. Fifty-seven percent of all adults said they would be more likely to patronize restaurants offering customer-loyalty and reward programs. Therefore, customers do not face switching costs in the traditional sense of occurring costs and/or penalties for switching restaurants; however customers who are recipients of the benefits associated with customer loyalty programs may endure opportunity costs when patronizing an establishment in which they do not generate benefits.

Integration: threat level HIGH
The threat of integration is extremely high for the entire restaurant industry regardless of the restaurants’ position in the industry. Buyers can credibly threaten to integrate backwards and produce the industry’s product at home. For price sensitive buyers, if restaurant food proves to be too expensive and starts to take up a larger fraction of the buyers’ procurement budget, then buyers will forgo the convenience of eating outside of the home in favor of cooking meals at home. For health conscious consumers, a lack of transparency or a food scare may also prompt buyers to cook at home instead of eating outside of the home.

Price sensitivity: threat level MODERATE Figure [ 8 ]: Share of the Food Dollar | | [ 13 ]. Sourced from National Restaurant Association, 2014 |

The following measures buyers’ price sensitivity and the respective threat levels as it pertains to restaurants in the industry.

Procurement budget: threat level HIGH

First, an illustration: A five dollar foot-long sandwich from a Subway restaurant may not appear to put a major dent in the pockets of buyers. However, the same five dollar foot-long sandwich purchased for three meals a day for every day of the month could easily total nearly $500 a month. For the same $500 a month, a buyer can get more for their money by procuring food items at a grocery store and making meals at home. Therefore, by comparison to the alternative, one can assume that eating outside of the home takes up a larger fraction of the buyer’s procurement budget as opposed to making meals at home. Luckily for the restaurant industry, many buyers value convenience over the joy of cooking and therefore attempt to extract as much value as possible out of their food procurement budgets. In the US, that accounts for about 31% of the US food dollar, or 31.1 cents. More specifically, the restaurant industry’s share of the food dollar takes up a whopping 47%. As a result, buyers shop around for value meals thereby forcing down prices and playing Figure [ 9 ]: US Food Dollar (2012) | | [ 14 ]. Sourced from USDA, Economic Research Service, Food Dollar Series. | industry participants against one another. This exhibition of price sensitivity illustrates a high threat level for restaurants as it relates to buyers’ procurement budgets.

Quality: threat level LOW

The prevalence of the health conscience buyer requires that quality be a factor of importance for restaurants. The American documentary “Super Size Me” where filmmaker Morgan Spurlock ate only McDonald’s for thirty days and for three meals a day, resulted in a high degree of deterioration of his health. The film prompted many changes in the fast food industry. Six weeks after the film’s release, McDonald’s discontinued the Super Size option and began putting emphasis on healthier menu items such as salads. However, the truth is most food supplying companies are privately operated. Their private status protects them from the scrutiny and transparency expected of publicly traded companies. As a result, the perception of quality of their products is most likely a mix of assumption and trust. Many major restaurants engage in campaigns to ramp up the visibility of their food sources but none without degrees of doubt. The main goals seem to impact perception as oppose to actual transparency. Therefore, although the quality of the restaurants’ food product may or may not have an impact on the buyers overall health, the threat of it having an impact on the industry is low given the ability to circumvent the threat with creative marketing and advertising efforts.

Threat of Substitutes: High

Price performance trade-offs: threat level HIGH
The threat of substitutes related to price performance trade-offs is high for restaurants. Supermarkets, convenience stores, and the cultural prevalence of snacking play a role in threatening the restaurants position. Additionally, the aforementioned alternative food sources are also likely to be less-expensive than eating out at a restaurant giving them an attractive price performance trade-off.

The measurement metrics generally used to determine consumption of food outside of the home and food inside of the home are called “food-at-home” (FAH) and food “away-from-home” Figure [ 10 ]: FAH and AFH expenditures in the US | | [ 15 ]. Sourced from USDA, Economic Research Service. | (AFH). In general, the FAH and AFH expenditures are about evenly split in the US market, as illustrated in Figure 10.

However, a more concentrated look reveals that is only true for consumers in the top 20% income bracket. Those in lower income brackets spend less on food consumed away-from-home as illustrated in Figure 11.

Figure [ 11 ]: FAH and AFH expenditures in the US | | [ 16 ]. Sourced from US Bureau of Labor Statistics |
The rise of income around the globe and the prevalence of globalization of the food retail and foodservice industries give rise to increasingly similar food consumption patterns across the world. American brands not only export their products, but they also export their culture and influence consumer practices. Just like the US, as incomes rise, consumers around the world spend an increasing amount of their food budget on food away-from-home. As incomes decrease, more of the food budget goes to food-at-home.

As consumers reign in spending, the supermarket format is further substituted by the convenience store. First restaurant trips become less frequent and then supermarket trips become less frequent. Finally, only needed essential items are purchased. In the Asia-Pacific region, shoppers steadily shifted their shopping to convenience stores which in turn saw 15% annual growth.

Supermarkets and convenience stores are also encroaching restaurant territory by offering ready-made-meals to be eaten in-store or as take-away. Although, food cooked and eaten at home is typically cheaper, most Americans do not prefer cooking from scratch. Although, food cooked and eaten at home is typically cheaper, most Americans do not prefer cooking from scratch due to the amount of planning and work involved.

A new niche called The Grocerant is emerging to compete for a share of the consumer’s stomach. The grocery and restaurant hybrid mashup, Grocerant, has become a formidable adversary for restaurant participants. Ready-to-eat and heat-and-eat meals are convenient substitutes for families. Figure [ 12 ]: Global snack market outside of the US | | [ 17 ]. Sourced from The Nielsen Company |

The snacking culture around the world also presents a threat to the restaurant industry. By year 2020, projections are that 110M households in India, Russia and Brazil will move to the middle class. As more consumers move into the middle class, the trend is to have a treat or to fill the stomach while working late or enduring lengthy commutes. Industry players in the global snacking industry like Mondelez International, Inc. present a threat to the restaurant enterprise. Mondelez International is a global snacking powerhouse, with 2013 revenues of $35B. Located in 165 countries, its presence is felt.

Starting over 100 years ago with the humble potato chip, snacking has evolved into an actual meal category with sales of over $64B dollars. Active and mobile lifestyles have shifted the demand for food faster and more convenient than quick service and fast food.

Switching costs: threat level HIGH
The threat of substitutes as it relates to buyer switching costs is high given that switching costs are low. Restaurant food is easily substituted for eating at home with food purchased at a supermarket, eating on the go with ready-made food prepackaged and bought at a convenience store, and with snacks replacing the need for a meal. The one caveat is the presence of restaurant loyalty programs. Forgoing eating at a restaurant where one participates in a loyalty program presents an opportunity cost for the buyer who otherwise could get more purchasing power with his/her dollar (or comparative currency). However, this caveat is balanced with the presence of supermarket loyalty programs and shopping coupons. Essentially, the presence of loyalty programs and discounting opportunities in the form of coupons in all categories across the board (restaurant, supermarket, convenience) cancels out the attempted circumvention of the threat. Therefore, the threat of switching costs still remains high, and furthermore, the presence of these programs decrease industry profitability and raises customer value.

Industry improvements: threat level HIGH
The threat of substitutes as it relates to industry improvements, especially geared toward improved buyer convenience, is high for industry participants. The convenience factor associated with restaurants is threatened and often trumped by convenience stores and one-stop-shop establishments. As certain players on other industry sectors ramp up their customer value offerings, they encroach on restaurant industry participants. One such example exists in the ready-to-assemble furniture, appliances and home accessories store Ikea. Despite being a home furnishing business, its cafeteria concept implemented into its stores to increase customer value rakes in nearly $1.2B. In terms of worldwide sales, Ikea Food ranks 18th amongst Non-US/Canada based restaurant chains and companies.

Enter the age of the mashup where smartphones have replaced GPS, camera, internet hotspot and video- teleconferencing hardware. The home is now also the office. And now, you can dine at the supermarket. The supermarket prepared foods industry was expected to grow to $14B in 2011. In a particular month, 64% of adult consumers reported having gotten ready-to-eat/heat-to-eat food from a grocery store or supermarket. As supermarkets compete for a portion of the consumers’ stomachs by putting this strategy at the forefront, restaurants should view this threat as moderate to high.

Rivalry among Existing Competitors: High Intensity of rivalry
The intensity of rivalry is high in the restaurant industry based on the following factors: competitors, industry growth rates, and exit barriers.

Competitors
Competitors are numerous in the global restaurant industry. Of the countries populated with the most restaurants, the top fifteen countries’ restaurants total over 12.7M. The global restaurant industry leaders, in terms of sales, account for less than 2% of total industry sales. This means, not only the competitive landscape is highly populated, but also the industry leaders are close in size and power. For global restaurant industry players, irrespective of size, the rivalry is intense, and new business is usually acquired at the expense of another player. Buyers have a myriad of choices from a low-priced value meal at $5 to a $250 tasting menu at a celebrity restaurateur’s establishment. Therefore, the rivalry translates across all segments of the industry.

Growth
Although the US has experienced its fifth consecutive year of real growth in restaurant sales, the gains remain below what would be expected during a normal post-recession period. Countries that have done well in the past are now experiencing negative growth, or otherwise are in decline, namely Japan, the UK, Germany, and France. Competition for market share ensues in such climates as growth is slow and business is either gained from or lost to rivals. In emerging markets, such as China and India, restaurant participants are experiencing more growth and less rivalry. Figure [ 13 ]: Restaurant Sales Growth in 2014 (projected) | | [ 18 ]. Sourced from Euromonitor International/Bernstein Estimates and Analytics |

Exit barriers
Exit barriers can be measured as a component of structural or economic exit barriers, corporate strategy exit barriers, and managerial exit barriers.

Structural or economic exit barriers
Restaurants require durable assets that are specific to the foodservice industry. However, when a restaurant divests its operations, the resale of the equipment, furniture, and supplies is still valuable. Restaurants are opening every day and restaurants are also shutting down every day which creates a market for resale restaurant equipment and supplies in the commercial foodservices market. Outside of the restaurant industry, opportunities still exist in the noncommercial foodservices such as healthcare and business and industry sectors. Such opportunities makes the structural/economic factor less of a barrier for firms that want to divest, especially if the durable assets can command higher values in other capacities.

Inventory liquidation may be difficult for firms that operate in large volumes. The perishability of food products means on-hand inventory will rapidly lose value. Suppliers used to operating to fulfil large orders will have to scale back operations and/or find other buyers.
Distribution, receiving and transportation arrangements can be of use to industry rivals and once a firm exits the business, they will likely be swallowed up into rivals’ existing distribution networks thereby lessening this barrier to exit.

Corporate strategy exit barriers
Many of the larger firms in the industry manage multiple brands such as Yum Brands, Inc. and Darden Concepts’ restaurants. A firm in such a position may decide to divest its operations in one of the brands and have that business exit the market. However in doing so, it can affect the company’s relationship with it customers, distribution channels and suppliers. For such firms, there is a high degree of interrelatedness that makes exiting difficult.

Managerial exit barriers
In general, the fixed costs associated with financial resources and top management time consumed in the process of actually divesting a business may pose a substantial deterrent to exiting the business.

It is important to note that exiting a business may also be taken externally as a sign of failure. For restaurants that conduct business using the franchise format, it is important to maintain the image of vitality to attract more franchisees. A franchise may close business due to low financial performance but the low financial performance can be disguised by the company by reclaiming possession of the franchise and refranchising it to another person thereby lessening the incentive to exit. A business can be in financial turmoil, but as long as the parent company received its upfront franchise fee and subsequent royalties, they are not as incentivized to exit the business. Once a franchisee has notified the franchisor of financial distress, the franchisor can sue for what it is owed knowing that the franchisee cannot afford legal fees. This system of churning franchises masks the financial information that would aid in determining to exit a business. It also presents conflicting goals in an organization.

Price competition
Rivalry is especially destructive to profitability if it gravitates solely to price because price competition transfer profits directly from an industry to its customers.

The largest rivals in the restaurant industry compete on the basis of price. They only account for 2% of the overall market and thus the rest of the industry competes on a variety of bases. Other restaurants have differentiated products and entrants can easily enter and exit the market. Therefore price competition is moderate. It is higher in markets where the larger firms dominate such as the US; however it is lower in markets where they do not dominate such as India. The restaurant industry’s product, namely food, is perishable. Perishability also creates a strong temptation to cut prices and sell a product while it still has value.

Industry Analysis Recap
The industry analysis revealed the following: * The industry is split into two segments: full-service restaurants (FSR) and limited-service restaurants (LSR) * Global sales are up 4.9% * The global labor force is up 2.4% * The grand majority of restaurants in the industry are independently operated * The largest industry players are multinational restaurant chains * The countries with the most restaurant outlets are: China, India, Brazil, Japan, and the US * The countries with the most multinational restaurant chains are: the US, Taiwan, the UK, Japan, South Korea * The Asia-Pacific region is the biggest market with 46.6% of global revenues * Globally, the largest segment is FSR accounting for 53.8% of total industry value * Domestically, the largest segment is FSR accounting for 31.6% of total industry value * The six leading competitors are: McDonald’s Corp., Doctor’s Associates, Inc. (Subway), Starbucks Coffee Company, Yum Brands, Inc., Burger King Corp., and Darden Concepts, Inc. * Between the years 2003-2009, the China restaurant market has grown to be largest restaurant market with a 68.1% change. Next is India with 71.7% change and Brazil with 13.4% change. * The fourth largest restaurant market, Japan, has seen a 8.4% decline in restaurant outlets between years 2003-2009 * During the economic recession, profitability increased for fast food restaurant McDonald’s while profitability decreased for full service Darden restaurants during the same period. * Domestically, FSRs and LSRs are in the maturity phase. Projections for industry revenue and GDP growth are both 2.1%, indicating growth occurring at the same pace, a significant sign of a mature market. * Firms are finding quality growth in emerging markets as well as less rivalry * There is a moderate threat of new entrants * Industry incumbents enter into strategic alliances to reach more consumers and raise barriers to entry * There is a moderate threat of suppliers * Restaurants that depend on standardization rely heavily on supplier consistency * Restaurants that pit suppliers against each other in bids create a struggle between buy low, sell high dynamics * The threat of buyers is high for the restaurant industry * Buyer integration is high and buyers face little to no switching costs * The threat of substitutes is high * Comparable substitutes are better price performance trade-offs impact the restaurant industry’s share of the consumer’s stomach * A new niche called the Grocerant has emerged offering ready-to-eat and heat-and-eat prepared meals at grocers * The threat of rivalry is high based on competitors, industry growth rates, and exit barriers
Introduction: Macro Environmental Analysis

In order to fully understand how an industry operates, its external factors must be analyzed for conditions that impact the firms operating in the industry. The macro-environmental research that was performed on the restaurant industry assesses the external factors that can be a potential threat to the firms in which it operates and which have a direct impact on the industry’s performance and strategies. The method for analysis used in this study focused on the technological, legal, political, regulatory, social-cultural, demographic and economic factors of the restaurant industry.

These factors were evaluated in order to provide a better understanding of how the restaurant industry responds to them and the level of influence they have on its operations. These seven factors are discussed in depth during this analysis and were chosen in order to provide a better understanding of how the industry operates on a global level as well as how susceptible it is to certain external conditions.

These factors affect the restaurant industry in both positive and negative ways, which will be covered in greater details during this analysis. Because the industry is very consumer driven, many of the external factors that will be discussed have a substantial influence on additional costs that restaurants incur, as well as demand and what consumers are willing to spend. In particular, influences such as technology affect buyer behavior as consumers like the idea of convenience and the time it saves them when making food purchases. Issues surrounding the legal, political, and regulatory aspect of the restaurant industry provide a bigger picture as to the challenges that many restaurant chains face with regards to entrance into the market and maintaining complacency. During this macro-analysis, it will become evident who the consumers are that drive the restaurant industry based on the demographic and social cultural information that is revealed. This analysis will help us to understand who the most influential target market is to the restaurant industry and how their lifestyles and cultures affect their food choices and buying habits. Lastly, the analysis will look at the economic perspective of the industry, which will help to identify how external factors such as inflation, interest rates, foreign direct investment, and raw materials can have a significant impact on how the restaurant industry operates and how it affects its profitability. Assessing each of these external factors will create a better understanding of how strong the international restaurant industry is in the marketplace and how vulnerable it is to external factors in the environment.

Technological
The international restaurant industry is one sector that has been tremendously affected by the ever growing changes in technology. This has become evident by the way consumers have reacted to using new technologies at restaurants. A study done by the National Restaurant Association found that 40% of respondents are willing to use a smartphone app from a quick service restaurant, while 32% said they would use a mobile or wireless payment option if a full service restaurant offered it as a payment option. Technology can streamline management functions, provide consistency for chain restaurants that have multiple units, and improve overall business profit.

Technology Awareness
There are many new technologies that were developed to increase customer traffic in the restaurant industry. One example is waiting applications, which send text messages to customers alerting them when their table is ready as well as providing a forecast as to the length of the line at restaurants. Some restaurants are now even using QR codes in order to capture their customers’ information in order to keep them updated with news and promotional offers. For customers who are in a hurry to pay their bill, or do not want to spend the extra time dealing with servers, there are mobile payment applications available so that customers can pay their bill at any time during the meal without having to wait. In order to keep communication channels open between employees so that information gets relayed quickly, some chains are now using cloud-based online collaboration and communication suites. These collaboration tools allow team members to share, organize and store emails, messages, documents and other material in online suites where data is safely guarded and can be accessed at any time and from anywhere by authorized personnel.

There are many areas of a restaurant’s operation that depend on technology. Electronic point of sale, property management systems, accountancy and procurement systems, and employee scheduling are some of the areas where technology has taken over. In order to help managers deal with situations such as finding vendors, maintenance service workers, helping with workforce management, human resources, and inventory control, there are numerous software systems that have been developed in order to address each of these problems. In quick service restaurants, where drive-thru sales constitute a major portion of revenue, digital menus that suggest side dishes and desserts are being developed in order to increase sales. Additionally, confirmation screens that read the order back to the customer in order to ensure accuracy are also being utilized to create faster and more efficient service. One example of a software program being used to create drive-thru efficiency is software called HyperBob. This software helps to manage QSR (Quick Service Restaurant) Operations by directing managers as to how much food to prepare based on the number of vehicles waiting in line as well as the demand for promotional and popular items. Full service restaurants offer customers the ability to make reservations online, using systems such as OpenTable. This website has a list of main restaurants in a certain area, and there are filters based on review ratings, popularity, price and type of cuisine. The customer chooses the time they want to make the reservation and this information is then relayed to the restaurant.

Figure [ 14 ]: Technology in the Restaurant Industry | | [ 19 ]. Infographic sourced from National Restaurant Association |

In London, some restaurants use E-tables, which allow customers to order food, play games, and request their bill using touchscreen devices. In Italy, customers can create their pizzas using touchscreen devices as well. An Italian chain restaurant, Carluccio’s, is now offering an application for the blind and visually impaired, which provides them the ability to listen to and read the menu more easily. The European Dining Index found that one third of European restaurants are now taking orders online, 40% have a mobile optimized website and 68% can do online bookings. Restaurants are also offering free Wi-Fi to patrons dining inside their stores, and developing software that allow customers to place their orders using computer generated voice systems. Figure 14 demonstrates that the majority of restaurants are going onboard with technological trends by offering customers the ability to have their dining experience laced with technological quirks.

Figure [ 15 ]: Rank of top 10 companies in social media interaction | | [ 20 ]. Sourced from Nation's Restaurant News |
Social Media
Chain restaurants are increasing their communication channels with customers. The restaurant industry is now using social media platforms to showcase advertising strategies and to retain valued customers. Customers can use Facebook, Twitter, Google, and many other social media websites to learn about promotions, menus, share experiences, and provide feedback. A study conducted by Wall Street Journal found that pizza companies, like Domino’s and Pizza Hut, had at least 40% of their business conducted online. Other statistics show that three out of four customers have used Facebook to make a decision about restaurant or retail options.,

Restaurants in places like Hawaii and Sri Lanka are seeing an increase use of social media outlets. The European Dining Index found that 73% of restaurants are active on Facebook and 48% on Twitter. In Asia, 72% of customers are using social media to decide what to eat and which restaurant to choose.

Research and Development
There are a few restaurants around the world that serve as R&D kitchen labs for renowned chefs. These kitchens are not set up to feed customers; rather they serve as a place where chefs can experiment with food in order to design new recipes. Places such as Mugaritz (Spain), Noma (Denmark), Moto (US) and Sat Bains (UK) are examples of locations that are embracing the idea of these kitchen labs. Some companies, such as Subway for example, already have a dedicated R&D executive in charge of overseeing product development (menu expansion, for example), so that the company is able to gain a competitive advantage.

More developed R&D plans are usually conducted by the major players in the restaurant industry. For example, Darden Restaurants developed a multiyear plan to enhance their technology capabilities in order to better serve customers in this digital era. McDonald’s also has a strong focus on R&D, as it has R&D facilities located in the U.S., Europe, and Asia as well as contracts the services of independent R&D suppliers. Another large restaurant chain, Yum Brands, also has R&D facilities located in China and the US. They have spent $31M, $30M, and $34M in 2013, 2012 and 2011 respectively specifically on R&D. In order to assure food quality, chains like Darden Restaurants Inc., Dine Equity Inc., and Subway are urging suppliers to use GSI standards – a neutral, not-for-profit organization that develops and maintains standards for supply and demand across multiple sectors. These suppliers need to have a GS1 issued bar code application referred to as GS1-128 developed to track supplies throughout the food chain.

Technology as a Barrier to Entry
The use of technology gives larger restaurant chains an advantage over smaller restaurants, thus making it harder for these smaller organizations to succeed. In the quick service segment, for example, larger chains have better developed technology to improve their products as well as more funding to invest in marketing strategies to use on social networks such as Facebook, Twitter and other social media as a way to interact with their customers. Full service restaurants, like Ruby Tuesday’s and Outback Steakhouse, are able to use technology in order to understand what their customers want and create innovative services, like curbside service, which allows customers to be waited in their vehicles. Easier access to technological tools allows larger companies to develop a closer relationship with customers as well as reach more customers with marketing strategies.

Automation
The trend in the next years is for restaurants to replace labor with robots. Back in 2006, Subway was one of the first chains to test this technology, where customers placed orders in electronic kiosks-machines similar to ATMs. Panera Bread has also recently announced that it will offer self-ordering kiosks in stores as well. Restaurants such as Applebee’s and Chili’s are now offering customers the ability to place orders using tablets installed on their tables in order to create efficiency and convenience for the consumer.

Although this may not happen for quite some time, there has also even been discussion in the restaurant industry around the development of self-driving cars to make deliveries and robots that bartend and prepare hamburgers in the future. In addition to this, restaurants are now using automated solutions that control and standardize their hiring processes, scheduling, time, attendance, and absence management.

Technological Effect on Costs
Technology has allowed restaurants to lower overall costs by providing systems that better manage operations, such as scheduling, procurement, and accounting procedures. Software that allows customers to make purchases online has also helped restaurants to decrease labor costs, while increasing productivity by increasing the number of orders. Technology has also helped restaurants cut costs by improving inventory control, kitchen organization and accuracy of the reporting of operational information.

Legal

Labor Laws
The International Labor Organization (ILO) formulates global labor standards as an agency of the United Nations. The ILO creates benchmark conventions for labor standards through its annual meetings, which are then sanctioned by 96% of UN members who participate in the organization. These countries agree to abide by these guidelines and hold restaurant owners to these standards. Figure [ 16 ]: Min. Wage of Selected Countries | | [ 21 ]. Sourced from Wikipedia |

Restaurants operating in the US are required to abide by the US Department of Labor (DOL) laws. The purpose of these laws is to regulate employee wages and hours through the Fair Labor Standards Act, which requires businesses to pay at least a federal wage minimum of $7.25 as of July 2009. Restaurants have one exception to this law in that employees earning tips can be paid hourly wages as low as $2.13 per hour, so long as in total (hourly wage plus tips) the employee earns at least minimum wage. The DOL additionally prohibits discrimination via the Equal opportunity laws.

Another important law in the restaurant industry is the Occupational Safety and Health Act, which regulates safety and health of workers in the US and many other employee protection regulations aimed at protecting injured workers, union workers, retirees, and many others.

In China, the Labor Act of 1994 set minimum wages and maximum working hours for employees and was created to protect women and children from unfair treatment. In countries like Japan, the Labour Standard Law was designed to set minimum wages and prohibit discrimination and forced labor among employees. On the other hand, countries such as Germany do not currently regulate minimum wage, but do have regulations in place that make it illegal to pay an employee an “immoral wage.” This is expected to change in 2015, when the German minimum wage is enacted.

Food Safety
The World Health Organization (WHO) is the global authority on health for countries that are part of the United Nations. WHO researches and sets standards designed to protect the health and welfare of the world’s population. Concerned with the spread of disease globally, WHO is the organization that steps in when contagious diseases threaten human health. Most recently, WHO has been tackling the Ebola epidemic in West Africa. Another organization that is important in ensuring healthy safety is the Center for Disease Control and Prevention (CDC), which protects US citizens from threats to their health and safety due to disease outbreaks. The CDC recently worked to prevent the spread of Salmonella illness in Illinois due to infected food from Subway restaurants.

The US Food and Drug Administration (FDA) is responsible for regulating the safety of America’s food supply amongst many other responsibilities including regulation of medications, tobacco, vaccines and veterinary products. In order to keep compliancy among restaurants in the US, all restaurants must register with the FDA before beginning operations. In 2010, the FDA instituted legislation requiring restaurant chains with more than twenty locations to display calorie data on their menus for customary items and have nutritional facts available for customers to view. In China, food safety is regulated by the China Food and Drug Administration (CFDA) through a number of agencies including the Department of Food License and Department of Food Safety Supervision. Japan utilizes “Korosho” or Ministry of Health, Labour, and Welfare to regulate standards for food and drugs. Similarly, the UK is governed by the Food Standards Agency and Russia is governed by the European Commission’s Department of Health and Consumers.,
Political

Tax and Tariffs
International restaurants are subject to business taxes, tariffs, and various labor laws contingent on the country in which they operate. While these tax rates vary between countries, some of them can have a significant impact on a business. For example, over an 8-year period from 2006-2014, tax rates were the reason that many businesses in various countries experienced a decline. While the US remains unchanged with a 40% tax rate, corporate tax rates in China have decreased by 32%, Brazil decreased by 36% and the UK decreased by 43% in the last 8 years.

Table [ 6 ]: Corporate Tax Rates of Selected Countries

[ 22 ]. Sourced from KPMG International

Tariffs, taxes on imports and exports, also vary for restaurants operating in multiple countries. While overall tariff rates average 0% to 5% in the major countries listed in chart below, tariffs on food and beverage ranged from 0% to 26%. In order to prevent paying these high tariffs restaurants must find local suppliers, which can be very challenging particularly in underdeveloped countries.

Table [ 7 ]: Tariffs of Selected Countries

[ 23 ]. Sourced from Find the Best

Trade Restrictions in various global countries:
China:
Prior to 2001, China severely regulated imports with restrictions on trading rights, tariffs, and more. Since 2002, China joined the WTO (World Trade Organization), which has reduced such restrictions and allowed expansion for trade with foreign companies. China has liberalized much of its trading practices, through treaties such as China’s revised Foreign Trade Law in 2004; however, the country still lags behind its liberal counterparts in the global market.

Japan:
Currently, Japan has vast trade barriers that limit international trade. Japan holds many high tariffs on food products imported from the US. As a result, any restaurant food products would likely have to come from within the Japanese market. The US is attempting to encourage the reduction of these barriers through the US-Japan Economic Harmonization Initiative, which encourages growth, cooperation, and foreign trade.

Germany/France/UK/Italy/Spain:
As part of the European Union, there are no tariffs on trade between these countries. However, there are barriers to trade such as health and safety, and packaging requirements that create some hindrances to international trade. These are referred to as ‘technical’ barriers to trade, which the WTO is working to remove to prevent them from obstructing international trade opportunities.

Brazil:
As a member of MERCOSUR custom union, Brazil upholds a Common External Tariff (CET) along with other members such as Argentina, Uruguay, Paraguay, and Venezuela. The CET provides rates from 0-35% (averaging 11.6% in 2012) for ‘favored’ nations. On the other hand, outside trade through the WTO averaged 31.4%. Brazilian government reserves the right to change tariffs rates and often does this to protect domestic competition. This ambiguity makes it difficult for international restaurant owners to forecast costs with any certainty.

Russia:
In 2012, Russia joined the WTO, at which point both the U.S. and Russia lifted their non-application status and consented to trade agreement terms under WTO’s regulations. However, in May of 2014, the US imposed a trade ban and investment discussions after Russia’s military intervention in the Ukraine. As relations between the US and Russia remain politically unstable, it is unclear as to what extent trade relations will be reestablished with Russia.,

Political Stability

Figure [ 17 ]: Political Stability Index for Selected Countries | | [ 24 ]. Data sourced from The Economist Group |
The political stability of a country affects the businesses operating in that country, including restaurants. George Mason University created the Political Instability Task Force which gathers data regarding the political stance of countries across the world. Factors included in the calculation of political stability range from poor governance to cases of discrimination and level of public services. The overall index is measured from 0 for no vulnerability, to 10 for highest vulnerability. These factors will influence a restaurant’s ability to hire employees, secure suppliers, and commence operations. As a result of these factors, the political situation of a country should be considered by restaurant management before deciding to invest in capital.

Figure [ 18 ]: EPI for Selected Countries | | [ 25 ]. Data sourced from Yale University |
Environmental Performance

The Environmental Performance Index (EPI) rates countries on various environmental conditions. Factors considered include health impacts, air quality, water, agriculture, and climate conditions. In this index rating, countries are assigned ratings from 0 for worst cases to 100 for best cases in each category. The graph on left shows the overall 2014 Environmental Performance Index for selected countries. Australia is one of the highest ranked countries selected, with overall EPI of 82.4, primarily driven by a score of 100 in the categories; health impacts, water and sanitation, and forests. Conversely, India has one of the lowest EPI scores due to scoring only a 10 in the water resources category and 23 in air quality. Environmental conditions can impact a restaurants ability to open and run operations and must be assessed and taken into consideration by management. These environmental factors affect the quality of goods which can be attained by restaurant owners.

Regulatory

Business Regulations

The restaurant industry is subjected to an enormous amount of regulations from government agencies and regulatory departments. These regulations are aimed at protecting consumers and employees as well as ensuring food safety. Owners desiring to open restaurants in major countries across the globe must fulfill an array of obligations before operations can begin. In the US for example, owners must acquire a legal name, a business license, a certificate of occupancy, and a health department permit in order to be able to open a restaurant. This is in addition to federal requirements where business owners must take extra steps to establish the business as a taxpayer. China requires thirteen procedures to open a business including making a company seal, registering with the local statistics bureau, and opening a bank account. Obtaining these required permits is both timely and costly. The below chart compares the number of procedures it takes to open a business in various countries, along with the minimal days these procedures take and cost to the restaurant owner.

Table [ 8 ]: # of Procedures, Time, and Cost to Open a Business in Selected Countries | | [ 26 ]. Sourced from World Bank Group | Equipment Regulations

The National Sanitation Foundation (NSF) is an agency of the Public Health and Safety Organization as well as a protector of global human health. NSF tests and certifies food service equipment to ensure it is safe for use as well as helps to prevent food products from contamination. NSF provides one-time certification of food service equipment and conducts on-site audits of equipment to verify it continues to comply with all standards. For restaurants this includes commercial food equipment such as refrigerators, freezers, and meat processors. NSF is a Global Food Safety Initiative (GFSI) certifier, which establishes standards for food retailers around the world. Many restaurants require their suppliers to be GFSI certified as this ensures the food is packaged, stored, and delivered properly to protect its quality.

Social-cultural

Cultural trends

Consumers who spend in the casual dining sector tend to do so because of the experience it offers as well as having the opportunity to spend time with friends and family. Consumers who choose to dine out are most interested in the quality of the food, portion size, experience, and how popular the eating establishment is among other consumers. The restaurant industry is most popular among younger consumers who are on the go and with reasonably higher incomes that are not as spending conscious, mainly consumers who fall under the middle class income bracket. Restaurants have been able to identify this as the most profitable segment of customers and by doing so, have been able to offer more opportunities such as a wider variety of foods more frequently throughout the day.

Other factors that have impacted consumer spending in the restaurant industry are unstable food prices, energy costs, a sensitive housing market, and consumers making a comeback from a harsh recession. When consumers have other financial burdens they are forced to be more cautious with their disposable income, which in turn affects their ability to spend on extracurricular activities such as dining out. Social media has also played a significant role in how consumers are eating and whether or not they will choose to dine out or prepare meals at home. Consumers tend to use tools such as social media to check online reviews before eating out in order to determine whether spending their time and money is an investment for them.

Because the restaurant industry is so vast it appeals to a variety of consumers, which has opened doors for expansion and opportunities to improve profitability. The outlook for the restaurant industry in 2014 is positive, as it is estimated to reach $992B in revenue and 586B transactions worldwide - a large increase from previous years. Other impacts on the restaurant industry include risk factors such as sanitation and food borne illnesses that can result in loss of customer base and reduced customer loyalty. Customer service is also critical to the success of the restaurant industry. If customers are receiving poor customer service they will choose to purchase goods from the grocery store and prepare home cooked meals or prepackaged meals as oppose to spending money eating out. The restaurant industry also has to adjust to price changes quickly and pay attention to the market conditions; otherwise this can result in loss of profits and opportunities with suppliers. This happens frequently with food items such as vegetables, beef, and chicken. When economic conditions like higher gas prices and unemployment rates take place the prices of food is also greater and impacts the way many restaurants operate.

Health Considerations

Health conscious consumers are increasingly growing in number and changing the way that many restaurants do business. This trend has become more and more important among consumers and is driving them to live healthier lifestyles and to be more health conscious about the food items they choose. This has caused the restaurant industry to change their portion sizes as well as find healthier substitutes by working with alternative food suppliers to find organic and more nutritious foods. Nutritionists and researchers in the food industry have created consumer awareness by bringing attention to the fact that frequently consumed processed foods can cause harmful effects on the body and become a source of various diseases.

The fact that customers have become more aware of healthy eating habits has caused pressure on the restaurant industry and left them with no other choice but to substitute unhealthy menu items with salads and organic foods in order to maintain their customer base. This has even impacted developing countries such as India, whose consumers like Americans are also concerned about maintaining a healthy life style and making the right food choices. Diseases such as heart disease and diabetes are among the top diseases that consumers in India are making an effort to avoid. The initiative to maintain healthy eating habits is especially strong among the older female population in India.

Lifestyle

The food choices and the restaurants that consumers choose are in some cultures a direct reflection of their income level and life style. Consumers in China view food as a symbol of their social class and the income level they represent. By choosing more extravagant food choices, this displays to family and friends that they are doing well financially and have the additional means for fine dining. In India, consumers tend to dine out in order to gather with friends and families, typically in larger groups of individuals. Because the population in India begins working at a fairly young age, this provides the younger working class population the additional income to be able to dine out more and explore different restaurants and food options. Consumers who make a higher income take pride in their income levels and thus are more apt to fine dining and more luxurious restaurants.

In the US, while Americans still continue to seek out casual dining and fast food restaurants to accommodate their busy life styles or spend time with friends and family, many are still cautious of spending as they are trying to regain their financial position from the recession that took place from 2007-2009. As a result of the recession, employment was affected and earnings for many consumers saw a significant decline. Unfortunately, this has still left an impact on consumers even in 2014, and as a result more families are preparing meals and eating at home together. Restaurants have reacted to this trend by offering value meals and more affordable food options in order to win back these customers.

Figure 19 illustrates food-away-from-home (red line) declining as a percentage of food expenditures during the economic recession in 2008-2009. Post-recession food expenditures can be seen increasing with food-away-from- home as the major cause. This is favorable for the restaurant industry as more consumers are purchasing food for consumption away-from-home rather than for consumption at-home.

Figure [ 19 ]: Increasing trend of food away from home consumption | | [ 27 ]. Sourced from USDA, Economic Research Service |

Safety/Health Concerns

Food safety concerns are substantial among consumers even in developing countries such as India and China. Restaurants such as Yum Brands’ KFC and McDonald’s are making a large presence for themselves globally, which has created a fad among international consumers as it symbolizes a more urban way of living. In China, fast food dining has become so popular that it has resulted in high consumption of fatty unhealthy foods leading to obesity spreading across the Chinese population. Other countries that are also developmentally on the rise such as Vietnam and India face similar challenges by consumers overindulging at fast food restaurants, which cause malnourishment due to the high consumption of low quality foods. This in turn is causing disease such as diabetes, high blood pressure, and heart disease to emerge in greater numbers among these populations. Another safety concern for restaurants operating globally is not adhering to proper sanitation and licensing guidelines. In developing countries proper protocol is not followed, leading to contaminated food that causes food borne illnesses among consumers. In countries such as India, many of the restaurants do not carry the proper licensing or follow the required health and safety guidelines, causing even high quality foods to become contaminated. As this has become an increasingly large problem in India and created awareness to consumers, The Food Safety and Standard Authority of India (FSSAI) is now forcing every operating restaurant in India to obtain the necessary licensing.

Demographics

Figure [ 20 ]: Growth of Middle Class in US, China, and India | | [ 28 ]. Sourced from The Queen's Business Review |
Although, the target market strategy of the restaurant industry attempts to appeal to all age groups and income levels, its target market is on younger working class professionals who have a higher level of disposable income and busy on the go lifestyles. The middle class working individuals whose incomes are on the rise are also a fairly large target as these group of individuals have a growing income that allow them to spend more frequently on higher priced food items. The middle class population in China, India, and the US are important target markets for the restaurant industry.,

Income level

Disposable income in the restaurant industry is what many restaurants use to determine prices and how successful sales will be for the given year. Restaurant sales are dependent on income levels and the amount of disposable income consumers have as this affects a consumer’s ability to dine out as often and to purchase more expense food options. Although, US consumer’s disposable income is not where it should be in terms of flexibility, it has grown by 3.3% since 2012 and is slowly managing to recover. However, for the time being restaurants are taking the trend with disposable income into consideration as this has a large impact on a consumer’s ability to dine out as often and having to save funds for other finances and necessities.

Figure [ 21 ]: Growth of Disposal Income in China | | [ 29 ]. Sourced from CNN Money |
While countries such as the US are attempting to improve their level of disposable income, countries such as China, are experiencing a fast growth among various geographical areas in the country and income levels. The urban and rural disposable income levels have risen by 10.9%, with urban residents experiencing an increase of 9.7% and the lower income an increase by 12.4%. In countries such as India, the disposable income level is growing so quickly that the middle class population has been steadily increasing overtime. With India’s growth rate estimated at 9-9.5% over the next five years, the amount of disposable income will continue to grow even larger leading to a more flexible spending level for consumers.

Figure [ 22 ]: Growth of Disposable Income in India | | [ 30 ]. Sourced from Unitus Seed Fund |
Consumer Profiles

Understanding target markets globally is important for international restaurants. In China, restaurants target the middle and upper class Chinese population as these are the individuals who have the flexibility in their income to spend more eating out and on more expensive menu items. The average middle class consumer in China consists of having a dual income household and one child. In a middle class household in China, it is expected that at least one of the parents will possess a college degree, which leads to dining out at more upscale restaurants as a result of their education. The education level of Chinese consumers has a direct impact on their income level and the ability to choose more upscale and fashionable restaurants with better quality foods.

The fast food industry’s target market in India consists of both male and female, young unmarried, working professionals. India’s target market is considerably focused on the middle class, which is continuing to grow as well as younger consumers due to the younger working population in India. The US is similar to India and China, where the middle class is also an emerging market which restaurants choose to place much of their focus on. This includes consumers who fall within the age group of 35-54 and have the additional income to be able to spend eating out. Consumers who have college degrees are estimated to be able to spend more eating out as a result of more employment opportunities and the ability to make a higher income. This group of consumers ends up spending 39% higher than the typical consumer. Another target for restaurants in the US is families, who make 49-51% more frequent trips eating out than the average consumer due to their busy lifestyles. The fast food markets cater more to younger consumers, while casual dining is more popular among the age group of 50 and over.

Living Standards

Living standards in different countries impact consumer food choices and their ability to dine out, whether it is in the casual dining or fast food industry. The wealth in China is only continuing to grow and has had a significant impact on the younger Chinese population with regards to where they dine out and spending on more luxury items. Eighty percent of the Chinese population accounts for individuals under the age of 45, which is much higher when measured up against the US and Japan, which is 30% and 19% respectively. Because of such a large percentage of consumers that are up and coming and consist of the younger portion of the population, they have a higher interest in finer things and choosing more expensive and trendy restaurants to eat out at. In India, consumers tend to eat out more frequently because of restrictions on housing and the shortage of homes needed to accommodate the growing population. These restrictions have resulted in a larger number of the younger population leaving their homes and escaping to restaurants as a way to meet and socialize with friends and family. In cities in India such as Mumbai, eating out is such a large part of a consumers’ recreational activities that approximately 30-35% of their time is spent dining out.

Culture and tradition

In Asian countries dining out is a cultural tradition where time is spent either gathering with large groups of friends and family members or where working professionals meet to conduct business. The restaurant industry in China has taken notice of these traditions by incorporating them into the way food is prepared and served as well as its appearance. When Chinese consumers dine out at casual dining restaurants they look more to restaurants that can provide a peaceful, relaxing and more private environment as well as serve larger groups of individuals at one time. Chinese consumers usually visit restaurants in larger groups and tend to be served dishes to share around the table at one time. As a result of this, restaurants in China have spent more time creating a dining experience that provides more privacy to families and high profile business professionals to allow them to conduct business and spend time with family in private.

In American culture consumers like to receive a personal level of service when dining out and have higher expectations as to the level and quality of service they receive from staff. For consumers that are repeat customers, they expect a certain level of service every time they visit a restaurant and will many times not accept anything less. Americans looking to save even more in today’s economy are always interested in obtaining the most value for their dollar. This is why the way they are treated by the wait-staff, the quality and appearance of food, and the experience they receive from the restaurant are all of utmost importance when dining out. In European countries, consumers have become more conscious of their spending habits and when choosing restaurants do so based on factors such as pricing which takes priority over the quality of service they would receive. Europeans have reduced the amount they are spending in the interim, until they receive reassuring signs that the economy has moved closer to improvement. Until then, European consumers look to convenience and cost to drive their food choice options.

Economics

Economic Pressures

The most recent economic downturn pressured consumers to trim their purchasing costs. Eating at restaurants as oppose to home is generally seen as non-essential. As a result, many restaurants in the industry saw a decline in sales. One exception to this decline is restaurants that offer value meals and compete on the basis of price. Formal dining restaurants also did not face much of a decline as their customers are generally higher income and not as affected by the economic downturn. Only the restaurants that fall somewhere in between were hit the hardest.

Economic Growth

The restaurant industry has seven countries that dominate its market share. These markets include: Japan, the US, the UK, France, Canada, Spain, and other. However, there are four countries that are key players in the industry: Japan, the US, the UK, and Canada. Japan has the largest portion of the market share, while the US is second largest, and the UK and Canada share the market on a smaller scale. These four main markets JP, US, CA and UK account for 80% of global sales. In 2013, the global industry did fairly well with a growth rate of 6.4% from 2009- 2013 and is expected to grow even higher in 2018 to 7.4%. Asia Pacific and Europe also had sustainable growth rates of 1.8% and 9.8%, which are also estimated to increase by 2018 to 4.3% and 9.4%.

Figure [ 23 ]: Major Regions of Restaurant Industry 2013 | | [ 31 ]. Sourced from Global Restaurant Industry Profile |

The restaurant industry is broken down into two main segments: casual dining restaurants such as Darden Restaurants and quick serve restaurants such as McDonald’s and Yum Brands. In 2013, the casual dining segment proved to be the more profitable segment of the industry by occupying 53.8% of the market segment and bringing in revenue of $1.4T, while the quick service segment brought in revenue of $561.9B maintaining 21.8% of the market revenue. The restaurant industry brings in revenue by selling food, soft drinks, and alcoholic beverages through various sectors such as cafes, restaurants, fast food, bars, and catering companies.
The most recent economic downturn pressured consumers to trim their purchasing costs. Eating at restaurants as oppose to home is generally seen as non-essential. As a result, many restaurants in the industry saw a decline in sales. One exception to this decline is restaurants that offer value meals and compete on the basis of price. Formal dining restaurants also did not face much of a decline as their customers are generally higher income and not as affected by the economic downturn. Only the restaurants that fall somewhere in between were hit the hardest. Therefore, this threat level is determined to be moderate as its effects vary amongst industry participants.

Employment

The global restaurant industry is performing fairly well in terms of employment as the number of employees has continued to grow from 2009-2013 by 2.1%, increasing the number of employees to 62.4M. Employment is expected to grow even larger to 69.1M over the next five years. The fact that the restaurant industry is creating more jobs by its expansion has helped to stimulate the economy by employing a large number of individuals, thus decreasing the unemployment rate. Large companies such as Yum Brands dominate the restaurant industry in countries such as China, and have a strong focus on employee development and growth. Yum Brands has had such a strong impact on the employment rate in the restaurant industry that in 2013 they were able to employ 1.5M employees in 40,000 stores across 128 countries.

Figure [ 24 ]: Growth in Restaurant Industry Employment | | [ 32 ]. Sourced from Global Restaurant Industry Profile |

Other successful companies, such as McDonald’s, had a high employment level of 440,000 employees’ in 2013 on a global scale. Yum Brand stores, like KFC restaurants in China, are focused on growing their brand, which they understand takes strong employees. This is why in 2013 alone; KFC made this a priority by hiring 8,000 new management recruits into their management training program. The individuals they hire are important to their brand growth, which is why 100% of their management staff possesses a college level education, while 50% of their team members attend a university.

Table [ 9 ]: # of Employees and Outlets for Select Countries | Country | # of Employees2013 | # of Outlets2013 | China | 22,442,584 | 1,060,264 | India | 17,722,871 | 862,672 | US | 4,717,893 | 239,829 | Japan | 2,034,911 | 96,136 | UK | 969,835 | 45,818 | Canada | 559,617 | 26,438 | 33. Sourced from Worldwide FSR Industry Report |
Raw Materials

Efficient management and control of raw material is important in maximizing profits and minimizing costs for many restaurants. Restaurants are largely impacted by high costs in controlling the amount of energy that is used on a daily basis for necessities such as lightening, use of kitchen equipment, and vitalization systems. Raw materials like energy and water can be increasingly expensive for firms within the restaurant industry, which is why many of the larger companies have made it a priority to spend the extra funds towards improving their equipment and machinery in an effort to reduce energy consumption. Companies such as Yum Brands are making a conscious effort to reduce their energy consumption costs by creating (Leadership and Energy Efficient Design) LEED stores. Yum Brands now has three LEED stores in China that are geared towards saving water and energy. By developing new lightening and air conditioning systems, this has allowed them to be able to save considerably on energy consumption.

Yum Brands is continuing to expand the concept of LEED stores in the US as well by having created LEED stores at two of their Taco Bell locations that also have a primary focus on energy saving and utility consumption. In turn theses efforts to save on raw materials have allowed Yum Brands to see an increase in profitability and a 25% return on investment. Yum Brands KFC LEED stores in India are redesigning its restaurant operations by installing upgraded equipment that has allowed them to reduce their water consumption by 42% and energy by 30% all in the time span of only one year. The restaurant industry has also had to consider the rise in fuel prices as this has become an increasing concern and has had an impact on consumer spending. Lower and middle class consumers are not as willing to spend the additional funds when fuel prices are on the rise for extra circular activities such as dining out as saving for fuel is their priority. Restaurants such as Applebee’s who depend on the low and middle class population is one of the many family friendly restaurants impacted by this trend and has experienced decline in customer visits due to the high fuel costs.

Interest rates

High interest rates can have a negative impact on consumer spending and the amount of disposable income they have available to make purchases that are not considered a necessity. For countries with higher interest rates such as Brazil at 11%, India 8%, and Russia 8%, these consumers may not have as much disposable income to use towards dining out, which in turn would affect the frequency of visits as well as a more cost conscious consumers. As a result, this has a negative impact on restaurants as it affects their ability to purchase new equipment and make upgrades to expand and grow their business and sometimes even results in a hiring freeze.

For countries that have lower interest rates such as the US at 0.25%, UK at 0.5%, and Japan at 0%, consumers have more freedom in their spending and helps to boost the economy. Lower interest rates in the restaurant industry allow potential for growth and investment opportunities, which help to stimulate the economy. For countries that have a larger role in the restaurant industry such as the US and Asia, lower interest rates provide the restaurant industry with an advantage in terms of growth, which is estimated to see an even higher growth rate increase of 7% by the end of 2014.

Foreign Exchange Rates

Foreign exchange rates can have a negative impact on restaurants that are conducting business internationally, whether it is US companies who own restaurants internationally or international companies that own restaurants in the US. This is especially true for some of the larger companies such as Yum Brands and McDonald’s who were hit hard with foreign exchange rates, ultimately having an impact on the amount of profit they could have potentially earned. In 2013, Yum Brands incurred costs of $7M just by currency exchange alone, which decreased their operating profit. Yum Brands China division was impacted most significantly by $1million, while the Yum Brands KFC division was impacted by $6M. McDonald’s is another major restaurant that has also been affected by high foreign exchange rates in the past as well, which in 2012 caused their net income to experience a decrease of 4% in the second quarter. While McDonald’s along with many other fast food international chains has the goal to provide consumers with quick and inexpensive dining, with increasing exchange rates this has become quite the challenge. High foreign exchange rates have affected many restaurants in terms of the cost of ingredients they have to pay for and when converting currencies from one form of currency to another. If companies continue to experience high foreign exchange rates when purchasing ingredients for their foods, this may result in many restaurants having to change food menu items or substitute ingredients that are lower in cost.

Inflation

In order for restaurants to maintain sustainable growth rate and increase profit they have to be proactive by responding to the changing inflation rates in the economy. Inflation in food ingredients and prices leaves many restaurants no other option but to increase their prices as well, which in turn has a negative impact on consumer spending. As prices rise, this results in restaurants finding alternative food choices and substitutes to accommodate them and their consumers. Larger companies such as McDonald’s, who at one point in 2013 was experiencing an inflation rate that was 8-10% higher than normal, reverted to increasing their prices by 5-6% in order to account for these additional costs and still be able to maintain a reasonable profit.

In 2012, Yum Brands were also negatively impacted by inflation in China by 4%, due to an increase in labor and material costs. Even with strong sales and growth, inflation rates can greatly reduce profits and decrease the amount of demand that restaurants typically see as a result of having to increase menu prices. High inflation in Europe has caused a decrease in consumer spending and made consumers more cautious with how to use the amount of disposable income they have available.

Foreign Direct Investment

Foreign direct investment provides opportunities for restaurants to expand into new markets in order to promote growth and reach customers internationally. Although, foreign direct investment among US restaurants is popular in countries such as Japan, Canada, Australia, and Mexico, foreign restaurants have also started to invest in the US as well in companies like in Burger King for example. Companies’ like Yum Brands have been expanding into more international markets in order to continue growth and expand their restaurant chains more rapidly. Foreign direct investment in countries such as India serve as an important means for growth and profitability due to the size of its population and how quickly its middle class is growing.

Yum Brands has seen significant growth since they first entered into the India market in 1996 and continues to be confident of future returns and growth that it has to offer. Yum Brands was so confident in its profitability that in 2012 they planned to invest $100M in India to expand its restaurant chain over a time span of 3-4 years. Companies like McDonald’s are rapidly investing in more Asian countries as they are recognizing the amount of growth potential and consumer trends that point to a higher demand for fast food in this region. As an increasing number of fast food restaurants such as KFC and Pizza-Hut are recognizing these trends other companies such as McDonald’s are quickly following behind them by also expanding their restaurants in these same markets as well.

Macro Environmental Factors-Section Recap

The external factors stated above: social-cultural, political, technological, legal, economic, and environmental were explained in order to provide insight as to the external conditions that exist in the restaurant industry. It is important for new and existing restaurant chains to consider these macro-environmental factors when making the decision as to whether or not they should enter into the market and what changes they need to adapt to in order to maintain a competitive advantage as these trends arise. There are many opportunities for profitability in the restaurant industry, however as this industry is highly susceptible to external factors, restaurant owners need to understand the importance of threats as well, which can quickly lead any business to failure if undermined.

Existing conditions * Increasing demand for quick service/ready-made food –The population of consumers that work outside of their home has caused demand for restaurants to increase over the last few years, especially in the quick service and casual dining segment. As younger and middle-aged customers account for the majority of the work force in the economy, this has resulted in them becoming the industry’s target market segment. * Advance of technological solutions –Advancements in technology has helped the restaurant industry to cut costs and increase productivity with systems that automatize various operations. Technology has also helped draw the attention of customers to restaurants with the help of social media websites such as Facebook, Twitter, Instagram, and others. * Decrease of corporate taxes – Corporate taxes are an important aspect of a company’s expenses, especially among major countries in the industry, such as China, Japan, the UK, and Brazil who have decreased their corporate tax rates making it more attractive for restaurants to expand their businesses in these regions. * Growth of middle class – A key characteristic of consumers in the restaurant industry is the availability of their disposable income. Typically, as incomes rise, so does the demand for food consumed outside of the home. The long standing markets in the US and Europe have traditionally provided the restaurant industry with quality growth and profitability. However, these markets have reached levels of maturity and decline. Currently, any growth will happen at the expense of other industry participants. For restaurants’ continued success, maintaining industry position as oppose to losing ground in the mature markets is vital to success. * Economy improvement – During the 2008 recession, not only were consumes impacted but the restaurant industry as well. As customers’ disposable income decreased, this caused many restaurants to seek out more cost effective alternatives for food substitutes and suppliers. As the economy has gradually improved, more consumers are now willing and have the means to enjoy the experience of dining out again. * Supplier power and dependence - Suppliers are increasingly integrating value-added activities into their operations thereby increasing their power and the industry’s dependence on their services. * Industry consolidations - Industry consolidations are common in mature markets as the level of rivalry is intense. The most recent merger between Burger King and Tim Horton’s will form the third largest restaurant in the industry. * Increasing health awareness – In the last few years, consumers have increasingly become more aware of health related issues. This awareness has caused an increasing demand for healthier food options, smaller food portions, and restaurants using more natural ingredients. Restaurants, in the quick service segment that have a large portion of their budget dedicated to unhealthy food items such as burgers and fried food, will have to make adjustments in the near future in order to meet this new market demand. * Increasing price of raw materials – When the price of raw materials increase, this ultimately affects the final price consumers pay at restaurants. The price of raw materials in the restaurant industry is projected to increase in the next few years, which could possibly lead to more consumers who are not willing to spend the additional funds towards eating out, but rather look for alternative food options. * Bureaucracy in emerging economies – For leading countries in the restaurant industry, such as China, Brazil, and India, opening a restaurant is very bureaucratic and takes a significant amount of time and investment. Because of the challenges and amount of work required, this may create a barrier of entry for new restaurants trying to establish themselves in countries such as these regions. * Many local and international regulations – The restaurant industry is subject to many local and international laws and guidelines. In order for a business to stay open, it has to comply with all regulations in that particular country; otherwise their non-compliancy can lead to loss of profit and cause even greater expenses. * Labor unrest – There is a movement of the labor force, especially in the quick service segment, for better wages and benefits. Labor comprises a big portion of the industry’s total cost and restaurants rely heavily on their employees in order to stay profitable. Having to pay higher wages means that restaurants will lose profits and the profit margin will decrease significantly. On the other hand, not yielding to the demands of employees can also cause loss to the industry in the form of strikes and under average performance. * Trade restrictions – Trade restrictions, in emerging countries make it difficult for international chain restaurants to expand as this requires them to rely heavily on domestic suppliers who may or may not be able to meet their criteria for quality supplies. * Fierce competition – The restaurant industry is a very competitive business with a low profit margin. Because of this, companies need to constantly be thinking of new ways to stay innovative in order to retain loyal customers and attract new customers to grow their business. It is even harder for new entrants to enter the restaurant industry as this means heavy competition with some of the more well-known brands that have already been operating for an extended period of time.
External Factor Evaluation (EFE) Matrix

The EFE Matrix below illustrates macro-environmental conditions that exist in the international restaurant industry. The weight assigned to each factor demonstrates the impact it can potentially have on the businesses that operate in the industry. The table illustrates that mature life cycle in the US and European markets, fierce competition, growth of middle class and price of raw materials are the external factors most relevant to the restaurant industry. Other external factors are important but do not have as high an impact as the aforementioned factors.

Table [ 10 ]: External Factors Evaluation (EFE) Matrix External Factor Evaluation (EFE) Matrix | | Existing Conditions | Weight | Economic improvements | 0.08 | Growing middle class in emerging markets | 0.05 | Mature life cycle in the US and European markets | 0.10 | Supplier power and dependence dynamics | 0.06 | Demands for transparency in food supply | 0.03 | Industry consolidations | 0.05 | Fierce competition | 0.17 | Increase in health awareness | 0.03 | Growth of middle class | 0.10 | Price of raw materials | 0.07 | Advance in technological solutions | 0.04 | Corporate taxes | 0.04 | Demands for quick service and ready-made food | 0.04 | Bureaucracy in emerging economies | 0.03 | Labor unrest | 0.03 | Trade restrictions | 0.02 | Local and international regulations | 0.06 | Total weighted score | 100% |

Conclusion

This report is based on an analysis of the global restaurant industry, which is divided into two major sectors, full-service restaurants and limited-service restaurants. The restaurants that are a part of this industry are either independently owned or part of multinational chains. Through this analysis, it was determined that the industry’s most dominant restaurant chains are McDonald’s, Yum Brands, Doctor’s Associates, Starbucks, and Darden Restaurants. The restaurant industry is highly fragmented and involves a strong level of competition between businesses. Although the industry is global by nature, the countries that generate the highest volume of service and largest revenue are US, Canada, the UK, China, India, Japan and Brazil. Because important markets such as the US and Europe have reached a mature phase in the industry’s life cycle, organizations are starting to expand into emerging markets in hopes of increasing revenue and brand recognition globally.

The Porter’s 5 Forces analysis and Macro-environmental analysis presented in the aforementioned sections demonstrates the internal and external conditions that can affect the industry and how businesses operate. Factors such as growth of middle class, industry consolidation, advancement of technological solutions, increase in demand for quick service and ready-made foods, high bargaining power of buyers, substitutes threat, and competitive rivalry all shape the industry and drive players to continue to change and innovate operations in order to stay well positioned in the market. It is important to note that these factors can have either a positive or negative impact on the industry as well as on individual organizations and must be closely monitored so as not to disrupt the business flow of the restaurant industry.

Internal Analysis: Comparison of Top Tier Firms

As previously mentioned in this report, the restaurant industry is split into two sectors: Full Service Restaurants (FSR) and Limited Service Restaurants (LSR). In the FSR sector, Darden Restaurants Inc. is the highest revenue generating company, considered the world’s largest company-owned and operated full service restaurant company. The LSR sector has three industry leaders: McDonald’s, Yum Brands and Burger King. All four companies are headquartered in the US, but McDonald’s, Yum and Burger King have a global presence with franchises as well as company-owned stores all over the world. Darden Restaurants Inc. is slowly beginning its foreign expansion. Although the restaurant industry is highly fragmented, McDonald’s is the industry’s leader in overall sales, accounting for 1.09% of total global restaurant sales. Yum has the lead in total number of outlets, with more than 40,000 units around the world. Following is a detailed discussion of each company.

Darden Restaurants Inc.

History
Darden Restaurants Inc. is the parent company of eight brands – Olive Garden, LongHorn Steakhouse, Bahama Breeze, Seasons 52 Fresh Grill, The Capital Grille, Eddie V’s Prime Seafood, Yard House and Wildfish Seafood Grille. Red Lobster was also part of the company, however was sold to the private equity firm Golden Gate Capital in July of 2014. William Darden opened the first restaurant, called The Green Frog, in 1938; in 1968, the first Red Lobster was opened in Florida. The company grew to an operation with three other brands- Olive Garden, Bahama Breeze and Seasons 52. In 1995, the company split from General Mills and became a public traded company on the NY Stock Exchange. In 2007, the company completed the acquisition of RARE Hospitality International, Inc. adding two more brands to its portfolio, LongHorn Steakhouse and The Capital Grille. In 2011, the company acquired Eddie V’s Prime Seafood and Wildfish Seafood Grille and in 2012 they also acquired Yard House. Also, at the time of the RARE purchase, the company created The Specialty Restaurant Group to support the operations of The Capital Grille, Seasons 52 and Bahama Breeze. Today, this group also supports Eddie V’s, Yard House, and Wildfish Seafood Grille.

Mission
Darden’s mission is to be “the best, now and for generations... and a place where people can achieve their dreams.” The mission statement covers two important factors for the company: its place in the market as a profitable and well recognized firm and its care with the human resources that are part of the business. Darden’s mission statement reveals the company’s goal to be the number one brand for full service restaurant operation and strives to achieve this goal by offering different dining environments to meet the diversified tastes and demands of their customers. An example of this is the Specialty Restaurant Group (SRG), which caters to the tastes of customers that enjoy seafood, organic and low calorie food, Caribbean cuisine and a dining environment that provides more relaxation and socialization venues. The goals surrounding human resources in the company’s mission statement are fulfilled in many ways. The company provides ample opportunities for minorities; in 2014 the employee minority percentage in the US was 47%. Another attempt to fulfill this part of the mission statement is by providing the management team with performance measurements, qualified training, and compensation programs to attract and retain employee talent. For hourly employees, such benefits include healthcare for full and part-time workers, the Darden Dimes program, which provides financial help to employees experiencing severe need, 401(k) programs and tuition reimbursement, among others.,

Structure Figure [ 25 ]: Darden Revenue by Brand | | 34. Source The Motley Fool |
Darden’s total revenue in 2014 was $6.29B, a $2.3B decline from 2013. This number represents the sales in all company-owned restaurants, excluding franchises in foreign markets. The majority of Darden’s revenue comes from its stores in the US and Canada, as the company is still strengthening its international presence in global markets. The company opened 70 new restaurants in 2014, with LongHorn Steakhouse leading this number with 34 units.

Table 11: Darden Restaurant Units Globally | [ 35 ]. Source from Darden 2014 Annual Report |
Outside of the US and Canada, the company has units in countries like Brazil, Peru, Mexico and Saudi Arabia. All locations in the US and Canada are owned and operated by the company through subsidiaries, except for three locations in Florida and three in California, which are owned jointly by the company and third parties, but managed by the company. In Puerto Rico, there are five franchised locations. Outside of the US, Canada and Puerto Rico, restaurant operation is conducted through area development and franchise agreements. Table 13 shows the number of restaurant units either owned or franchised by Darden Restaurants Inc. Figure 25 shows how the company’s revenues are divided among its brands. Before the sale of Red Lobster, Olive Garden and Red Lobster accounted for the majority of the company’s revenue. After the sale, Olive Garden and LongHorn Steakhouse are the two core brands of Darden Restaurants.

Development
This functional area is responsible for real estate research and strategic planning, real estate development, design and construction, asset management, facilities maintenance and remodels. The executive in charge of this area is Laurie Burns, Senior Vice President, Chief Development Officer. Darden prefers to buy their land and properties, and is the owner of the largest real estate portfolio in the casual dining segment, owning both land and buildings in over 1,000 stores and the buildings of over 850 stores, amounting to an approximate value of $4B., Figure 26 provides a detailed picture of Darden’s real estate holdings. The figure shows that Darden owns the majority of the buildings and land where their restaurants operate. Darden’s strategy to own its properties creates tension between the firm’s leaders and activists, who argue that this strategy takes value away from shareholders. Darden utilizes cash flows from operating activities to fund the purchases of land and buildings, as well as the remodeling of existing restaurants. A five year comparison in net operating cash flow shows a steady trend from 2010 to 2013, with an average of $878M.

Figure [ 26 ]: Overview of Darden's Real Estate

[ 36 ]. Sourced from FT Alphaville

However, in 2014 there is a significant decline to $555M, which demonstrates that the company may not have had the opportunity to expand its business as expected. This is especially important since the majority of US and Canada based restaurants are company-owned. The Balance Sheet for 2010, 2011 and 2012 shows a steady increase in Property, Plant and Equipment (PP&E) from $3.3B to $3.9B. In 2013, there is an almost $1B increase in this number, which may be due to the acquisition of the restaurant Yard House in 2012. Darden’s fixed asset turnover ratio for the last nine years has been steady, with ratios over 2. Overall, this shows that the company has managed the investment in real estate development well and this management has brought revenue for the company. However, in 2014 there is a decrease to 1.6, the first time in 10 years that this ratio goes below 2. This may be due in part to the fact that in 2014 Darden has initiated a plan to remodel Olive Garden restaurants, which includes a total remodeling of 75 restaurants by the end of 2015. The investment in this remodeling plan may have affected the company’s ability to generate sales based on efficient asset management. Another factor that may be influencing this ratio is the sale of the Red Lobster brand, completed in July of 2014. This significant sale has increased current assets in the form of cash or cash equivalents but has decreased the company’s property and land holdings. Strategic Operations Figure [ 27 ]: Darden´s SG&A costs over 10 years | [ 37 ]. Sourced from Mergent | Figure [ 28 ]: Darden’s Annual Profit Margins (%) | | 38. Sourced from Mergent Online database |
Darden’s Chief Operating Officer and interim CEO, Eugene Lee Jr., is responsible for the strategic and operational matters of Olive Garden and LongHorn Steakhouse, as well as restaurant operations, brand management, culinary, and business insights of all Darden brands. With the help of this functional area, Darden has become a company that invests in the strategy of having many different concepts under its umbrella in order to appeal to different customers. One of the reasons for Darden to have so many brands under its name is to consolidate and lower selling, general, and administrative (SG&A) spending. However, the company’s SG&A for the past five years shows no significant decrease in these costs. Since 2006, these costs have been steadily increasing, as shown in Figure 28. The exception is found in 2014, which reflects the decrease in overall costs due to the sale of Red Lobster. As a percentage of sales, SG&A costs from 2008 to 2013 ranged from 9.2% to 9.9%. This number went up to 10.5% in 2014. Compared to like peers, such as The Cheesecake Factory, Brinker International Restaurants, Bloomin’ Brands and Texas Roadhouse, all with an average of SG&A costs of 5% or 6% of total sales the numbers for Darden are not very good. , , ,
Figure [ 29 ]: Darden´s Same-Store-Sales & Guest Count Growth & Avg. Check per Guest
Figure [ 29 ]: Darden´s Same-Store-Sales & Guest Count Growth & Avg. Check per Guest
This demonstrates that the company’s strategy to reduce such costs with the purchase of multiple brands is not proving to have the expected results they had hoped for. Darden acknowledges this weakness by stating in their Strategic Action Plan to Enhance Shareholder Value that they have opportunity for additional support cost optimization. Figure 27: Darden´s Same-Store-Sales, Average Check per Guest, and Same-Store Guest Count Growth | | 39. Sourced from Buzz Feed News |

Another significant operation taking place in this functional area is the closing of the company’s “synergy restaurants”, which feature a Red Lobster and Olive Garden with separate entrances and dining rooms, but shared kitchen, bathroom and bar space. The firm argues that with the sale of Red Lobster such an operation no longer can function. This operational move reflects the decline of same-restaurant sales in both Olive Garden and Red Lobster, which declined 3.4% and 6.0%, respectively. Figure 29 compares same-store sale growth, average check per guest growth, and same-store guest count growth for Olive Garden and Red Lobster. Over a period of five years, both restaurants had only one year of positive same-store sales growth. Same-store guest count growth is also negative all years for both restaurants, except for Red Lobster in 2012. These numbers show how these two brands are struggling to increase sales and is a reflection of management policies that have not resulted in the expected customer traffic and revenue desired. Not only that, but the loss in same-restaurant sales in these two restaurants is significant for the company because they are considered to be the core brands of the firm and the two highest revenue generators.

Figure [ 30 ]: Darden’s Annual Revenue | [ 40 ]. Sourced from Mergent Online database | Figure 31: Darden's Annual Net Income | | 41. Sourced from Mergent Online database |
Darden’s revenue in 2014 decreased $2.27M compared to 2013. Although the company has been struggling to generate sales, this decrease in revenue is mostly due to the sale of Red Lobster, which had its $2.46B revenue in 2014 credited as earnings from discontinued operations. Nonetheless, Darden’s net income has also shrunk from $476M in 2011 to $286M in 2014 which reflects an increase in total costs and expenses for the company. Other attempts by the company to overcome financial hurdles and catch up with competitors are also under fire as they are hurting Darden’s profit margins. One such attempt is the promotion “Never Ending Pasta” at Olive Garden. The company’s profit margins have been decreasing over the last four years as shown in Figure 31. Promotions such as this one only help to decrease this margin as sales are not generating revenue. An example of this is found in Darden’s 2013 Annual Report, where the company states that promotional and core menu affordability efforts put a lot of pressure on margin, even more than what was anticipated.

Figure [ 32 ]: Darden Operating Costs as Percent of Revenue | 42. Sourced from Yahoo Finance | Figure [ 33 ]: Darden’s Annual Return on Equity (ROE) % | 43. Sourced from Mergent Online database | In 2007, Darden announced that portfolio expansion would allow the company to capture value through synergy of the different acquired brands. However, as figure 31 points out, the costs that company incurs with the management of these brands are not reflecting this synergy. Because labor and benefits tend to be variable, so achieving economies of scale in this area is more difficult. The SG&A expenses, where the company could potentially achieve economies of scale and scope, are actually increasing.

Some strategic operations in Darden Restaurants Inc. have had a significant negative impact on the company´s overall profitability in the last year. The Return on Equity (ROE) ratios from 2008 to 2013 shows an average of 25%, but in 2014 this ratio has decreased to 13.6%. This decrease signals weakness within the firm, especially because Darden’s ROE percentage is below average for the industry sector and Standard and Poor’s 500 stock indexes (S&P 500)., The decrease in ROE reflects the firm’s struggle with the ability to generate more sales, decrease SG&A costs and increase overall net income. On the other hand, it is also important to note that in the last seven years, with the exceptions of 2010 and 2011, the company has had higher debt compared to equity, so this may also be reflected in the high ROE percentage of the last few years. Also, in the last six years, the company’s asset turnover went from 1.75 to 0.9 and the net profit margin percentage decreased from 5.66 to 4.55. These numbers also reflect the company’s inability to have a more effective ROE.

Figure [ 34 ]: Darden’s priorities for value creation

[ 44 ]. Sourced from Darden Strategic Action Plan In order to improve overall company operations and create more value for shareholders, Darden executives created a plan of action with seven priorities as shown in Figure 33. Actions such as Olive Garden brand reformulation and Red Lobster sale were the first steps performed. Other actions, such as disciplined capital allocation and optimization of operating support and direct operating costs are ongoing efforts to improve the operation areas.

In the last year, there has been a tremendous fight between Darden’s former Board members, its CEO and activist shareholders concerning the overall operation management of the firm. These activist shareholders, mainly Starboard Value, do not agree with the way that the company is being managed and feel that the current Board and CEO are taking value away from the company’s stock. One point of great debate was the sale of Red Lobster, which Darden executives felt would bring more value to the company but went against activists’ view that the company should separate smaller chains from Olive Garden, Red Lobster and LongHorn Steakhouse and put real estate holdings in another firm. In the beginning of October 2014, Starboard called for a proxy voting and was able to get a vote to replace all current board members with members appointed by Starboard Value. This new Board will seek to strengthen investment-grade rating, dividend, as well as enforce a company culture that is focused on restaurants, people and operations.

Finance/Accounting Figure [ 35 ]: Darden’s Annual Return on Invested Capital (ROIC) | 45. Sourced from Mergent Online database |
The company’s Chief Financial Officer, C. Bradford Richmond, is responsible for all financial functions for the company including finance and accounting, corporate tax, treasury and planning, mergers and acquisitions, investor relations, and information technology. The company’s Controller, Dave Lothrop, is responsible for managing Darden’s financial operations, including financial reporting, corporate accounting and analysis, operations information accounting, and purchasing analysis. Darden’s Return on Investment (ROI) shows a steep decline in 2014 compared to the previous years. While from 2005 to 2012, this ratio averaged 15.2%, in 2013 it was down to 12% and in 2014 it further decreased to 6%. While the total invested capital increased over the years, the operating income decreased. The decrease in operating income is due to rise in food cost inflation and unfavorable menu-mix, wage-rate inflation and decrease in labor efficiency as well as an increase in rent expense and higher repair and maintenance expenses- this last one due to the acquisition of Yard House, which generated more repair and maintenance expense thus affecting operating income. Another investment made by the company, which is not yet generating the desired revenue, is the research and development of proprietary technology for lobster aquaculture farming, which were $13.5M, $6.3M and $1.6M in 2014, 2013 and 2012 respectively. The ROI decrease is also a result of the investment made by the company to increase same-restaurant sales as well the capital invested in order to reimage Olive Garden. In 2013, while Darden peers had a 54% advance in share prices and S&P 500 like companies saw an increase of 30%, Darden only had a share price increase of 20.6%, which also reflects not so efficient investment and management decisions. In 2013, Darden acknowledged in its Annual Report that actions taken in order to mitigate decline in traffic and overall same store restaurants affected the company’s margins. It seems that Darden is suffering with recent strategic actions to improve overall company performance.

The company looks at Average Unit Sales (AUV) as a financial performance metric. Darden concept restaurants have higher AUVs compared to other brands, such as Outback, Chili’s and Ruby Tuesday. This means that the company is able to generate more sales per each restaurant it operates when compared to other companies. Figure 36 shows a chart comparing AUV’s for Darden and peers. Only The Cheesecake Factory has a higher AUV than Darden restaurants.

Figure [ 36 ]: Darden AUVs Compared to Peers | 46. Sourced from Darden |
Darden’s financial sector has recognized the importance of cost control and has announced a plan to reduce costs. Steps in this plan include: supporting cost reductions of $60M annually, streamlining operating support costs with completion of Red Lobster sale, and retaining the services of a consulting company to identify additional operating support and direct operating cost savings opportunities as well as potential revenue enhancement opportunities. Darden also proposed to align management compensation to ensure efficient growth and strong free cash flow. This plan seeks to improve the company’s financial performance and guarantee higher shareholder returns. The company also plans to expand its international business by franchising its brands in potential markets. This franchise expansion will help to boost the company’s revenue as there will be a steady flow of revenue in rent and royalty income. In addition to the agreements that the company already has in place with businesses in Asia, Middle East and the Americas, in September of 2013 the company closed an agreement with Secret Recipe, a South Asian restaurant operator that operates more than 300 restaurants in China, Malaysia, Thailand, Indonesia, Singapore, the Philippines, Brunei, Cambodia, India and Australia.

Darden’s total debt to equity is below the industry average at 0.77 (industry average is 1.17). This ratio shows stability for the company as the firm is not depending highly on debt to fund its operation and shareholders’ earnings will not be affected by high interest rates. This lower number is due in part to the sale of Red Lobster, as Darden used the proceeds to retire a portion of the company’s debts in order to improve leverage ratios and maintain investment grade rating. In 2014 first quarter, the company was able to repay 40% of its long term debt and that had a significant impact on this ratio.

Figure [ 37 ]: Darden’s Annual EPS | 47. Sourced from Mergent Online database |
The company’s (Earnings Per Share) EPS ratios have been decreasing since 2011. Although there was not a significant increase in the number of shares, this decline is a reflection of the decrease in net income, especially in 2013, which was $412M and 2014 which was $286M. This decrease in net income and in earnings per share from continuing operations is due, in part, to the sale of Red Lobster. Additionally, the brand that generates the most revenue for Darden, Olive Garden declined in sales in 2014.
Information Technology
Darden’s Chief Information Officer, Patti Reilly White is responsible for the company’s information technology. She developed the Check-Level Analytics project in order to gather information from the entire guest experience, from guest wait times to how long it takes to pay the bill, in order to provide state of the art technology solutions that improve sales and create a memorable guest experience. One of the goals of this project is to use a common website platform for all restaurants in order to improve online processing of take-out orders which is an area that the company has been struggling with.

The company is forecasting an economy of $20M dollars by using customer information to detect fraud, analyze duration of dinner visits, and improve menu prices. Also, in order to improve same-restaurant sales and improve customer loyalty, the company is also depending on Check-Level Analytics. To do so, White decided to bring on board Oracle Data Miner and Oracle R Enterprise to find meaningful patterns in the data gathered. All restaurants agreed on common definitions and performance metrics.

In 2012, Darden announced a multiyear, $200M investment in predictive analytics and mobile technologies over the next five years. The plan is to bring the company’s IT department up to date with current technology savvy customers. In addition to the enhancement of the Check-Level Analytics project, this investment also aims to include loyalty coupons, targeted offers, as well as game mechanics in order to attract and retain customers. Another feature is to allow customers to visit Darden’s website through a computer or tablet, and be able to sign in with a login and password or using Facebook and Twitter credentials. White dedicated 60 of her 175 IT employees for this technological transformational and hired Infosys to develop additional applications. This project is in line with the company’s mission to be the best, now and for generations, as they seek to enhance sales and customer retention by investing in technology that will allow the firm to better understand customers’ preferences and demands as well as provide customers with a meaningful dining experience.

The hardware and software support for restaurants is provided or assisted by a support facility in Orlando, FL. There is a high speed data network that sends and receives critical business data from restaurants throughout the day and night. There is also a disaster recovery plan, which includes storing critical business information off-site, testing the recovery plan at host-site facility, and providing on-site power backup plan via a large diesel generator. Darden recognizes the importance of information security and thus has put in place a sound plan to prevent information disruption and loss of data.

Human Resources
Daisy Ng, Darden’s Chief Human Resources Officer, leads the development of Darden’s people strategy as well as building organizational capability and employee culture. She is also responsible for all aspects of HR functions within Darden, including the oversight of the HR organizations within each of Darden’s operating companies. The company employs more than 206,000 employees and a core concept of Darden’s HR department is to create a diverse team. In 2014, the company reported that approximately 47% employees are minority and over 53% are female. According to the People Report’s Human Capital Intelligence Report, Darden’s minority and female percentage exceeds the industry by 7 points.

Darden also obtained a 100% score on the Human Rights Campaign’s Corporate Equality Index for business practices and policies toward lesbian, gay, bisexual and transgender employees. Figure 38 shows Darden’s employee demographic information and demonstrates that the majority of employees are in the age range of 25 or younger and have been with the company for less than two years. This reflects the high turnover that is found in the restaurant industry in general. Figure [ 38 ]: Darden employees’ demographic information | [ 48 ]. Sourced from Great Rated |
A cause of major concern for the restaurant industry in the US and thus for Darden, which has the vast majority of its operations in the US, is the Affordable Care Act, which requires that restaurants with 50 or more employees provide health care benefits for full time employees. Darden had announced that in order to avoid spending a high amount to comply with this law, they would move employees to part-time status. However, due to extreme negative feedback from both employees and media, the company reversed its announcement.
Darden is the only restaurant company that has been recognized by Fortune magazine as one of the top “100 Best Companies to Work For”. Restaurant managers comprise the largest number of full time salaried employees and servers comprise the largest full time hourly employees in the company. A full time salaried employee receives an average of 96 hours of training per year and a full time hourly employee receives 63 hours of training. Darden has a culture that values people, and this is reflected in the company promoting 50% of its managers from hourly employees and nearly 100% of all general managers and managing partners from internal positions. In addition to this, Darden uses a “balanced scorecard” with performance metrics that looks not only at revenues, but also at guests, employees and shareholders.

In 2013, the average income for hourly employees ranged from $13 to $21 per hour and the voluntary employee turnover rate for full time employee was 8%. Overall turnover rates in the company are 20 points lower than what is found for its competitors.

Figure [ 39 ]: Darden employee ratings | [ 49 ]. Sourced from Great Rated |
In the restaurant industry, where this rate is especially high and there is a good amount of labor substitutes, this percentage is low and demonstrates the company’s compromise with the second part of its mission statement, which is to be a place where people can achieve their dreams. Figure 39 shows employee ratings based on a survey conducted with 664 employees by Great Place to Work showing how employees evaluated the company on metrics such as great challenges, atmosphere and rewards. The company received high ratings demonstrating an organizational culture where employees feel valued. The company´s current revenue per employee is $36,548 which ranks as the number one in the industry, number five in the sector and number 27 in S&P 500. This ranking demonstrates that Darden has a good overall productivity and this is due in part to the culture of employee motivation that the company has implemented throughout the years. This culture influences employees to work more efficiently thus bringing better results to the company and reaching 27 on the S&P 500.

Supply Chain
Darden’s Chief Supply Chain Officer, James Lawrence, is responsible for sourcing, distribution and quality assurance for all Darden concepts. Jim’s team of supply professionals manages over $3B in capital and food product expenditures on an annual basis. The supply team sources more than 35M cases of product from 1,500 vendors in 20 countries around the world. Figures 40 and 41 provide a snapshot of how Darden’s supply chain is idealized by the company. Darden works with large consolidated suppliers, regional and local suppliers. This gives the company flexibility to get the best prices and comfort as they have a backup plan in case something goes wrong along the supply chain. In order to maintain top quality, the company also has quality teams that supervise the entire supply chain process in order to ensure that the company is getting the best products available.

Figure [ 40 ]: A snapshot of Darden´s supply chain | 50. Sourced from the World Bank Group | One of the things Darden has done to improve its supply chain is adding traceability. This has resulted in the ''Darden Direct Supply'' - a program that automates its supply chain to link supply and demand information. Darden has asked all of its suppliers to get GS1 prefixes, assign GLNs to all locations, and use GTINs in all products so information gets back to the company. Suppliers also have to use a bar code in order to trace all shipment. This process allows the company to have faster communication with suppliers, and rapidly respond to any crisis. In addition, the company automated ordering between restaurants and suppliers and uses intelligent forecasting that allow restaurants to measure demand more accurately, positively impacting transport and purchasing costs. In order to ensure that customers always receive products with fresh quality, Darden has set up a supply chain with four channels: Central distribution (non-food items), Independent supply chain (locally purchased products, such as dairy and produce), Direct distribution systems (uses third party logistics) and Seafood network (focuses only on seafood products)., The way Darden has set up its supply chain logistics allows the company to have great control over the products that end up with customers. This is especially important as the cost of food keeps rising, as was reported in the company´s 2013 financial information and expected to be the same for 2014. Darden utilizes both large and small suppliers that are local as well as international and has partnerships with these suppliers that allow them to get the best deals on supplies. They have also created a backup network of suppliers so they are prepared for any out of ordinary event, which could potentially harm the company’s operations.

Figure [ 41 ]: A snapshot of Darden´s supply chain | 51. Sourced from the World Bank Group |

One competitive advantage for the company is the fact that they acquire their seafood products directly from producers, without having to go through middlemen. The company has established long-time relationships with these vendors and is able to adjust menus if unforeseen events take place. Although Red Lobster is no longer a part of Darden Restaurants, other Darden brands such as Eddie V’s continue to offer a variety of seafood options as part of its menu offering. This allows Darden to still be able to maintain its relationships with its seafood suppliers. Additionally, the ongoing health trend in the US forces the company to offer healthy menu options, and seafood products are usually sought for to supply this demand. Another competitive advantage is the fact that the company supports supplier diversity, and opens opportunities in its supplier network for minority and women owned businesses. This initiative is another element that demonstrates how the company puts its mission statement into action by allowing people from every background to have a chance to achieve their dreams.

Marketing
Darden’s Chief Marketing Officer, Matt Park, is responsible for strengthening overall marketing, culinary and insights excellence and ensuring a strong foundation at each brand, elevating innovation to drive long-term growth and directing Darden’s marketing talent strategy. Darden has increasingly spent more money in advertising for the company over the years. In 2011, the company spent $340M and in 2012 and 2013, the amount spent was $357M and $409M respectively. The company reports that these expenses are included in the SG&A costs, and the income statements for 2011, 2012 and 2013 show that Darden spent a total of 45%, 47% and 48% of its SG&A costs in advertising and marketing programs. These numbers demonstrate that the company considers marketing to be a very important part of its operation as nearly half of SG&A costs are dedicated to this area. Figure 42 shows that compared to like peers; Darden spends almost three times more in advertising, which demonstrates an aggressive drive in the company for marketing promotion. Figure [ 42 ]: Darden and Peers´ Restaurant Cost Breakdown | [ 52 ]. Sourced from Market Realist |

Promotion
Darden uses various mediums to promote its marketing programs. Channels such as national network television, cable and local television, billboard, direct mail, email, radio, newspapers, digital coupons, search engine and social media such as Facebook and Twitter, are some of the ways the company uses to promote its brands and attract customers. In 2013, the company started using electronic gift cards that can be ordered online via the company’s website and sent instantaneously and in 2014 the company is implementing a single digital technology platform that will allow the brands to tailor marketing programs in order to increase customer awareness and loyalty and drive up sales. The company’s uses channels that are likely to reach customers with different demographic characteristics, such as age, education and income level.

Another important initiative for the company to attract and retain customers is the consumer marketing research techniques utilized to monitor guests’ experience with the brands as well as their expectations.

Price
Darden’s restaurant prices vary according to the brand and consumer target. Casual restaurants, such as Olive Garden and LongHorn Steakhouse, have menu option that range from $15-$20 a plate. The fine dining brands have options ranging from $30-$40 a plate.

Product
The products served in restaurants also vary according to the brand theme. Olive Garden focuses on Italian dishes; Bahama Breeze on Caribbean dishes; Eddie V’s and The Capital Grille on seafood and steaks for higher end consumers and LongHorn Steakhouse for a more middle class working population; Seasons 52 on healthier menu choices and Yard House on its beer. Darden is a large company with concepts that target different customer segmentations. Casual dining such as Olive Garden, LongHorn Steakhouse and Bahama Breeze, target more families, while Yard House targets younger, higher end consumers. On the other hand, The Capital Grille and Eddie V’s are fine dining restaurants, targeting business people and higher end consumers. The firm’s marketing initiatives show that the company understands that in order to attract customers, they need to make their brand visible.

Place
Darden’s two core brands, Olive Garden and LongHorn Steakhouse, are spread throughout the country and slowly expanding into foreign markets. Seasons 52 and The Capital Grille are found in bigger cities and Eddie V’s is mostly based in Texas. The company has about 40 units outside of the US and Canada, but is hoping to expand through franchising and joint ventures. There are agreements with companies in Middle East, Asia and the Americas with the latest agreement signed in September of 2013 with restaurant operator Secret Recipe to initially open 16 Olive Garden and LongHorn Steakhouse in Malaysia.

Although, Darden is very aggressive with its marketing campaigns, it seems like the company’s efforts are not translating into actual revenue. Advertising expenses as percent of sales have risen for Darden over the last few years, while like peers are actually decreasing this percentage. Nevertheless, the company is not seeing the return on sales they should be with the amount of money they are spending, and this is reflected in the decline of same-store restaurant sales for Olive Garden, a decline in overall sales and an increase in costs such as labor and other operating costs. One strategy the company is investing in to overcome this hurdle is to focus more on digital marketing, using channels such as email and social media, and less on television. This will allow the company to spend less money on advertising, while at the same time reaching a greater number of customers since computers and smartphones are now a daily part of almost every consumer’s life. People are most likely to pay attention to advertising through these mediums than regular television. In light of this idea, it is important for the company to focus on two very important social media communication channels: Facebook and Twitter. Darden is the largest company-owned and operated full service restaurant company in the world; however its Facebook and Twitter accounts only have 4,000 and 1,500 followers respectively. This number is very low, especially when compared to a company like Yum that has nearly 13,000 likes on Facebook and 10,000 followers on Twitter. Darden needs to focus on the marketing channels that have the greater number of adepts and allocate a higher percentage of advertising budgets to these channels as they will most likely translate into more sales for the company.

Government and Community Affairs
Robert S. McAdam is Darden’s Senior Vice President of Government and Community Affairs, responsible for government and environmental affairs, foundation and community affairs, and media and communications. Darden is a champion for community responsibility and is proud to oversee projects that have a positive effect on the community and the environment. One of the company goals is to reduce energy and water use by 15% by 2015 and one day send zero waste to landfills. As of 2013, water usage had been reduced by 17% and energy 13%. Furthermore, the company has expanded regular and grease recycling and food donation. Darden is also active with sustainability, investing in a sustainable supply chain and other sustainable attempts, such as helping to launch the Atlantic Lobster Sustainability Foundation and working with institutions such as the World Bank, the New England Aquarium, Clinton Global Initiative, and the Sustainability Consortium among others. Darden also invests in the Darden Harvest Program, which donates surplus food to local food banks and soup kitchens as well as the Restaurant Community grant, which awards $1,000 grants to nonprofit organizations in the local community.

To help its employees, Darden has established the Darden Dimes, which is a program that gives short-term, emergency assistance for employees facing personal hardships. Employees can contribute a small amount from their paycheck towards this fund. The company also encourages employees to participate in programs such as United Way, United Arts and to be volunteers. These efforts demonstrate that Darden is a company that cares about its employees and about the community and is one of the reasons why it figures on Fortune, top 100 best companies to work for. Darden sees these employees and community efforts as a competitive advantage for the company and they are very vocal about all the initiatives they are involved with. As far as regulations, Darden is subject to all federal and state regulations that govern the restaurant industry. One important license for them is that for alcoholic beverages, which in 2014 accounted for 11% of the company’s sales. The company also has to comply with federal and state labor laws and operates under the Tip Rate Alternative Commitment agreement with the IRS in order to prevent chain-wide employer-only FICA assessments for unreported tips. The company must now comply with the Affordable Care Act, which has been the reason for some negativity towards the company as Darden made a public announcement stating that it would move employees to part-time status to avoid the extra costs associated with this new law. The company later reviewed and recanted its comment. Under the Affordable Care Act, the company also has to report calorie information on their restaurants’ menu. The company went above and beyond this law by announcing in 2011 a plan to reduce calorie and sodium from their menu options. The company has not had any major problems with the government and complies with all legislature required to operate its business.

Burger King

History
Burger King is a Delaware based company and the world’s second largest fast food hamburger restaurant (FFHR) by number of establishments. Founded in 1954 in Miami, FL, Burger King became well known for its signature sandwich, the Whopper, which was introduced in 1957. Popularity grew after the ‘Home of the Whopper’ campaign in 1958 and the company acquired national and international franchising rights in1961. Within two years, Burger King opened its first two international restaurants in Puerto Rico. After being purchased by Pillsbury in 1967, Burger King launched the ‘Have it your way’ marketing campaign. Sold to Grand Metropolitan PLC in 1988, Burger King executives’ strategic focus became expanding internationally and soon expanded into numerous emerging markets including East Germany, Poland, Saudi Arabia, El Salvador, Peru, Israel, Dominican Republic, New Zealand, Paraguay, Turkey, Bolivia, and Italy.

In 2002, Goldman Sachs along with two other investors purchased Burger King for 1.5B and in 2006 the company went public in an initial public offering (IPO) on the NY Stock Exchange. After the IPO, Burger King experienced tremendous growth, increasing its value to $3.2B by 2010 when 3G Capital purchased Burger King. After this purchase, Burger King once again became a privately owned company. However, in 2012, management decided to go public again and offered stock on the NY Stock Exchange under the symbol BKW.

Burger King Worldwide (BKW) owns and operates the Burger King trademark through selling franchise operations. In the beginning of 2010, Burger King consisted of 88% franchise restaurants and 12% company owned restaurants. A strategic focus was adopted to become 100% franchised and BKW began selling restaurants to franchisees. BKW was aggressive in attaining this strategy and by 2013 had sold 96% of company owned restaurants becoming essentially 100% franchised. BKW retains ownership of 52 company owned restaurants in Florida to be used for testing new products and marketing efforts. Most recently, Burger King merged with Tim Horton´s, a Canadian multinational fast-casual restaurant chain. This merge has resulted in a company that is the third largest quick service restaurant company in the world.

Mission
While moving away from the operations side of the restaurant business and focusing on franchise management, Burger King maintains commitment to service and quality. BKW performs many actions to ensure brand image remains superior within franchise locations. BKW has created commitment statements that detail the vision and mission of the company. BKW upholds establishments as family-friendly dining with premium ingredients in its primary commitment statement: “Our commitment to premium ingredients, signature recipes, and family-friendly dining experiences is what has defined our brand for more than 50 successful years.” BKW also furthers its commitment to customers regarding food quality: “For over 50 years, our restaurants have been serving high quality, great tasting and affordable food around the world. Our commitment to the food we serve is what defines us as a company and is at the center of our HAVE IT YOUR WAY brand promise.” BKW makes a third commitment to their people: “We are dedicated to supporting and investing in our people – employees, franchisees, suppliers and restaurant guests – because they are the cornerstone of our business. In many different ways, we do all that we can to serve employees and guest alike.” BKW has chosen commitment statements to demonstrate the company’s focus on providing a superior brand. All aspects of BKW’s mission signify dedication to top-quality brand image. BKW investor’s page also provides a “What Do We Believe” statement which outlays a sense of responsibility to the community and people with whom BKW interacts.

We believe in working together with and listening to our employees, guests, business partners and the people in the communities in which we live and work. We share their concerns for our neighborhoods, educating children, preserving the environment, providing jobs and doing our part to help families eat and live better by offering more nutritious food options and promoting healthy life-style messages. We know we have a role to play in each of these areas.

BKW goes beyond providing a generic vision statement and instead clearly defines a commitment to customers, suppliers, and partners as well as food quality and community. Furthermore, BKW acts on these commitments through charitable donations, offering health-conscious food options and other promotional activities to be discussed in later sections.

BKW generates revenues from three main sources: company owned restaurants, royalties and fees from franchise restaurants, and rent from properties leased to franchisees. BKW does not report the revenues earned in the privately owned franchise restaurants across the world. While some of this information is available and reported through BKW’s SEC filings, the majority of franchise financial information is unavailable. Amounts found throughout this report are for BKW and do not include franchise information unless otherwise stated.

Structure
As of December 31, 2013, BKW owned 13,667 restaurants, of which 13,615 are franchised. These restaurants are located in over 95 countries and US territories. While Burger King ranks as the second largest FHHR, it has less than half the number of restaurants compared to the highest ranked FHHR, McDonald’s.

Figure 43: Distribution of BK restaurants globally | | 53. Sourced from BKW Annual Report | Figure 44: Distribution of BK revenues globally | | [ 54 ]. Sourced from BKW Annual Report | BKW has four major segments for which they report financial information: US and Canada, EAME (Europe, Middle East, Africa), LAC (Latin America and Caribbean), and APAC (Asia Pacific). With 7,436 restaurants, US and Canada is the largest segment of Burger King making up 54% of total restaurant counts. In 2013, the US and Canada segment generated 58% of Burger King’s total revenues. EAME is the second largest segment of Burger King consisting of 3,450 restaurants, or 25% of total units, and generating 29% of BKW revenues in 2013. LAC segment consisted of 1,550 restaurants in 2013 and generated 8% in revenues. Lastly, the APAC segment consists of 11% or 1,231 restaurants in 2013 and generated 5.1% of BKW total revenues. Table 12 shows the number of Burger King Establishments around the world.

Table [ 12 ]: Burger King Restaurant Units Globally | | [ 55 ]. Sourced from BKW Annual Report |
Recently, BKW has focused expansion efforts in international restaurants. Between 2010 and 2013, BKW increased the number of restaurants in the APAC region by 48%. The APAC segment focus has been primarily in China and Japan, and these markets increased by 239% and 86%, respectively. BKW also expanded the LAC market by 36%, with the majority of this growth in Brazil and Colombia. The EAME market saw a growth of 26% in restaurant counts, primarily due to an increase of 346% in Russia restaurants. This growth is spurred by a company emphasis on international development, which BKW executives see as part of a broader marketing strategy.

Development and Franchising
BKW management has clearly defined a long-term strategic focus to develop and fully franchise the company, which was launched in April 2012. This strategy involves four main areas of concentration; “the 4-Pillars”, accelerating international development, pursuing refranchising, and focus on corporate cost structure. BKW believes emphasis on these areas will drive sales and traffic while refocusing the business and reducing costs.

The first element of BKW’s strategy involves the 4-pillars of driving sales and traffic. This strategy focuses on the US and Canada in order to improve franchise sales through capturing additional market share. BKW plans to accomplish this goal through the following components; menu, marketing and communications, image, and operations.

In order to focus on menu, BKW has vowed to enhance their menu, adding new menu items which they believe will appeal to women, children, and senior citizens. This strategy was demonstrated in 2012, when Burger King Restaurants added 21 new and enriched menu items. These items were tailored to moms and children with salad choices and smoothies. Furthermore, the new menu items are considered healthy options to appeal to the culture shift toward health conscious lifestyles.

BKW drove a “food-centric marketing” strategy through target marketing advertisements highlighting the new menu items featuring well-known celebrities. These advertisements, primarily commercials featured stars like David Beckham and Jay Leno, enjoying some of BK’s new food offerings. Celebrities of diverse backgrounds were utilized to broaden BK’s consumer market through target marketing. BK’s marketing and communications efforts also included distribution of food samples at events across the US and investing in testing new services such as home delivery.

In addition, BKW’s franchising strategy included attention to store image. BKW managers recognize that restaurant image influences brand image. In an effort to promote store updating, BKW provided lower cost remodeling and third party financing programs to franchise owners in the US. Moreover, BKW utilizes field employees who manage their ‘field optimization project’. This project supports the store image improvements, through ensuring all locations have superior food quality, guest services, service speed, and restaurant cleanliness.

BKW has also focused their development on accelerating business internationally. To accomplish this goal, BKW has united with international partners and entered joint ventures to open franchises restaurants abroad. Several of these ventures include granting exclusive rights to specific regions of the world to franchisees for development. BKW has focused these developments in emerging markets where high-growth is forecasted, such as; Brazil, Russia, South Africa, India, and France.

Aggressively pursuing refranchising opportunities is the next effort in BKW’s strategic plan, which involves a business goal of becoming 100%, franchised in less than two years. This strategy relieves the company of the capital intensive nature of global restaurant ownership and allows the company to concentrate on enhancing profits and margins. This goal was achieved in 2013, when BKW sold the last of the company owned Burger King Restaurants which were slotted for franchising and remained owner of only a few Florida based companies.

Lastly, BKW maintains a strong focus on corporate-level cost structure in order to maximize profits. Management achieves this goal through a “zero-based budget” model, which encourages minimal spending in all general and administrative departments. While most companies use previous years to determine the spending of a department, BKW starts with a blank slate and requires upper management to explain all line items in their respective budgets. This enables self-ownership of department expenses and BKW further this responsibility by tying executive incentive pay to the success of achieving budget.

Figure [ 45 ]: BK revenue and revenue growth (%) trend | | 56. Sourced from BKW Annual Reports |
Finance
Figure [ 46 ]: BK Income and Profit Margin (%) trend | | [ 57 ]. Sourced from BKW Annual Reports | In 2013, BKW reported $1.1B in revenues, a decrease of 42% from previous year. While this is a dramatic decrease in revenue over a one-year period, it is expected due to the refranchising efforts BKW has made in recent years. The trending decrease in revenue from 2010 to 2014 is a direct result of BKW selling company owned restaurants to franchisees and no longer reporting the revenues of those stores. Figure [ 47 ]: BKW EPS Trend | | [ 58 ]. Sourced from BKW Annual Reports |

Burger King reported record sales in 2009 of $2.5B, of these sales 74% came from company owned restaurants. However, due to the cost involved in running these operations, BKW reported just $200M in net income, or an 8% margin. In 2013, BKW’s sales were just $1.1M; however, net income was $234M or 20% margin.

The increased profit margin of BKW demonstrates the current success of the refranchising efforts. BKW’s profit margin grew from 6% in 2012 to 20% in 2013, giving affirmation the company strategy benefits stockholders. Profit margin not only increased greatly, in 2013, net income saw an upturn of 99% over the previous year. This was preceded by a 34% net income growth from 2011 to 2012.

In addition to net income, BKW reported an upward trend in EPS in 2012 and 2013. Due to the mergers and acquisitions Burger King has experienced over the last ten years, trend analysis of EPS is unfeasible. It can, however, be used to examine year-over-year comparisons for those years when Burger King had a single owner. From 2011-2013, under the management of 3G Capital, Burger King showed an increase in EPS of 160%.

Operations
BKW employs an operations strategy of driving the best-in-class restaurant operations by franchisees. Through their field optimization project they monitor and ensure this operation strategy is followed. BKW encourages friendliness, cleanliness, speed of service and overall guest satisfaction in all restaurants. BKW promotes uniform operating standards and specifications relating to selection of menu items, maintenance and cleanliness of the premises. This strategy is the pillar to success in driving long-term growth for the business.

While BKW has hundreds of franchisees across the world, they also have group franchisees that operate numerous Burger King’s at once. Carrols Restaurant Group is BKW’s largest franchisee, owning 560 locations with plans to purchase up to 100 more this year. The second largest Burger King Franchise owner is Heartland Food Group. Heartland operates 330 Burger Kings across the Midwest US. Together these companies own 6.5% of BKW’s total locations and 12% of the US locations. This raises significant risk if these companies have declined sales or discontinue the franchise agreement. In fact, just recently, announcements have been made that Heartland intends to sell 260 or 79% of their restaurants to Houston Foods in Texas. This would increase Houston Foods ownership of Burger Kings to 456, effectively making them the second largest BKW franchisee. In order to manage operations in franchise restaurants, BK Guru, a digital learning and communications platform, is utilized. BK Guru provides training of all levels for managers and team members of Burger King. This is an ongoing program requiring initial and subsequent training on restaurant operations and food safety. BKW then determines and evaluates the success of this program through BK Guest Trac, a customer satisfaction survey. The data collected from this survey is analyzed at an individual store level and used to make improvements. Furthermore, the scores of the survey are used to evaluate and incentivize the performance of the field optimization employees.

BKW reported an increase in franchise restaurant sales in 2013 of $1.4M or 9.5% over previous years. BKW also reported an increase of 1,036 franchise restaurants in 2013, due to their refranchising efforts. This equates to average restaurant sales of $1.18M in 2013 compared to $1.16M in 2012. While this increase is minimal and likely caused by inflation or other factors, tracking average store sales will going forward will evaluate the success of BKW’s franchising efforts.

Figure [ 48 ]: BKW ROA and ROI 3-year Trend | | [ 59 ]. Sourced from Mergent Online database |
Furthermore, BKW reported increases in ROA and ROI in the past three years. There has been very little fluctuation in BKW’s assets value or investments, so the increase in these ratios is directly related to increasing income. Investments made in operational and development strategies have earned BKW a nearly 12% ROI as of 2013. This is an increase from the 8.5% ROI in 2011. ROA for BKW has also grown recently, with an increase from 1.6% in 2011 to 4.1% in 2013. While only time will tell if BKW’s recent business approach will lead them to long-term success, it has earned them short-term gains.

Marketing Table [ 13 ]: Burger King vs. McDonald's Pricing | | [ 60 ]. Sourced from Fast Food Menu Prices |
Burger King operates in the fast food hamburger restaurant (FFHR) category of the quick service (QSR) segment of the restaurant industry. The quick service restaurant segment generated annual revenues of $254B in 2013. Of this amount, $72.6B or 29% originates from the FFHR category. Burger King’s market share is 22% of the FHHR segment or 3.4% of the QSR market. Burger King’s market share is only surpassed by their closest competitor McDonald’s, which has 49% of the FFHR market. Although, BKW does report total franchise sales on their annual reports, they do not record these as revenues and do not provide segmented detail of these sales. This makes it difficult to determine the market share Burger King holds in regions across the world.

Price
While Burger King prides itself on superior quality, competition in pricing cannot be avoided. Top competitor McDonald’s aggressively markets its products at low prices and Burger King wants to satisfy customer demands. After McDonald’s launch of the dollar menu in 2003, Burger King quickly followed with the value menu. The value menu currently offers twenty items ranging from burgers to ice-cream; of these items eight cost just $1.00.

Products
Burger King offers a variety of quick service menu items including flame-grilled hamburgers, chicken sandwiches, specialty sandwiches, french fries, soft drinks, ice cream, and coffee. The most popular item offered by Burger King is the Whopper® sandwich; however, the company prides itself on all its flame-grilled hamburgers.

In 2012, BKW announced its 4-pillar strategy which included launching several new product lines to satisfy customer demands for a more extensive menu. BK added items like fruit smoothies, chicken wraps, garden salads, and frappes to menu. This new comprehensive menu allows Burger King to bridge the competition gap with companies like Starbucks.

Promotion
In order to promote a consistent global brand Burger King created a ‘Marketing Fund’ to support advertising worldwide. The marketing fund consists of monthly contributions, generally 4% to 5% of franchise restaurant gross sales, to managed advertising expenses. This marketing strategy helps create a harmonious global brand image for Burger King. Creative yet consistent brand image is the goal of BKW. In 2013, BKW recognized $6.2M in selling expenses, described as primarily advertising fund contributions. This equates to approximately 3% of BKW’s net income, allocated to advertising. BKW drastically reduced spending on advertising in 2013 down 87% from 2012 when $48.3M was spent primarily on advertising. BKW intentionally limited advertising spending in order to concentrate on the refranchising effort. This strategy was developed to focus all areas on refranchising and BKW intends to restore the advertising fund in the near future.

Place
As mentioned earlier, Burger King operates primarily in the US and Canada, with 55% of restaurant locations in this segment. However, BK also has locations throughout Europe, the Middle East, and Africa and draws 29% of their revenues from these areas. Most recently, BK has expanded in areas such as Germany, Brazil, and Russia which now have 692, 317, and 174 restaurants, respectively. Expanding internationally is a primary focus of BKW’s strategic mission and they are expected to continuous this expansion well into the future.

Human Resources
BKW had 2,420 employees as of 2013. This includes company owned restaurant employees, restaurant support centers, and field operation employees. This does not include employees working within the privately owned franchise restaurants. BKW recorded $68.1M in payroll and benefit expenses in 2013. This was a reduction of $277M or 80% compared to 2012, primarily because of the refranchising efforts which caused these employees to become the private franchisee’s responsibility. BKW employees are located in US, Canada, and EAME; however, their duties expand to all Burger King Establishments. In US and Canada, BKW spent 29.9% of revenues on payroll and benefit expenses for their employees. EMEA segment payroll and benefits accounted for 33.5% of EMEA revenues.

As previously mentioned, BKW provides extensive and continuous training to employees throughout franchises across the globe. This program increases communication with team members and allows BKW some control over the operations and employees within Burger King Restaurants. As part of BKW’s commitment to employees, the creation of the BK® Family Fund was created in 2004. This program supports employees in times of need providing financial support for disasters or other emergency hardships. BKW has provided over $1M in support through this fund to employees who are victims of crime, accidents, or regional disasters such as hurricanes, tornados, and floods. Through programs like The BK® Family Fund and overall treatment of employees, Burger King has earned 3.5 stars out of 5 on Indeed’s employee reviews.

BKW also acts on its commitments to the community through partnerships with charitable organizations. In Burger King’s home state of Florida, BKW supports the community through donations of time and money to Habitat for Humanity, Toys for Tots, and Teacher appreciation programs. These programs provide labor and materials, gifts to children in need, and much need school supplies to Florida residents. BKW is also involved in charitable organization globally. Room to Read is an organization focused on education and literacy which has aided millions of children in Africa and Asia. In 2012, BKW teamed with Room to Read to establish six libraries and thousands of books to children in South Africa. Additionally, BKW partnered with Fundacion Lazos to launch value programs throughout secondary schools in Mexico.
BKW’s commitment to employees and community helped to earn them the 2010 Diversity Leader Award. This is awarded to companies which instill diversity in operations and in community action. BKW’s US Restaurant Inc. franchise was awarded the ‘Wishes’ award for donations to the local Make-A-Wish foundation in 2013. BKW was also recognized for its commitment to quality food with the National Animal Welfare Award from the Humane Society in 2013. These awards and recognition provide Burger King with increased publicity and further the company image of a responsible consumer focused business.

Supply Chain/Distribution
BKW manages franchise operations through established standards and specifications. All franchise food products, equipment, and product packaging must be approved through BKW. Suppliers and distributors are evaluated thoroughly to ensure consistence, food safety, and timely deliveries. Furthermore, BKW utilizes Restaurant Services, Inc. (RSI) to manage distribution and act as an independent purchasing agent for the company. RSI negotiates terms for food, beverage, and equipment sold to Burger King Franchise restaurants in the US. RSI managed 91% of the US restaurants and its subsidiary manages purchasing for Canadian franchise establishments.

Currently, BKW does not have equivalent purchasing and distribution agents internationally; however suppliers and distributors must still be approved through BKW’s evaluation criteria. BKW’s control over suppliers and products supplied assists in promoting their brand and image strategy. BKW strives to provide consistent food and services regardless of restaurant location. Nearly identical advertisements are used for Burger King’s Whopper, regardless of language the brand image remains the same. ,,

McDonald’s

History
McDonald’s is considered one of the largest fast food restaurants around the world with 35,000 restaurants globally in over 100 different countries, serving 68 million customers a day. McDonald’s was founded in the US in 1940 as a BBQ restaurant by two brothers, Richard and Maurice McDonald and it was not until 1948 that they started selling hamburgers instead of BBQ. McDonald’s was later purchased by entrepreneur Ray Krock who was a franchise businessman. Ray Krock’s goal was to establish a restaurant where the main focus was on burgers, fries, and beverages with a consistency in quality. Krock not only saw a vision for McDonald’s owned and operated restaurants but also for franchise opportunities as well. With involvement from suppliers and franchisees, Krock was able to rapidly grow McDonald’s and allowed investors and suppliers to share in the same opportunities for revenue and success.

Ray Krock’s business strategy included a three-legged stool that revolved around McDonald’s, franchisees and suppliers. This was later developed into the slogan “Be in business for yourself, not by yourself” as a way to encourage involvement from multiple parties. Although consistency was still stressed and overseen by McDonald’s, much involvement and new product ideas can also be attributed to its franchised restaurants who take much of the credit for creating items such as their famous Big Mac and the Egg McMuffin sandwiches. Suppliers also played a large role in the success of McDonald’s. Suppliers saw potential in the high number of orders being processed each day and thus viewed McDonald’s as an investment opportunity. Because of Ray Krock’s involvement with his suppliers, many of these relationships are still profound today. Today, McDonald’s primarily operates in Middle East & Africa, Latin America, Asia Pacific, Europe, and North America.

Mission
McDonald’s mission statement is as follows: “McDonald's brand mission is to be our customers' favorite place and way to eat and drink. Our worldwide operations are aligned around a global strategy called the Plan to Win, which center on an exceptional customer experience – People, Products, Place, Price and Promotion. We are committed to continuously improving our operations and enhancing our customers' experience” McDonald’s values are centered on seven main initiatives that focus on the customer, growth, and their relationships with suppliers. These seven initiatives are as follows: customer experience, commitment to employees, McDonald´s system, acting ethically, giving back to the communities, growing business profitability, and continuous improvement. Conducting business in a way that reflects continuous improvement and growth and acting ethically represents the type of company that McDonald’s aspires to be and what they stand for.

McDonald’s business focus revolves around four main areas:

Menu
McDonald’s has a strong focus on product innovation and the development of new menu items that are primarily centered on breakfast, chicken, beef, and iced drinks. New menu items are developed to compliment some of the larger selling items such as the well-known Egg McMuffin and Big Mac Sandwich, which account for 40% of McDonald’s sales. McDonald’s plan is to incorporate healthier ingredients as well as a wider variety of unique food choices in to their menus in the future.

Customer service
With a strong focus on technology, McDonald’s has been able to provide its customers with an easier and more convenient customer service experience, as well as better controls and realignment of staffing in restaurants. By utilizing technology, McDonald’s hopes to engage a larger number of customers as well as provide an added level of value and convenience to their dining experience. Convenience
McDonald’s will continue its efforts to expand and reimage their stores, both domestically and internationally, as well as offer their customers affordability through value deals and promotions.

Trust and Brand Loyalty
McDonald’s will help to develop brand loyalty and trust by encouraging their customers to develop healthier eating habits as well as promote global awareness through its sustainability efforts.

Structure Figure [ 49 ]: McDonald’s Revenue by Geography | | [ 61 ]. Sourced from Market Realist |
McDonald’s operates its restaurants in four main geographic segments: the US, Europe, and the Asia Pacific, Middle-East, and Africa region (APMEA), and other countries which fall under Latin America and Canada. McDonald’s revenue from company-owned stores in 2014 was $18.87B, a slight increase from 2013 and 2012, which generated $18.6B and $18.3B respectively. Rents generated a total of $6.1B and royalties a $3.1B in 2014. The company’s total revenue, including company owned and franchised revenue in 2014 was $28.1B.

McDonald’s has more than 35,000 restaurants globally, 80% of which are franchised, and currently has a total of 440,000 employees working in franchised and company owned restaurants. , McDonald’s top tier of management is its board of directors and consists of 13 members including McDonald’s Chief Executive Officer, Donald Thompson. The responsibilities of the board of directors include ensuring that McDonald’s is operating in a way that is ethical, diligent, fair and honest. Continuous improvement and providing stakeholders with highest level of integrity are priorities that the board of directors takes very seriously and which their corporate governance is built on. The Executive committee at McDonald’s consists of eight Chief Officers, five Vice Presidents, and four Regional Presidents.

Finance
McDonald’s financial department is run by Senior Executive Vice President and Chief Financial Officer (CFO) Peter J. Bensen. The CFO is in charge of all areas pertaining to the financial functional area at McDonald’s, which include: Accounting, Internal audits and controls, tax treasury and investor relations, IT shared services, facilities and aviation. McDonald’s uses methods such as financial measures, comparable sales and guest count growth, as well as system wide sales growth, to analyze their business trends. McDonald’s utilizes constant currency when analyzing their performance results, which are currency calculations that exclude foreign exchange rates. These constant currencies are used to make management decisions as well as financial compensation plans. McDonald’s categorizes itself as part of the informal eating out category (IEO) and utilizes sources such as Euromonitor International to identify market trends and compare themselves against competitors. Although McDonald’s mainly compares itself to the IEO segment, it also understands that other segments within the restaurant industry can serve as competition, which is why they also make it a point to compare their performance to that of the full service restaurant segment as well. McDonald’s market share in the IEO segment is 8% in sales and 0.4% in restaurants, while its presence in the full service industry accounts for 4% and 0.2%, respectively.

Figure [ 50 ]: McDonald's Revenues and Growth % | | [ 62 ]. Sourced from Morningstar |
Each year, McDonald’s sets financial targets that they hope to meet for the upcoming fiscal year. In 2013, McDonald’s financial target was a 3-5% system wide sales growth and a 6-7% operating income growth. Although McDonald’s accomplished its goal for system wide sales, they fell short in meeting their operating income goal, which was 3% in constant currencies. This was mainly a result of not performing as they had hoped regarding their franchised business model.

Figure 51: McDonald's Annual ROIC % | | [ 63 ]. Sourced from Morningstar |
However, they did see positive results with regards to comparable sales, which increased to 0.2% while guest count fell to a negative 1.9%. McDonald’s ROI as of June 2014 reflected 33.99, a decrease from their ROI in 2013 which was 34.76. There has been a decreasing trend in ROI ever since 2011 and 2012 which was 38 and 36.22, respectively.

ROI continues to decrease as result of restaurant expansion and low guest count. In 2013, McDonald’s opened 225 new restaurants and reimaged 700 existing restaurants in the US, 470 new and reimaged 312 existing in Europe, and 731 new and reimaged 240 restaurants in APAMEA. In each of these geographic regions they experienced comparable guest count declines by 1.6%, 1.5% and 1.9% respectively. On the other hand, McDonald’s Return on Invested Capital (ROIC) has seen a significant increase since 2007 and has remained fairly stable ever since. McDonald’s has been able to effectively expand the number of restaurants globally as well as domestically at a rapid pace, while continuing to effectively increase the amount of invested capital to make this possible. This can be quite challenging for many larger restaurants to accomplish, however because McDonald’s does a good job at providing consumers with a lower cost advantage and maintaining its costs this has significantly worked in their favor towards continuous expansion. Revenues are derived from McDonald’s sales both from company operated restaurants as well as fees and rents received from its franchised restaurants. In 2013, McDonald’s revenues in US, Europe, and APMEA segments were as follows: 31%, 40%, and 23% reflecting its European segment as the region with the largest percentage of revenue, mainly derived from France, Russia and Germany, having the largest impact on revenue by 67%. In 2013, McDonald’s revenue was $28.1B, which was an 8% increase since 2008. This can be attributed to its continuous expansion in domestic and international markets such as China as well as new menu items and value deals it has developed to attract customers. In 2008 and 2009, McDonald’s saw a decrease in revenue, before it picked back up in 2010. This decrease was a result of its refranchising strategy of approximately 1,100 restaurants. Due to change in the number of company owned restaurants to franchised restaurants it had a negative impact on consolidated revenues.

McDonald’s debt to equity ratio has seen a steady increase over the past nine years, with the exception of 2006. The decrease is a result of their efforts to reduce company owned restaurants in the UK by 54% in 2006. In 2006, McDonald’s also partnered with Sinopec, one of the largest petroleum retailers in China, allowing them to develop more drive –thru restaurants as well as restaurants in China and become closer to the Chinese market. In an effort to start focusing on just McDonald’s restaurants, in 2006, McDonald’s made a decision to sell its ownership in Chipotle through a tax-free sale which they received $329M and $88.4M in shares. As a result, McDonald’s was able to pay $2.3B towards decreasing its debt.

McDonald’s has continued to use its debt strategically to expand into international markets as well as fund the expansion of new restaurants and reimage existing restaurants. As the debt to equity ratio has always managed to remain under 1 this is a good sign that McDonald’s has a good handle on its debt management. McDonald’s has managed to increase its profitability over the last nine years mainly as a result of expansion into international restaurants as well as introducing new menu items to consumers. By gaining on investments from various sales as well as being able to control costs effectively this has worked in their favor and allowed them to increase gross profit by 9% since 2004.

Figure [ 52 ]: McDonald’s Income and Profit Margin% | [ 64 ]. Sourced from Morningstar | | From 2004-2013, McDonald’s has seen an increase in their net income with the exception of 2007, which decreased due to net income loss from Boston Market. In 2007 McDonald’s experienced a loss of net income totaling $9M before deciding to sell its investment in Boston Market. In 2013, McDonald’s net income increased to $5.6B, a 2% Figure [ 53 ]: McDonald’s EPS | [ 65 ]. Sourced from Morningstar | increase in constant currency from 2011, which was $5.4B, while earnings per common share increased to $5.55, a 4% increase from 2012 and $5.36 in 2011. These increases were a result of lower selling, general and administrative expenses and higher franchise margin dollars. This was an improvement from 2012, which experienced higher income tax rates in addition to an increase in selling, general and administrative expenses (S&G). McDonald’s uses the Dow Jones Industrial Average (DJIA) along with S&P 500 index to evaluate their stock performance in comparison to the industry average. Over the past three years, McDonald’s has managed to return $16.4B to its shareholders. Evidence through a five year compound annual return to shareholders reflects the success of McDonald’s against its competitors as they continue to come out as the leading performer in the industry with the following benchmarks: S&P -0.2%, DJIA- 2.4%, and McDonald’s 21.4%. In 2013, McDonald’s was able to provide a return of $4.9B to its shareholders through dividends and share repurchases. As McDonald’s uses its cash flow to provide returns to its shareholders, this has allowed them to increase their dividends by 1 each year as well as see in an increase in shareholders’ equity from 2011-$14B to $16B in 2013. McDonald’s uses its focus of the 5Ps: people, product, place, promotion and price in order to increase its value to shareholders.,

Operations
This functional area is run by Ken Koziol, Executive Vice President and Global Chief Restaurant Officer. Under this functional area Koziol is responsible for worldwide operations, concept and design, equipment, and innovation. McDonald’s plan to win strategy has played a large role in the success of McDonald’s. This strategy has allowed McDonald’s to have better control and efficiency with regards to its operations as well as develop a greater level of appeal to its customers. McDonald’s “Plan to Win” consists of menu optimization, providing a more modern experience and accessibility to consumers with a strong focus on its 5 P’s-people, product, place, promotional, price.

Figure 54: McDonald’s 5P’s ‘Plan to Win’ Concept | | [ 66 ]. Sourced from Market Realist |
McDonald’s strives to continue to maintain quality, service, cleanliness and value in their restaurants, which has been and will continue to be their main initiative in their business strategies. McDonald’s operations are focused around providing menu items that their customers have come to know and love, while at the same time providing new and unique food options. Items from McDonald’s menu such as chicken, beef, breakfast and beverages have allowed McDonald’s to offer their customers a multitude of food choices, which consists of both their original menu items as well as new menu items they have developed. McDonald’s also continues to strive to improve their customer service in their restaurants and understands how important it is for their staff to provide good customer service. Whether interaction with the customers take place inside their restaurants or through their drive thru services, employees are the face of McDonald’s and their actions have a tremendous impact on customer retention and loyalty. McDonald’s understands that customer service is an ongoing effort, which will need to be improved through means such as staffing, scheduling, and positioning of their employees.

The dollar menu has been crucial to McDonald’s business strategy and has allowed them to provide alternative food items that are affordable to consumers at a low cost. The expansion of new restaurants and reimaging existing restaurants is an important part of operations at McDonald’s. In their remodeling efforts, they hope to provide their customers with a more memorable food experience with their contemporary restaurants as well as being able to reach more of their customers through expansion and accessibility. McDonald’s S&G expenses have remained fairly stable over the past nine years with the exception of 2010, which was $2.3B and is when S&G expenses started to see an increase. In 2011, S&G expenses increased to $2.4B (3% increase-flat constant currencies) and $2.5B in 2012 (4% increase in constant currencies). These increases were mainly a result of higher employee costs, Olympic sponsorships, higher technology, and worldwide owner operator conventions. McDonald’s continues to work closely with its suppliers to help minimize risk and control food costs as well as, control selling and administrative costs. Although McDonald’s has seen strong revenue growth its comparable sales decreased in 2013 as a result of customers not reacting as planned to McDonald’s new offerings and strategic improvements. Growth was also impacted as a result of being part of an industry that had a slower year, causing them to face intense competition from its competitors. From 2011-2013, McDonald’s comparable sales decreased as follows: 2011-5.6%, 2012- 3.1%, and 2013-10.2%. The decrease is largely due to the APMEA region which reflected a decrease as a result of economic conditions. Comparable sales will likely decrease even further in 2014 as a result of the recent food scandal in China that has affected McDonald’s. Preliminary results show a 3.7% decrease in sales thus far in 2014, as a result of a supplier in China repackaging expired meat. Although, McDonald’s was not the only fast food chain affected, this has severely impacted their trust with customers which they will need to work hard in order to repair in the upcoming months.

McDonald’s strong net cash flows from operating activities have allowed them to continue to grow their revenue and invest towards expanding into new markets. This has also allowed them to reimage a larger number of its restaurants by offering more features and convenience to its customers. McDonald’s net cash from operating has grown significantly from 2004-$3.9B to 2013-$7.1B, which is evidence of their significant growth. In 2013, this cash flow was a result of the number of franchised restaurants, which allowed McDonald’s to generate revenue at a lower cost. From 2010-2012, McDonald’s was able to generate a free cash flow of $12.5B which was allocated as follows: $8.6B towards share buy backs and $7.9B towards dividends during this time frame.

Figure [ 55 ]: McDonald’s Comparable Store Sales by Region | | [ 67 ]. Sourced from Yahoo Finance |
In 2013, McDonald’s operating margin was 31.2% and managed to increase their revenue by 2% from the previous year. McDonald’s managed to accomplish these results by opening new restaurants in China and Europe, specifically in UK and Russia, which had favorable comparable sales. McDonald’s average unit sales per restaurant was $2.5M in 2013, which in comparison to the quick serve industry average of $1M, indicates a fairly successful year. This can be attributed to McDonald’s performance in managing franchise restaurants, strategic advertising, strong brand image, and convenience to customers.

McDonald’s EBITDA has increased steadily over the past few years increasing from $7.77B in 2009 to $10.08B in 2013. EBIDTA has remained fairly consistent from 2010-2013 staying within a percentage bracket of a 36.5%-37% growth rate, however has yet to experience an increase in growth as it did in 2010, which was at 40%. This is mainly a result of McDonald’s having a hard time managing its gross margins as a result of battling with competitors to provide lower prices to consumers and maintain costs.

Figure [ 56 ]: McDonald’s Annual ROE % | | [ 68 ]. Sourced from Morningstar |
McDonald’s ROE has remained in the percentage bracket of 30-40% since 2008., With the utilization of debt, this has allowed McDonald’s to open new restaurants and fulfill its mission of expansion at a rapid pace. However, at the same time it has also exposed them to risk due to the amount of debt they are utilizing in order to fund their expansion. By assessing McDonald’s ROE using the DuPont analysis, it is evident that as a result of their ROA decreasing by 80% in 2011, this had a direct impact on the amount of leverage McDonald’s was able to build in order to be able to maintain a positive ROE.,

Supply Chain
This functional area along with development and franchising is led by Jose Armario, who serves as McDonald’s Executive Vice President of Worldwide Supply Chain, Development and Franchising for McDonald’s. In this functional area, Armario is responsible for executing market development strategies, managing its supply chain, and its franchising strategy. McDonald’s has continued to operate by the three legged stool mentality developed by its Founder Ray Krock which revolves around its relationships with investors and suppliers. McDonald’s works hand in hand with its suppliers to ensure consistency and food quality. In doing so, it provides them with the advantage of being able to respond quickly to changing economic conditions and consumer demands. Having this relationship helps to minimize damages to operations as well as have a negative impact on profitability. In 2014, McDonald’s honored 36 of its suppliers and 51 projects that they felt truly represented innovation and supply chain management. McDonald’s has made a strong effort to incorporate what they refer to as the three Es of innovation in their supply chain management efforts. These include ethics, environment, and economics.

Figure [ 57 ]: McDonald’s Supply Chain | | [ 69 ]. Sourced from Yahoo Finance |
McDonald’s supply chain is geared towards providing more convenient and affordable food choices, providing food from thriving farms, and ensuring environmental efficiency and protection. To ensure that the three Es are implemented properly this is enforced at each supply chain level within McDonald’s: raw material production, processing, and distribution. Because supply chain development is so important to McDonald’s, they have implemented a supplier code of conduct, which each supplier working with McDonald’s must sign and which outlines expectations and guidelines. McDonald’s has also created a performance index tool that is designed to measure food quality, fair treatment of workers, and safety practices and protocol. Because the three legged stool mentality has been so instrumental in McDonald’s business model, it has allowed them to expand their restaurants while still having control over quality and consistency. It has also provided them with the ability to work with suppliers collaboratively in an effort to be innovative and brainstorm when it comes to responding to changes in consumer needs. McDonald’s understands the risks associated with using suppliers, this is why they stay involved in continuous product reviews as well as conduct onsite visits to their suppliers. The fact that McDonald’s stays so closely connected to its suppliers helps them to manage costs more efficiently. By staying involved in this aspect of the business, it allows them to have better insight as to food and paper costs in the future so they can plan accordingly. McDonald’s only receives food and paper supplies from independent suppliers and thus does not supply these products themselves. However, McDonald’s makes it a point to provide their employees with the proper training in order to learn how to utilize such materials properly. Some of McDonald’s suppliers include Cargill, Coca-Cola, Tyson and Golden Foods. As a result of McDonald’s efficient use of their supply chain which includes a mixture of direct and indirect suppliers, such as farmers, they are able to serve 1% of the population around the world each day. McDonald’s operating costs for food and paper from 2011-2013 reflects a slow increase of $6.1B in 2011 to $6.3B in 2012 and $6.3B in 2013. This increase may be a result of McDonald’s wanting to provide higher quality food and products to their customers and having more of a focus on their “Plan to Win” strategy which strongly revolves around menu optimization, accessibility for customers and modernizing the customer experience.

Development and Franchising
McDonald’s has two types of franchise agreements, which include conventional franchised restaurants from which they receive rent and royalties based on a percentage of sales as well as additional fees. The second type of franchise agreement includes its affiliates and developmental licensee’s revenues, which are derived from a percentage of sales and initial fees. Although McDonald’s does not record franchise revenues, it still helps management to have a better understanding as to the overall performance of the company.

McDonald’s still plays a large role in management of their franchise locations. In doing so, they are very careful about what investors they provide franchise licenses to and strongly consider their motives and intentions before agreeing to grant any licenses. Franchises allow McDonald’s to share with its investors profitability and growth as well as the amount of risk involved in opening new restaurants. Because investors are a direct reflection of a company, this tends to create risk for McDonald’s with regards to brand imaging, food safety, and the amount of experience the investor has in running the restaurants. Real estate purchased and leased by McDonald’s is done so for the purposes of transacting business for its restaurants. Prior to McDonald’s purchasing property and buildings it performs an in depth analyses to determine customer traffic, convenience, long term sales and profitability. Other factors taken into consideration include construction costs and designs in order to maintain costs and increase profitability for both McDonald’s restaurants and its franchisees.

Table 14: McDonald’s Owned and Franchised Restaurant Counts and Sales | McDonalds (millions) | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | System wide restaurants | 31,967 | 32,478 | 32,737 | 33,510 | 34,480 | 35,429 | Company Owned | 6,502 | 6,262 | 6,399 | 6,435 | 6,598 | 6,738 | Franchised | 25,465 | 26,216 | 26,338 | 27,075 | 27,882 | 28,691 | Company Owned Sales | 16,561 | 15,459 | 16,233 | 18,293 | 18,603 | 18,875 | Franchised Sales | 54,132 | 56,928 | 61,147 | 67,648 | 69,687 | 70,251 | | 70. Sourced from McDonald’s Annual Report |

In 2013, McDonald’s managed to increase the number of franchise restaurants, which now accounts for more than 80% of their restaurants. From 2011-2013, capital expenditures fluctuated, which were $2.7B in 2011, $3.0B in 2012, and $2.8B in 2013. In 2013, McDonald’s saw a 7% decrease in capital expenditures as a result of not focusing as much on reimaging its existing restaurants, but rather investing a larger amount towards the creation of new restaurants. In 2013, $2.8B in cash was used towards investing in new restaurants accounting for half of its capital expenditures, while the rest was used for reimaging existing restaurants. McDonald’s has the ability to expand as a result of their cash flow and strong credit.

Figure [ 58 ]: McDonald’s Asset Turnover | 71. Sourced from Morningstar |
McDonald’s property, plant and equipment have seen a steady increase over the past nine years representing $20.7B in 2005, increasing to $25.7B in 2013. This can be attributed to their rapid expansion and development of new restaurant and reimaging. McDonald’s asset turnover has remained fairly stable over the past nine years with the exception of 2008, 2011, and 2012, which were .81, .83, and .8.1 respectively. The reason for the increase during these years is a result of their rapid expansion and an increase in the number of restaurants they purchased and franchised during that time. However, for the most part, their steady asset turnover is suggestive of the fact they are using their assets efficiently in order to be able to continue reinvesting in their business to generate new sales.

Marketing
This functional area is led by Erik Hess, Senior Vice President of Consumer Brand Strategy. In this functional area he is responsible for global menu strategy, market planning and marketing/insights training. McDonald’s marketing strategy revolves around uniformity and consistency in their menu items as well as a focus on their “Plan to Win”. Their plan to win strategy involves optimizing their menus, customer experience, and convenience to McDonald’s restaurants. McDonald’s marketing is based on its brand image and is designed to set itself apart from their competitors. They emphasize value, taste of their menu items, food options, nutrition, accessibility, and experience.

Product
McDonald’s has been very diligent in maintaining menu items customers have come to know and love as well as testing and introducing new menu items as a way to provide more choices and healthier food items to consumers. McDonald’s also takes into consideration changes in consumer needs and wants and adapts menu items accordingly based on the geographical segmentation and consumer’s culture. McDonald’s understands the importance of maintaining its well-known menu items that have been around for years that consumers have come to know and expect at every location. However, they also acknowledge that consumers eating habits and diets are changing constantly. This is why they make sure to consistently expand their menu items to include new and innovative items such as coffee, smoothies, McCafe, wraps and salads and provide their customers with menu items that are different and unique in taste. McDonald’s has a strong focus on one part of their menu in particular, which is the dollar menu in an effort to provide more food options to its customers at an affordable price. Place
Convenience is one of McDonald’s number one priorities when serving its customers. This is why McDonald’s has worked steadily to open new locations domestically as well as internationally and providing access to restaurants with more drive-thru options. McDonald’s strategically places its stores in locations that are convenient and are not out of a consumer’s way. New features and technology provide more convenience and faster service to McDonald’s customers. In 2013, McDonald’s focused their efforts to open new locations and reimage existing restaurants as well as implement more restaurants with hand-held menu ordering and extended service hours to 24 hours. In the US, this consisted of 225 new restaurants and the reimaging 700 existing restaurants to provide more of a contemporary feel to customers, and included 45% interior and exterior designs. In Europe, 312 new restaurants were opened and reimaging efforts accounted for 470 restaurants, including 100% interior and 100% exterior designs. The APMEA region opened 731 new restaurants and reimaging was conducted on 240 restaurants, including 65% interior and 55% exterior designs.

Price
McDonald’s is known for their low cost menu items and providing meals that are affordable to consumers through limited time offers as well as a large focus on their dollar menu. McDonald’s menu items are split up based on cost, where its core menu items are the more pricey options and its dollar menu items appeal to consumers who are more spending conscious. McDonald’s uses a price tier pricing strategy that allows them to provide menu items at different pricing points to attract consumers from all income levels. Because McDonald’s is diligent in managing inflation costs, this also allows them to adjust their menu prices quickly in relation with changes in economic conditions and implementing strategic cost controls to manage changes in pricing. McDonald’s pays special attention to changing food prices and supply in demand. Higher commodity costs in beef prices or economic conditions such, as sanctions in Russia on US chicken, leads to more promotions and value deals around their chicken menu items. McDonald’s also pays close attention to their competition in an effort to strategically price their items to beat out their competitors. This is evident in their recent battle with Burger King and their offering of Chicken nuggets and Taco Bell to compete with their new breakfast menu.

Promotion
McDonald’s advertises through means such as radio, television, posters, press and the internet. McDonald’s has a strong focus on its advertising campaigns and game prizes as a way to draw in and attract its customers. These endorsements have ranged from the Olympics, movies such as Shrek, and teaming up with celebrities. In 2013, the APMEA region recognized National Breakfast day by giving away 5,000 Egg McMuffin sandwiches to attract consumers and draw attention to their breakfast menu. Just recently in 2014, McDonald’s promoted its breakfast menu in the US by offering free coffee to its customers for a limited time only. McDonald’s is constantly experimenting with new dollar menu items such as the new jalapeno McDouble that was just recently added as a way to advertise a wide variety of food options that are affordable to its consumers. They also attract customers with their limited time offers such as their current promotion of 20 chicken nuggets for only $5.00. Current celebrity endorsements are now focused around athletes such as Lebron James, Patrick Kane, Alex Morgan, and Jamie McMurray. McDonald’s has made consistent efforts to engage its customers through efforts such as its Monopoly game prize providing customers with the opportunity to win prizes such as cash or experiencing an athlete experience as well as encouraging customers questions through their website around their food items. Advertising costs increased from $768.6M in 2011 to $808.4M in 2013. This increase was a result of the Olympic sponsorship in 2012 as well as costs resulting from advertising cooperatives. McDonald’s advertising expenses will most likely only continue to increase as a result of its advertising efforts and attempt to engage a higher percentage of its customers.

Human Resources

Figure [ 59 ]: McDonald’s Employee Demographics | | [ 72 ]. Sourced from Pay Scale | Figure [ 60 ]: McDonald’s Employee Satisfaction | | [ 73 ]. Sourced from Pay Scale | This functional area is run by Rich Floersch, Executive Vice President and Chief Human Resources Officer. In this functional area he is in charge of global human resources, talent management, leadership development rewards and employee branding programs. McDonald’s has a high regard for employee training and development and understands that employees must be properly trained in order to take them to the next level as a successful fast food chain restaurant. This is why McDonald’s has established a training center for employees referred to as Hamburger University, a global training center, which focuses on procedures, service, quality and cleanliness and trains employees in operations and leadership development.

McDonald’s also strives to help each employee become a leader by instilling their values in employees and encouraging them to become leaders. They work with employees to develop career plans as well as succession planning to ensure that its employees are on the right path to reaching the next phase in their careers.

McDonald’s also has a global mobility program, which allows employees to take job assignments in other countries as paid internships, which they offer to college and graduate level students providing them with the ability to work on projects and develop initiatives. From 2010-2013, McDonald’s number of employees as well as its payroll and benefits expenses increased. The number of employees increased from 400,000 in 2010 to 440,000 in 2013, while their payroll and benefits expenses also increased from $4.1M to $4.8M respectively. These figures are evident of McDonald’s expansion and the need for additional employees to help facilitate their growth. On average McDonald’s hires approximately 1 million employees each year, which are 700,000 of the domestic workforce and reflects a 150% turnover rate. Compared to the fast food industry’s average turnover rate of 75% this is quite significant. The average hourly rate of a Fast Food Worker at McDonald’s ranges from $7.09-$9.21, Fast Food Manager ranges from $8.24-$11.37, and Assistant Managers: $8.56-$13.18. This is -4% below market of like company’s hourly wages. Such low wages is a resulting factor of their high turnover rate.

Benefits for staff employees in the US: * Medical * Dental * Profit sharing * Vacation * Sabbatical program * Employee and dependent life insurance * Incentive pay * Rewards and Compensation

McDonald’s determines its base pay off of what other restaurants in similar industries are paying as well as individual skill level. McDonald’s benefits package is made up of its short term and long term incentives. Short term incentives are based on individual and company performance and are linked to the overall business strategy. Long term incentives awards employees with ownership in stock based on their contribution level and position in the company. Awards are also provided to deserving employees such as their Presidents Award and Circle of Excellence award both geared towards employees growing and being influential to the McDonald’s vision. Company vehicles are provided to employees in certain positions and tiers within the company. McDonald’s encourages employees to invest in their futures through assistance programs such as profit sharing and savings, purchasing shares of McDonald’s, and taking advantage of financial planning services. Additionally to promote happier employees, McDonald’s also offers incentives such as vacations and holidays, compressed work weeks, anniversary incentives, and education assistance.

Technology
McDonald’s understands the importance of technology and recently hired their first Chief Digital Officers, Atif Rafiq to help run this functional area of the company and to assist McDonald’s with maintaining a competitive advantage in the IEO segment. It is important to McDonald’s to continue their efforts in enhancing and testing new products, which is why they have centers specifically dedicated to ongoing research and development and also work collectively with their suppliers to benefit from their independent research efforts. McDonald’s has research and development locations in US, Europe, and Asia. As convenience is key, McDonald’s is currently testing digital technology such as mobile ordering in the US that will make it easier for customers to order and pay using their mobile phones making it quicker and more convenient to come and pick up their orders. Testing is also happening in their global locations in the UK where McDonald’s has decided to put a new twist on its Monopoly game prizes by allowing customers to play by utilizing their tablets and mobile phones as opposed to how the game is typically played in the US by peeling off the stickers on the back of select food items. In order to market the monopoly game even further, UK McDonald’s has developed digital channels on YouTube as well as made more of an effort to interact with its customers on Facebook. McDonald’s has also been testing the concept of providing its customers with iPads in some of its restaurants. Because McDonald’s understands how important the internet is in engaging its customers they spent $960M on measured advertising in 2012 just in the US and have continued to focus on utilizing social media sites such as Facebook and Twitter in order to communicate more heavily with its customer’s. McDonald’s has also attempted gamification as a way to enhance its promotions and connect with customers on their mobile devices as well as to collect data regarding marketing trends. This was utilized by UK McDonald’s in 2012, when they were promoting new smoothies and used this as an opportunity to win a free smoothie for whoever downloaded their application. Gamification is a way to launch new food menu items as well as engage customers.

Self-ordering kiosks have also been developmental in European countries such as the UK. In 2013, self-ordering kiosks were placed in 14 restaurants along with interactive table service mechanisms. In France, self-ordering kiosks have now made their way into every McDonald’s location as of 2013. These self-ordering kiosks were implemented by McDonald’s as a way to provide more convenience to customers in a less stressful way and improve the interaction between employees and customers. Now with self-ordering kiosks it allows customers to order their food quick and easy and have it delivered to their tables, having more direct interaction with McDonald’s staff.

Sustainability & Philanthropy Figure 61: McDonald’s Upcoming Goals | Focus Area | Goals | Food | Serve 100% more fruits, vegetables, low fat dairy or whole grain. Reduce sodium, sugar, saturated fat, and calories in menu items | Sourcing | Support sustainable beef production, 100% of coffee, palm oil and fish, 100% fiber based products | Community | Strengthening community and improving the lives of children | Planet | 20% increase in energy efficiency in companies ,Increasing amount of recycling by 50% and minimize waste | People | Creating opportunity and promoting diversity | | 74. Sourced from McDonald’s Website | Overtime sustainability has become a large part of what McDonald’s stands for. They have come to realize how important a healthier planet and consumers are and have taken efforts to show these initiatives in their everyday business practices. McDonald’s recognizes the importance of providing nutritional information to its customers, which is why they are making more of an initiative to provide nutritional information to customers and provide healthier food items on their menus. They are striving to accomplish this by providing healthier menu items that include fruit, vegetables low fat dairy and whole grains. They have already made a significant effort to reduce saturated fat, calories and Trans fat, as well as sodium in various items throughout their menu. These efforts are evident in their effort to reduce sodium by 20% in their French fries in European restaurants and a 20% sodium reduction in Australia in their cheese slices. McDonald’s understands their customers concerns regarding healthier eating and how it is affecting their children. This is why they have made more of a conscious effort to provide healthier food items to children and encourage living more active and healthier lifestyles.
Another part of McDonald’s sustainability plan is to improve the sourcing of its food. McDonald’s stresses the importance of ensuring positive and fair treatment of its supplier’s employees as well as their concern for the ethical treatment of animals. McDonald’s also has a strong focus on improving the environment by its effort to reduce waste reduction and increasing energy efficiency 20% by 2020. They have already made progress with their efforts and have managed to recycle 36% of in-house restaurant waste in 2013. Another large part of their sustainability efforts include the employees of McDonald’s. McDonald’s strives to provide all of their employees regardless of geographical location or being a franchised restaurant the necessary training and takes measures to protect their well-being. In 2013, an employee satisfaction survey of crew members reflected 89% of employees were satisfied with amount of training necessary in order to perform their job duties well. McDonald’s also promotes diversity and welcomes cultural difference both from its employees and its customers. McDonald’s is an advocate for strong women leadership and strives to promote women workers by helping them to advance in their careers and providing them with the tools they need to succeed.

McDonald’s also gives back to the community through their charity, Ronald McDonald House Charities, which helps to raise proceeds for extremely sick children. McDonald’s manages this charity each year through collection boxes they make available for donation at over 13,000 of their restaurants. In 2012, McDonald’s was able to raise $27.9M in donations towards their charity. McDonald’s also encourages children to participate in nutritional educational programs and reading through their Happy Meal Books.

Legal
Gloria Santona, General Counsel and Secretary, leads this functional area and is responsible for worldwide legal compliance and regulatory and corporate governance. McDonald’s has faced some harsh criticism in the past regarding their quality of food and health issues it causes for consumers. Although, McDonald’s takes great strides to maintain close relationships with suppliers, a recent scandal in China proved having global restaurants can be difficult. As this recent scandal involved a supplier selling expired meat to McDonald’s it has impacted same store sales by 7.3% in the APMEA region and has resulted in McDonald’s doing some serious damage control while having to seek out alternative suppliers in China, for their estimated 2,000 restaurants. McDonald’s has also faced issues regarding its labor liability to its franchises. In 2014, The National Labor Relations Board determined McDonald’s to be a joint employer with its franchises. This ultimately means that McDonald’s is now responsible for labor and other practices in 14,000 restaurants in the US, an issue they plan on disputing. There are also ongoing global protests and demands from employees and labor activists to increase the minimum wage rate to $15.00 per hour. This is causing McDonald’s to face severe pressure to increase their employee wages.

Additionally, the company is facing backlash from parents of children who eat McDonald’s accusing them of using marketing tactics that directly target children who are easily influenced and encouraging them to consume unhealthy foods. However, McDonald’s continues to deny these allegations and claims this is not their intention. One of the more popular lawsuits occurred in 1993, involving a customer who was burned with hot coffee. Just recently a law suit almost identical to the first was filed in 2013, by yet another customer who was burned with hot coffee as well. Although, it is lawsuits like the one that occurred in 1993 and ended up costing them $500,000, McDonald’s still continues to operate in the same manner by brewing their coffee 180-190 degrees in order to keep it fresh and reduce production costs.

Yum Brands

History
Yum Brands, Inc. is the parent company of three brands – KFC, Pizza Hut and Taco Bell. All three brands are the global leaders in the chicken, pizza and Mexican-style food categories, respectively. Yum is the largest limited-service restaurant in terms of number of outlets with over 40,000 restaurants in more than 125 countries and territories. Of the 40,000 restaurants, 20% are operated by the company, 75% are operated by franchisees and unconsolidated affiliates and 5% are operated by licensees. Yum’s former parent company is PepsiCo, Inc.

The first Pizza Hut was opened in 1958 in Wichita, Kansas. PepsiCo acquired the company through a merger in 1977. Today, Pizza Hut is the largest restaurant chain in the world specializing in the sale of ready-to-eat pizza products. The first Taco Bell restaurant opened in 1962 in Downey, CA. PepsiCo acquired Taco Bell in a merger transaction in 1978. Headquartered in Louisville, Kentucky, Kentucky Fried Chicken began in 1939. In 1986, PepsiCo acquired Kentucky Fried Chicken. PepsiCo changed the name of the company from Kentucky Fried Chicken to KFC to reflect broader product offerings such as Rotisserie Chicken.

In 1997, PepsiCo’s divestiture of its restaurant division resulted in a spinoff creating Tricon Global Restaurants Inc. The restaurants were PepsiCo’s growth engine but there was no way a $33B company could devote the same attention to the restaurants as people who knew and loved the restaurant business. For the first time in the history of the brands, KFC, Taco Bell and Pizza Hut were finally being run by a company with restaurant business understanding.

Tricon Global Restaurants was created as an independent, publicly-owned company on October 6, 1997 via a tax-free distribution by former parent company, PepsiCo, Inc., of common stock to its shareholders. The name Tricon reflected the company’s three iconic brands. In 2002, the company acquired Long John Silver’s and A&W Food Restaurants. The addition of the two brands prompted a change in the company’s name to reflect the expanded portfolio of restaurant brands and the company’s multi-branding leadership. The company’s New York Stock Exchange ticker, Yum, inspired the company’s current name Yum, Inc. In 2011, Yum sold Long John Silver’s and A&W All American Food Restaurant brands.

Mission
The company employs the Dynasty Growth Model which comprises the company’s vision, goal, passion and formula for success. The company’s vision is to “Be the Defining Global Company That Feeds the World”. The company’s goal is to “Be the Best in the World at Building Global Restaurant Brands!” The company’s passion is “Customer Mania…with customers front and center in everything [they] do.” The company’s formula for success is “People Capability First…satisfied customers and profitability follow”.

Through December 2013, Yum consisted of six operating segments, namely: Yum Restaurants China, Yum Restaurants India, Yum Restaurants International (YRI), KFC US, Pizza Hut US, and Taco Bell US. As of January 1, 2014, Yum Brands US, consisting of KFC US, Pizza Hut US, and Taco Bell US, and YRI combined to focus on global brands. As a result, the company structure now consists of five separate divisions: Yum Brands China, Yum Brands India, KFC, Taco Bell, and Pizza Hut. The restructuring notates a departure from geographic focus to brand focus. China and India remain separate divisions given their strategic importance and growth potential.

The new company structure warranted an evolution of the Dynasty Growth Model to reflect the company’s three strategies for faster global growth and long-term sustainable results:

Build powerful brands through superior marketing, breakthrough innovation and compelling value – with a foundation built on winning food and world-class operations

Drive aggressive unit expansion everywhere, especially in emerging markets – and by building leading brands in every significant category in China and India

Create industry-leading returns through franchising and disciplined use of capital – maximizing long-term shareholder value

The major difference between the aforementioned 2013 Dynasty Growth Model and the 2012 Dynasty Growth Model is a shift in strategy. The 2012 Dynasty Growth Model included the aforementioned three strategic directions as well as the following statement: “Dramatically improve US brand positions, consistency and returns”. The drop of the specific mention of US brand positions is indicative of the company’s dedication to global brand focus going forward. All financial reporting going forward will now be by global division: KFC, Taco Bell, Pizza Hut, China, and India. The change takes the emphasis off of the locale and places it on the brands with China and India as the exceptions given their growth potential and need for geographic specific focus.

Structure
The new leadership structure reporting to Chairman and CEO, David C. Novak, includes: CEO of Yum Restaurants China, CEO of KFC, CEO of Pizza Hut, CEO of Taco Bell, and President of Yum Restaurants India. Also reporting to Novak are the Yum Corporate functional leaders of finance, operations, human resources, public affairs and legal. Table [ 15 ]: Yum Brands Restaurant Units Globally | | 75. Data Sourced from Yum 2013 Annual Report |

David C. Novak worked for PepsiCo as president of KFC and Pizza Hut. The company spinoff into Tricon (later Yum) occurred in 1997. In 1999, Novak was appointed CEO. In 2015, Novak will transition from his current position to Executive Chairman. The current CEO of Taco Bell will then become CEO of Yum. Together they will form the Office of Chairman along with current CEO of Yum China. This new position will partner as triumvirate on overall corporate strategy and leadership development to propel continued growth.

In 2013, Yum’s company sales totaled $11.2B. As standard industry financial reporting would have it, company sales do not include franchisee sales. Include the franchise and license fees and income of $1.9B, then total revenues total $13.1B. Operating profit totaled $1.8B in 2013. China and YRI represented approximately 70% of the company’s operating profit in 2013, suggesting a reliance on the emerging world. It is worth noting however, that a higher percentage of China’s Yum restaurants are company owned as opposed to franchised like the majority of Yum’s other restaurants around the world. At the end of 2013, 77% of Yum restaurants were franchises while 21% were company owned. At the same time, 81% of Yum restaurants in China were company owned while a mere 8% were franchises. This may be due, in part, to a weak regulatory environment in China as it pertains to weak intellectual property enforcement and inadequate legal framework for the foreign franchisor.

Figure [ 62 ]: Yum Brands Revenues by Geography | | 76. Sourced from Market Realist |
As of January 1, 2014, the company structure now consists of five separate divisions: Yum Brands China, Yum Brands India, KFC, Taco Bell, and Pizza Hut. The China division makes up most of the company’s revenues given that a majority of the restaurants in China are company-owned and operated. The China division consists of mostly KFCs and then Pizza Huts.

Finance
The primary commitment Yum makes to its shareholders is consistently above EPS. To Yum, above average is at least 10% growth in EPS year after year. The company has been able to fulfill this commitment to shareholders with at least 13% EPS growth, excluding special items, for 11 consecutive years until 2013. In 2013, EPS declined 9% to $2.97 per share, excluding special items. The poor performance was due primarily to poor performance in the China division.

In 2012, the company projected 2013 EPS to grow 10%. Wall Street predicted 14% growth. The actual 2013 9% EPS decline was a major departure from previous projections. The company then projected 20% EPS growth for 2014 based on expectations that the China Division Operating Profit for 2014 will grow at a rate significantly above the ongoing rate of 15%. However, China has not been so promising. In the company’s fiscal third quarter for 2014, same-store sales in China fell 14%, hurt by the country’s latest food-safety scare. As a result, the company lowered its previous forecast of at least 20% to between 6% and 10%. Outside of China and India, Yum’s KFC division system sales rose 6% and operating profit rose 16%. Same-store sales rose 4% in emerging markets, 3% in developed markets and 2% in the US.

Figure [ 63 ]: Yum NEO Target Bonus vs Actual | | [ 77 ]. Sourced from Yum 2013 Annual Report |
For the named executive officers (NEO) of Yum, EPS and same-store sales are important performance metrics for determining executive bonuses. Figure 63 illustrates performance targets and actual performance for NEOs, namely: CEO - Novak, CFO - Grismer, CEO of China - Su, CEO of Taco Bell - Creed and CEO of YRI - Pant.

The CEO, CFO, and CEO of China performances all fell below performance targets and as a result the executives did not receive their targeted bonuses. For these executives, EPS and same-store sales reflect the performance of their department functions in the company.

Yum determines shareholder value as a function of: new unit development, same-store sales, and high returns as it relates to ROIC. In terms of new unit development, YRI opened a record 1,055 new restaurants last year and China exceeded their development plan of 700 new restaurants with 740 new restaurants in 2013. The company plans on opening 700 more new units in China in 2014. China continues to be the driving force in fulfilling the company mission of “Be the Best in the World at Building Global Restaurant Brands!” China remains the #1 retail opportunity in the world and Yum asserts that they are on the ground floor of global growth.

Restaurant development in India pales in comparison with the rest of the company’s portfolio of global brands, however the company is investing in the future of India. India is forecasted to have the largest consuming class in the world by 2030. This year, Yum opened 157 new units in India and plans to open an additional 150 new units in 2014.

Figure 64: Yum Brands Total Number of Units Each Year | | 78. Sourced from Market Realist. Data gathered from Company Filings. |

Outside of China, much of the company’s growth is developed by franchisees. This franchise-led growth is great news for shareholders as the capital-free franchise business is about as high a return business as you can possibly have. Franchisees invest virtually all the capital to own and operate what is now 78% of Yum restaurants. A great majority of the capital invested by the company is located in China with the largest number of company-owned restaurants.

Figure [ 65 ]: Yum Brands Annual Return on Invested Capital | | 79. Data sourced from Morningstar. |
Food prices and labor costs continue to be a problem that impact return on invested capital. However, the company is now shielded from similar issues in UK by refranchising its remaining 331 company-owned Pizza Huts in 2013. The refranchising agreement decreased company sales by 18% and increased franchise and license fees and income by 2% and operating profit by 3%. By refranchising, the company is insulated from external factors like unemployment and commodity costs. During 2013, the company invested $1B in capital spending, including $568M in China, $289M in YRI, $161M in the US and $31M in India. For 2014, the company estimates capital spending will be approximately $1.2 B. Yum’s return ROIC is amongst the highest in the industry further fueling high shareholder value.

Figure 66: Yum Brands Return on Equity | | 80. Data sourced from Morningstar |
ROE can be seen recovering from recent lows, likely due to the Chinese meat expiration scandal. ROE peaked in 2009 and it appears that ROE is returning to its10 year average levels. The year 2009 appears to have been an event rather than a trend which suggests its catalyst is not sustainable.

Figure 67: Yum Brands Annual Return on Assets | | 81. Data sourced from Morningstar | Given Yum’s rapid expansion and use of external financing, it can be suggested that ROE is artificially inflated and not a reflection of managerial capabilities. However, Yum’s income has steadily increased in the past decade with the exception of the 2012-2013 reporting cycle, another isolated event. This is an indication of a reliable ROE in terms of trend analysis.

Again, 2012 was a destructive year for Yum and we can see that again in Yum’s ROA. However, prior to 2012 and even now after 2012, ROA, is trending upwards. Most of the company’s assets are located in China where there are the most company operated locations. Any Chinese scandal related to the company will have a significant impact on the firm’s operations and subsequent returns. This is what happened with Yum’s ROA, but the outlook is positive. This may also point to a need for the firm to diversify its operations because its heavy reliance on China brings the entire portfolio down in times of hardship.

Figure 68: Yum Brands Same-Store Sales Growth | | 82. Sourced from Market Realist. Data gathered from Company Filings. |
Same-store sales were flat or declined except for Taco Bell and YRI. Taco Bell represents two-thirds of US profits. In 2013, Taco Bell delivered another solid year with the fourth-quarter representing the eight consecutive quarter of same-store sales growth. However, because the China division contributes over half of the total revenues for Yum overall, world restaurant margins and operating profits were negatively affected. World restaurant margins dropped 2.7 points to 14.9% while operating profits tumbled 12%. Both values are huge reversals from the second quarter this year where world restaurant margins increased 3.0 points to 15.5%, as operating profits soured upwards 34%.

The company attributes its decline in same-store sales to the 2014 OSI Shanghai meat scandal and the 2012 poultry scandal in China. However, same-store sales in China were already starting its decline in 2011. In 2013, same-store sales declined by 13% in China. Same-store sales grew 1% at YRI and were flat in the US. As a function of performance, system sales were below target for all Yum Brands NEO’s.

Table 16: Yum Brands System Sales Growth Performance Measures | NEO | Measures | Target | Actual | CEO of China: Su | System Sales Growth | 15% | (4)% | CEO of Taco Bell: Creed | System Same-Store Sales Growth | 3% | 3% | CEO of YRI: Pant | System Sales Growth | 6% | 5% | 83. Sourced from Yum 2013 Annual Report |

Operations
Overall, Yum has demonstrated moderate to low operational profitability and efficiency compared to company historical rates as well as industry, sector, and S&P 500 averages.

As a function of sales, their gross margins have statistically flattened out over the past ten years and show little prospect for growth or a return to 2004 gross margin highs where costs of goods sold (COGS) were extremely low, comparatively. In 2004, COGS were just over 50% of total revenues. In year 2005, COGS increased to over 70% of revenues and have remained nearly flat ever since. It is however not surprising that the company has not been able to achieve a positive trend upwards given that the company is unable to charge a high markup on goods. Yum’s gross margin is reflective of the company’s price strategy of offering products at competitive prices.

Figure 69: Yum Brands Annual Gross Margins | | 84. Data Sourced from Morningstar |
Compared to industry, sector, and S&P 500 averages, Yum’s five year average gross margins are below average. The nearly flat trend Seen in Figure 69, would suggest that the company is maintaining margins despite competition and that the company has raced to the bottom of the barrel on prices. Despite this, there is opportunity for growth. This trend has persisted for the past ten years, which would suggest that the company needs to make a significant change to its operations in order to develop a catalyst for growth in sales and subsequently, gross margins.

Figure 70: Yum Brands Annual Operating Margins | | 85. Data sourced from Morningstar |
Also, despite below average gross margins, the company has demonstrated the ability to leverage their strong supply management controls thereby keeping cost of goods sold relatively stable.
The company’s operating margin has experienced some slight volatility over the past ten years but it is appearing to be trending upwards. This is a good sign given that the company is heavily invested in fixed assets in China and India. The increase in company operated stores in China and India requires the ability to cover the associated fixed costs that otherwise would not be incurred with franchised locations. The trend going upwards also suggests decreased financial risks in paying debt and other financial obligations. It is, however, important to note that operating margins below industry averages would suggest the firm will use more external financing than its competitors given its decreased ability to generate returns from operations.

In terms of comparing with industry averages, Yum continues to be below average as it pertains to operating margins. However, the company is only slightly below sector averages and edges out ahead of S&P 500 averages. The decreased ability to generate returns from operations may not however suggest inefficient or ineffective management on Yum’s part in comparison to competitors.

Operating in China and India requires a great deal of localization to cater to the Chinese and Indian consumer tastes and preferences. Yum is notorious for its localization strategy and has been referred to as a best practice case scenario amongst many business schools. For the most part, this requires higher priced inputs for making products that are demanded by these markets. So essentially, the value is passed on to the consumer as opposed to the provider, in this case, Yum. It can be considered an investment in brand loyalty and brand equity.

The company’s ability to translate sales into profits saw a rapid decline in 2013, followed by a rapid recovery with a 2.49 increase TTM. Overall, net margins appear to be trending upwards. It is important to note however, that the company is highly dependent on its China operations for company sales given its large number of company operated stores in the region. As a result, any event can negatively impact sales, which was the case with the most recent poultry scandal and meat expiration scandal that had a profound impact on the company’s return on sales. Therefore, although net profit margins appear to be trending upwards, the appearance is not reliable given that any negative event can quickly result in a nosedive down as is seen here in year 2012.

Figure 71: Yum Brands Annual Net Profit Margin % | | 86. Data sourced from Morningstar |
In terms of industry standards, Yum’s ten year percentage average net profit margins are below the norm. However, as it relates to sector and S&P 500 averages, the company outperforms by a modest margin. This is impressive given that the company is in a period of rapid growth as opposed to return. The net profit margin is demonstrative of the company’s ability to control its costs. With higher input costs abroad, as discussed above in relation to operating margins as it relates to the Chinese and Indian markets, the company still maintains a positive trend upwards which lends a great deal of confidence to future performance of profits.

Figure 72: Yum Brands Annual Worldwide Restaurant Margins | | [ 87 ]. Data sourced from Morningstar |
Overall, Yum’s operational profitability as a function of return on sales is below industry averages for the metrics of gross margins, operating margins, and net profit margins. There is however, another measure of operational profitability that is unique to restaurants that operate both franchises and company owned restaurants – worldwide restaurant margins. This measurement excludes any sales and expenses incurred as a result of franchise business actions. The company measures company restaurant profit as company sales less expenses incurred directly by company restaurants in generating company sales. Restaurant margins are measured as a percentage of sales by dividing restaurant profit by company sales. This metric is reported as a worldwide performance measurement.

Yet again, 2012 was a challenging year for Yum and worldwide restaurant margins declined. For the past ten years, whenever worldwide restaurant margins declined, the company recovered within the next year with the exception of 2006 and 2007 which saw two consecutive years of declined restaurant margins. This was later followed with two consecutive years of growth. Worldwide restaurant margins appear to be trending downward at an increasingly slower rate which may suggest a recovery on the horizon.

In terms of operational efficiency, Yum’s ability to generate sales given investments in assets is relatively stable. Both fixed-assets and total assets turnover are stable with fixed asset turnover experiencing a slight trend upwards.

Figure 73: Yum Fixed-assets & Total Assets Turnover | | 88. Data sourced from Morningstar |
Comparatively, Yum is outperforming industry, sector, and the S&P 500 in asset turnover. Most recently, the restaurant industry achieved the highest level of asset turnover at a ratio of 1.16 with attributes pointing to a 0.13% revenue increase from same quarter a year ago. This means that Yum’s performance in turning over assets is stellar. Despite their rapid growth overseas, sales are growing just as rapidly thereby resulting in a high asset turnover ratio. This suggests that the company knows very well where to open new locations and how to attract customers to the new locations in a timely manner without cannibalizing sales elsewhere within its portfolio.

Having a majority of Yum’s restaurants operating as franchises translates into profits achieved without the use of dedicated assets. So although, Yum may appear to have a high degree of operational efficiency given the relatively high asset turnover ratio, a true comparison with a comparable industry competitor will determine if this is truly a company strength.

Figure 74: Yum Brands Annual Free Cash Flow Growth % YOY | | 89. Data sourced from Morningstar | Yum’s free cash flow growth percentage year-over-year is seen in Figure 74 trending downwards. Shrinking free cash flows indicate increasingly insufficient cash flows to fund operations and growth. Given the company’s commitment to rapid growth, the company’s apparent negative free cash flow growth suggests that much of the company’s restaurant growth is being propelled with external financing. However, despite the negative free cash flow growth rate, the company was able pay dividends, repurchase shares and comply with all debt covenant requirements for 2013 with a considerable remaining amount of cushion.

Human Resources
Yum has over 1.5 million global associates and franchisees. As of year-end 2013, the company employed approximately 539,000 persons, approximately 86% of whom were part-time. People are the driving force of success at Yum and the company invests heavily in people capabilities. The corporate values – or what the company calls How We Win Together Principles (HWWT)2 – are built around a “People Capability First” philosophy and lay the groundwork for the way they team together every day.

Coaching and mentoring plays an important role in identifying and developing talented organizational leaders within the company. The operations staff in China, which represents about 90% of the entire China-based team, has been entirely developed and promoted from within. In Yum’s US company-owned restaurants, as of 2012, 81% of Restaurant General Managers and Shift Managers were promoted from within the company. In India, Yum India launched Yum Academy to build a pipeline of “ready-now” team members. To do this, they recruit potential team members from underprivileged areas of India, and teach them social skills, hospitality, hygiene and how to be customer maniacs. Yum’s culture of coaching and mentoring shows just how dedicated the team is to making the HWWT2 culture a competitive advantage for both the company and employees.

Another important element in translating human resource inputs into profitable returns is training. The sheer size of Yum makes it a difficult task to deliver training that would result in a consistent product and service globally. However, Yum has done very well in developing a training system that can deliver consistent training content to associates and franchisees around the world. For many years, each restaurant brand designed, developed, and delivered training on its own.

Today, however, with the application of technology, Yum has implemented a consistent, high-quality, standard training utilizing global learning technologies. Yum’s global learning technologies are currently live in more than 30,000 Yum restaurants around the world. In 2013, Yum delivered more than 11 million courses to team members equating to 21 courses per minute across the globe. One of Yum’s learning technologies, Learning Zone, reaches more than 708,000 associates worldwide and most recently had a record in May 2014 with nearly 1.4 million course completions. In 2014, Yum earned the Excellence in Practice Award from CorpU for Learning Technologies.

The restaurant industry has traditionally been known for having high employee turnover rate. However, Yum consistently receives awards for being a great place to work such as:

* 2013 Fortune’s Top 50 World’s Most Admired Companies * Britain’s Top Employer in the Large Company category. The first business to receive the accolade three years in a row for 2012, 2013, and 2014. * KFC UK: Top 50 UK Great Places to Work. Five years in a row. * KFC UK: City and Guilds list of Top 100 Apprenticeship Employers in 2012. * KFC UK: 2013 Great Place to Work Best Workplaces Program, ranking 18th in the Large Employer category * KFC Russia: Top 100 Employers in Russia by Headhunter Company Group’s 2014 ranking. * KFC Vietnam: Vietnam’s 100 Best Employers by Anphabe Company and Nielsen Vietnam * Yum Canada: named in April 2014 as one of the 50 Best Workplaces in Canada by Great Place to Work for the second year in a row. Yum placed 15th overall and was the top restaurant company, outperforming both Starbucks and McDonald’s. The company reported 85% average employee engagement level at the time. * Yum China: named the 2013 Netizen Voted Most Trusted Employer Brand in an online poll conducted by Xinhuanet News Agency. * Yum also named to the city of Tianjin’s Top 10 Employers list.

As a function of human resource performance, Yum still leaves a bit to be desired for the American consumer with customer satisfaction rates declining year-over-year for KFC and Taco Bell and increasing for Pizza Hut.

Table 17: Yum and Limited-Service Restaurant American Customer Satisfaction Index | Company | 2014 | 2013 | % Change | Limited-Service Restaurants | 80 | 80 | 0% | Pizza Hut (Yum) | 82 | 80 | 3% | KFC (Yum) | 74 | 81 | -9% | Taco Bell (Yum) | 72 | 74 | -3% | 90. Sourced from ACSI Restaurant Report 2014 |

Public Affairs
Yum’s Chief Public Affairs Officer is also the Global Nutrition Officer of Yum. His role is to deal with public policy issues management, internal and external communications, corporate social responsibility, community diversity, nutrition, government affairs, community relations, and philanthropy. The activities perform within this office are crucial to the success of fulfilling the company vision of being “the Defining Global Company That Feeds the World.” In 2013, the Yum Foundation invested nearly $8M in charities with missions focused on hunger, youth, social services, the arts and diversity. Additionally, the company has spearheaded a number of initiatives geared towards solving hunger issues in the world all of which include the following:

Yum Harvest Program
Yum Harvest Program is the world’s largest prepared food donation program with KFC, Pizza Hut and Taco Bell restaurants donating more than 10 million pounds of food annually to partner agencies nationwide. Since 1992, the Yum system has contributed more than 169 million pounds of product, $50M worth, to over 3,000 nonprofit organizations.

Dare to Care Food Bank
The company has contributed more than $11M over 11 years to the Dare to Care Food Bank to end hunger in the Kentucky/Indiana region.

Muhammad Ali Center Peace Gardens
Launched in 2010, Yum committed $100,000 in awards to establish multicultural gardens in underprivileged schools through 2014.

World Hunger Relief (WHR)
Launched in 2007, WHR is an annual initiative leveraging the power of Yum’s global restaurant system to address hunger through awareness, volunteerism and fundraising. This global movement is now the world’s largest private sector hunger relief effort in history benefiting the United Nations World Food Programme (WFP). Yum has risen nearly $185M for WFP and other hunger relief organizations and is helping to provide approximately 750 million meals to save the lives of millions of people in remote corners of the world.

Figure [ 75 ]: Yum in China. Impact of negative publicity on same-store sales | | 91. Infographic sourced from Food Business News |
Aside from philanthropic performance, the office of public affairs also deals with the company’s global reputation and public relations. Mismanagement of responses to public petitions and concerns could drastically impact sales. Figure 75 shows the impact of recent Chinese scandals on Yum’s same-store-sales growth in the region.

In terms of governmental affairs, the company lobbies for favorable operating conditions. Most recently, the company spent $264K on lobbying efforts. The company lobbies on issues pertaining to labor, food safety, animal cruelty, and environmental issues.

The company has lobbied heavily to keep labor costs down while also resisting a growing campaign to raise the wages of fast food workers. The company has lobbied against offering health benefits to its lowest paid employees, many of whom are part-time, a whopping 86% are part-time, and many of who receive some form of governmental assistance to supplement income. At the same time, the company is lobbied unsuccessfully for the use of food stamps at its restaurants.

Legal/Franchise Policy
Yum’s General Counsel is also the Chief Franchise Policy Officer. The quantitative metrics for measuring and improve productivity and success within the company’s law department involves ensuring proactive compliance with all laws and regulations and stewardship of the legal budget, including cost-effective management of inside and outside costs including litigation. Despite the legal departments work to ensure compliance, Yum has been party to a number of lawsuits involving allegations of fair labor standard violations and food safety violations.

Beginning in 1997, Yum and its chains have faced a series of major overtime lawsuits. In each case, Yum either took the case to court and lost (Oregon in 2001) or agreed to a settlement (Washington in 1997, California in 2006, and Colorado in 2013). Yum has also been accused of violating minimum-wage rules in China, where the minimum can be the equivalent of less than $1 an hour. Also in China, KFC admitted to hiding antibiotic test results of tainted chicken. As a result, four securities fraud actions were brought against Yum alleging that as a result of false and misleading statements made by Defendants Yum, shareholders suffered losses.

In the instances of fair labor standard violations, the company has clearly not curbed its violations because the company is also party to pending litigation regarding proper reimbursements for Pizza Hut delivery drivers. In July 2009, a class action was filed alleging that Pizza hut did not properly reimburse its delivery drivers for various automobile costs, uniform costs, and other job-related expenses. A class action is being sought nationwide under the fair Labor Standards Act (FLSA) and Colorado state law.

Marketing

Yum markets three different concepts: KFC, Pizza Hut, and Taco Bell. All concepts are global leaders in the chicken, pizza, and Mexican-style food categories, respectively. Advertising expenses increased between 2011 and 2012, while they were nearly flat between 2012 and 2013. The company reported advertising expenses at $607M in 2013. Advertising expenses in 2012 and 2011 were $608M and $593M, respectively. In general, all three brands offer products priced competitively. The price competition results in product differentiations and more value for the consumer. In terms of the marketing mix, price marketing is basically the same across all three brands. Product, place and promotion all vary.

Price
Prices in the fast food industry are generally low. KFC, Taco Bell, and Pizza Hut attempt to keep prices competitive. If the general price of fast food increases, so will the prices of KFC’s, Taco Bell’s, and Pizza Hut’s product offerings, as they typically attempt to pass price increases on to customers. There is no significant difference in price amongst competitors. What is significant is that price competition exists keeping prices generally close in comparison and relatively low.

Product
KFC
China and India are the two markets in which multinational CEOs are most likely to modify or develop their own products specifically for local needs, due to their size. This is definitely the approach Yum takes with its concepts. KFC restaurants also offer a variety of entrees and side items suited to local preferences and tastes. The highly localized menu in China includes congee or Chinese-style porridge for breakfast; Beijing Chicken Roll (a la Beijing Duck) served with scallion and seafood sauce; Spicy Diced Chicken resembling a popular Sichuan-style dish.

KFC restaurants offer fried and non-fried chicken products such as sandwiches, chicken strips, chicken-on-the-bone and other chicken products. It is the most powerful brand in China, while McDonald’s is ranked seventh. Chicken as KFC’s core product offering is a natural advantage that fits this region well. Most Chinese prefer pork, followed by chicken; whereas beef and mutton lag far behind. This gives KFC a natural product advantage over McDonald’s.

Taco Bell
Taco Bell specializes in Mexican-style food products, including various types of tacos, burritos, salads, nachos and other related items. Most recently on Oct 28, 2014, Taco Bell made marketing waves not with a new product rollout, but with an industry-leading technology announcement. Taco Bell is now the first national, fast-food chain to launch its mobile ordering and payment app for both drive-thru and dining room orders. The free Taco Bell mobile ordering app for iOS and Android gives consumers access to every Taco Bell ingredient. Their strength relies in the unique product availability to its consumers via mobile ordering.

Pizza Hut
Pizza Hut is the largest restaurant chain in the world specializing in the sale of ready-to-eat pizza products. Pizza Hut China Casual Dining is the #1 western casual dining chain with a 6:1 advantage over its nearest competitor.

Many Pizza Huts also offer pasta and chicken wings, including 4,800 stores offering wings under the brand WingStreet, primarily in the US. Outside of the US, Pizza Hut Casual Dining restaurants offer a variety of core menu products other than pizza, which are typically suited to local preferences and tastes. Almost two-thirds of sales are non-pizza items.

Place
KFC
Operating globally, KFC is the world’s most popular chicken restaurant chain. Effective January 1, 2014, KFC includes nearly 14,000 restaurants – including over 4,400 units in the US and more than 9,500 outside the US – in 114 countries, excluding Yum China and India divisions. Outside of meeting customers through their global brick-and-mortar physical locations, the company also has a decent social media presence. Beginning in 2010, the KFC marketing team began experimenting with social media marketing by adding social sharing button to their communications and measuring results. They found in addition to sharing KFC email on social sites, subscribers actively engaged in other ways with the email program, showing open and click-through rates 70% higher than the average subscriber. The KFC Facebook page now drives 3% of all email sign-ups.

The brand’s latest marketing campaign is a testament to KFC’s relation to its consumers. #HowDoYouKFC is a marketing campaign defined as a “movement” by the senior manager of public relations at KFC. It is a revealing fact that there is cross collaboration between the public relations and marketing departments at KFC. It reveals that KFC is tuning into the needs of its consumers and deploying a consumer-centric marketing strategy. The KFC mobile strategy in China is strictly product and marketing-oriented: the WeChat channel has a feature allowing its followers to get food delivered at home, and has a section with all the promotions KFC is currently running. The brand also has other mobile apps focused on food delivery, providing customers who use it a series of offers and discounts.

Taco Bell
Taco Bell operates in 21 countries and territories throughout the world. As of year-end 2013, there were 5,769 Taco Bell units in the US, 279 units in YRI and 5 units in India. Taco Bell represents two-thirds of Yum US profits.

In terms of its social media presence, on October 28, 2014, Taco Bell deleted all of its social media accounts, temporarily. As part of the launch of its online ordering app, the company wanted to drive people directly to its new mobile application. The Senior Director of Digital Marketing said they wanted to make sure that the message broke through.

Pizza Hut
Pizza Hut operates in the delivery, carryout and casual dining segments around the world. The brand operates in 91 countries and territories throughout the world. There are over 1,000 Pizza Hut Casual Dining units in 277 cities. In China, Pizza Hut Home Service has over 200 units in 25 cities and is the only “All Meal” replacement delivery brand in China. Forty percent of the Pizza Hut menu in China consists of Chinese food. So essentially, the company delivers not only pizza but also Chinese food to Chinese consumers. The company acknowledges it has some catching up to do in the US versus its competition.

In terms of its digital strategy, 40% of orders are placed by means other than phone calls. About half of the digital orders are through the Pizza Hut mobile app.

Promotion
KFC
Place and promotion are interwoven through KFC’s marketing directives. Given that place is no longer considered just a physical presence but also a presence based on wherever the consumer is located whether it is on social media or in-store. However, KFC – Yum crown jewel in China – recently advertised a two-week promotional “Half-Price Bucket” in China that returned a litany of search engine results not about the deal but about how the deal rips off the customer. The brand shrunk the contents and Chinese consumers noticed. A Weibo post was forwarded nearly 3,600 times. Another post forwarded nearly 1,000 times all in just the second day of promotion. Even worse, China’s newspapers picked up the controversy and ran stories about how KFC’s new deal “忽悠了一大批消费者栽倒了桶里” or “tricked a lot of consumers into buying the bucket.”

Figure 76: Chinese social media response to KFCs “Half-Price Bucket” promotion | | 92. Post sourced from Chinese microblogging website Weibo user Happy张江 |

KFC also offers coupons through a variety of mediums: KFC’s main website, online coupon providers, coupons by request, coupons via social media, in-restaurant coupons and newspapers. Coupons play an important role in KFC’s accessibility in China. Chen Zhen, a 20 year old college student in Shanghai, China, eats at KFC about three times a week with her friends, something they could not afford to do without the company’s coupons.

Taco Bell
Advertising Age named Taco Bell its Marketer of the Year in recognition of its Live Mas campaign. The publication said the company’s use of social media and smart rebranding campaigns made the most of the $280M it spent on measured media last year. As a result Taco Bell, in the US, grew restaurant margins by 19%.

Taco Bell engages in integrated marketing and consumer engagement that includes television, radio, outdoor, digital, and cinema advertising as well as social and public relations support.

Pizza Hut
Pizza Hut has been focused on emphasizing low prices with deals such as a large two-topping pizza for $7.99. The brand’s latest promotions include two variations of a cheese stuffed crust pizza and a BBQ pizza endorsed by country singer Blake Shelton. However, performance has lagged compared to competitors. Yum says it is working hard to turn around the poor performance at Pizza Hut, not only by strengthening its digital offerings but by overhauling its marketing efforts and debuting new menu items that will connect with millennial diners.

Financial Trend Analysis

This report has discussed four key companies in the restaurant industry and how their functional area strategies have affected the companies’ present and future conditions. Comparisons of financial information trends help to understand how the companies above rank in association to competitors. Due to the large difference in the size of Darden, McDonald’s, Burger King, and Yum Brands comparisons based on revenue, costs, and even balance sheet items are insufficient. To compare these companies we look at ratio trends and how strategy’s within the company strengthen or weaken those trends.

Figure 77: Comparative Revenue Growth 2007 – 2013 | | 93. Sourced from Mergent Online database |

All four companies have an irregular growth pattern over the last 10 years. They were affected by the economic crisis that started in the US around 2008 and which had a snowballing effect in other countries as well. McDonald’s, Yum and Burger King had a difficult year in 2009, but McDonald’s and Yum were able to reverse this trend. Darden’s most difficult year was in 2010, but the company was also able to get back on track. Burger King is the only company that has not been able to reverse the negative effect of the crisis as its revenue growth continues to decline reaching an alarming -40% in 2013. This might be one of the reasons why the company decided to merge with Canadian company Tim Horton, in order to use the brand recognition and increased number of outlets to drive up business and bring more revenue. McDonald’s has seen a significant decline in 2012 and 2013, which has been the result of customers being confused by new menu items introduced as well as a decrease in same-restaurant sales. The company’s dominance in the breakfast arena has also diminished due the other companies starting to offer breakfast items as well, such as Burger King, Starbucks and Taco Bell. Another negative factor impacting the revenue growth of the company is the decrease in sales in Germany, a key market for the company, due to an incompatibility between products being offered and customer preferences. Sales in Japan have also decreased, where the company acquires a good portion of revenue. Yum revenue growth decline in 2013 may be a reflection of the company’s negative publicity from China Central TV about store cleanliness as well as a poultry scandal in the beginning of 2013. Because China constitutes such a heavy portion of the company’s revenue, this negative publicity took a toll on Yum overall revenue growth.

Figure 78: Comparative Profit Margins 2004 - 2013 | | 94. Sourced from Mergent Online database |

Profit Margins compare the percent of profit a company recognizes as a factor of its revenue. A look at comparable profit margins shows McDonald’s has a substantial lead in this area with profit margins ranging from 10% to 20% over the past ten years. However, it also shows McDonald’s has experienced little growth in the ratio since 2009, which is an indicator that marketing promotions and/or cost reduction efforts have not been successful in recent years. On the other hand, Burger King has had relatively low margins for the majority of the past ten years ranging from 1% to 8%. That was until 2013, when BK reported a profit margin of 20%. By removing costs related to restaurant operations, BK has improved their profit equal to that of McDonald’s in just one year. This demonstrates a positive result of the company’s strategy to go for 100% franchising. Yum falls in the middle of these two companies when it comes to profit margin ratio, with a low but steady ratio ranging from 8% to 12%. While this may be lower than that of competitors, the stability of their profit margin could serve as one of their strengths. It reflects the company’s ability to rein in costs and expenses in order to create more value for shareholders. While the company is not successful at increasing revenues, which would increase overall profit margin if they were able to control costs, this would at least allow them to keep this part of the equation balanced for a steady operation. An example is the fact that while McDonald’s and Darden experienced reduced profits in years of economic downturn like 2007, Yum was able to maintain their profit margin of 9%. Darden’s profit margin is also quite stable ranging from 4% to 6% over the last ten years. This is a relatively low margin but like Yum it is stable and not affected greatly by the economy. The company’s low profit margin reflect its inability to effectively control costs as well as the decline in same-restaurant sales, as has been previously reported in the functional area sections. Also, Darden’s attempts to increase traffic in its restaurants have hurt profit margins as reported by the company in their 2014 Annual Report.

Figure 79: Comparative Current Ratio 2004 – 2013 | | 95. Sourced from Mergent Online database |
Comparison of the current ratio demonstrates the firms liquidity compared to competitors. This ratio illustrates a company’s ability to cover short term debt with short term assets. Of these competitors, Yum shows a steady current ratio over the last 10 years averaging 71%. This is not a high ratio and may indicate some pressure in meeting current and future obligations.

However, the stability of the ratio also demonstrates the company’s capacity to manage long-term operations while carrying a high amount of current debt compared to assets. On the contrary, Burger King’s current ratio is trending upwards in the past three years, to a record high of 311% in 2013. This trend is primarily caused by an increase in the current asset, cash. This influx of cash is a consequence of the sale of company-owned restaurants to franchisees and has allowed BK to be positioned in an improved financial state. McDonald’s has improved their current ratio over time, ending 2013 with 159%, compared to 81% ten years earlier. This improved ratio is consequential of gaining assets while maintaining liabilities. McDonald’s has been able to increase assets in the form of cash and cash equivalents from successfully selling company owned restaurants to franchisees. By comparison, Darden is in the worse shape as far as current ratio, averaging only 42% over the last ten years. While this ratio is quite low, like Yum the stability would indicate the company’s ability to manage assets and liabilities over time. While Darden’s current liabilities outweigh assets, leaving them in a position of potentially not meeting obligations, this has obviously not be an issue for the company.

Figure 80: Comparative Return on Investment 2010 - 2013 | | 96. Sourced from Mergent Online database | ROI measures the efficiency of investments made by a company; a higher ration indicates more benefit or efficiency. A look at ROI for these companies indicates Yum as most efficient in investment strategies. Strategic moves, like the opening of 428 new KFCs and 237 Pizza Huts in China, the purchase of the concept Little Sheep and the development of new
Chinese fast food concept, East Dawning, along with the opening of new restaurants in new markets such as Tanzania, Ukraine, Argentina and Mongolia and purchase of 100 franchise restaurants in Turkey, has translated into profits for the company. Yum’s ROI ranges from 33% to 41% over the last four years, much higher than that of competitors. This shows the company’s ability to effectively manage its investments in order to obtain more value for the company. McDonald’s has the next highest returns for their investments at an average of 30% return since 2010. A reason for this strong ROI may be due to the fact that while the company’s long term liabilities have been increasing for the past seven years, so has their net income. From 2007 to 2013, McDonald’s net income more than doubled its amount, demonstrating that the company’s investments are having a positive return as translated in sales. The company’s costs and expenses have increased proportionately to the increase in revenue, and they were even able to decrease SG&A costs in 2013 as compared to 2012 and 2011. While Darden has fluctuation in its ROI ratio, they are averaging 18% over the past 4 years. This is much lower than closest competitor McDonald’s and less than half the average of Yum. Darden has not had the same operating efficiency as McDonald’s and Yum. The company shows an irregular net income pattern, decreasing from 2008 to 2009, slightly increasing in 2010, 2011 and 2012, only to decrease again in 2013 and then decrease by half in 2014. Between 2012 and 2013, there was a considerable increase in long-term debt, but that did not translate into more sales, which were down by almost $2.5M in 2014 as compared to 2013. While only three years of reliable information is available on Burger King, it proves their weakness in profitable investments. With only a return average of 10% on investments made since 2011. It remains to be seen how the purchase of Tim Horton’s will affect the company’s overall profitability.

Figure 81: Comparative Return on Assets 2010 – 2013 | | [ 97 ]. Sourced from Mergent Online database |
Similarly ROA measures the efficiency of the assets owned by the company. Companies successful at using their assets to generate profits will have higher ROA ratios. Comparable looks at these companies show McDonald’s and Yum are more efficient with assets than their competitors Darden and BK.

Yum has experienced an ROA ration ranging from 12% to 18% in the 4-year time frame however; the lowest of these ratios was recorded in the most recent year, 2013. This decrease reflects the company’s net income and total asset decrease in 2013. However, even with a lower ROA ratio, the company is still performing above average when compared to the industry, sector, and other S&P companies.,

McDonald’s ROA ratio has been 16%, three of the previous four years. This is a steady ratio denoting McDonald’s has not seen significant changes in their assets or net income since 2010. In fact, the change in assets from 2010 to 2013 was $681M, which was matched by an increase in income of $640M, proving the most recent investments in assets is not providing a positive return for McDonald’s. Darden’s ratio ranges from 6% to 9%, but like Yum the lowest of these ratios is from 2013.

While total assets for Darden have increased over the last six years, the company’s net income has been decreasing since 2012 as aforementioned in the ROIC analysis. Also compared with McDonald’s and Yum Darden has a much lower net income total over the years. BK has the lowest of the ROA ratios, ranging from 0% to 4% over 4 years. This shows inefficient use of assets in the part of BK management. However, the increase in BK’s assets is in the form of cash and cash equivalents and at the same time BK has experienced higher net income, these do not improve the ROA, but are important progresses for the company.

The property, plant, and equipment turnover, or fixed asset turnover, is a measure of a firm’s ability to generate revenue with the assets it owns. Higher ratios indicate a firm uses fixed assets efficiently or conducts business without significant investments in assets. This strong ratio may be a reflection of the company’s policy to rent or lease most of its building and land.

Figure [ 82 ]: Comparative Property, Plant, and Equipment Turnover 2010 – 2013 | | 98. Sourced from Mergent Online database |

The company only owns about 850 units but leases land, building or both for approximately 7,275 of its units. While the costs with leasing so much property could put a dent in Yum’s overall profit, we see a result of efficient management as the company still has the strongest ratio, which means that more revenues are coming in. On the other hand, Darden and Burger King have roughly equal PP&E turnover in 2011 and 2012 at 2.1, showing they make two times the value of their assets per year. While this is a good number for both companies, Darden still fails in comparison to Yum. Because they own the majority of their real estate, so many of the PP&E costs attributed to Yum are not an issue for Darden. In addition, their revenues are also lower when compared to Yum and McDonald’s, demonstrating that the company does not have strong management systems like McDonald’s and Yum. Burger King’s PP&E ratio dropped in 2014 to 1.4. This drop is caused by the major reduction in revenues BK experienced in 2013 due to eliminating company owned stores and increasing franchises, whose revenue is not recorded in BK’s financials. Lastly, McDonald’s has the lowest of the PP&E ratios ranging from just 1.1 to 1.2 in the four years listed. This indicates McDonald’s investments in fixed assets are not generating the amount of sales competitors are receiving for their investments or the investments are in areas which do not improve revenues. Lastly, we compare the EPS of these four companies. EPS may be the most widely used measure to compare public companies today. This ratio measures a company’s profitability and shareholder value, and is the most important factor used to determine the price of shares of stock. The chart displays that McDonald’s has the largest EPS of the four companies reviewed and has an increasing trend in EPS over the last ten years. Since 2004, McDonald’s has increased their EPS by 210%, a tremendous achievement, which has led to an increase in their stock price of 56.8%. Darden’s EPS has experienced low variation but overall has trended upwards over the last ten years. Although, this growth has not been steady or continuous, with some years having decreased compared to previous, overall they acknowledged a 134% growth in EPS since 2004. As with Darden’s EPS, their stock price has Figure 83: Comparative Earnings per Share 2004 - 2013 | | [ 99 ]. Sourced from Mergent Online database | had little fluctuation remaining around $45 and $50. However, in 2014, the company experienced a decline in EPS, the result of a decline in same-restaurant sales in Olive Garden (-6%) and Red Lobster (-3.4%).

Yum has experienced variations in their EPS, with a low in 2005 of just $1.28 and a high in 2012 of $3.38. Overall, compared to ten years ago, Yum recognized a 2% decrease in EPS, meaning they are producing less income per share of outstanding common stock. This decrease has also affected their stock price, ranging between $50 and $70 in the last few years. In 2013, the company’s full-year EPS declined 9%, as a result of underperformance in the China division; a reflection of the poultry scandal and the avian flu news.

Burger King’s EPS has ranged from just $.05 in 2004 to $1.46 in 2009. It’s important to note that while this information was available to make the calculations, BK was not a publicly held company for all of the last ten years. This often changes the focus of management, which may focus on EPS as a key metric when publicly owned, but likely did not consider this an important measure when privately owned. After incorporating again in 2011, BK has made efforts to improve EPS and has successfully increased it 160% in just two years. In addition, to this spike in EPS, BKW stock price has increased significantly from $14.97 the beginning of 2012 to $24.34 at the end of 2013. This increase of 63% can be contributed, at least in part, to the successful strategies of refranchising, image improvements, and focus on international expansion.

Strengths and Weaknesses

The functional areas described in the analysis for each company vary depending upon how each company functions and which areas are important to them in terms of growth and revenue. While we have managed to address similar functional areas for all companies, such as Finance, Operations, Human Resources, and Marketing, there are also functional areas unique to each company depending on their strategic focus and offerings to customers. The company analysis includes information about the history, mission and company structure of each firm in order to provide insight as to why each functional area is important and how each plays a role in the overall purpose of the organization. The functional areas selected for each firm were discussed in depth in order to identify the strengths and weaknesses of each organization and how they are performing against the industry average as well as against competitors. Based on this analysis, an overall list of strengths and weaknesses was created to demonstrate what each company can claim as competitive advantage and which factors are taking value away from the business. This list will be presented in the Internal Factor Evaluation (IFE) table.

Based on the discussion of the companies’ functional areas as well as the financial trend analysis, an IFE table was developed to show how internal strengths and weaknesses are measured and how they affect the overall operation of these companies. In the table, it is possible to compare the companies based on the factor weight and score of each company. A score of 1 indicates very poor resistance to the internal factor, while a score of 4 indicates strong positioning regarding the strengths and weaknesses. The weights and ratings provided in this matrix help to identify areas of success that firms can use to capitalize on their business as well as new opportunities they can take advantage of. The weaknesses identified should be used by each organization as a sign of caution as they can be detrimental to the success of the company if corrective measures are not put in effect.

The comparison shows that McDonald’s, Burger King and Yum Brands score above the average of 2.5, indicating that they are well positioned with regards to internal strength points, and not too much vulnerable against the internal weakness factors. On the other hand, Darden has a score of 1.93, which is not only below average but well behind the scores of the other three companies, all of which had scores of no less than 3. The difference in Darden’s score demonstrates that the company is lacking the necessary managerial expertise to capitalize on the organization’s resources in order to defend itself against potential internal threats. This score is a reflection of the functional area discussion that demonstrated Darden’s struggle in the last few years with maintaining profitability and keeping costs and expenses on track as well as the financial trend analysis, which pointed Darden as the company that constantly underperforms when compared to McDonald´s, Burger King and Yum. This is a sign that the current operational strategy utilized by the company is not yielding the necessary results for the company to remain competitive in the restaurant industry. Thus, a business strategy reevaluation is necessary in order to make Darden a profitable business once again.

Table 18: Internal Factor Evaluation (IFE) | Internal Factor Evaluation (IFE) | Strengths | Weight | Darden | McDonald’s | Burger King | Yum Brands | | | Rating | Weighted Score | Rating | Weighted Score | Rating | Weighted Score | Rating | Weighted Score | Innovation and product development | 0.09 | 2 | 0.18 | 3 | 0.27 | 3 | 0.27 | 3 | 0.27 | Franchised restaurants impact on growth and profitability | 0.07 | 1 | 0.07 | 3 | 0.21 | 4 | 0.28 | 3 | 0.21 | Globally recognized brand names and product | 0.05 | 1 | 0.05 | 4 | 0.20 | 3 | 0.15 | 3 | 0.15 | Consistency in service and food quality | 0.05 | 3 | 0.15 | 3 | 0.15 | 3 | 0.15 | 3 | 0.15 | Aggressive advertising campaigns & marketing | 0.05 | 2 | 0.10 | 3 | 0.15 | 3 | 0.15 | 3 | 0.15 | Global market revenue | 0.05 | 1 | 0.05 | 4 | 0.20 | 3 | 0.15 | 4 | 0.20 | Technology utilization | 0.05 | 3 | 0.15 | 3 | 0.15 | 3 | 0.15 | 3 | 0.15 | Flexibility with menu and price adjustments | 0.07 | 2 | 0.14 | 3 | 0.21 | 3 | 0.21 | 3 | 0.21 | Expansion and reimaging of restaurants | 0.05 | 3 | 0.15 | 3 | 0.15 | 2 | 0.10 | 2 | 0.10 | Sustainability efforts revolving around community and charities | 0.03 | 4 | 0.12 | 4 | 0.12 | 3 | 0.09 | 3 | 0.09 | Weaknesses | | | | | | | | | | Legal issues | 0.04 | 1 | 0.04 | 1 | 0.04 | 1 | 0.04 | 1 | 0.04 | Price pressures | 0.05 | 2 | 0.10 | 3 | 0.15 | 4 | 0.20 | 4 | 0.20 | Changing consumer trends and eating habits | 0.04 | 2 | 0.08 | 3 | 0.12 | 3 | 0.12 | 3 | 0.12 | Supplier control | 0.08 | 2 | 0.16 | 4 | 0.32 | 3 | 0.24 | 4 | 0.32 | Protests and boycotts from health and labor rights activists | 0.03 | 1 | 0.03 | 1 | 0.03 | 1 | 0.03 | 1 | 0.03 | Franchised restaurants having negative impact on brand image and profitability | 0.05 | 1 | 0.05 | 3 | 0.15 | 4 | 0.20 | 3 | 0.15 | Impact of slowed growth in restaurant industry on guest counts and same store sales | 0.03 | 3 | 0.09 | 3 | 0.09 | 3 | 0.09 | 3 | 0.09 | Food quality and nutritional value | 0.04 | 2 | 0.08 | 3 | 0.12 | 3 | 0.12 | 3 | 0.12 | Restaurants in up and coming global markets affecting profitability | 0.05 | 1 | 0.05 | 4 | 0.20 | 4 | 0.20 | 4 | 0.20 | Failure to meet customer expectations regarding promotional efforts and new menu items | 0.03 | 3 | 0.09 | 2 | 0.06 | 2 | 0.06 | 2 | 0.06 | Total | 100% | | 1.93 | | 3.09 | | 3.00 | | 3.01 |

Internal Analysis of each firm-Section Recap

The functional areas described in the analysis for each company vary depending upon how each company functions and what areas are important to them in terms of growth and revenue. While for all company’s we have managed to address functional areas such as Finance, Operations, Human Resources, and Marketing, there are functional areas which are unique to each company depending on their strategic focus and their offerings to customers. The analysis of each company includes information surrounding its history, mission and company structure to provide insight as to why each functional area is important and how each plays a role in the overall purpose of the organization. The functional areas selected for each firm were described to provide insight as to each firms strengths and weaknesses and how they are performing against the industry average as well against its competitors. Identifying functional areas are critical for a company as they allow for a company to lead with a greater level of efficiency as well as have a combined effort from different areas of the business to help overcome weaknesses and build on strengths. Functional business areas help to designate responsibilities appropriately. This ensures that a company is maintaining its competitive advantage in the market by focusing on specific areas of the business needed to function properly in order to achieve certain goals and meet financial targets.

Internal factors are also important for companies to consider as failure to pay attention to important changes that may serve as weaknesses can result in a decline in business and have a negative impact on growth and profitability. Similarly, paying attention to strengths allows a business to capitalize on their investments and build on what they do well as a company to growth their business further. The Internal Factor Evaluation (IFE) provided above lists the strengths and weaknesses for firms. This matrix assigns ratings and weights that identify areas of success that bring value to the business as well as, areas of risk, which need to be better aligned internally so these companies do not lose profit as a result of underperforming management.

Introduction: Strategy Planning, Implementation and Evaluation

In past sections of this report, an overview of the restaurant industry has been presented with a detailed discussion of two important segments: full-service restaurants (FSR) and limited-service restaurants (LSR). In terms of size, 2013 global restaurant sales were $2.6 trillion, up 4.9%. The 2013 global restaurant labor force was 62.4 million employees, up 2.4%. In accordance with Porter’s Five Forces framework, the forces that shape competition in the international restaurant industry have a moderate to high impact on competitiveness. There is a moderate threat of new entrants and a high threat of substitutes. Buyers have a high degree of bargaining power and suppliers have a moderate degree of bargaining power. The restaurant industry as a whole is highly competitive and experiences intense rivalry.

Internal analyses of the top players in the international restaurant industry resulted in an in depth look into McDonald’s, Yum Brands, Burger King and Darden Restaurants. A comparative analysis of the companies’ functional areas and financial trend analyses reveals the internal strengths and weaknesses for the top four players. Yum has the highest ROIC, however McDonald’s has been able to yield returns quickly on capital invested for brand reformulations. Darden has not been so fortunate with the same strategic move for its Olive Garden brand. Conversely, Darden’s variety of brands appeals to a range of demographics and income levels which proves to be a unique strength comparatively. Slow international expansion and poor use of social media proves to be a weakness and these factors make this brand stand apart from its competitors as well.

The Competitive Profile Matrix (CPM) below lists the critical success factors for the restaurant industry and illustrates how each company measures up against its competitors. The CPM here is used to choose one of the four companies analyzed for further strategy development. A detailed discussion of each critical success factor is presented after the matrix. Following the CPM is a presentation of strategies, developed using a variety of tools, that will help to increase the company’s competitiveness as well as better align its brand position in the market. Based on the scores from the CPM, the company chosen for this strategy implementation phase is Darden Restaurants. Darden is not as strongly positioned in the restaurant industry market as its competitors who have already been noted in the previous analyses throughout the report. The company exhibits potential for improvement and has the necessary resources to make the success of this reformulation possible. In the following sections, there will be a number of analysis tools presented to formulate strategies that are most relevant to the company. Finally, the chosen strategy will be evaluated for implementation at Darden. A review of the expectations after this strategy is implemented is also presented.

Competitive Profile Matrix

Table 19: Competitive Profile Matrix | | Darden | McDonald’s | Yum Brands | Burger King | Critical Success Factors | Weight | Rating | Score | Rating | Score | Rating | Score | Rating | Score | Financial Position | 0.18 | 2 | 0.36 | 3 | 0.54 | 3 | 0.54 | 1 | 0.18 | Marketing/Advertising | 0.14 | 1 | 0.14 | 4 | 0.56 | 3 | 0.42 | 3 | 0.42 | Global Expansion | 0.10 | 2 | 0.20 | 4 | 0.40 | 3 | 0.30 | 4 | 0.40 | Efficient Operation | 0.10 | 2 | 0.20 | 3 | 0.30 | 3 | 0.30 | 2 | 0.20 | Market Share | 0.10 | 2 | 0.20 | 4 | 0.40 | 3 | 0.30 | 3 | 0.30 | Foreign Market Threats | 0.10 | 4 | 0.40 | 3 | 0.30 | 3 | 0.30 | 2 | 0.20 | Efficient Supply Chain | 0.06 | 4 | 0.24 | 4 | 0.24 | 3 | 0.18 | 2 | 0.12 | Price Competitiveness | 0.05 | 4 | 0.20 | 3 | 0.15 | 3 | 0.15 | 3 | 0.15 | Franchising | 0.05 | 1 | 0.05 | 3 | 0.15 | 3 | 0.15 | 4 | 0.20 | Economic Recession | 0.04 | 1 | 0.04 | 3 | 0.12 | 2 | 0.08 | 2 | 0.08 | Brand Diversification | 0.03 | 4 | 0.12 | 1 | 0.03 | 3 | 0.09 | 1 | 0.03 | Trends in Eating Habits | 0.02 | 3 | 0.06 | 2 | 0.04 | 2 | 0.04 | 2 | 0.04 | Totals | 1.00 | | 2.21 | | 3.23 | | 2.85 | | 2.32 |

Critical Success Factors

Financial Position
Darden received a weight of 2 for this factor since they have been struggling with decreasing same-store sales, ROIC, and restaurant profitability. McDonald’s and Yum Brands have demonstrated more consistent financial returns when compared to competitors with leading ROIC. Although Burger King’s financial position pales in comparison to McDonald’s and Yum, it is important to note that the company has lower ROI and ROA because franchisees are putting up the capital, not the company. This means the franchisees are also the ones achieving the returns on investments and assets. Additionally, the decrease in revenue for Burger King is a result of franchisee revenue not being recorded by the company. Compared to competitors, Darden does not exhibit positive returns and is struggling with decreasing customer traffic leading to declines in same-store sales and profitability. However, it is also important to note that the company employs a value leadership position as opposed to low cost leadership such as its competitors. This means that in terms of profitability, the company has higher COGS compared to its fast food competitors.

Marketing and Advertising
While McDonald’s, Yum and Burger King have effective marketing and advertising strategies, Darden’s performance is weak in this area. Although Darden spends 4% of sales on advertising, twice the amount of its competitors, the company is still seeing a decline in customer traffic and same-store sales. The company has failed to focus on high return marketing channels such as social media outlets like Facebook and Twitter and thus has room for improvement in this regard.

Global Expansion
McDonald’s, Burger King and Yum Brands have global recognition in major markets around the world. Through a combination of franchising and company-operated stores, these brands have grown their global presence. Darden, on the other hand, has a very limited presence outside of the US and Canada, with only approximately 40 franchised restaurants overseas. This justifies the low rating the company received for this factor.

Efficient Operation
The poor returns in customer traffic and same-store sales for Darden’s core brands, as well as an increase in costs and expenses, show a lack of operational efficiency in the company. These results can also be attributed to Darden’s internal managerial problems, which resulted in the resignation of their CEO and the replacement of the entire Board of Directors. Burger King has had similar operational issues in the past. However, they have aggressively confronted this problem by implementing the strategy of becoming 100% franchised, thereby outsourcing their operations. McDonald’s and Yum show strong operational efficiency comparatively, as reported in previous sections.

Market Share
McDonald’s dominates the global fast food restaurant industry, but Burger King and Yum have an impressive global presence as well. Although Darden is considered the largest company-owned and operated full service restaurant company, the majority of its market share is based in the US and Canada.

Threat from Foreign Markets
Because McDonald’s, Burger King and Yum have such a pronounced global presence, they are vulnerable to any problems that might occur in these global economies. Darden, on the other hand, does not have such vulnerability because of its small presence internationally. However, international expansion will open the company up to foreign competitors that it has not yet successfully encountered. The company will have to consider entry barriers and retaliation from existing foreign competitors if it decides to pursue international expansion more aggressively.

Efficient Supply Chain
Although all companies have a strong supply chain established, recent problems with suppliers in China, which hurt sales for McDonald’s, Yum and Burger King, have shown these companies’ supplier vulnerability. Darden has a well-established supply chain with an international, regional and local supplier network.

Price Competitiveness
McDonald’s, Burger King and Yum pursue cost leadership positions in their respective markets and are able to aggressively compete on price. On the other hand, Darden as a full service restaurant operator offers food products that target customers with more disposable income available as well as customers with time to spend on leisure activities.

Franchising
All companies with the exception of Darden have strongly pursued the strategy of franchising restaurants, especially in international markets, which has allowed them to experience rapid growth in foreign markets. Darden owns the majority of its restaurants and has no significant presence outside the US and Canada. Although owning the restaurants gives the company more control over their brands, overseeing the daily operations of each restaurant also distracts the company from pursuing any international expansion.

Economic Recession
All four companies have been affected by the recent economic recession. However, based on the financial trend analysis, Darden was found to be the company with the least ability to fully recuperate its financial standing because of its relative price position compared to competitors’ low cost leadership.

Brand Diversification
Darden and Yum received the highest score for this factor because they own multiple brands that cater to different customer segmentations. McDonald’s and Burger King offer a similar line of products.

Trends in Eating Habits
Consumer trend is an important factor that affects all four companies. Because Darden’s products are not considered “fast-food”, they have not received as much negative publicity in this area. They also have special menu items to accommodate healthier lifestyle trends. Although McDonald’s, Burger King and Yum have reformulated their product lines to include healthier products, public perception still perceives their food as unhealthy.

External Factor Evaluation

The External Factor Evaluation Matrix (EFE) helps determine the factors that affect Darden and the importance or weight of those factors. Darden has several conditions and threats which influence the way they do business as well as the strategies they should implement to improve the business.

Table 20: External Factor Evaluation (EFE) Matrix External Factor Evaluation (EFE) Matrix | | | | Conditions | Weight | Rating | Weighted Score | 1 | Growth of middle class in emerging countries | 0.10 | 1 | 0.10 | 2 | Global expansion in developed countries | 0.09 | 1 | 0.09 | 3 | Success of other American restaurants globally | 0.08 | 2 | 0.16 | 4 | Advance in technological solutions | 0.07 | 2 | 0.14 | 5 | Decreases in corporate taxes (China, Japan, UK, Brazil) | 0.05 | 1 | 0.05 | 6 | Developing franchise operations | 0.05 | 2 | 0.10 | 7 | Digital lifestyle increasing consumer touch points | 0.03 | 2 | 0.06 | 8 | Time crunched customers lead to faster table turnovers | 0.02 | 3 | 0.06 | | Threats | Weight | Rating | Weighted Score | 1 | Lack of familiarity with competition outside of US/Canada | 0.09 | 2 | 0.18 | 2 | Increased demand for unique fusion-meals | 0.08 | 3 | 0.24 | 3 | Increased demand for quick service and ready-made foods | 0.07 | 2 | 0.14 | 4 | Lack of cultural awareness for success in foreign countries | 0.07 | 2 | 0.14 | 5 | Increase in health awareness | 0.05 | 3 | 0.15 | 6 | Lack of familiarity of global gov’t regulations/laws/tariffs | 0.05 | 2 | 0.10 | 7 | Increasing costs of raw materials and energy | 0.05 | 3 | 0.15 | 8 | Labor law changes | 0.04 | 3 | 0.12 | 9 | Healthcare reform | 0.01 | 3 | 0.03 | TOTALS | 1.00 | | 2.01 |

EFE Conditions

The top conditions for Darden, as presented in the EFE Matrix, include global expansion in developed countries and the growth of the middle class in emerging countries. Until recently, Darden had approximately 40 restaurants outside of the US and Canada, however, with the sale of Red Lobster this number has declined to 27 restaurants abroad. This is extremely low in comparison to competitors like DineEquity who have 206 establishments outside of the US, all franchised. The presence and success of competitors, such as DineEquity, lay the groundwork for cultural acceptance of American full-service restaurants abroad. Furthermore, the growth of the middle class in emerging countries abroad have created an exploitable condition given that the middle class is often full-service restaurants’ targeted consumer class. The middle class has the potential of doubling over the next 15 years, creating a favorable condition for Darden in the regions with the highest expected growth. In addition, the restaurant industry is forecasting steady growth and expecting to add 10% more employees to the industry over the next decade. Another condition is the availability of technology in the restaurant industry. Advancements in equipment used within the restaurant industry include table ordering and electronic payment. These capabilities are now available for restaurants and according to the National Restaurant Association, 50% of customers would use these services if offered. Customers have also expressed interest in applications for viewing menus, making reservations, and ordering as well as in store self-service kiosks for ordering without a server. In addition, the use of digital technology to advertise and create brand awareness has increased the touch points Darden can develop with customers. Customers utilize social media, online reviews, smartphone apps, and online ads to learn and decide which restaurant they will visit. The availability of these low cost technologies lowers the cost of reaching customers of the industry. The decrease in corporate taxes of some developed countries, such as China, Japan, the UK, and Brazil, is a condition that impacts where companies choose to operate. Expanding operations to these areas could be more profitable than operations in the US, due to the lower tax rates. The success of competitors in franchising their operations in order to grow business across the globe serves as a blueprint for others to do the same. This strategy has been recently successful for Burger King, although long-term success is still unknown; the company was able to increase profit margin by more than 200% over the last two years. Similarly, Darden’s full-service restaurant competition has expanded into foreign markets and experienced success with this strategy. This condition has created consumer interest internationally for US branded restaurants. EFE Threats External factors that present threats for Darden should be considered in order to create strategies to minimize or eliminate the associated risk. Darden’s largest threat is competition, particularly as it pertains to the company’s lack of familiarity with competitors operating abroad. The restaurant industry is inundated with options for consumers which range in price, quality, and selection. Competing with so many choices and price ranges can make it difficult for Darden to find a niche. Furthermore, Darden’s lack of familiarity with the competition abroad is due to their lack of penetration in those markets. Consumers are becoming increasingly aware and concerned with healthy eating and are shying away from restaurants that do not provide or advertise healthy menu options, choosing instead to eat at home. Additionally, consumers are demanding more unique and trendy dishes when they do eat-out. This is a threat to Darden because their establishments are quite specialized, leaving little room to be outside the norm. Brands like Olive Garden are known for their traditional Italian dishes, LongHorn Steakhouse for their Texas style steaks, Eddie V’s and Wildfish Seafood Grille for their American seafood, making it difficult for Darden to create a unique combination of diverse cultural flavors. Consumers are also incredibly busy these days, triggering an increase in demand for quick meals and ready-made items. Darden’s restaurants are full-service and do not cater to this busy lifestyle. This threat is likely to continue and grow into the future, affecting both traditional meal times (typically noon for lunch, and 5pm for dinner) and amount of time people spend eating. Labor laws, government regulations, and healthcare reforms within the US are a threat to Darden. Restaurants are usually considered to pay lower wages than some other industries. These wages are often equal or slightly greater than the minimum wage, which is government regulated and could be increased through legislation. Government also regulates overtime pay, benefits, and employee time off through various laws. While Darden has a good reputation of following labor laws and treating employees above average, the increased cost that changes in these laws could bring is a threat Darden should consider. Recent healthcare reform laws such as the Affordable Care Act can also produce increased expenses in employment and further laws to abide. Outside the US, the food industry is regulated by government regulation, tariffs and trade restrictions and is a territory Darden has only marginally entered. Cost of raw materials and energy is also a threat to Darden’s profitability. As costs for food products rise, it becomes increasingly difficult for restaurants to compete with fast food prices. Raising menu prices has an adverse effect on the number of store visits customers will make and can actually cause profits to decline.

Internal Factor Evaluation The purpose of the Internal Factor Evaluation (IFE) table is to show how the internal factors of the restaurant industry are measured against Darden’s performance. The IFE table illustrates the strengths and weaknesses specific to Darden Restaurants in order to determine the areas they are doing well and the areas which need improvement. This matrix provides ratings and weights to identify strengths that Darden can use to capitalize on their business. Weaknesses have also been identified, which Darden should use as a sign of caution for necessary improvements as these weaknesses can be detrimental to the success and growth of the company. Darden’s total weighted score is 2.34, which is under the average of 2.5. This indicates that while Darden is not entirely underperforming; there is potential for growth and improvement. Table 21: Internal Factor Evaluation (IFE) Matrix Internal Factor Evaluation (IFE) Matrix | | | | Strengths | Weight | Rating | Weighted Score | 1 | Wide variety of options that appeal to diverse groups | 0.09 | 4 | 0.36 | 2 | Relationship with suppliers | 0.07 | 3 | 0.21 | 3 | Strong relationship with employees | 0.06 | 4 | 0.24 | 4 | Acclimation and recognition received for contributions | 0.06 | 3 | 0.18 | 5 | Corporate control on restaurant operations | 0.05 | 3 | 0.15 | 6 | Debt-to-equity control | 0.05 | 4 | 0.20 | 7 | Valuable assets-land-holdings | 0.05 | 3 | 0.15 | 8 | Focus on core brands | 0.04 | 3 | 0.12 | | Weaknesses | Weight | Rating | Weighted Score | 1 | Expansion into global markets | 0.08 | 1 | 0.08 | 2 | Marketing and promotional efforts | 0.08 | 1 | 0.08 | 3 | Price pressure from competitors | 0.07 | 2 | 0.14 | 4 | Closure of synergy restaurants | 0.06 | 1 | 0.06 | 5 | Offering healthier food items to consumers | 0.06 | 2 | 0.12 | 6 | Utilization of social media outlets | 0.06 | 1 | 0.06 | 7 | Lack of franchises, stunting growth opportunities | 0.06 | 2 | 0.12 | 8 | Management structure and strategic direction | 0.06 | 2 | 0.12 | TOTALS | 1.00 | | 2.37 |

IFE Strengths

Darden just recently, in 2014, relinquished their ownership of Red Lobster in order to focus on enhancing the value of their other core brands such as Olive Garden and LongHorn Steakhouse as well as their Specialty Restaurant Group (SRG) brands. This has also allowed them to focus on making much needed improvements to core brand Olive Garden in order to increase same-store sales growth and guest count which dropped by 0.02% and 2.80% in 2013, respectively. One of Darden’s major strengths is its ability to offer a variety of food options that appeal to different cultural backgrounds and food preferences. This is evident in their restaurant offerings such as Olive Garden Italian Restaurant and Bahama Breeze’s Caribbean food fare. Darden’s relationships with their employees are important in the service they deliver to their customers. This has been a proven strength for them in the recognition they received from Fortune Magazine when they were voted as one of the 100 Best Places to Work. Darden has also been mindful of how they treat employees which shows in their employee turnover rates being lower compared to that of the industry average. These relationships with employees are a strength that Darden will want to continue to capitalize on in the future.

The fact that Darden owns their own properties provides them with a certain level of control in sustaining their establishments and ensuring that they are being properly maintained and operated to company standards. This is also a strength for Darden as it provides them with the ability to make decisions and improvements to their properties as they see necessary, without having to gain additional permissions from other parties. Additionally, due to their large real estate portfolio, these assets have the potential to grow in value over time providing Darden the option to sell these properties for a profitable return. The company can also close down unprofitable restaurants with ease without the burden of lease agreements. The company’s operational experience may also prove to be a benefit if the company decides to expand globally. Darden’s debt utilization is lower than that of like competitors and below the industry average of 0.77. Less debt for Darden minimizes the amount of risk for shareholders and prevents shareholders earnings from being affected by high interest rates. The fact that Darden has strong relationships with their suppliers allows them to manage costs and prices effectively, however, there is still opportunity to capitalize on this strength by continuing to build on their relationships should they expand even further on a global level. Due to Darden’s level of involvement with charities as well as various contributions they have made, such as the $3.8M they have made towards political contributions since 1989, they have been able to build brand awareness and positive public relations as a company.

IFE Weaknesses

The fact that Darden does not have a significant global presence is one of the reasons why it is not seeing the amount of growth that competitors have cultivated. By expanding into international markets, this will provide Darden with the ability to create brand awareness and reach out to more customers. Also, Darden spends more than twice as much as competitors in advertising but uses channels that are more expensive than alternatives and that do not result in adequate ROI. At 4% of sales, the company spends twice as much as competitors and yet their customer traffic is still in decline. This demonstrates ineffective marketing efforts which are not well received by consumers. Darden’s Olive Garden brand attempted to enter into price competition in order to appeal to more customers but did not deliver the results they forecasted. The company actually raised prices at Olive Garden and then advertised them as value offerings. While Darden succeeded in attracting customers who were willing to pay less, this did not have the impact on brand equity or profit margins as expected. Guest counts still declined 4.2%.

Darden’s decision to close its synergy restaurants, Darden’s form of dual branded restaurants, affected two of their largest brands - Red Lobster and Olive Garden. Though this was necessary because of Darden’s Red Lobster sale, this broke up the synergy that was being created between brands and the ability to provide more convenience and recognition of the Darden brand to its customers. The synergy restaurants were designed to work in markets that do not have the population density to support a single brand location. The purpose was to help Darden penetrate smaller markets and the shared building allowed for promotion of its brands while remaining cost efficient. Both restaurants shared facilities and a kitchen while keeping the dining rooms separate. However, the synergy brands did not add value to the customer other than by building brand awareness. Customers were seated in separate dining areas and could not order from both menus. The closure of these restaurants marks a missed opportunity to provide more value and convenience to the customer.

As consumers are consistently moving towards healthier eating habits, Darden should consider incorporating healthier ingredients and menu choices to appeal to more health conscious consumers. When companies choose to utilize marketing methods through the internet, it allows them to reach customers in a faster and more cost effective way. Darden’s current marketing methods, mainly television and print, are costly and have not proven to be effective. Most recently, advertising accounted for 48% of their selling and general administrative expenses. Darden only has a minimal level of involvement in reaching customers through social media outlets such as Twitter and Facebook. By utilizing social media, this would help to minimize a large percentage of these costs. Due to the disagreement that has recently occurred between Darden’s former board members, shareholders and Chief Executive Officer, it has caused a lack of direction for Darden and resulted in the implementation of a new board. While some parties were in agreement with the sale of Red Lobster, others felt it would end up hurting the company. With the new Board of Directors, this may hold Darden back as the company adjusts to these new changes. Lastly, lack of franchises prevents the company from sharing risks and enjoying partnerships that are more cost effective.

SWOT Analysis

The SWOT analysis (strengths, weaknesses, opportunities, and threats) provides Darden with a tool to evaluate its business condition. Strategies are formulated using the SWOT analysis based on the internal and external factor evaluations. The factors of these evaluations are analyzed side-by-side to construct strategies which combat threats and explore opportunities while keeping in mind the company’s strengths and weaknesses. The resulting strategies from the SWOT analysis for Darden are detailed below. While factors in the SWOT may result in duplication of suggested strategies, below the strategy will only be described once in the earliest section in which it applies.

Table 22: SWOT Analysis SWOTDarden Restaurants | Strengths1. Variety appeal to diverse groups2. Relationship with suppliers3. Relationship with employees4. Acclimation and recognition5. Establishment sustainability6. Debt-to-equity control7. Valuable assets/land holdings8. Focus on core brands | Weaknesses1. Expansion in global markets2. Marketing/promotional efforts3. Inability to lower prices4. Closure of synergy restaurants5. Offering healthier food items6. Utilization of social media7. Lack of franchises/slow growth8. Management structure/strategy | Opportunities 1. Growth of middle class overseas 2. Global expansion 3. Successful American brands globally 4. Available technology for streamlining 5. Decrease in corporate taxes abroad 6. Developing franchise operations 7. Digital lifestyles/consumer touch points 8. Time crunched guests/table turnovers | SO Strategies(S8,O2,O4) Global expansion, in developed markets with lower corporate taxes, of core products(tailored to location)(S1,O1) Global expansion in emerging markets with more diverse menu options(S1,O4,O7) Utilize advancements in technology to optimize efficiency and modernize customer service (S2,O3) Develop relationships with suppliers international | WO Strategies(W1,O2) Global expansion(W3,O1) Focus on growing middle class and competing with casual dining prices(W6,O4) Use technology to promote brand and products (apps, tablet ordering)(W4,O6) Create synergy restaurants with current brands through franchise(W7,W8,O6) Offer more franchise options to reduce complexity in management | Threats 1. No familiarity with global competition 2. Demand for unique fusion-meals 3. Demand for quick-service/ready foods 4. Cultural awareness/foreign countries 5. Increase in health awareness 6. Familiarity of global gov’t laws 7. Increased cost of raw materials/energy 8. Labor law changes 9. Healthcare reform | ST Strategies(S5,T1,T4) Expand to better leverage market share(S3,T8,T9) Continue to promote diversity and employee retention with attention to proposed legislation involving labor(S2,T6) Develop relationships with int’l suppliers and governments and be conscientious of regulations(S2,T7) Leverage relationships with supplier to manage food costs | WT Strategies(W1,W2,T1) Expand and advertise in int’l markets to combat competition(W4,T1) Improve food quality and nutritional value of food(W3,W4,T3) Offer quick meals at lower prices or ‘value menu’(W5,T5,T2) Menu rejuvenation to meet quick service/healthy/ innovative demands of customers |

SO Strategies

Strategies created using Darden’s strengths and opportunities include global expansion, utilizing technology, developing international suppliers, and offering franchise options. These strategies work to employ Darden’s internal strengths in coordination with the external opportunities in the restaurant industry. Many of Darden’s competitors have had success in expanding to markets outside the US and Canada, while Darden has limited penetration in these markets. Global expansion of Darden’s core brands is a potential strategy to increase popularity and profits of the company. The Chinese restaurant industry has an estimated growth potential of 12.1% and 13.2% for 2014 and 2015, respectively. Furthermore, China’s corporate tax rate is 60% less than that of the US, currently at 40%. Expansion to China and other countries with similar growth and tax advantages such as the UK, Russia, India, and Brazil, is a viable strategy for Darden.

Table 23: Revenues and Growth Rates of Select Countries | Revenues ($B) | Growth Rate | | 2014 | 2015 | 2013-2014 | 2014-2015 | China | $ | 174 | $ | 197 | 12.10% | 13.20% | India | $ | 31 | $ | 34 | 10.00% | 11.10% | Russia | $ | 38 | $ | 41 | 6.70% | 7.80% | Brazil | $ | 40 | $ | 43 | 6.30% | 7.50% | UK | $ | 38 | $ | 40 | 5.90% | 4.50% |
100. Sourced from Barnes Report Worldwide Full-Service Restaurant Industry

With reports of middle class growth in many emerging countries, Darden can conceivably enter these markets in the early stages of growth and establish a long-term escalating revenue generator. Ernest & Young Global Limited analyzed the growth patterns of emerging countries to determine when the middle class will yield rapid growth. They forecast Indonesia, India, the Philippines, and Vietnam will hit this “sweet spot” between 2015 and 2019. These are all potential growth markets for a full-service restaurant targeting the middle class.

Advancements in technology have provided numerous mechanisms to make restaurant operations run more smoothly. Restaurants are automating operations through use of self-service ordering kiosks and at the table tablets. These devices save time and allow guest to order at their own pace without needing a server. Full-service restaurants can take full advantage of these types of technology, because the restaurant is already set up to have guests seated immediately at tables. Also, these devices can provide entertainment to guest while they are waiting for their food to arrive and allow them to request a refill or additional food instantly. These factors can all increase customer satisfaction.

Increased customer satisfaction through added value increases Darden’s competitive position in the marketplace. By offering the following digital amenities, Darden increases its restaurants’ appeal to a growing demographic of customers whose interest lie in digital convenience.

Figure [ 84 ]: Customer Interest in Digital Amenities

[ 101 ]. Infographic sourced from Restaurant Hospitality

Developing international connections through suppliers is a strategy which can increase Darden’s awareness of the restaurant industry operations in these regions. With few global establishments and the majority of establishments in the western hemisphere, Darden has little experience with suppliers and government agencies in many nations outside the US and Canada.

WO Strategies

Strategies created using Darden’s weaknesses and opportunities include global expansion, focusing on middle class and casual dining prices, utilization of technology, creation of synergy restaurants, and offering franchise options. Strategies such as global expansion and focus on areas with an emerging middle class are discussed earlier. In addition, this SWOT would suggest Darden should focus on competing with the casual dining pricing structure. Since Darden has not had success with lowering prices and running all-you-can-eat specials, focus should be spent on creating quality menu items which compare in taste and price to other full-service, casual dining restaurants.

Darden has made little use of the available social media outlets for promoting and advertising their brands. Websites like Facebook and Twitter can be used to promote restaurant specials and gain customer awareness. These services are very cheap or even free to use and the number of viewers can be substantial. Furthermore, competitors are using phone apps to provide a resource for customers to view menus and current specials and make reservations. These applications not only provide a convenient source of information to customers but also increase the customer’s loyalty. Through digitally advertising and promoting brands, Darden can increase customer touch points and increase brand recognition.

When Darden sold Red Lobster, they also relinquished their synergy restaurants. These restaurants provided one location where customers could purchase from multiple brands. While these restaurants were operational for only a year, Darden management believes the innovative design has financial potential. This unique concept gives customers more options and Darden should consider creating more synergy restaurants both within the US and abroad.

While Darden does offer franchise operations and they currently have less than 30 franchised restaurants worldwide, this has not been a focus of management for growth. Many competitors have utilized strategies of increasing franchise operations and reducing or even eliminating company owned restaurants. This strategy can increase shareholder value by reducing costs associated with running restaurant operations and increasing profits. Darden could also benefit from this strategy by reducing the complexity of their management, which is currently arduous due to the large number of brands owned.

ST Strategies

Strategies derived from Darden’s strengths and industry threats include expansion, promotion of diversity and employee retention, developing relationships with international suppliers, and leveraging current supplier relationships. Expansion and developing international suppliers to better market products in countries outside the US have been mentioned earlier. In addition, Darden should continue and further its connection and commitment to employees through diversity, fair pay, and benefits. These commitments have amplified the company’s reputation and sustainability and should be prolonged.

Darden has strong relationships with their suppliers and has worked diligently to create the Darden Direct Supply program. This close relationship should be advantageous to Darden in securing static cost for goods purchased. With rising costs and inflation, the prices of raw materials and energy are steadily growing. Securing price ceilings for long-periods of time through contracts and agreements with suppliers Darden can reduce costs.

WT Strategies

Strategies derived from Darden’s weaknesses and threats of the industry are expansion, improving food quality, offering an expanded menu, and menu rejuvenation. These strategies combine Darden’s weaknesses such as low restaurant count globally and attention to customer demands of healthy, unique items quickly. International expansion is again exposed as a potential strategy. Additionally, the WT strategies suggest Darden should improve quality of food through increased nutritional value and presentation. Casual dining restaurants can distinguish themselves from competition through presentation of entrees; creating an environment that mimics that of a fine dining establishment while maintaining the advantages of casual dining such as portion size and atmosphere. Expanding product offering is also a WT strategy for Darden. Competitors such as TGI Fridays have had success in creating frozen appetizers, which are sold in grocery stores. These quick meals are an additional revenue generator which serves customers’ demands for fast options with a unique taste. Likewise, competitors have had success with offering value or quick food items on their menus. Uno’s offers selected lunches which they guarantee will be ready within 10 minutes. This ability to provide quick service in a sit-down restaurant not only encourages customer visits, it shortens the time those customers will be at the table allowing more customers to be served daily. In addition, Darden can rejuvenate their menu to include these quick meal options, healthier selections and more innovative food. These menu variations can be geared to promote and diversify each brand.

Porters Competitive Matrix

The Porters Competitive Matrix strategy tool is used here in conjunction with the SWOT analysis in order to help Darden identify generic strategies based on their strengths and weaknesses. This tool focuses on three specific strategies, which include cost leadership and differentiation, both having a broad scope, and market segmentation which has a narrow scope. These three strategies revolve around two main initiatives: strategic scope, which is the target market and strategic strength which focuses on Darden’s capabilities. The purpose of using the Porter’s Competitive Matrix is to find a competitive advantage in the marketplace that allows for Darden to stand out amongst its competitors with regards to cost and differentiation.

Table 24: Porter’s Competitive Matrix | | Competitive Advantage | | | Low Cost | Differentiation | Competitive Scope | Broad Target | Cost Leadership - Relationships with suppliers, minimizing food wastage, focusing on marketing efforts that will lower S&G costs, global expansion, focusing on promotional efforts that will be cost effective and low in cost to produce. | Differentiation - Ability to provide unique services and products to consumers. Determine what consumers need and wants are and meeting those needs by setting themselves apart from the competition. Focusing on enhancing brand image by creating synergy of restaurants and focusing on product quality and uniqueness. | | Narrow Target | Cost Focus - Taking advantage of franchise opportunities in order to expand into international markets at a faster rate. Increasing annual EBITDA by developing stronger relationships with suppliers and cutting food wastage costs. Utilizing technology more efficiently, which will allow for employees to produce better results and service the customers more efficiently through product knowledge and wait times. | Focus Differentiation - Although Darden has several brands that appeal to different cultures and eating habits, customers have a hard time recognizing how each brand is unique. Developing stronger marketing strategies that focus on its core brands will attract more consumers. |
Cost Leadership (Broad Target)

Darden’s cost of goods sold from 2012-2014 has increased from $1.55B - $1.89B, which accounted for 77% and 79% as a percentage of sales in 2012 and 2014, respectively. Darden has potential to decrease their food costs by implementing policies and controls in their restaurants to reduce food wastage. Proper training of employees can help minimize food wastage and have better control with portion sizes and food execution. This strategy could be especially effective in their restaurant brands, such as Olive Garden, that offer ongoing promotional items, such as unlimited salad and bread sticks, with a purchase of an entrée. By utilizing technology, Darden has the ability to better control its food waste as well as have closer relationships with their suppliers in order to receive the best prices with changing markets. Technology will also help them to reduce customer wait times in order to service more customers at a faster rate as well as work more closely with their suppliers. Another cost initiative that Darden may want to consider is implementing more simplistic menu options within their restaurants. By doing so, this will still provide the customer with options, however allow for Darden to remove higher priced specialty items and focus on their more profitable menu items such as steak and seafood. Although these food items are typically higher in price, these are also the same foods that provide restaurants with the ability to obtain a larger gross profit. Given that Darden offers seafood in the majority of their restaurants, such as Olive Garden, LongHorn, Yard House, The Capital Grille, Bahama Breeze and Eddie V’s, it would allow them focus in on some of their more profitable items and reduce costs by eliminating menu items that are not as popular among customers.

Differentiation (Broad Target)

Companies who focus on differentiation set themselves apart from the competition and provide a unique value that their competitors do not. Although each restaurant has a unique feel, the separation of these brands causes the brand to become unrecognizable, which is why many customers have difficulty connecting these restaurants back to Darden. There is a lack of synergy between restaurants, which eliminates options for consumers and diminishes brand awareness. By creating more synergy restaurants, this will help bring Darden’s brands together, create convenience for customers and bring more awareness to the Darden brand. Additionally, by implementing synergy restaurants, it allows staff to be cross-trained as well as share in the same facilities and resources which can help to improve the overall total cost of sales. Not only will this help to decrease operational costs but also provide something different that other full service restaurants have not started doing yet.

Cost Focus (Narrow Target)

With only seven franchised restaurants in Puerto Rico, one in Atlanta and 52 restaurants run by third parties under franchise agreements internationally, it is evident that Darden has not fully taken advantage of growth by means of franchises. Given the minimal number of franchised restaurants Darden has, this provides significant room for growth not only in the US but expansion into international markets as well. Although there is some risk involved with franchises, other full service restaurants are seeing its profitability and growth potential which is why 77.1% of full service restaurants in the US are part of the franchise market, which represents approximately 37,092 full service restaurants, a 1.2% increase from 2013. In 2014, US franchised restaurants are expected to increase revenue potential by 4.7%, up from 4.3% in 2013. By taking advantage of such opportunities, Darden will be able to enter into thriving international markets at a faster rate, in places such as in the Asia-Pacific region, which accounts for 43% market share of the foodservice industry.

Focus Differentiation (Narrow Target)

Darden is lacking in the area of focus differentiation. Their marketing efforts have proven to be unsuccessful and are not returning the results they would like to see from their sales. From 2012-2014 Darden’s selling, general, and administrative costs increased from $540M to $664M respectively, while their EBIDTA decreased from $355M to $175M. This is significant because while Darden’s expenses are increasing, their EBIDTA is not and in fact has been decreasing. Darden needs to focus on both its core brands as well as its SRG restaurants and create customer awareness through proper marketing channels such as digital advertising and Facebook and Twitter. Using marketing methods, like social media, will help to develop stronger relationships with their customers and connect with them on a more personal level. This will also provide a more cost effective strategy to target and measure customer interaction, while cutting back on their S&G costs from traditional marketing concepts. By Darden utilizing social media it will provide a better understanding as to what their customers’ needs and wants are and help to base their promotional efforts around these concepts.

ADL Matrix Portfolio Analysis

The ADL Matrix developed in the 1970s and coined after highly respected consulting company Arthur D. Little, plots strategic business units (SBU) relative to industry life cycle and the competitive position held by the business unit in the industry. The position of the SBU on the matrix yields a general strategy for that SBU. Figure 85 presents the ADL Matrix key. For Darden, the factors considered in assessment of competitive position held by Olive Garden, LongHorn, and the restaurants in SRG are: market share, same-store-sales (SSS), average unit volume (AUV), and distribution (units). Factors related to supply, labor, and production are not considered as Darden manages these functions collectively. Other financial factors such as profitability as it relates to the SRG restaurants are difficult to obtain as the company does not report these metrics for the restaurants individually. The company also did not report 2014 sales for each SRG restaurant like it had in 2013. As a result, market share is determined with 2013 Figure 85: ADL Matrix key | | 102. Sourced from Lee Merkhofer Consulting | sales. It is important to note however, that Darden reported a 25.2% increase in 2014 SRG combined sales. SRG 2014 market share is 0.086% and Olive Garden and LongHorn 2014 market share is 0.260% and 0.099%, respectively.

Table 25: Darden Restaurants Business Strength Assessment by Concept | Market Share(FSR) | SSS | AUV(in millions) | Units | Olive Garden | 0.263% | -3.4% | $4.4 | 837 | LongHorn | 0.088% | 2.7% | $3.1 | 464 | Capital Grille | 0.024% | 3.4% | $7.1 | 54 | Yard House | 0.018% | 0.3% | $8.2 | 52 | Bahama Breeze | 0.012% | 4.1% | $5.6 | 37 | Seasons 52 | 0.011% | -2.2% | $5.7 | 38 | Eddie V’s | 0.005% | 1.1% | $6.0 | 15 |
103. Sourced from Darden Restaurants 2013 and 2014 Annual Reports,

The company’s two core concepts are Olive Garden and LongHorn Steakhouse. They both capture a larger percentage of the FSR $1.4T market compared to the SRG restaurants. In fact, both Olive Garden and LongHorn’s market share is larger than the SRG’s combined 2013 and 2014 market share. Comparatively, LongHorn consistently outperforms its segment while Olive Garden continues to perform poorly year-over-year.

Within the casual dining restaurant industry, Olive Garden competes in the Italian restaurant industry and LongHorn in the Premium Steak Restaurant industry. Industry experts say the casual dining industry has reached a level of maturity. Trends show the Italian restaurant industry is also in the maturity phase of the life cycle. The same is true for the US Premium Steak Restaurant industry.

Both Olive Garden and LongHorn Steakhouse cater to customers with an average household income just under $60K while the SRG restaurants cater to customers with an average household income over $60K. Olive Garden is better positioned to offer meals based on value given that protein is not a menu staple like it is for LongHorn and pasta is relatively inexpensive. Most recently, the cost for beef in the US reached an all-time high which puts pressure on restaurant margins, particularly steakhouses. Domestically, the US market has seen a decrease in the middle class and in disposable incomes. As a result, the demand for beef declines as incomes decrease. This is not good news for steakhouses like LongHorn and yet, LongHorn still outperforms Olive Garden and its segment.

Darden, by its own assessment, positions restaurants in SRG as growth brands. Sales in SRG alone increased year-over-year by 25.2% in 2014 propelled by new restaurant openings and increases in SSS for each concept with the exception of Season 52 which saw a 2.2% decline. The largest increase in sales is attributed to Bahama Breeze with a 4.1% SSS increase. In 2014, blended SRG SSS grew 1.6%.

ADL Strategy Formulation

In terms of strategy, where to allocate resources and what strategy to employ can be difficult to ascertain given the various business strengths and life cycle phases of each brand. The ADL Matrix below considers how the competitive position of each business unit fairs in accordance with its relative position in the market and helps determine which strategy to pursue for each concept. According to the ADL Matrix key, SBUs that land within the green boxes are faced with a broad spectrum of strategic options. SBUs in the yellow boxes only have selective development strategic options. Those in the red boxes are faced with the strategic option of divestiture or liquidation or the strategic option to withdraw to niche markets.

Table 26: Darden Restaurants ADL Matrix | ADL Matrix (Portfolio Management) | | | Industry Life Cycle Stage | | | Embryonic | Growth | Mature | Aging | Competitive Position | Dominant | | | | | | Strong | | Capital GrilleYard House | LongHorn | | | Favorable | | Eddie V’sBahama Breeze | | | | Tenable | | Seasons 52 | | | | Weak | | | Olive Garden | |
104. Template adapted from CoMindWork
Capital Grille and Yard House are both strong contenders with promise for growth. As an upscale steakhouse fine dining establishment, Capital Grille caters to customers with higher disposable incomes and is thus better positioned to deal with price fluctuations as it can pass increases on to the customer thereby preserving margins. Yard House is ranked 2nd on the industry-leading report of Top 10 Growth Chains compiled by Nation’s Restaurant News. Yard House also has the largest AUV at $8.2M compared to other concepts in Darden’s restaurant portfolio. LongHorn has obtained a strong competitive position while Olive Garden, on the other hand, has lost its foothold in its market. Eddie V’s and Bahama Breeze fair favorably competitively with SSS increases of 1.1% and 4.1%, respectively. Seasons 52’s natural position as a fine dining establishment is favorable but its SSSs have decreased 2.2% which suggests a need to evaluate its position and protect it.

Strategy: Olive Garden - Turnaround
Accordingly, the suggested strategy for Olive Garden given its weak position in a mature market is to turnaround the brand. As Darden’s main core concept, a total withdrawal from the market is not a feasible option. The brand has much promise with great brand recognition but has rather been plagued with inefficient management. The effects of inefficient management extend to the whole firm.

Glass Lewis and ISS, both prominent proxy advisory firms, found Darden to have poor governance and poor compensation practices. Glass Lewis gave Darden a “D” grade for being “deficient in linking executive pay to corporate performance” and ISS gave the company a Quickscore of 10, indicating the “highest possible governance risk.” As a publicly-traded company, Darden is required to disclose compensation paid to its CEO, CFO, and three other most highly compensated executive officers in a given year. From 2013 to 2014, reported executive compensation increased 24.2% despite declines in revenues, operating cash flows, EPS growth, ROA, ROE, and ROIC., In fact, Darden linked executive performance and compensation to sales growth as oppose to SSS growth, which led to management’s decision to expand restaurant units and to acquire other restaurants. This strategy required aggressive capital investment and increased sales but did not positively impact ROIC or free cash flow.

To turnaround the Olive Garden brand, the company will first have to employ a retrenchment strategy to stop the financial hemorrhage and then a stabilization plan to streamline and improve core operations. Once the company has achieved efficiency and operational recovery, then a growth strategy can be employed to return the brand back to a growth beginning with an improvement in the company’s marketing mix.

More specifically, Darden’s retrenchment strategy should include the following initiatives to turnaround Olive Garden: * Replace leadership with transformational change leaders * Identify wasteful spending and cut costs * Leverage synergies through scaled economies * Identify underfunded functions and reallocate resources * Cut marketing costs and reallocate from mostly television and print to include digital, social and direct marketing. Base marketing initiatives on ROI * Develop an interactive application with real time wait times * Halt new logo and front-of-house renovations. Instead renovate back-of-house operations including equipment upgrades for increased productivity and product consistency * Remove extra layers of management * Give restaurant managers more autonomy * Institute a retraining program focused on product consistency and customer service * Spinoff the company’s fee simple and ground leased real estate, which represents 87% of Darden’s locations, into a publicly traded REIT * Lease locations * Close or turnaround locations that are no longer profitable after eliminating rent subsidy

Strategy: LongHorn Steakhouse – Growth Strategy
According to the ADL Matrix, LongHorn should hold its position and grow with the industry. To do this, LongHorn should employ market development and market penetration growth strategies. Despite gross mismanagement at the corporate level, LongHorn generates enough cash to not only fund its own expansion, but also reinvest in enhancing its brand. Notwithstanding LongHorn’s segment leading position, its competitors still outperform the brand on a number of fronts leaving much room for improvement. Olive Garden and LongHorn have the lowest alcohol sales as a percentage of sales compared to competitors. Additionally, competitors like Outback Steakhouse have already reached markets abroad whereas LongHorn has no global presence.

In terms of market development, LongHorn should:

* Feature alcoholic beverages to increase consumption per customer * Launch a social media campaign to convert noncustomers into customers * Develop its presence in the LSR segment by offering an abbreviated menu during lunch time with quickly prepared items such as steak sandwiches for customers demanding convenience and quick service

In terms of market penetration, LongHorn still has room to grow domestically and should also pursue international expansion. Expansion will happen rapidly with the use of franchisees. The company should shift focus from restaurant operations to the development of best practices for training franchisees. Shifting from a company operated structure to a franchisee operated structure will also improve ROIC. International expansion should begin with company owned restaurants for the purposes of developing a prototype and then phase into franchises.

Strategy: SRG – Equity carve-out (partial spinoff)
Given the industry position of the restaurants in SRG, intense focus on improving position and market share is needed for these growth brands to realize their full potential. Again, given the turnaround needed at the corporate level, it will be difficult for that level of focus to be dedicated to SRG. An equity carve-out will dedicate resources specifically to SRG and unlock the value in these brands while still allowing the company to capitalize on each of SRG’s restaurants.
The SRG brands have been successful in obtaining their market presence through diversification. The SRG brands should also utilize growth strategies such as product development, market penetration and market development to continue its growth as newly formed company byway of the partial spinoff.

ADL Strategy Recap

The company would benefit from a complete turnaround at the corporate level as well as in their Olive Garden restaurants. LongHorn is well positioned for franchising its domestic locations and expanding into international markets with company operated stores. The company should divest its SRG division with an equity carve-out. The new SRG company will benefit from deploying growth strategies for all of its brands.

Value Chain Analysis

Table 27: Darden Value Chain Analysis Primary Activities | | | | | | Total Quality Inspection System | Olive Garden brand reformulation | Middle scale and upper scale dining environment | More interaction between customers and employees | Various food options (Italian, Caribbean, etc.) | Direct network with seafood suppliers | Sales of Red Lobster | Differentiated brands | Many marketing channels | Sit down environment | 4 types of distribution systems | LongHorn Steakhouse market position | Multiple locations in the US and Canada | Differentiated brand themes | Individual, small, or large gatherings | | | | Electronic gift cards | | | | | Market research | | Support Activities | | | | | Development | Focus on diversity | GS1 standards | Check level analytics | Strategic operations | 100 Best Companies to Work | International, regional and local suppliers | Single digital platform for all brands | Finance/Accounting | Internal promotions | Automated supply chain | | Human resources | Above average benefits and restaurant industry | Direct contact with seafood producers | | Government and community affairs | Lower employee turnover rates | Development of small suppliers to bring new products to market | | Supply chain | | Opportunity for women and minority owned businesses | |

Inbound logistics bring value to the company because of the way the supply chain is set up. The company utilizes a Total Quality Inspection System that sends field workers to check on the company’s suppliers to make sure they are adhering to the company’s quality procedures. This ensures fresh supplies, which means a better quality final meal for customers. The company also organizes inbound logistics by setting up four different distribution systems. This helps to organize the inventory as well as the logistics of how supplies arrive to each restaurant. This also gives the company more control over suppliers, as they are separated and inspected by product type. Seafood is a major portion of Darden’s supplies and the fact that the company has direct access to seafood producers helps to cut down costs, making sure that price savings can also be passed down to final consumers. Direct access to these producers also ensures better product quality.

The final product delivered through outbound logistics creates value for the company because it reaches a broad customer range through the company’s differentiated brands. The company’s brands are strong in the US, and the fact that it offers middle scale as well as upper scale dining environments allows customers to have more choices, thus fostering customer loyalty to the company brand. Operations have recently tried to generate value by selling Red Lobster, which was negatively impacting the company’s profits, as well as by reformulating Olive Garden to offer customers a more contemporary appeal. LongHorn Steakhouse and the SGR are also generating value due to their strong position in the market. In order for this primary activity to generate more value to the company, Darden should rethink its franchising strategy. The majority of restaurants are company-owned and they are not aggressively expanding internationally. Darden should take advantage of emerging economies and expand its brands, especially LongHorn Steakhouse, to foreign markets. The company also should invest more on franchising in order to free up capital to invest in other necessary projects, such as revamping Olive Garden operations, which are struggling at the moment.

Marketing and sales help create value by conducting customer research and using different marketing channels to communicate with customers. The differentiated brand themes are another way to market to different customer segmentations. What Darden needs to do to improve this area and obtain more value is to allocate a larger part of the advertising budget towards online marketing. The company spends a big portion of their marketing budget in television advertising, but customers today are more connected to internet mediums, such as social media networks, than to television, so the company needs to capitalize on this channel, especially because it is much easier and cheaper to advertise on the internet than it is on television.

Technological development is another area of value for the company. Darden has invested on the Check Level Analytics system in order to better understand customer preferences, as well as on a single digital platform for all brands, to make sure that information and promotions are consistent across all brands. In order to improve this area Darden should invest in mobile applications that allow customers to make reservations and check wait times over the phone, as well as extend their tabletop tablet strategy to all brands, especially those in the SGR group that caters to upscale and business customers.

The Supply Chain generates value for Darden. It has been automated in order to ensure delivery accuracy and efficiency. Darden has also implemented GS1 standards to make sure that all supplies are not only accurate and efficient, but are also delivered on time and with quality. The company has a wide network of suppliers that include local, regional and international suppliers. This gives them the competitive advantage of having a backup system in case there are any problems along the supply chain and could also be a source of competitive advantage for them internationally, if they pursue an international expansion strategy.

VRIO Framework - Value, Rareness, Imitability, Organization Analysis

The VRIO Framework is an analysis tool that utilizes four characteristics in order to understand whether a company’s tangible and intangible resources can be considered a source of sustained competitive advantage. The four characteristics analyzed are:

Value: does the resource add value, allowing the firm to exploit advantages and defend against threats?
Rare: is the resource owned or can only be acquired by a small number of industry players?
Imitate: is the resource costly to imitate, buy or substitute?
Organized: is the company well organized to capture the value of the resource?
The resources included in the analysis help Darden create value for the customer. They are both tangible and intangible assets that Darden utilizes in order to operate the business and achieve profits. The VRIO analysis demonstrates that Darden does not have many resources that can be considered sustainable competitive advantages for the company and there is room for different strategies to be implemented in order for the company to improve its competitive position.

Table 28: VRIO Framework Resources | Valuable | Rare | Imitate | Organization | Competitive Implication | Marketing/ Advertising | No | | | | Competitive disadvantage | Franchises | No | | | | Competitive disadvantage | Supply chain | Yes | No | | | Temporary competitive advantage | Human resources | Yes | No | | | Temporary competitive advantage | Technology | Yes | No | | | Competitive parity | Real estate | Yes | Yes | Yes | No | Temporary competitive advantage | Differentiated brands | Yes | Yes | Yes | Yes | Sustained competitive advantage |

Darden’s supply chain and real estate holdings are considered a temporary advantage. Although the company argues that owning most of its real estate gives them the ability to be flexible and benefit from the rent subsidy, board members argue that owning so much real estate takes away value from shareholders. It has also hindered the company’s global expansion as they have not invested aggressively in franchising as like peers have. Darden’s supply chain is well established but competitors also have a well-established supply chain, such as McDonald’s with its “three-legged stool” philosophy.

Differentiated brands are considered a sustainable competitive advantage for Darden. The company has multiple brands that target a broad range of customers, from Italian food to seafood lovers. Although one of its core brands, Olive Garden, is not performing well, the company is still in position to revamp this brand’s operations by implementing strategies that will cut costs, such as leveraging its scaled economies with food cost and implementing policies that address execution and discipline to prevent food waste. Other brands, such as LongHorn Steakhouse and the SGR group are doing well.

Technology is rated as a competitive parity for Darden. The company is onboard with the latest technological innovations for the restaurant industry. They have the Guest Analytics Technology, which was named #5 on InformationWeek’s Elite 100, they have developed a multi-million dollar program to design a single shared digital platform and are offering services, such as online ordering and tabletop tables where customers can place orders, pay their bill and even play with games while waiting for their meal., However, these initiatives have also been undertaken by competitors and in order to remain technologically competitive, Darden will have to be innovative with its concepts.

Darden has a temporary competitive advantage with its human resources. The company has been included in Fortune’s “100 Best Companies to Work For” three years in a row. The company also has been recognized by many diversity groups as a company that fosters a culture of diversity in the workplace and has good employee ratings such as great atmosphere to work in, great communication and pride., The company is not perfect but it still manages its human resources well, better than average for the restaurant industry and this is why they have a temporary competitive advantage in this area. The company must maintain its culture of employee recognition in order to sustain this resource as a source of value for the business.

Marketing, advertising and franchises are a competitive disadvantage for the company. Darden has an insignificant presence outside of the US and Canada, with approximately 40 restaurants overseas. Because they pursued the strategy of owning their real estate, they did not aggressively invest in franchises and focused their expansion for many years inside the US. Darden spends a large amount of their budget on marketing and advertising; however it is spent on outdated advertising mediums, such as television for example. These are two resources that have the potential to be better utilized to create more value for the company.

In terms of strategy, the company should capitalize its sustainable competitive advantage found in its differentiated brands. At the corporate level, the company can lower supply costs by using standardized items across all brands including food items and packaging. The company can also capture value by offering standard cross-training and shared facilities.

Another strategy centered on the company’s differentiated brands is the opening of synergy restaurants. The company has tried this in the past with little success due in part to lack of marketing that demonstrated the benefits of dining at synergy restaurants. The initial phase of the synergy restaurants were designed to work in markets that do not have the population density to support a single brand location. The purpose was to help Darden penetrate smaller markets and the shared building allowed for promotion of its brands while remaining cost efficient. However, the synergy restaurants only added value to the company and not to the consumer. Customers were seated in separate dining areas without the option to order from the other restaurant. The only commonality was the shared kitchen for corporate efficiency purposes. The strategy suggested here is focused on adding value to the customer by offering menu items from both restaurants joined in the synergy brand as well as unique fusion meals that combine elements from both restaurants.

Strategy Selections

Table 30 below presents the strategies formulated using the SWOT Analysis, Porter’s Competitive Matrix, ADL Matrix, and VRIO Framework. The following strategies listed below fall under one of two umbrellas: strategic or operational strategies. The strategic strategies are: market development, market penetration, product development, and diversification. The operational strategies take place at the corporate level and involve policy, rule, and procedure. The Strategy Selection table concludes with the final two selected strategy alternatives.

Table 29: Suggested strategies for Darden Restaurants SWOT Strategies | | Market Penetration | Global expansion into developed markets with lower corporate taxes of core products, tailored to location | Market Penetration | Global expansion into emerging markets. Offer diverse menu options | Market Penetration | Offer more franchise options to reduce complexity in management | Market Development | Develop relationships with international suppliers and governments and be conscientious of regulations | Market Development | Focus on growing middle class and compete on price | Market Development | Develop relationships with suppliers internationally | Product Development | Utilize technology to optimize efficiency and modernize customer service | Product Development | Use technology to promote brand and products (apps, tablet ordering) | Product Development | Create synergy restaurants with current brands through franchising | Product Development | Improve food quality and nutritional value of food | Product Development | Offer quick meals at lower prices or “value menu” | Product Development | Menu rejuvenation to meet quick service/healthy/innovative demands | Operational | Leverage relationships with suppliers to manage food costs | Operational | Continue to promote diversity and employee retention with attention to proposed legislation involving labor laws | Porter’s Competitive Matrix Strategies | Market Penetration | Use franchises to expand internationally | Product Development | Utilize technology to enhance employee product knowledge | Product Development | Utilize technology to decrease customer wait times | Product Development | Simplify menu by getting rid of specialty food items | Product Development | Focus menu around high profit items such as steak and seafood | Differentiation | Implement synergy restaurants | Operational | Cross-train staff at synergy restaurants | Operational | Implement policies and controls to reduce food waste | Operational | Train employees on portion size and food execution | Operational | Utilize technology to control food waste | ADL Matrix Portfolio Strategies | Market Penetration | Expand internationally with company-operated LongHorn restaurants | Market Penetration | Franchise existing domestic locations | Product Development/Market Development | Develop its presence in the LSR segment by offering an abbreviated menu during lunch time with quickly prepared items such as steak sandwiches for customers demanding convenience and quick service | Product Development | Develop an interactive app with real-time wait times | Operational | Replace leadership with transformational change leaders | Operational | Identify wasteful spending and cut costs | Operational | Leverage synergies through scaled economies | Operational | Identify underfunded functions and reallocate resources | Operational | Cut marketing costs and reallocate from mostly TV and print to include digital, social and direct marketing. Base marketing initiatives on ROI. | Operational | Remove extra layers of management | Operational | Give restaurant managers more autonomy | Operational | Institute a retraining program focused on product consistency and customer service | Operational | Lease locations | Operational | Develop best practices training program for franchisees | VCA Strategies | Market Penetration | Expand LongHorn Steakhouse internationally | Market Penetration | Franchise domestically | Product Development | Feature seafood items in advertisements and on menus | Product Development | Develop mobile applications and implement tabletop tablets | Operational | Reallocate marketing expenditures away from TV and to digital marketing | VRIO Framework Strategies | Market Penetration | Reformulate synergy restaurants focused on customer value | Product Development | Offer unique fusion meals at the synergy restaurants | Operational | Develop synergies at the corporate level that capture value based on the differentiated brands such as lower supply costs, standardized packaging, cross-training, and shared facilities | Selected Alternative Strategies | Market Penetration | Domestic market penetration with franchised restaurants | Market Penetration | International market penetration with company owned LongHorn Steakhouse restaurants |

There are two strategies that emerge consistently from all of the aforementioned analyses tools. The final two selected strategy alternatives are both market penetration strategies. The first alternative is for domestic market penetration with franchised restaurant units. The second alternative is for international market penetration with company-owned LongHorn Steakhouse restaurants.

Quantitative Strategic Planning Matrix-QSPM

All of the analyses performed in the previous sections have appointed market penetration as the best strategy to improve Darden’s market positioning. Although Darden is the largest full-service restaurant company, they assume a lot of risk with their company-owned and operated restaurant structure. The fact that they own almost all of their restaurants is hindering the company from focusing on corporate operations, which have been struggling in recent years. The company also has an insignificant presence outside of the US and Canada. In order to implement the expansion strategy, two alternatives have been discussed: (1) domestic market penetration by franchising new restaurants and existing company-owned restaurants and (2) international market penetration with LongHorn Steakhouse by opening company-operated restaurants in emerging markets.

The Quantitative Strategic Planning Matrix (QSPM) below is a strategic-level approach that will evaluate these two alternatives. This analysis tool provides an analytical comparison of the two aforementioned alternatives. Each alternative is evaluated against the key factors from the IFE and EFE and given an attractiveness score (AS). The sum product of the key factor weights and the AS result in a total attractiveness score (TAS) for each option.

The total attractiveness score of the second alternative, international market penetration with LongHorn, yields the best results according to the QSPM with a TAS of 4.55 compared to a TAS of 3.44 for the first alternative. The growth of the middle class in emerging markets proves to be the greatest opportunity for Darden. LongHorn is positioned to succeed abroad with domestic success already under its belt. An attractive menu offering for those in the middle class is a natural advantage as incomes increase abroad, so does the demand for beef.

Table 30: QSPM for Darden Restaurants | Key Factors | | Alternative 1Domestic Market Penetration (all brands) | Alternative 2Int’l Market Penetration (LongHorn) | | Strengths | Weight | AS | TAS | AS | TAS | 1 | Variety of options that appeal to diverse groups | 0.09 | 3 | 0.27 | 4 | 0.36 | 2 | Relationship with suppliers | 0.07 | 3 | 0.21 | 2 | 0.14 | 3 | Strong relationship with employees | 0.06 | - | | - | | 4 | Acclimation and recognition received for contributions | 0.06 | - | | - | | 5 | Corporate control of restaurant operations | 0.05 | 1 | 0.05 | 4 | 0.20 | 6 | Debt-to-equity control | 0.05 | 1 | 0.05 | 4 | 0.20 | 7 | Valuable assets-land-holdings | 0.05 | - | | - | | 8 | Focus on core brands | 0.04 | 3 | 0.12 | 4 | 0.16 | | Weaknesses | | | | | | 1 | Expansion into global markets | 0.08 | 2 | 0.16 | 4 | 0.32 | 2 | Marketing and promotional efforts | 0.08 | 2 | 0.16 | 4 | 0.32 | 3 | Price pressure from competitors | 0.07 | 3 | 0.21 | 4 | 0.28 | 4 | Closure of synergy restaurants | 0.06 | - | | - | | 5 | Offering healthier food items to consumers | 0.06 | - | | - | | 6 | Utilization of social media outlets | 0.06 | - | | - | | 7 | Lack of franchises, stunting growth opportunities | 0.06 | 4 | 0.24 | 3 | 0.18 | 8 | Management structure and strategic direction | 0.06 | 3 | 0.18 | 2 | 0.12 | Sum Weights | 1.00 | | | | | | Opportunities | Weight | | | | | 1 | Growth of middle class in emerging countries | 0.10 | 1 | 0.10 | 4 | 0.40 | 2 | Global expansion in developed countries | 0.09 | 2 | 0.18 | 4 | 0.36 | 3 | Success of other American restaurants globally | 0.08 | 2 | 0.16 | 4 | 0.32 | 4 | Advances in technological solutions | 0.07 | 4 | 0.28 | 4 | 0.28 | 5 | Decreases in corporate taxes (China, Japan, UK, Brazil) | 0.05 | 1 | 0.05 | 4 | 0.20 | 6 | Developing franchise operations | 0.05 | 4 | 0.20 | 3 | 0.15 | 7 | Digital lifestyle increasing consumer touch points | 0.03 | - | | - | | 8 | Time crunched customers lead to faster table turnovers | 0.02 | - | | - | | | Threats | | | | | | 1 | Lack of familiarity w/ competition outside of US/Canada | 0.09 | 2 | 0.18 | 1 | 0.09 | 2 | Increased demand for unique fusion-meals | 0.08 | - | | - | | 3 | Increased demand for quick service and ready-made foods | 0.07 | - | | - | | 4 | Lack of cultural awareness for success in foreign countries | 0.07 | 2 | 0.14 | 1 | 0.07 | 5 | Increase in health awareness | 0.05 | 3 | 0.15 | 2 | 0.10 | 6 | Lack of familiarity of global gov’t regulations/laws/tariffs | 0.05 | 2 | 0.10 | 1 | 0.05 | 7 | Increasing costs of raw materials and energy | 0.05 | 4 | 0.20 | 1 | 0.05 | 8 | Labor law changes | 0.04 | 1 | 0.04 | 4 | 0.16 | 9 | Healthcare reform | 0.01 | 1 | 0.01 | 4 | 0.04 | Sum Weights | 1.00 | | | | | Total Attractiveness Score | | | 3.44 | < | 4.55 |

Strategy Implementation

Based on all the analyses performed in the sections above, the strategy that will help Darden capture value is expansion by international market penetration with LongHorn Steakhouse. The initial international market penetration should be done with company-operated stores so Darden can increase its familiarity of operating in foreign markets as well as maintain operational control. LongHorn was chosen as the brand to be expanded due to is strong market position in the US. Additionally, LongHorn’s main food product, beef, is in high demand in many emerging markets. Beef can also easily be substituted with bison, buffalo, or bovine in cases where menu customization may be deemed necessary.

Critical Success Factors

Using the critical success factors (CSF) tool will allow Darden to easily identify objectives in implementing their new strategy. It is essential that CSFs are met in order for Darden to achieve each objective and accomplish its overall strategy. The CSFs for Darden were determined by identifying certain objectives in meeting its overall strategy and developing the company’s CSF to meet these objectives.

Figure [ 86 ]: Critical Success Factors, Missions & Goals

The chart above shows a summary of Darden’s objectives and goals to accomplish the global expansion mission. Below, a more a detailed analysis provides the components necessary to accomplish this goal.

Objective: Expand into international markets and gain market share of .01% by third year.
CSF: Expand into China and India due to large growth rates and restaurant revenues

To expand internationally, Darden must consider what areas to focus its expansion by understanding whether they can develop reliable suppliers, talented employees, facilities, and equipment. Darden must also consider areas that have growth potential and cultural interest in full-service steak restaurants. Through analyzing GDP and forecasted restaurant revenues, specific countries that present opportunities of growth and profitability can be determined. The chart below summarizes the analysis of these financial considerations.

The ranking of the specified countries is based on several factors including: 2014 GDP, 2015 GDP projections, GDP growth, estimated full-service restaurant revenues for 2014 and 2015 and revenue growth. Through weighting and ranking these factors, an overall ranking of countries is achieved. The top countries represent opportunity for Darden due to their disposable income and restaurant spending.

Table 31: Current and forecasted GDP and restaurant revenues for select countries

105. Adapted and sourced from Barnes Report 2014 Table 32: China Facts | | 106. Adapted and Sourced from CIA World Factbook |
While Darden could construct a strategy to penetrate all these markets, a more specific strategy to focus on the largest potential opportunities will increase Darden’s success and limit their initial capital investment. In 2014, Darden signed agreements to expand through franchises in Japan, Mexico, Brazil, Peru, and the Middle East. This additional expansion strategy will focus on China and India based on the evaluation and ranking of these countries.

China
China presents the largest opportunity internationally for Darden, with $197B in estimated restaurant revenues for 2015 and 13% growth over 2014. China’s full-service restaurant industry has just over one million establishments and employs 24M people. The population of China far exceeds the other countries ranked, with nearly 1.4B people and a labor force of 798M. Of this population, 51% is considered urbanized, which means there is a higher probability that LongHorn Steakhouse will be well received by consumers. In terms of meat production, China is the fourth largest beef producer in the world, after the US, Brazil, and Europe, producing an average of 6.5 million tons. China’s market is massive in terms of size and dollar value and is therefore Darden’s best prospect for success. China’s demographics show that 47%, (the majority of the population) are between the ages of 25 and 54, with a median age of 36. Additionally, the middle class comprises 25% of China’s population, but if only urbanized areas are considered, then this percentage increases to 50%.

Darden should focus market penetration efforts in the country’s most influential cities, which are Beijing and Hong Kong. Beijing has a population of 15.6M people and is the location of many American-owned company headquarters. The city is also known as the location of the most innovative companies. Beijing ranks 59th on the global financial centers index rating, while Hong Kong ranks 3rd.

In China, the rise in cost of living is mainly a result of high consumer demand, which accounts for wage increase that the government must balance out by increasing consumer costs. Today, a consumer can expect to pay $15-$31 for an average meal at an inexpensive restaurant and anywhere from $100-$200 for a three course meal for two. This recent increase in cost of living has caused Chinese consumers to become more conscious of their spending habits. Table 33: India Facts | | 107. Adapted and sourced from CIA World Factbook |

India

India is the second ranked country for which Darden should focus its expansion efforts due to its growth in both GDP and restaurant revenues. India’s full-service restaurant industry estimates $34M in revenues for 2015, an 11% increase over 2014, indicating a booming market. The expansion of the market is attributed to factors such as an increase of disposable income, urbanization and growing working population of on-the-go adults. These factors are characteristics of Darden’s target audience abroad because the company has experienced success with these demographics domestically. India’s total population is 1.2B people, of which 31% is urbanized with a labor force population of 487M people. China has a large percent of middle-aged citizens with 41% between 25-54 years old. India’s middle class comprises approximately 20% of the population; however, this is forecasted to increase to 37% by 2025. This growing middle-class is a great opportunity for Darden to establish brand identity early and experience profit growth in conjunction with class growth.

In India, a vegetarian lifestyle has deep cultural and social roots. However, within the growing middle class of India has emerged a class of people who aspire to a Western lifestyle. This includes eating meat. “Non-veg”, as it is called in India, has become a status symbol among parts of the population. In India, more than half of India’s population is under the age of 25, with 65% of the population under 35. By 2020, India is set to become the world’s youngest country. Among India’s urban middle class, beef is gaining popularity as factors like globalization and growing mobility enable people to travel abroad and develop a taste for red meat while others have simply moved away from the traditional Hindu values their parents may have held. Many in the Indian middle class, and especially the younger generation, equate meat-eating with a cosmopolitan attitude and a certain level of education. It is also seen as a sign of affluence, as meat dishes are more expensive than vegetarian food. The popularity of beef amongst the youth of India should fare well for LongHorn given the country’s growing youth population. It is commonplace, in any major Indian city, to find steaks and beef burgers on the menus of high-end restaurants. LongHorn Steakhouse’s Texas-styled American food should therefore, fare well with India’s middle class.

As many states in India have passed laws to prevent the consumption of beef, Darden should be weary of this when deciding upon the locations in which to establish their restaurants. In cities such as Delhi, which banned beef consumption as a result of a law that was passed in 1994, this prevented restaurants from selling beef to consumers. Similarly, in states such as Gujarat it is illegal to slaughter both cows and bulls or for individuals to possess these type of meats. There are however, cities in India such as Punjab and Haryana, which are not as heavily affected by such strict laws and, although cannot sell beef or bull meat, can still do so if the meat has been imported from outside of the states in sealed containers. Darden should focus on Indian states such as West Bengal and Karnataka, where laws are minimal affecting the sale of beef, but especially in Kerala, which has no restrictions with regards to beef consumption and where beef consumption is popular among consumers. The culinary shift, resulting from changing lifestyles, has many Indian restaurants serving imported beef and/or locally procured Buffalo, all available to a variety of budgets. Today, in India a consumer can expect to pay anywhere from $70-$200 for an inexpensive meal at a restaurant and $350-$800 at a mid-range restaurant for a three course meal for two. In comparison to China’s cost of living, India’s cost of living is substantially higher reflecting more of an opportunity for LongHorn to charge higher menu prices for their food items.

Objective: Creating a positive brand image
CSF: Becoming involved in fundraisers and charities to give back to local communities

Darden’s functional area committed to community and government affairs will be influential in this strategy by creating brand awareness and a positive image for their brand in countries they have never ventured into before. Darden can take advantage of making contributions to countries in need such as India where, although the growth rate is substantial, there is also a well-known imbalance between the rich and the poor. This is evident in the fact that 85% of the villages in India lack a secondary school and 50% do not have proper shelter. Additionally, India only spends 1% of its GDP on healthcare, which is an indication that a large amount of the Indian population is not receiving proper medical care. Although, China has made significant improvements by reducing poverty, as of 2011, China and India were counted as having 8% and 30% of the world’s poorest populations, respectively. By taking these struggles into consideration, LongHorn can pride itself on giving back to such causes by performing volunteer work and being a part of fundraising donations in order to help contribute to some of these major deficiencies.

Objective: Staying compliant in new countries of operation
CSF: Understanding licenses and regulations in both China and India

As Darden expands its LongHorn restaurants into new international markets, it is important to assess the regulations in both India and China that may affect their operations. It does however; depend on the specific location in which Darden locates its restaurants. Some of the common licenses required in China include: health and food hygiene licenses, an environmental impact report, and a fire protection opinion. As it is common for foreign restaurants to have unexpected inspections by officials, it is important that proper licenses are obtained prior to opening and that proper protocol is being followed during operations. This further affirms the view that Darden should expand with company-operated stores as oppose to franchises in part due to the ability to control and monitor operational standards abroad. The amount of capital required to fund restaurants in China is most commonly decided by local government officials and can vary depending on the cost of living and whether or not the restaurant resides in a city that is considered to be expensive. Developing a restaurant in China can take as long as a year in some cases due to the complex regulations and licenses that is required. LongHorn will need to take this into consideration when determining their timeline for expansion. World Bank ranks China as 151 out of 183 economies on the list of the “Ease of doing business” index. In India, there are also certain licenses that are required when opening up a new restaurant. Some of the more common ones include: Food Safety License, Health/Trade license, Eating house license, liquor license, Fire Department license, and a pollution certificate in addition to carrying proper insurances.

Objective: Management of new operations
CSF: Appointing training and Operational managers to oversee new operations

Darden strives for operational excellence in each of its 1,500+ locations. To achieve this, Darden’s focus on the importance of its operational management leadership team is paramount. In 2013, Darden restructured corporate operations to geographic territories of responsibility. A continuation of this effort on the global scale will prove to be beneficial. Division of operational maintenance by regional locations will benefit global expansion efforts in several ways. First, newly launched satellite locations abroad will experience a stronger level of connectedness to the corporate headquarters in the US. Restaurants preparing to open require a great deal of operational training. Adherence to corporate policies, inventory management, overhead costs and building an effective team of employees are just a few of the elements critical to operational success. Global expansion can pose potential hindrances due to varying cultural, legal and labor differences from the US. A manager that is accustomed to business dealings in the global region can mitigate potential operational issues. Darden has also added a designated Training Manager to every location and this designation will be present in the company’s global locations as well in accordance to the proposed strategy. With differing responsibilities from the Culinary and Service Managers, the Training Manager is able to focus on employee development and operational concerns. This newly added position will be of particular importance to newly launched international establishments unfamiliar with the traditional operations of Darden restaurants.

Additionally, regional operational managers are better able to maximize efficiencies at the local level. Daily activities ranging from timely inventory deliveries to technical difficulties can be resolved more swiftly and consequently in a more cost effective manner, than funneling operational concerns through the US headquarters. In sum, regional managers are able to establish and maintain relationships with local vendors and service providers that reduce inefficiencies through delayed communication and cultural misunderstandings.

Darden’s operational strategy to accomplish the company’s overall expansion strategy includes site selection criteria, investment needed, and workforce concerns. Darden’s operational managers in charge of the China and India markets will manage the procurement of land and facilities in accordance with Darden’s site selection criteria and prototype information. This criterion assesses the requirements for a standard LongHorn restaurant. Land and Property within Beijing and Mumbai should contain approximately 1.5 acres, space to build or a preexisting building of 6,170 square feet, and parking for 127+ vehicles. Stand-alone buildings for sale are the company’s preference, however, end-caps of adjoining buildings and leases with 10-year initial terms and 5-year renewal options will be considered. Darden also has established average capital investment needed for these restaurant openings. Per establishment, a budget of $3.5M includes lease obligations and working capital credit. This budget is based on a facility which can house 49 dining tables and 228 seats, the average LongHorn facility size.

Another consideration is workforce in China and India. In order for Darden to achieve its mission, it has to consider the employees and people that are going to help them achieve their goals. By understanding employment rates and demographics in each area this will help provide a better understanding of operational success.

Objective: Building consumer awareness in new countries
CSF: Cultural understanding, advertising, and menu development

Marketing to different cultures on an international level is different than marketing on a domestic level. Depending on the country, customers want to see different concepts with regards to advertisements based on their culture and beliefs. This is why much research is required in order to determine demographics, eating habits, and consumer touch points in both China and India in order to allocate the advertising budget efficiently. This is a good time for Darden to expand into China given the increase in disposable income that impacts approximately 23M consumers. As a result of this increase, it is predicted that much of this spending will be used towards recreational activities and consumption of services such as dining out. In 2011, 41% of upper middle-class Chinese consumers spent more per month on dining out than they did the previous year. This compares with only 15% of US upper middle-class consumers year-on-year. Discretionary spending in China is expected to grow considerably by 2020 and spending for dining out will grow 10.2% a year in the coming decade. China is known for its consumers to have strong brand awareness, which is what Chinese consumers base many of their purchasing decisions on. Chinese consumers like to show off their social status as well as wealth by identifying with certain brands and the amount they spend. Given these spending habits, Darden should position themselves as a high in quality restaurant brand, while still providing menu items that are affordable to all income levels as they have done in the past.

In China, eating out is perceived as a social activity, where consumers can spend time with friends and family and carry out well known traditions. Due to recent restrictions passed by the Chinese government in 2012, placing limits on the amount allowed for spending on official banquets, anti-waste policies as well as anti-extravagance has caused many high-end full service restaurants to rethink their operating strategies and reach out to more customers through mass marketing. Although, their focus is still high quality food products, they have also started offering more affordable dishes that are in line with these new restrictions by implementing low to mid-priced level menu options. Darden should take such pricing strategies into considerations when pricing its LongHorn menus.

In order for Darden to make an impact on the Chinese market they should take the time to understand the Chinese population’s emotional needs and eating preferences. To accomplish this, Darden should consider incorporating items into their menus that provide specific flavors and tastes that appeal to the Chinese population, such as chocolate, cookies, instant noodles, dried fruits, nuts and seed, juices, smoothies and energy drinks as well as offer a few traditional Chinese cuisines in their menus as well. Additional menu items to be considered are dumplings, duck, chow mein, pork and spring rolls which are all popular menu items among the Chinese population.

In India, dining out is an important part of the consumer culture, which is evident in a survey conducted by Franchise India that revealed 27% of consumers in India eat out only one time during the week, 34% eat out two to three times during the week, and 12% eat out at restaurants on a daily basis. Approximately 60% of individuals surveyed advised their preference was eating out at restaurants as opposed to taking food to go. Much of the Indian population look to restaurants as a way to meet with friends and family, gather for celebrations, as well as to accommodate activities such as dating. These trends are heavily supported by the younger population in India. These are important considerations for LongHorn to make when developing their restaurants to make sure they appeal to the younger population and promote a warm and inviting environment that appeal to the Indian culture. In keeping with customary tastes and preferences, LongHorn should focus more on menu items that will be well-received by this demographic group such as lamb, chicken, and fish.

There is a growing concern for brand awareness and quality food items in India. This works to LongHorn’s strategic advantage as they have the opportunity to showcase their brand as high-end by continuing to offer quality food items with high profit margins that appeal to the trendier consumer. This is especially true in cities that use dining out as a form of frequent entertainment in tier 1 cities in India such as Mumbai and Kolkata. Tier 1 cities are considered to have a higher income level and employ a large number of women who are able to spend a higher amount towards dining out. In addition, the Indian culture has become more open to foreign cuisines. Another important trend occurring in India is food preferences and tastes. While there are certain food restrictions in India that must be considered due to religious beliefs, affecting religions such as: Hinduism and Sikhs which do not allow the consumption of beef, and Muslims which do not allow the consumption of alcohol or pork, many Indian consumers have started to look to restaurants that offer diversity in taste and origin. This shift can be attributed to the change in urban culture that has developed in India overtime as well as an increase in disposable income. Disposable income has increased international travel and the ability to afford luxury items, which the newer generation consumers now are using to experiment with different food options and restaurants. Several multinational chains have become quite successful in India such as those offering Chinese, Mexican and Mediterranean cuisines. As of 2013, Dominos remained India’s market leader which demonstrates the cultural openness to American food. This fares well for Darden’s expansion initiatives in this country. Even as a new market entrant, the expanding casual dining industry provides an opportunity for newly captured market share and ultimately high revenues for LongHorn Restaurants in India. While maintaining their current menu will still be viable, LongHorn should also consider incorporating fusion dishes into their menu items as well utilizing different spices and chilies and fresh produce which are popular ingredients in Indian cuisine.

In order to reach customers in both the Chinese and Indian culture, we recommend a combination of both television and digital advertising, with a strong focus on digital advertising as a way to reduce costs and reach out on a more personal level to these market demographics since it will be a new market for LongHorn.

Objective: Manage efficient supply chains in new countries
CSF: Maintain current supplier relationships and build global supplier relationship

One of Darden’s strengths is its strong relationships with suppliers. Over time, Darden has developed strategies for monitoring the food quality of its products as well as developing closer relationships with their suppliers through methods such as Darden Direct, a best-in-class food distribution system, which dramatically increases the efficiency of the company’s logistics and distribution activities. This has allowed them to better track supply and demand, food prices as well as fuel consumption to and from its distribution centers. Their vast network of suppliers consists of 2,000 suppliers in over 35 different countries, which has allowed them to build relationships all over the world which can continue to be built upon by expanding these networks into India and China. It is important for Darden to maintain current relationships with suppliers while being careful not to jump into new relationships too quickly. By working with their current suppliers, this will allow them to have better control over food quality and prices as well as to ensure a certain level of consistency and sustainability which is important to the reputation of the Darden brand. Once Darden has established their brand in India and China then they can possibly pursue new supplier relationships with suppliers they know they can trust and who will help to maintain lower costs and food quality. Events such as the Avian flu scare in China is also important for Darden to consider when working with suppliers as this has created consumer concern and had a significant impact on the amount of dining out in the Chinese culture. Because LongHorn has a variety of menu items that contain chicken and beef, a supply of these meats could be affected by such risks. Therefore, relationships with suppliers must be managed tightly and proper sanitation and safety protocols should be followed in order to mitigate these risks. Tariffs, custom duties, and import taxes will depend not only upon India and China’s regulations but also the trade agreements with Darden on importing countries. As noted, Darden sources its food products from 35 different countries. Each will be subject to the appropriate duties and tax rates established with India and China. Darden can leverage its relationships with distributors that have advantageous trade agreements with each country. Corporate tax rates are important for Darden to consider when expanding internationally as this will indicate how much tax they will be paying as a percentage of their sales. A benchmark in making this determination will be completed to compare it to that of the global average tax rate of 23.57%. In China the corporate tax rate is 25%, India is 33.9%.

Benchmarking Success

As with all new restaurants, Darden will create short term and long term financial goals for each establishment. The forecasted sales will combine historical and forecasted industry growth, the success of sales and marketing promotions, and overall operational efficiencies. Through the use of supply chain and sales technology, data will be collected and analyzed to mitigate value chain inefficiencies. Revenue growth will be assessed via key sales performance indicators.

First, the number of LongHorn visitors (overall guests count) will be benchmarked and assessed to indicate a continued expansion of guests. Promotional efforts will be employed to attract new customers as well as leverage the eClub loyalty rewards membership to encourage repeat and loyal customers. Next, sales will be measured by the average price-per-check. After collecting a baseline of consumer purchases at the LongHorn location, sales goals will be adjusted to improve revenue per check.

As the industry continues to expand, it will be difficult to measure market share. This is particularly true if the number of establishments is small given larger competitors in the market. Initially, Darden will focus on sales growth and restaurant profitability and then incorporate market share expectations in the 5-10 year goals.

Table 35 below presents a forecasted 10-year statement of earnings for each LongHorn restaurant opened in China. Following is Table 36 which presents a forecasted 10-year statement of earnings for each LongHorn restaurant opened in India. Financial forecasts include additional expenses in the first and second years for establishing the facility, equipment, and team members necessary.

The expectation is for Darden to be fully functional by the third year of operations with projections of a .01% market share attainment. Through increases in advertising of approximately 1% each year, Darden expects the international LongHorn Steakhouses’ to bring in an additional 5% in sales.

Table 34: LongHorn forecasted statement of earnings from China operations Statement of Earnings Forecast Darden-China (per facility) | | ($ Thousands) | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | Year 6 | Year 7 | Year 8 | Year 9 | Year10 | Sales | 2,948 | 3,007 | 3,157 | 3,315 | 3,480 | 3,654 | 3,837 | 4,029 | 4,230 | 4,442 | | Food & Bev. Costs | 905 | 932 | 960 | 989 | 1,019 | 1,050 | 1,081 | 1,113 | 1,147 | 1,181 | | Restaurant Labor | 994 | 965 | 955 | 955 | 955 | 955 | 955 | 974 | 1,003 | 1,033 | | Restaurant Expenses | 517 | 533 | 549 | 565 | 582 | 600 | 618 | 636 | 655 | 675 | Total Direct Cost | 2,417 | 2,430 | 2,464 | 2,510 | 2,556 | 2,604 | 2,654 | 2,724 | 2,805 | 2,890 | Gross Margin | 530 | 577 | 693 | 805 | 924 | 1,050 | 1,183 | 1,305 | 1,425 | 1,552 | | Advertising Expense | 121 | 122 | 123 | 124 | 126 | 127 | 128 | 129 | 131 | 132 | | R&D Expense | 6 | 6 | 6 | 6 | 6 | 6 | 6 | 6 | 6 | 6 | | Other SG&A Exp. | 192 | 190 | 189 | 188 | 187 | 185 | 184 | 183 | 182 | 180 | Total SG&A Expenses | 319 | 319 | 319 | 319 | 319 | 319 | 319 | 319 | 319 | 39 | | Deprec. and Amor. | 144 | 156 | 156 | 156 | 156 | 156 | 156 | 156 | 156 | 156 | | Interest Expense | 63 | 65 | 65 | 65 | 65 | 65 | 65 | 65 | 65 | 65 | | Other Expenses | 9 | 9 | 9 | 9 | 9 | 9 | 9 | 9 | 9 | 9 | Total Indirect Cost | 217 | 230 | 230 | 230 | 230 | 230 | 230 | 230 | 230 | 230 | Earning before tax | (5) | 28 | 144 | 256 | 375 | 501 | 635 | 756 | 876 | 1,004 | | Tax | (1) | 7 | 36 | 64 | 94 | 125 | 159 | 189 | 219 | 251 | Net Earnings | (4) | 21 | 108 | 192 | 282 | 376 | 476 | 567 | 657 | 753 |

Table 35: LongHorn forecasted statement of earnings from India operations Statement of Earnings Forecast Darden-India (per facility) | | ($ Thousands) | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | Year 6 | Year 7 | Year 8 | Year 9 | Year10 | Sales | 520 | 541 | 568 | 596 | 626 | 657 | 690 | 725 | 761 | 799 | | Food & Beverage Costs | 160 | 165 | 169 | 175 | 180 | 185 | 191 | 196 | 202 | 208 | | Restaurant Labor | 184 | 169 | 168 | 168 | 168 | 168 | 168 | 168 | 168 | 168 | | Restaurant Expenses | 91 | 94 | 97 | 100 | 103 | 106 | 109 | 112 | 116 | 119 | Total Direct Cost | 435 | 428 | 434 | 442 | 450 | 459 | 467 | 476 | 486 | 495 | Gross Margin | 85 | 113 | 134 | 154 | 176 | 199 | 223 | 249 | 276 | 304 | | Advertising Expense | 21 | 22 | 22 | 22 | 22 | 22 | 23 | 23 | 23 | 23 | | R&D Expense | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | | Other SG&A Expenses | 34 | 34 | 33 | 33 | 33 | 33 | 33 | 32 | 32 | 32 | Total SG&A Expenses | 56 | 56 | 56 | 56 | 56 | 56 | 56 | 56 | 56 | 56 | | Depreciation and Amor. | 25 | 28 | 29 | 29 | 29 | 29 | 29 | 29 | 29 | 29 | | Interest Expense | 11 | 11 | 12 | 12 | 12 | 12 | 12 | 12 | 12 | 12 | | Other Expenses | 2 | 2 | 2 | 2 | 2 | 2 | 2 | 2 | 2 | 2 | Total Indirect Cost | 38 | 41 | 42 | 42 | 42 | 42 | 42 | 42 | 42 | 42 | Earning before tax | (9) | 16 | 35 | 56 | 77 | 100 | 124 | 150 | 177 | 205 | | Tax | (3) | 5 | 12 | 18 | 26 | 33 | 41 | 49 | 58 | 68 | Net Earnings | (6) | 11 | 24 | 37 | 52 | 67 | 83 | 100 | 119 | 138 |

Evaluation

A Balanced Scorecard has been developed to assist Darden with evaluating its performance after its strategy has been implemented. It uses both a combination of financial and non-financial measurements, in determining how well Darden’s new strategy is being received by both the Chinese and Indian market. The purpose of the balanced scorecard is to provide specific goals that Darden hopes to achieve throughout their new strategy along with measures for determining whether or not the desired results are being achieved. Specific targets have also been defined along with initiatives for meeting these goals. This evaluation tool assesses four different areas that Darden should take into consideration in evaluating its performance results, which include: financial perspective, customer perspective, internal processes perspective and learning and growth perspective.

Balanced Scorecard

Through meeting the goals of the balanced scorecard, Darden can assure LongHorn’s success in the China and India markets. These goals are important to achieve as quickly as possible. However, in order to establish itself internationally, Darden must adapt a conservative time-frame to successfully establish start-up operations. Therefore, the balance scorecard represents Darden’s goals after start-up, which can take up to two years.
Table 36: Balanced Scorecard Financial Perspective | | Result Sought | Measures | Targets | Initiatives | | | * Gain market share * Increase sales | * Sales $$ * Percent sales increase | * .01% * 5% | * Mimic US spending/share * Year-over-Year increases | | | | | | Customer Perspective | | | Result Sought | Measures | Targets | Initiatives | | | * Increase customer touchpoints * Increase brand awareness * Acclimate to local culture | * Number of advertising outlets * Number of advertisements and community ventures * Balanced menu with traditional and local | * 10 * 50 ads * 15 ventures * 30% | * TV, print, web ads, social media, phone apps * 5 ads per outlet * Have 30% of menu localized | | | | | | Internal Processes Perspective | | | Result Sought | Measures | Targets | Initiatives | | | * Build facilities in ideal locations * Established supply chain local and globally | * # of locations/ population of areas * Two suppliers for each product | * 5 * 1 primary * 1 alternate | * Build/Buy facilities within selection criteria * Develop relationship with local suppliers, maintain current supply chain | | | | | | Learning and Growth Perspective | | | Result Sought | Measures | Targets | Initiatives | | | * Find local workforce resources * Community Involvement and positive brand imaging | * Count of team members and management trainees attained (per restaurant) * Number of fundraisers and volunteer activities | * 50 team * 8 managers * 15 per year | * Apply same training as used in US for team members and management * local community involvement, school fundraisers and organizations which provide healthcare and housing to the less fortunate | |

First Year Goals: * Locate property and building for restaurants in major cities within China and India * Develop relationship with local suppliers * Hire talented employees and managers to staff new facilities * Build brand awareness through various advertising outlets

Third Year Goals: * Gain desired .01% market share China and India full-service restaurant industry * Reach targeted fundraiser and community involvement levels

Five to Ten Year Goals * Increase revenues by 5% each year * Reduce advertising expense by eliminating unsuccessful media outlets * Reduce food and beverage cost through cooperation with suppliers

Contingency Plan

Whenever a company is implementing a new strategy, especially one that requires considerable invested capital into foreign markets, it should always have a contingency plan in case the strategy fails. Ensuring that a company has a backup plan that takes into consideration all of its critical operations as well as assessing each risk will help the company to minimize its losses and damages. Identifying and prioritizing these specific risks along with a backup plan for each can help increase the level of preparation Darden will have in case parts or all of the strategy fails.

Risks - listed in order of importance

* Future government regulations impacting business profitability * Intense rivalry with other full-service restaurants that are already well-established in these markets * Inflation and tax rates increasing in the future * The length of time it may take for Darden to establish itself due to training employees and adjusting to cultural differences * Food not being well received among Indian/Chinese culture

If any of these risks should pose a potential threat to Darden’s strategy, they have a few possible options in overcoming these challenges. If LongHorn Steakhouse restaurants are not well-received by consumers, they have the option of testing new menu options. The company can also attempt to protect and grow their restaurant’s position through different marketing strategies and food promotions prior to making the decision to close the restaurant and exit the Chinese and Indian markets. However, in instances where events occur that are out of Darden’s control such as government regulations, inflation and tax rates as well as intense competition, Darden can make the decision to either move their restaurants to a location in another city, wrap up their operations all together in India and China, or bear down until the threat passes. If they choose to cease doing business in either country, they have the option of pursuing new markets such as Germany and Turkey, which are the top two second markets with the highest GDP or continue to do business internationally in countries they have already entered through partnerships such as Brazil and Japan where there is some brand recognition.

Conclusion

The chosen strategy of international expansion into China and India with Darden’s LongHorn Steakhouse restaurants by way of company-operated locations was formulated with careful, meticulous strategic planning and evaluation. Utilization of CPM, EFE, IFE, SWOT, Porter’s, ADL, VCA, VRIO, and QSPM strategic analysis tools provided an in depth analysis of potential strategies for Darden Restaurants. The result is a strategy that leverages Darden’s sustainable competitive advantages as well as increases the company’s competitive position in the global restaurant industry. The strategy directly responds to all of the analysis tools used.

The CPM identified critical success factors that Darden could immediate act upon. The top three scores were for the following factors: foreign market threats, financial position, and efficient supply chain. Although foreign markets do not currently pose a threat, it presents the biggest missed opportunity. However, the company’s favorable financial position and efficient supply chain are factors in which the company can immediately take advantage. Domestically, LongHorn is an industry leader and it generates enough cash to fund its own expansion thus, a testament to its superior financial position. The company already has cultivated an international supply chain in its regular course of business and this advantage can be utilized in LongHorn’s global expansion. The highest scores in the EFE Matrix opportunities and threats are attributed to success of American brands abroad and increased demand for unique fusion meals, respectively. The LongHorn international expansion strategy directly responds to these top external factors because the brand stands to benefit in China and India where American brands are viewed as superior. The brand’s natural advantage of offering American, Texas-styled food fare will benefit the restaurant in this respect. The natural inclination to modify the existing menu to include offerings that suit the regions unique consumer tastes and preferences while staying true to the core offering results in a unique fusion of menu offerings.

In contrast, as it pertains to the firm’s internal factors listed in the IFE, the LongHorn strategy responds to the firm’s weakest strength and biggest weakness - focus on core brands and price pressure from competitors, respectively. As Darden’s most successful core brand, global expansion will increase corporate focus on the most profitable brand in the core brand portfolio. Increasing the number of LongHorn restaurants will also combat price pressure from competitors since LongHorn has higher than average profit margins, thereby retaining value for the company as oppose to relinquishing it to the consumer byway of price competition.

Of all of the strategies formulated with the SWOT analysis, global expansion appeared the most, followed by development of international supplier relationships. China was shown to have the highest growth rates with India hitting the “sweet spot” sometime between 2015 and 2019. LongHorn’s international expansion suits both suggested strategies, and the selected locations are further validated by the SWOT analysis. While the strategies formulated with the Porter’s Competitive Matrix did not overwhelmingly recommended international expansion with LongHorn, the strategies suggested are crucial to the implementation process of the LongHorn global expansion strategy. Most of the suggested strategies involved operational and tactical initiatives as well as product development strategies.

The ADL Matrix, which assessed all of the firm’s brands, resulted in mostly operational and tactical strategies suggested for improving operational efficiency and readiness. The only suggested strategy that resulted from the ADL analysis that was ready for immediate deployment was the global expansion of LongHorn restaurants with company-operated stores. The VCA also recommended global expansion of LongHorn and the VRIO confirmed that the firm was operationally ready to capitalize on its differentiated brands. The QSPM finally confirmed the strategy through objective evaluation of all key success factors. It is therefore conclusive through all of the utilized strategy formulating tools that the strategy will result in a sustainable competitive advantage.

Successful implementation of the strategy relies on the company’s ability to develop reliable suppliers, talented employees, facilities, and equipment. The company already has an extensive international supply chain and has received recognition for its ability to cultivate positive relationships with its employees. The company has also demonstrated superior operational performance with its domestic LongHorn restaurant operations. The high GDP and restaurant revenue growth rates in both China and India provide a high degree of confidence that LongHorn will perform successfully in both markets.

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[ 205 ]. Ibid.
[ 206 ]. Ibid.
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[ 210 ]. Mergent, Inc. (2014). Darden Restaurants. Retrieved from Mergent Online database
[ 211 ]. Darden Restaurants Inc. (2014). Form 10-K 2014. op. cit.
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[ 216 ]. Ibid.
[ 217 ]. Darden Restaurants Inc. (2014). 2013 Annual Report. op cit.
[ 218 ]. Indap, S. (2014, September 25). Keeping it real at Olive Garden. FT Alphaville. Retrieved from http://ftalphaville.ft.com/2014/09/25/1979832/keeping-it-real-at-olive-garden/
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[ 221 ]. Darden. (2014.). News release details. Retrieved from http://investor.darden.com/investors/news-releases/press-release-details/2014/Olive-Garden-Continues-Brand-Renaissance-With-National-Remodel-Program--Online-To-Go/default.aspx
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[ 234 ]. Information true for Red Lobster before the completion of the restaurant’s sale to Golden Gate Capital
[ 235 ]. Mergent, Inc. (2014). Darden Restaurants. op.cit
[ 236 ]. Mergent, Inc. (2014). Darden Restaurants. op.cit
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[ 238 ]. Darden. (2014). 2013 Annual Report op. cit
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[ 240 ]. Mergent, Inc. (2014). Darden Restaurants. op.cit
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[ 245 ]. Darden Restaurants. (2014, April 1). op. cit.
[ 246 ]. Rubin, B. F. (2014, March 21). Darden Restaurants reports 18% earnings decline. The Wall Street Journal. Retrieved from http://online.wsj.com/news/articles/SB10001424052702303802104579452903958105742
[ 247 ]. Jones, M. (2014, October 10). Darden Restaurants Inc. loses to Starboard. Retrieved http://www.valuewalk.com/2014/10/darden-restaurants-inc-loses-starboard/
[ 248 ]. Mergent, Inc. (2014). Darden Restaurants. op.cit
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[ 250 ]. Darden Restaurants Inc. (2014). 2014 annual report of Darden Restaurants Inc. Retrieved from http://investor.darden.com/files/doc_financials/Darden_2014AR.pdf
[ 251 ]. Ibid.
[ 252 ]. Nichols, C. (2014, March 27). Red Lobster owner Darden has bigger problems than activist investors. Retrieved from http://finance.yahoo.com/blogs/the-exchange/olive-garden-owner-darden-has-bigger-problems-than-activist-investors-210601605.html
[ 253 ]. Darden Restaurants. (2014, April 1). op. cit.
[ 254 ]. Ibid.
[ 255 ]. Ibid.
[ 256 ]. Walsh, T. (2014, September 29). Top Franchises: Investing in Darden Restaurants. The Motley Fool. Retrieved from http://www.fool.com/investing/general/2014/09/29/top-franchises-investing-in-darden-restaurants.aspx
[ 257 ]. Fluker, A. (2013, September 24). Darden secures Secret Recipe for Malaysia growth. Orlando Business Journal. Retrieved from http://www.bizjournals.com/orlando/blog/2013/09/darden-secures-secret-recipe-for.html
[ 258 ]. Darden Restaurants Inc. (2014). MorningStar. Retrieved from http://quicktake.morningstar.com/stocknet/bonds.aspx?symbol=dri
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[ 260 ]. CSI Market. (2014). Darden Restaurant´s long term debt to equity. Retrieved from http://csimarket.com/stocks/singleFinancialStrength.php?code=DRI&Lte
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[ 262 ]. Ibid.
[ 263 ]. Carr, D. F. (2014, April 2). Darden uses analytics to understand restaurant customers. InformationWeek. Retrieved from http://www.informationweek.com/strategic-cio/executive-insights-and-innovation/darden-uses-analytics-to-understand-restaurant-customers/d/d-id/1141551?page_number=2
[ 264 ]. Ibid.
[ 265 ]. Boulton, C. (2012, October 13). CIO Journal. Red Lobster learns how to fish. Retrieved from http://mobile.blogs.wsj.com/cio/2012/10/13/red-lobster-learns-how-to-fish-2/
[ 266 ]. Ibid.
[ 267 ]. Darden Restaurants. (2014). Form 10-K 2014. Retrieved from http://darden.q4cdn.com/a0bc209a-6bb5-44da-9d8f-3452af825e51.pdf?noexit=true
[ 268 ]. Darden Restaurants. (2014). Daisy Ng - Senior Vice President, Chief Human Resources Officer. Retrieved from http://www.darden.com/pdf/bio/bio_dng.pdf
[ 269 ]. Darden Restaurants. (2014). Form 10-K 2014. op. cit.
[ 270 ]. Ibid.
[ 271 ]. Great Rated. (2014). Great Place to Work: Darden Restaurants. Retrieved October 16, 2014, from http://us.greatrated.com/review/darden-restaurants2014
[ 272 ]. Ibid.
[ 273 ]. Great Rated. (2014). op. cit.
[ 274 ]. Koteff, E. (2013). Complying with the costly affordable care act. FSR magazine. Retrieved from http://www.fsrmagazine.com/policy/complying-costly-affordable-care-act
[ 275 ]. Fortune. (2014, October 15). Best Companies to Work For. Fortune. Retrieved from http://fortune.com/best-companies/darden-restaurants-74/
[ 276 ]. Ibid.
[ 277 ]. Jennings, L. (2013, September 25). Darden defends pay practices. Retrieved from http://nrn.com/casual-dining/darden-defends-pay-practices?page=2
[ 278 ]. Estis, R. (2013, October 24). How Darden Restaurants Surprises and Delights Employees. Retrieved from http://ryanestis.com/employee-engagement/how-darden-restaurants-surprises-and-delights-employees/
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[ 280 ]. Fry, E. (2013). Serving up the American dream. Fortune, 167(7), 34.
[ 281 ]. Great Rated. (2014). op. cit.
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[ 284 ]. Darden Restaurants. (2014). James Lawrence - Senior Vice President, Chief Supply Chain Officer. Retrieved from http://www.darden.com/pdf/bio/bio_jlawrence.pdf
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[ 293 ]. Matt Park. (2014). Darden. Retrieved from http://www.darden.com/pdf/bio/bio_mpark.pdf
[ 294 ]. Darden. (2014). Form 10-K. op. cit.
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[ 296 ]. Darden. (2014). Form 10-K. op. cit.
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[ 299 ]. Marketing Madness. (2013, February 26). Darden Restaurants. Retrieved from http://prezi.com/ru5zs81w4eoq/darden-restaurant/
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[ 303 ]. Darden. (2014). Robert S McAdam - Senior Vice President, Government and Community Affairs. Retrieved from http://www.darden.com/pdf/bio/bio_rmcadam.pdf
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[ 307 ]. Darden. (2014). Form 10-K op. cit.
[ 308 ]. Darden. (2014). Form 10-K op. cit.
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[ 315 ]. Burger King Worldwide, Inc. (2014). 2013 Annual Report. Retrieved from http://investor.bk.com/conteudo_en.asp?idioma= 1&conta=44&tipo=43575
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[ 317 ]. Ibid.
[ 318 ]. Ibid.
[ 319 ]. Ibid.
[ 320 ]. Ibid.
[ 321 ]. Ibid.
[ 322 ]. Horovitz, B. (2012, April 2). Burger King reinvents itself with new food, new Look. USA Today. Retrieved from http://usatoday30.usatoday.com/money/industries/food/story/2012-04-01/burger-king-makeover-reinvention/53935172/1
[ 323 ]. Ibid.
[ 324 ]. Burger King Worldwide. Annual Report (2014) .op cit.
[ 325 ]. Ibid.
[ 326 ]. Ibid.
[ 327 ]. Burger King Worldwide. Annual Report (2014) .op cit.
[ 328 ]. Ibid.
[ 329 ]. Ibid.
[ 330 ]. Mergent, Inc. (2014). Burger King Worldwide. Retrieved from Mergent Online database.
[ 331 ]. Ibid.
[ 332 ]. Patton, L. and D. Banerjee. (2014, August 15). Blackstone Said to be Seeking Sale of Burger King Franchisee. Bloomberg. Retrieved from http://www.bloomberg.com/news/2014-08-15/blackstone-said-to-seek-sale-of-burger-king-franchisee-heartland.html
[ 333 ]. Mergent, Inc. (2014). Burger King Worldwide. op cit.
[ 334 ]. Ibid.
[ 335 ]. McDonalds, Inc. (2013, November 7) McDonald’s USA Launches New Dollar Menu & More to Offer Customers more Choices. McDonalds Newsroom. Retrieved from http://news.mcdonalds.com/US/news-stories/McDonald-s-USA-Launches-New-Dollar-Menu-More-to-Of
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[ 343 ]. Burger King Worldwide. Annual Report (2014) .op cit.
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[ 362 ]. Mergent, Inc (2014). McDonald’s. op. cit
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[ 365 ]. McDonald’s Corp. (2014). Form 10-K 2014. op.cit.
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[ 380 ]. McDonald’s. (2014). 2012 Annual report. Retrieved from http://www.aboutMcDonald’s.com/mcd/investors/annual_reports.html
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[ 403 ]. Nielson. (2013). op.cit.
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[ 405 ]. McDonald’s, Inc. (2014). Leadership.op cit.
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[ 407 ]. Nair, S. (2013, December 27). Where does McDonald’s food come from? Exploring the supply chain. Retrieved from http://finance.yahoo.com/news/where-does-mcdonald-food-come-210007995.html
[ 408 ]. Vitasek, K. (2013). Trust and Collaboration: McDonald’s Supply Chain Strategy. Retrieved from http://gscouncil.org/trust-and-collaboration-McDonald’s-supply-chain-strategy/
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[ 410 ]. McDonald’s Corp. (2014). Form 10-K 2014. op. cit.
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[ 412 ]. Nielson, S. (2013, December 25). How important are franchise revenues to McDonald’s? Retrieved from http://marketrealist.com/2013/12/important-franchise-revenues-McDonald’s/
[ 413 ]. McDonald’s Corp. (2014). Form 10-K 2014. op. cit.
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[ 415 ]. Morningstar, Inc. (2014). McDonald’s. op.cit.
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[ 423 ]. McDonald’s Corp. (2013). Form 10-K 2013. op. cit.
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[ 425 ]. Bhasin. op.cit.
[ 426 ]. McDonald’s Corp. (2013). Form 10-K 2013. op. cit.
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[ 430 ]. Little op.cit.
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[ 435 ]. Mergent, Inc. (2014). McDonalds. op. cit.
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[ 438 ]. PayScale. (2014, October 18). op. cit.
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[ 454 ]. Yum! Brands, Inc. (2014). Yum! Brands 2013 Customer Mania Report: Annual Report. Retrieved from http://www.yum.com/annualreport/pdf/2013yumAnnReport.pdf
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[ 476 ]. Ibid.
[ 477 ]. Jones, A. (2014, October 10). Why Yum! Brands’ restaurants have grown globally. Retrieved from http://marketrealist.com/2014/10/why-yum-brands-restaurant-grown-globally/
[ 478 ]. Ibid.
[ 479 ]. Morningstar. (2014). Yum Inc.: Financials. Retrieved from http://financials.morningstar.com/ratios/r.html?t=Yum
[ 480 ]. Ibid.
[ 481 ]. Morningstar. (2014). Yum Brands. op. cit.
[ 482 ]. Ibid.
[ 483 ]. Jones, A. (2014, October 10). Why investors should understand Yum! Brands’ earnings. Retrieved from http://marketrealist.com/2014/10/why-investors-understand-yum-brands-earnings/
[ 484 ]. Yum! Brands, Inc. (2014). Yum! Brands 2013 Customer Mania Report: Annual Report. op. cit.
[ 485 ]. Carter, M. (2014, October 10). 2 Key Takeaways from Yum’ Q3 2014 Earnings. Retrieved from http://seekingalpha.com/article/2553175-2-key-takeaways-from-yum-brands-q3-2014-earnings
[ 486 ]. Yum! Brands, Inc. (2014). Yum! Brands 2013 Customer Mania Report: Annual Report. op. cit.
[ 487 ]. Morningstar. (2014). Growth, Profitability and Financial Ratios for Yum Inc. Retrieved from http://financials.morningstar.com/ratios/r.html?t=Yum
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[ 494 ]. Morningstar. (2014). Growth, Profitability and Financial Ratios for Yum Inc. op. cit.
[ 495 ]. Yum! Brands, Inc. (2014). Yum! Brands 2013 Customer Mania Report: Annual Report. op. cit.
[ 496 ]. Morningstar. (2014). Growth, Profitability and Financial Ratios for Yum Inc. op. cit.
[ 497 ]. CSI Market. (2014). op. cit.
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[ 499 ]. Morningstar. (2014). Growth, Profitability and Financial Ratios for Yum Inc. op. cit.
[ 500 ]. Yum! Brands, Inc. (2014). Yum! Brands 2013 Customer Mania Report: Annual Report. op. cit.
[ 501 ]. Yum! Brands. (2014). Yum! Brands 2014 Corporate Social Responsibility Report. Retrieved from http://www.yumcsr.com
[ 502 ]. Yum! Brands, Inc. (2014). Yum! Brands 2013 Customer Mania Report: Annual Report. op. cit.
[ 503 ]. Yum! Brands. (2014). Yum! Brands 2014 Corporate Social Responsibility Report. op. cit.
[ 504 ]. Ibid.
[ 505 ]. Ibid.
[ 506 ]. Saba. (2014). Yum! Case study. Retrieved from http://www.saba.com/media/18566/cs_yum-brands_web.pdf
[ 507 ]. Yum! Brands. (2014). Yum! Brands 2014 Corporate Social Responsibility Report. op. cit.
[ 508 ]. Yum! Brands. (2014 Apr 22). Yum! Brands named 2014 best restaurant company in Canada by Great Place to Work. [Press Release]. Retrieved from http://www.yum.com/newsroom/news-people/yum-2014-best-co-canada.asp#.VEs9U_nF-eE
[ 509 ]. Juice Inc. (2014). Yum! Restaurants: Case Study. Retrieved from http://www.juiceinc.com/files/documents/Juice_YUM_CaseStudy_2014.pdf
[ 510 ]. ACSI, LLC. (2014, June 17). ACSI Restaurant Report 2014. Retrieved from http://www.theacsi.org/news-and-resources/customer-satisfaction-reports/reports-2014/acsi-restaurant-report-2014
[ 511 ]. Yum! Brands. (2014). Yum! Brands 2014 Corporate Social responsibility Report: Local Partnership Programs. Retrieved from http://www.yumcsr.com/community/local-partnership.asp
[ 512 ]. Ibid.
[ 513 ]. Ibid.
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[ 515 ]. Yum! Brands, Inc. (2014). World Hunger Relief: About the Movement. Retrieved from http://hungertohope.com/about/
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[ 545 ]. Ibid.
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[ 580 ]. Fry, E. (2013). op cit.
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[ 585 ]. Darden Restaurants, Inc. (2014). 2014 Annual Report. op. cit.
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[ 607 ]. Sales used to determine market share are from 2013 rather than 2014 due to Darden not reporting 2014 sales for each concept in SRG individually. All other chart data are from 2014.
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[ 668 ]. Darden Restaurants, Inc. (2014). 2014 Annual Report. op. cit
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[ 675 ]. Kwintessential. (2014). Op.Cit.
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[ 677 ]. Ibid.
[ 678 ]. Nusra. (2013, June 7). op. cit.
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[ 684 ]. Ibid.
[ 685 ]. LongHorn Steakhouses. (2014). Dinner Menu Item List. Retrieved from http://www.LongHornsteakhouse.com/menu-listing/dinner
[ 686 ]. KPMG. (2014). op. cit.
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