U.S. Fast Food Industry: Economic Growth

Abstract

This report examines the literature on the aspect of energy consumption and its effects on economic growth using various indicators. Research reveals that the relationship between energy consumption and economic growth shows a positive correlation, affecting micro and macroeconomic statistics and impacting the general economic environment affecting other industries. The secondary data is applied to the fast-food industry in the United States to analyze various indicators and patterns of growth, including demand and income elasticity, labor and technology trends, and profitability aspects. The price elasticity of demand and income will be discussed for the given sector. The industry’s competitors and potential substitute products will also be specified, along with opportunities for growth. The use of innovation and technology will be discussed in the interest of understanding industry-related sustainable profitability.

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Introduction

The fast-food industry has been a staple of American culture and the country’s economy for decades since its emerging popularity began in the 20th century. This sector is based on commercially mass-produced food that is sold with an emphasis on rapid service that provides fast, filling meals to accommodate consumers such as workers, travelers, busy parents, and consumer purchase towards speed and often low price for this food. The industry has grown to approximately $200 billion in the United States and continues to expand; currently, over 186,000 fast-food franchise restaurants are in existence. Major fast-food chains such as McDonald’s, Burger King, Wendy’s, and others bring in over $20 billion in annual revenue (“Fast food industry,” n.d.). Fast food has faced some challenges in the form of:

  • Labor practices
  • Marketing
  • Extremely negative health effects on consumers, which have led to a gradual decline in popularity and the rise of competition in the form of healthier casual dining restaurants. Currently, the industry is undergoing significant reforms as major fast-food companies are restructuring and attempting to shift their offerings, focus, and priorities to accommodate changing economic and consumer trends. The study by Jun, Kang, and Arendt (2014) shows that restaurant customers tend to choose healthier menu items and spread information about the places they visit via word-of-mouth. In turn, Dewald, Bruin, and Jang (2014) emphasize that the participants of their recent study were willing to pay more for healthy food. Accordingly, both of the mentioned research articles recommend restaurants shift towards healthful foods.

Objective

This report reflects multiple objectives in analyzing literature and applying economic data. First, literature will be summarized and reviewed regarding fast food energy consumption and its impact on economic growth as demonstrated through various indicators such as GDP. The goal is to derive critical aspects of microeconomic implications in the industry, such as price, income, demand elasticity, market competition, and the impact of labor and technology innovation on productivity. The measuring of changing economics and consumer trends is another essential point to be covered in this paper. More precisely, considering that the specified topic is associated with the population’s well-being, the impact of fast food on health and the environment in the US will be assessed.

The final objective is to produce a comprehensive economic analysis and application of the components learned in the literature review for the U.S. fast-food industry. This issue has been central to the economic performance as well as the cultural development of the country as some of the largest U.S. companies are fast-food-related. The industry’s economic data, patterns of growth, and business profitability will be examined and analyzed.

Literature Review

Cost of energy consumption in the US food industry

Canning, Rehkamp, Waters, and Etemadnia (2017) explored the link between the food industry’s energy use, its impact on the national economy, and ways to change customer nutritional behaviors to mitigate high costs. The authors evaluated CO2 emissions associated with fossil fuels and used a qualitative design to collect and appropriately analyze relevant information. Discussion of the background of the identified problem, along with the role of fossil fuels in the U.S. food arena, provided a foundation for analysis. This study, funded by the U.S. Department of Agriculture, aimed to answer the question of how the implementation of a CO2 tax may impact the dietary preferences of the population.

It was found that growth in energy prices inevitably leads to increasing food prices; for example, electricity accounts for 60% of the U.S. energy budget. The important hypothesis tested by Canning et al. (2017) showed the possibility of lowering the costs of energy consumption in the field of food by means of promoting healthy nutritional patterns among people. The ultimate finding referred to the potential use of a CO2 tax that would lead to consumers’ reconsidering food choices due to their price, which is likely to decrease energy costs.

Table 1. Summary of the literature.

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Author(s), year Main focus Research method Research findings
The role of fossil fuels in the U.S. food system and the American diet
Canning, Rehkamp, Waters, and Etemadnia (2017) Identifying the impact of fossil fuels on the American diet Used a framework suggested by the United Nations Statistical Commission to conduct the study along with mathematical optimization and regression analysis methods. The U.S. food industry is sensitive to growth in energy prices, a key factor in increasing food costs. Fossil fuels used to produce food created 13.6% of economy-wide CO2 emissions. If Americans were to meet the Dietary Guidelines for Americans, energy consumption might be decreased by 3%. The introduction of a CO2 tax is likely to significantly increase food prices.
What is the real cost of our food? Implications for the environment, society, and public health nutrition
O’Kane (2012) Revealing actual costs of cheap food with regard to environmental and social aspects and assume ways to mitigate negative impacts Conducted a literature review based on recent academic articles. The contemporary industrial food system provides huge amounts of cheap and fast food, which has adverse consequences for the environmental and social spheres. The extensive use of lands leads to erosion, water waste, and pollution, reducing the capacity of natural energy resources. The author states that more sustainable food production methods should be adopted to improve local economies.

Soil erosion and the fast food industry

Driven by the processes of globalization that bring people and industries of various countries closer, the food industry is showing a tendency to produce increasing quantities of fast food. O’Kane (2012) attempted to evaluate the social and environmental impacts of such a trend in terms of economic measures. The author mentioned that many manufacturers are under pressure from the high costs of energy resources and are selecting the cheapest methods for producing foods. At the same time, a significant amount of land and water resources are used to manufacture cheap food, creating a circle that needs to be broached. For example, according to O’Kane (2012), even though special programs to reduce soil erosion were introduced in the United States, the problem remains critical. The author also noted a 14-fold increase in the sales of fast foods since the 1970s, especially for adolescents and younger adults who visit fast-food chains daily.

In order to improve the current situation, the author recommended paying attention to local food systems and strengthening their economies. This approach would contribute to the production of more sustainable, organic, and cost-effective food. More to the point, local systems also promote relationships between customers and farmers so that the former may benefit from understanding what they eat and how it was produced.

Table 2. Summary of the literature.

What is the real cost of our food? Implications for the environment, society, and public health nutrition
O’Kane (2012) Revealing actual costs of cheap food with regard to environmental and social aspects and assume ways to mitigate negative impacts Conducted a literature review based on recent academic articles. The contemporary industrial food system provides huge amounts of cheap and fast food, which has adverse consequences for the environmental and social spheres. The extensive use of lands leads to erosion, water waste, and pollution, reducing the capacity of natural energy resources. The author states that more sustainable food production methods should be adopted to improve local economies.

Growth of fast food industry in developed and developing countries

The role of global producers is significant in the fast-food industry, and the growth of the latter is especially evident in low- and middle-income countries. As reported by Stuckler McKee, Ebrahim, and Basu (2012), tobacco and alcohol consumption acts as an additional risk factor for an increase in choosing fast food to supply nutrition. However, in developed countries, including America, this trend is associated with a steady decrease or a stable situation in the future. One of the essential findings specified by the author is that the development of the economy would not inevitably cause the growth of the fast-food industry. Based on the GDPs of 76 countries, Stuckler et al. (2012) concluded that even some of the most advanced, such as Sweden or Finland, may have low levels of “unhealthy commodities” intake. In contrast, Mexico demonstrates the highest rates of child obesity following the United States. The accessibility of fast food created by transnational corporations makes cheap food easily available, and free-trade agreements make this process more convenient and profitable for companies.

Table 3. Summary of the literature.

Manufacturing epidemics: The role of global producers in increased consumption of unhealthy commodities including processed foods, alcohol, and tobacco
Stuckler, McKee, Ebrahim, and Basu (2012) Understanding the role of global producers in increased consumption of soft drinks, fast food, tobacco, and alcohol Data from the Euromonitor Passport Global Market Information database was collected and analyzed. The consumption of “unhealthy commodities” is likely to increase in developing countries and diminish or remain steady in developed ones. The production and eating of fast food are higher in countries with free-trade agreements as well as high foreign direct investment. In contrast to previous research, urbanization is now not a factor of risk.

Research Gaps

While the articles under discussion provide valuable findings, some gaps should also be noted. Canning et al. (2017) focused their research on data from the year 2007 and the technologies of that time; however, indicators might change under the impact of more advanced technology and today’s food consumption level, such as 15,690 kilojoules per year. The report by Canning et al. (2017) includes 4,067 beverage and food items, stating that half of the whole food is eaten at restaurants and purchased from take-home facilities, while approximately ten percent of Americans’ income is spent on food. According to the data of the middle 2000s, the U.S. food system accounts for 19 percent of the country’s energy budget (Canning et al., 2017). Today, there is a need to re-estimate the economic data associated with food-related energy consumption since the available data tends to be outdated, and there can be new trends.

O’Kane (2012) argued that it is imperative to generate a stronger link between the farmers and customers, yet he provided neither specific strategies nor methods that can be used to accomplish such a goal. The author claims that globalized food system supplies are associated with high costs and an environmental impact, while people are not aware of how and where their food is produced. According to O’Kane (2012), sustainable food production methods in the form of collaboration between customers and producers are likely to resolve this problem. Although it is assumed that public health nutritionists can help in providing improved access to healthier food, it is not clear how exactly they are expected to act and what strategies should be applied in terms of their advocacy.

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Stuckler et al. (2012) discussed the problem of fast food consumption and posed the need to design social, economic, and political interventions to address it. However, the authors paid little attention to the potential contribution of corporations, for example, making changes in their production.

Economic Data Application

Market Description

The U.S. fast-food industry may be characterized as monopolistic competition reflecting the type of market structure in which a large number of enterprises produce differentiated goods. The key feature of this structure is in the offerings that existing companies produce. The products offered by Burger King, McDonald’s, and Wendy’s are similar but not completely interchangeable. This market structure has received its name due to the fact that each company becomes a small monopolist, producing its own special version of a product (Allegretto et al., 2013). The industry is marked by a high degree of rivalry that provides price-based as well as tough non-price competition through product advertising or favorable sales terms. For example, KFC focuses on fried chicken, while Burger King also offers beef burgers.

Price Elasticity of Demand

Price elasticity of demand shows the percentage of the relative change in demand for a product as a result of a 1% change in its price. Demand is elastic; for example, if the price changes by 1%, the quantity demanded changes by more than 1%. Today’s fast-food industry is elastic since either an increase or decrease in prices leads to corresponding alterations in demand. Lufkin (2018) stated that the current fast food pricing war is causing the major players of the industry to reduce prices to a minimum. For example, McDonald’s introduced a new menu with $1, $2, and $3 options with the opportunity to combine them. In its turn, Wendy’s created 20 new entries to its menu costing $1 each, and Taco Bell also offered nacho fries for $1 (Lufkin, 2018).

The way these companies plan to receive profit lies in the number of products sold, and that may easily be justified since one out of four Americans visits fast food restaurants daily. The available literature provides no information regarding the exact percentage of price elasticity of demand in the U.S. fast-food sector (search data and calculate by yourself, we need to calculate the price elasticity of Macdonald 2015, 2016, 2017, and 2018) for example, the price for one meal. Income elasticity characterizes the sensitivity of consumer demand to changes in income. Since fast food refers to essential goods, the demand for these products is growing more slowly than revenue increase, and the coefficient of elasticity is 0

Competitors and Substitutes

The closest competitor of the fast-food industry comprises healthy food restaurants that are gaining in popularity due to their potential ability to address overweight and obesity in the United States. Among such companies, the Little Beet, Freshii, True Food Kitchen, Cava Grill, and others are noteworthy. Since the healthy food industry strives to offer organic and low-fat products, their prices are significantly higher than those that fast food corporations provide. As reported by Garfield (2018), the cleaner food movement includes several chains that may supplant current fast-food giants. For instance, a European company that is expanding to the United States, Leon, prepares wraps, salads, and bowls using fresh ingredients. Salad and Go is another chain that offers soups, salads, breakfasts, and smoothies. However, fast food companies have the option to use all of the mentioned products as supplements.

Growing Demand

Today, a shift from fast food toward healthy nutrition is evident, dictated by chronic disease issues, especially obesity and cardiovascular problems (Schlosser, 2012). However, customer preferences depend on age: Millennials and Baby Boomers want to continue eating fast food, while generation Z is more oriented toward organic vegetables and pasture-fed pork (Best, 2014). Therefore, rather than targeting expansion, fast food chains are seeking to retain current customers by reducing prices and diversifying their menus. The employees working for fast food chains receive relatively low wages, and many of them must access public assistance programs (“Fast food industry,” 2017). These restaurants’ labor force is trained to perform their duties perfectly and improve productivity. However, high turnover rates and staffing challenges show that training without appropriate remuneration is insufficient.

Technology productivity and Economic Profit

The U.S. fast-food industry is employing technological innovation to attract more customers and make their experience pleasurable. People have become accustomed to using self-service kiosks, and analysts say that this situation could turn into a multi-billion dollar profit for the target industry (Kim, Christodoulidou, & Choo, 2013). Nevertheless, this does not mean that all consumers prefer kiosks. Recent survey results show that 78% of respondents were less likely to visit restaurants offering only automatic self-service kiosks for orders (Kim et al., 2013). Among the factors that define customer loyalty to an electronic kiosk are their previous use of them, the perceived ability to cope with an electronic order, and intrinsic motivation.

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It is also anticipated that robots may be adopted by some fast-food chains to serve customers more effectively. The companies that are replacing workers with robots believe that customers will be ready to abandon a talkative barista or intelligent person at the cash register for the sake of greater service efficiency. Business owners opine that robots will take away from people only dirty, dangerous, or boring work, allowing workers to focus on other tasks. When robots work in the kitchen instead of people, employees will still be able to communicate with customers, offer them extra napkins, or ask them if they liked the burgers.

The fast-food sector uses the economic profit to measure its productivity. In 2015, the U.S. industry obtained approximately $200 billion, and this number is expected to exceed $233 billion by 2020 (“Fast food industry,” n.d.). Based on the review of the current performance of the given industry, one may suggest that it will be profitable in the future. The companies operating in this area are sensitive to customer preferences and changes in the national and global economy. Since they are employing innovations and diversifying foods by pursuing more healthy options, their future appears to promise success. The experiments with ordering and paying online, express order counters, and serving food by way of waiters are also proving that the fast-food industry is strongly competitive. In order to maximize their profit, fast food chains should conduct ongoing surveys of market trends and collect customer feedback, adjusting strategies, and investing in the most beneficial projects.

Other Relevant Factors

The way that quick-service restaurants are planning for an increase in revenues is another essential factor. For example, in 2013, Wendy’s announced the sale of 425 restaurants belonging to the franchise chain. Thus, the company lowered the share of its own establishments and franchisee enterprises from 22% to 5% (Maze, 2017). The proceeds in the amount of $0.5 billion were invested in rebranding the company, updating the menu, and other innovations. This rebranding provided an opportunity to increase the perceived style of the restaurants, improving royalties. In comparison, Wendy’s main competitors, McDonald’s and Burger King, did not initiate a radical change of strategy. Burger King and Subway in the United States are fully franchised, and 97% of their restaurants operate according to this scheme (Maze, 2017). Ten years ago, McDonald’s independently managed 30% of the chain’s restaurants; today, their share had been reduced to 20%, a ratio the company considers optimal for maintaining quality and controlling the turnover of funds.

Conclusion

In conclusion, this paper revealed that the U.S. fast food industry is profitable due to the provision of cheap and rapid dining options as well as the employment of innovations. The profits of fast food chains compose a significant share of the country’s revenues, promoting the growth of the national economy. Since populations are showing a tendency to shift toward healthy nutrition, the companies operating in this sector should also reconsider their menus. Based on the analysis conducted in this paper, it is possible to assume a direct connection between energy consumption and economic growth: the more fast food industry produces, the more it boosts the economy, while particular costs related to the use of energy resources also exist. It is predicted that this industry will adjust to the needs of customers and remain a driving force in the U.S. economy.

References:

Allegretto, S. A., Doussard, M., Graham-Squire, D., Jacobs, K., Thompson, D., & Thompson, J. (2013). Fast food, poverty wages: The public cost of low-wage jobs in the fast-food industry. Berkeley, CA: UC Berkeley Center for Labor Research and Education.

Best, A. L. (2014). Youth consumers and the fast-food market: The emotional landscape of micro-encounters. Food, Culture & Society, 17(2), 283-300.

Canning, P., Rehkamp, S., Waters, A., & Etemadnia, H. (2017). The role of fossil fuels in the US food system and the American diet. Web.

Dewald, B., Bruin, B. J., & Jang, Y. J. (2014). US consumer attitudes towards “green” restaurants. Anatolia, 25(2), 171-180.

Fast food industry – Statistics & facts. (n.d.). Web.

Fast food industry analysis 2018 – Cost & trends. (2017). Web.

Garfield, L. (2018). 10 up-and-coming healthy fast food chains that should scare McDonald’s. Business Insider. Web.

Jun, J., Kang, J., & Arendt, S. W. (2014). The effects of health value on healthful food selection intention at restaurants: Considering the role of attitudes toward taste and healthfulness of healthful foods. International Journal of Hospitality Management, 42, 85-91.

Kim, J., Christodoulidou, N., & Choo, Y. (2013). Factors influencing customer acceptance of kiosks at quick service restaurants. Journal of Hospitality and Tourism Technology, 4(1), 40-63.

Lufkin, B. (2018). How can a fast food chain ever make money from a $1 burger? BBC. Web.

Maze, J. (2017). Wendy’s plans to add 1,000 units by 2020. Web.

O’Kane, G. (2012). What is the real cost of our food? Implications for the environment, society and public health nutrition. Public Health Nutrition, 15(2), 268-276.

Schlosser, E. (2012). Fast food nation: The dark side of the all-American meal. New York, NY: Houghton Mifflin Harcourt.

Stuckler, D., McKee, M., Ebrahim, S., & Basu, S. (2012). Manufacturing epidemics: The role of global producers in increased consumption of unhealthy commodities including processed foods, alcohol, and tobacco. PLoS Medicine, 9(6), 1-8.

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