Thesis Topic: Leadership in Competitive Strategy: A Demand Analysis of China’s Fast-food Industry

Introduction

            In the 1980s, China experienced “an explosion of pent-up entrepreneurship” facilitated by wide-ranging, although unorthodox economic reforms Regional influences such as the open-door policies and special economic zones that successfully attracted the investments from overseas Chinese to particular locations.  The government capitalized on available human capital and improved infrastructure to pursue high growth.

            One area of high growth is the fast food industry business. China, with a 1.2 billion population, is the biggest potential market in the world.  When China declared the open Door Policy in 1979, multinational companies started to enter the Chinese market.  In the 1990s, two foreign companies dominated the Chinese fast food market.  In contrast, the local fast food companies were very small in comparison to the foreign companies.  After a period of ten years, the local companies grew rapidly and are now posing a big challenge to the foreign fast-food companies as well.  However, the industry leader McDonalds (Beijing) Food Ltd. maintains its lead over the rest.

 

Nature and Significance of the Study:

The changing economic structure and sociodemographjc patterns are affecting the food expenditure patterns of the Chinese consumer. With more and more Chinese women entering the work force, the pressure on time and the opportunity has led to more demand for the prepared fore ready to eat or ready to cook food items.  Consequently, the demand for fastfood has increased but there has not been much research into the demand for prepared food and the factors affecting it. 

Objectives:

The broad objectives of this paper are:

1.)  Establish a demand model for fast-food consumption in Shanghai;

2.)  Investigate whether or not there were segments in the population that respond to brands in distinctly different ways in terms of affinity to brands.

Hypothesis:

The study aims to address the following:

1.)  To determine the demand function for fast-food consumption;

2.)  To determine whether there is a clear linear association between awareness and brand equity; and,

3.)  There are different consumer segments representing variations in how people respond to brands in the fast-food industry.

Statement of the Problem:

1.)    What are the key explanatory variables for the demand for fastfood services in China?

2.)    What segments of the population display affinity to brands in the fastfood industry?

 

 

Methodology:

 

 

1.)  Establish a multiple linear regression model to estimate the demand for fast-food service in China. A demand model with the revenues of fast-food companies as the independent variable and these as the independent variables:

Revenues of fast-food-companies = f ( population, family income, literacy rate, inflation, interest rate, female labor force participation rate, family size, employment rate, sex and the level of food expenditure for food consumed outside the home); and,

b.) carry out a cluster analysis procedure comparing brand awareness and affinity to brands of fast-food companies.

 

Study data:

     The study will make use of a 10-year database of the total revenues of the fast-food companies (international and local) and the economic indicators of China which are the independent variables of the demand function. These economic indicators are as follows: population, family income, literacy rate, inflation, interest rate, female labor force participation rate, family size, employment rate, sex and the level of food expenditure for food consumed outside the home); and,

 

     The study will also feature the brands of fast-food companies operating in China.

Review of Related Literature:

 

1.)

     Oral Capps. Jr., John R. Telford, and Joseph Havlicek Jr. (2001) examines the factors affecting the demand for convenience and non convenience foods in the United States.  They used the 1977-78 Nationwide Food Consumption Survey to study the impact of total food expenditure, household income, food prices, household size and demographic variates on demand. They used the Ideal Demand System (AIDS) introduced by Deaton and Muellbauer  to model the demand relationships.  The AIDS model for a particular household h is described by:

(1) Wih = ? I - ? j ?ij log P jh - ? ilog (Xh/Ph)

 

where, Wih is average budget share for the ith commodity for the hth household/ pih is price of the ith commodity for the hth household, and xh is total food expenditure for the hth household.  Ph represents a prcie index defined by

 (2) log Ph = ? 0 -?k? klog Pkh – ½ ? j ? k? kj log Pjh log Pkh

The first commodity corresponds to nonconvenience foods the second to basic convenience foods the third to complex convenience foods and the fourth to manufactured convenience foods.  The following restrictions are also Imposed:

(3) ?I?I = l.?I?ij = 0.?I?I = o                        (Adding up)

(4) ?I?ij = o                                        (Homogeneity)

(5)?ij = ?ji                                          (Slutsky Symmetry).

It is assumed that the parameter ? i, i = 1,2,3,4, depends on household size, region, population density,a nd race of the household head, education level, employment status, sex and age of the household manager.

Mathematically.

 

(6)  ?i = ?i? - ? liRl - ? 2iR2 - ? 3iR3 -? 4iEMPSHM - ?5iEDHM - ? 6iSXHM - ? 

                         7iUl -?8iU2-? 9iRACE -? l0iAGHM - ? HiLOGMP21

 

R!, R2, and R3 are dummy variables for region (Northeast, North Central, and West). EMPSHM, EDHM, SXHM, and AGHM are dummy variables for characteristics of the household manager (unemployed, not college educated, female. And less than 35 years of age).  U1 and U2 are dummy variables for population density (central city, non-metropolitan area). RACE is a dummy  variable for race (household head nonwhite), and LOGMP21 corresponds to the logarithm of household size in 21 meal equivalent persons. The study used data for 13,136 households for weekly time periods from 1977-78 Nationwide Food Consumption Survey (NFCS) are utilized.  The various food items in the NFCS are classified as: non-convenience (35.3%),  basic convenience (32.2%), complex convenience (27.4%), or manufactured convenience (4.6%).  The average share of the food dollar for non-convenience foods is roughly 54% while the average shares for basic convenience foods, complex convenience foods, and manufactured convenience foods are 18%, 19% and 7% respectively.  The average total expenditure on food for a single week is $47.71, with a range of $3.10 to $302.10.   The average household size in terms of twenty-one-meal equivalent persons is 2.80.

      The empirical results showed there is some degree of sensitivity of the budget shares to prices.  The budget shares are more responsive to prices than to real total expenditure.  Households located in the Northeast, North Central, and West allocate larger shares of the food dollar to complex convenience foods than households in the South  Also, households located in the Northeast and NorthCentral allot significantly smaller shares to non-convenience foods than households located in the South.  Households in central cities and non metropolitan areas allocate smaller shares of the food dollar to complex and manufactured convenience fods than households in suburban areas.  Black or nonwhite households, as well as households with the household manager at least thirty-five years of age, allot smaller shares of the food dollar to all convenience food classes but larger shares to non-convenience foods.  Households with female household managers allocate larger shares to non-convenience foods and smaller shares to complex and manufactured convenience foods than households with male household managers.   The shares of the food dollar to manufactured convenience foods are not significantly affected by household size in twenty-one-meal equivalent persons.   The demand for convenience and non-convenience foods are white households with employed household managers less than thirty-five years of age.

     The authors looked at the demand for the convenience and non convenience foods.  They classified convenience foods into three categories: (a) basic (b) manufactured, and (c) complex.  The model used had been in the previous studies in this area.  The hypotheses tested were explicitly formulated and stated. The NFCS 1977-78 data was used which is reliable and has been used for most of the study in this are.  Seperability was imposed by linking total food expenditure to income. The results obtains have significant policy implication for the food industry in planning their marketing strategies.

2.)

         Vicki  A. McCracken and John A. Brandt (2001) estimated consumption of prepared food in their study, “Household Consumption of food away from home:  Total Expenditure and by type of food facility”.    They identified and measured the influence of factors affecting away-from–home food consumption behavior by type of facility (restaurant, fast food, or other commercial).  The demand for market goods under certain assumptions is derived as a function of the price of the good and other goods, household income, a measure of the household’s opportunity cost or value of time (Lancaster 1966, 1971; Michael):

(1) Cij  =  Ci (Pj; Yj; Wj; Wj). i = l ……….”

Where Cij is the jth household’s consumption of the ith market good.  Pj is the vector of market prices faced by the jth household.  Yj is the jth household’s measure of income, Wj is the jth household’s value of time, and Ej is a vector of variables reflecting the environment in which production for the jth household occurs.

The equation (1) is modified to disaggregate the dependent variable from total expenditures on FAFH to expenditures at various types of food facility.  The hypotheses tested include:

(a) increased values of household time will significantly increase expenditures at fast food facilities more than at time-intensive, sit-down restaurants.

(b) households with higher incomes spend proportionately more ate sit-down restaurants than at fast – food facilities.

© household size and composition affect away from-home food expenditures differently by type of food facility.

  3.)

     John L. Park and Oral Capps, Jr., in their study Demand for Prepared meals by U.S. Households tackled the factors affecting the expenditure pattern of prepared food items using the 1987-88 Nationwide food Consumption Survey (NFCS).  Each of the 3,832 NFCS food categories were classified as to their degree of preparedness.  This classification resulted in 105 NFCS foods codes classified as “ prepared item:  Meal” Expenditures and quantities for these 105 items were aggregated for each household in the NFCS.  The items in the prepared meal groupd were further defines as either Ready-to-eat (RTE) meals or Ready-to-cook (RTC) meals.   In the sample only 12% of the households consumed RTE meals, only 16% consumed RTC meals and only 27% of households consumed any form of prepared meals.

 

 

 

4.)

     William M. Callaghan and Bradley Wilson (2001) in their study, “The Role of Category in brand Equity Studies: A Brand Attitudinal Segmentation Perspective”

Tackled consumer attitudes to brands. They surveyed over 2000 consumers and their attitudes to some 80 brands in 18 product categories. They set up a brand equity construct measure based on the extent to which a chosen brand reflects the values of consumers and this is used to examine the relationship between awareness and equity within and between product categories.

     The equity measure used in this study was based on a 4 point scale measuring the extent to which the brand was liked and they perceived it to reflect the respondents values “you stand for”. Fore ease of interpretation, this was converted to a 10 point scale where a score of 10 corresponded to “very well” and at the other extreme a score of 1 indicated “not at all well”. 

    They identified seven segments of consumers: the intellectuals, the unsophisticated, brand enthusiasts, brand haters, basics, the general positives and the non-identifiers.  The different characteristics of these consumer segments may have implications for marketers targeting broad segments of the market who have different stances on the merit of branding.

 

 

 

 

Conclusions: China’s demand for fast-food products is determined to a large extent by its population growth, literacy rate, family income, costs of doing business (i.e., inflation and interest rate), female labor force participation rate , family income, family size, gender, employment rate and the level of food expenditure consumed outside the home. 

    The cluster analysis findings point out that there is considerable diversity of attitudes to fast-food brands in the market place with a large proportion of the population fairly positive about brands.

 

REFERENCES :

 

Capps, O..Jr.. and  Park, L., J. (1997)  Demand for Prepared Meal by US Households.  American.Journal of Agricultural Economics. Vol. 79 (August 1997): 814-824.

 

Callaghan, William M. and Bradley J. Wilson. (2001). The Role of the Category in Brand Equity Studies: A Brand Attitudinal Segmentation Perspective. University of Melbourne: Melbourne.

 

Capps, O…Jr.  J.R.  Tedford and J.  Havelick, Jr. (1985). Household Demand for Convenience & Non Convenience Foods.  American Journal of Agricultural Economics. Vol. 67 (November 1985): 863-869.

 

Mc Cracken. V.A., and  J.A. Brandt. (1987).  Household Consumption of Food Away from Home;  Total Expenditure and By Type of Food Facility. American Journal of  Agricultural Economics.  Vol. 69 (May 1987): 274-284.