Marketing Report SUBWAY

MGG3401 – Strategic Management

Elizabeth Camilia Lee Shixin 23773057

Subway is an American fast food restaurant chain that mainly sells long sandwiches and salads. It is the biggest single-brand food chain and one of the fastest growing franchises in the world with 42,070 restaurants in 107 countries and territories as of June 28, 2014 (Subway, 2014). There are many Subway branches existing throughout Australia. Subway’s mission, vision and values concentrate on freshness and consumer happiness, in order to generate an excellent Subway experience and spread the word among friends and family. They also have a bigger vision for its many overseas restaurant operations, to be the number one quick service restaurant franchise globally, while providing delicious, fresh sandwiches and a unique experience (Subway, 2014). To conduct the food industry analysis, Michael Porter's five forces model will be used to help managers in their mission to analyze competitive forces to the chosen company, Subway. The model’s theory illustrates the competitiveness of the industry being derived by five distinctive forces. The analysis will help to determine the organization’s current or potential risk existing in its market. The five forces are 1) Threat of New Entrants, 2) Threat of Substitute Products or Services, 3) Bargaining Power of Buyers, 4) Bargaining Power of Suppliers, 5) Competitive Rivalry Among Existing Firms. The following discusses and apply the five forces analysis of Subway Company in relation to its market attractiveness. The first force, threat of new entrants, is extremely high in the fast food segment. This is because there are very few barriers to entry, and setup cost in a fast food eatery is low. In certain cases, typical SUBWAY® outlets could open for as little as $204,050 (Subway Financial Information, 2014). In addition, the experience dining in the fast food restaurant will define Subway from its competitors, apart from the food (Bloom, Hummel, Aiello & Li, 2012). Subway restaurants in Australia pride themselves on their clean environment, fresh healthy food, quick service and vast varieties of custom sandwich options. This made dining experiences at Subway very refreshing and safe (Ottenbacher & Harrington, 2009). Unlike its competitors like Hungry Jacks, McDonalds and KFC, Subway differentiated itself as a fresh diet dining experience in an upbeat environment, enabling it to succeed in the fast food industry easily among 1

MGG3401 – Strategic Management

Elizabeth Camilia Lee Shixin 23773057

the health conscious people (Bloom, et al, 2012). Subway has held a remarkable market share for a long time, but consumers love to try out new cuisines and are highly likely to try other fast food brands (Min & Min, 2013). The second force, bargaining power of Subway’s suppliers, is weak, but they have a huge impact on its market (Ottenbacher & Harrington, 2009). The main ingredients for Subway’s sandwiches include meat, vegetables, fruits, seasoning and sauces. There are many suppliers for these food products throughout Australia that caters to other fast food brands such as McDonalds, Hungry Jacks and KFC as well (Leschewski & Weatherspoon, 2014). However, these suppliers have little concentration or differentiation. Thus, Subway could select from many similar suppliers that suit their objectives best, and this would determine their product’s selling price (Leschewski & Weatherspoon, 2014). Because the suppliers are vulnerable to decision making in terms of price, Subway took the advantage to narrow down their most efficient suppliers. Also, being equipped with a growing reputation and consumer numbers, they were able to well control their suppliers’ power and build strong relationship with them to provide cheap and quality fresh food in a timely manner (Weyant, 2011). Therefore, suppliers’ force in the fast food industry is usually weak. The third force, bargaining power of customers, is strong because uniformed service and products in Subway will enable many options for customers to choose from, thus giving more power to buyers. Consumers of the fast food industry demand high quality food, unique dining experience and inexpensive price (Kisang, Heesup & Soocheong, 2010). If Subway failed to identify customers’ needs and cultural preferences, retaining consumers will be very challenging. At this point, to meet market demands, Subway had come up with value packs, such as selected 6-inch sandwich and a drink for $5. By providing lower prices, value adding options and taking care of customers’ needs with the introduction of the value pack, Subway was able to attract many more customer bases (Sun & Nijite, 2012). Although Subway may raise prices for other products, they must be careful not to significantly exceed beyond their competitors or disregard customers’ expectations (Weyant, 2011). To prevent customers from leaving for cheaper and better fast food 2

MGG3401 – Strategic Management

Elizabeth Camilia Lee Shixin 23773057

alternatives, Subway must maintain a lower price than its competitors, yet retaining its refreshing dining experience and high food quality (Bloom, et al, 2012). These days, consumers are more inclined to cheaper products instead of being loyal to brand, therefore Subway have to work harder to achieve higher market share, while at the same time manage the effect of strong buyers’ bargaining power. The fourth force is threat of substitute, which means products outside the fast food industry. In Australia, there is a high pressure of this force because as convenience shops, casual restaurants, ready-made cooked food, and healthy food stalls are plentiful in the market (Hokey & Hyesung, 2011). They serve as substitutes to the Subway customers. There are also an abundance of existing fast food brands such as McDonalds, KFC and Hungry Jacks, thus the fast food industry is faced with a stiff competition and high competitive rivalry (Kisang, Heesup & Soocheong, 2010). According to the Porter model, the threat of substitutes commonly influences a market with the fluctuations of prices between organizations. However, the decision to eat at fast food restaurants are not so much decided by the price factor, but more on the dining experience and food’s taste (Hokey & Hyesung, 2011). The average prices of a meal in a fast food restaurant ranges from $7 to $11, thus, Subway will not lose customers as long as they keep to this price range (Min & Min, 2013). The real substitute threat comes in when consumers decided to eat at home, or go to another fast food or casual restaurant. Because of these huge amounts of options to dine at, this force is very high. Unlike fast food restaurants, casual restaurants offer slightly higher prices, which may cause consumers to have second thoughts about dining there and turn to eating at home or at fast food restaurants instead, in times of economic crisis (Min & Min, 2013). However, casual restaurants are still the more preferred dining choice, as they offer better and healthier quality in terms of food preparation, giving them the advantage over fast food restaurants. Dining experience was also more casual for family and friends of all ages to hang out and talk over dinner. Organizations can reduced the threat of substitutes by adjusting their menus according to what the market wants. For example, Subway’s competitor McDonalds offers spicy vegetarian burger in India as most Indians are vegetarians and they love spicy food. McDonalds were also sensitive about their Hindu and Muslim religions, and do not to serve pork and beef products in their menu. The only meat products offered are 3

MGG3401 – Strategic Management

Elizabeth Camilia Lee Shixin 23773057

chicken and fish. By acting on what the market desires, McDonalds was able to maintain a competitive advantage over rivalling fast food chains and maintain their customers’ loyalty instead of losing them to substitute restaurants such as Subway (Øgaard, Larsen & Marnburg, 2005). The final force is competition among rival firms. In the fast food industry, this force is very high. Organizations can gain competitive advantage in the following ways: building trust and relationships with suppliers, increase product differentiation, altering prices and improve distribution channel performance. Rivalry in the fast food industry increases with a big amount of firms vying for the same pool of customer base and market share. They include the fast food restaurant chains that tried to look like a casual restaurant, and fast food brands that have not been franchised. The demand for food is expanding with population growth that needs food, hence the market could grow with numbers of surrounding residents in each state of Australia, and decline with deaths of previous consumers or residents who moved away. Normally, these factors will offset each other. Fast food restaurants have relatively few high fixed costs, and many variable costs. They generally pay the same fixed rent monthly. Variables include wages, utilities and food ingredients. The less volume of food the firms waste, the more inventory they could save and the more successful they would be compared to firms that have more wastage. However, food is perishable and firms would need to sell them off quickly lest they become spoiled goods. As a result, saving up inventory would counter the objective of preventing wastage. Firms then have to know the exact amount to order, so they would not have to face throwing food away or sell them off at very cheap prices to get back their losses. Additionally, if too little food is ordered from suppliers, firms may run the risk of losing profit when they could not provide customers with the orders they desire. Low switching cost is also a major factor when it comes to deciding which restaurant to dine in. When a customer decides to have lunch at a Japanese, Italian or Indian restaurant, he would consider the costs and value of paying for better food at casual restaurants or stick to low costing food fast (Sun & Nijite, 2012). 4

MGG3401 – Strategic Management

Elizabeth Camilia Lee Shixin 23773057

The two important changes that may impact the fast food industry are the demand conditions and technological advancements. The first change includes Australia’s technological developmen. In times of local production shortcoming due to poor machineries used or limited resources, Subway would be forced to develop new methods to improve and result in national comparative advantage. For example, the cooked food displayed at Subway will get stale in 30 minutes if they are not served. If there were a technological support in Australia that may prevent this issue from happening, the fast food industry would be able to save a lot of food wastage (Iqbal, Whitman & Malzahn, 2012). The fries cooked at McDonalds and Hungry Jacks left unattended in the kitchen will be able to sustain longer than 30 minutes before they are sold. The second change is demand conditions. When the fast food product is works better in local markets than overseas, the local firms would commit more attention to expand locally than overseas. This would result in a competitive advantage when the fast food brand exports in future. For example, KFC has proven to be more successful than McDonalds in China because Chinese people have greater preference for fried chicken than hamburgers. Hence, McDonalds invest slowly in China and focus their concentration more on other parts of the world that have wider consumer base (Qiaowei & Ping, 2014). The success of the fast food industry displays tremendous competitive power and attractiveness of its market, leading to worldwide demand for fast food everyday by people of all ages. It has amplified the fast food identity via the use of marketing channels such as cultural aspects, geographical, and unique dining experiences (Annaraud, Raab, & Schrock, 2008). In a rapidly changing business environment with large competitors, Subway have to appoint new expansion technics and modify the existing structures in order to maintain its primary market place in an already established food sector (Øgaard, Larsen & Marnburg, 2005). Subway has continuously adapted to the fast changing conditions with its changing menus and quick service (Ottenbacher & Harrington, 5

MGG3401 – Strategic Management

Elizabeth Camilia Lee Shixin 23773057

2009). In huge organizations like Subway, strategies should be thoroughly analyzed and applied throughout different levels within the firm. It is important these different levels of strategies are related and mutually sustaining one another. Subway’s strategy at corporate level defines the business, in which they will compete for their market share and competitive advantage.

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MGG3401 – Strategic Management

Elizabeth Camilia Lee Shixin 23773057

Reference list: Annaraud, K., Raab, C., & Schrock, J. R. (2008). The Application of ActivityBased Costing in a Quick Service Restaurant. (cover story). Journal Of Foodservice Business Research, 11(1), 23-44. Bloom, B. A., Hummel, E. E., Aiello, T. H., & Li, X. (2012). The Impact of Meal Duration on a Corporate Casual Full-Service Restaurant Chain. Journal Of Foodservice Business Research, 15(1), 19-38. Hokey, M., & Hyesung, M. (2011). Benchmarking the service quality of fastfood restaurant franchises in the USA: A longitudinal study. Benchmarking: An International Journal, 18(2), 282-300. Iqbal, Q., Whitman, L. E., & Malzahn, D. (2012). Reducing Customer Wait Time at a Fast Food Restaurant on Campus. Journal Of Foodservice Business Research, 15(4), 319-334. Kisang, R., Heesup, H., & Soocheong, J. (2010). Relationships among hedonic and utilitarian values, satisfaction and behavioral intentions in the fast-casual restaurant industry. International Journal Of Contemporary Hospitality Management, 22(3), 416-432. Leschewski, A. M., & Weatherspoon, D. D. (2014). Fast Food Restaurant Pricing Strategies in Michigan Food Deserts. International Food & Agribusiness Management Review, 17147-170. Min, H., & Min, H. (2013). Cross-cultural competitive benchmarking of fastfood restaurant services. Benchmarking: An International Journal, 20(2), 212-232. Ottenbacher, M. C., & Harrington, R. J. (2009). The product innovation process of quick-service restaurant chains. International Journal Of Contemporary Hospitality Management, 21(5), 523-541. Øgaard, T., Larsen, S., & Marnburg, E. (2005). Organizational culture and performance– evidence from the fast food restaurant industry. Food Service Technology, 5(1), 23-34.

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MGG3401 – Strategic Management

Elizabeth Camilia Lee Shixin 23773057

Qiaowei, S., & Ping, X. (2014). McDonald's and KFC in China: Competitors or Companions?. Marketing Science, 33(2), 287-307. Subway (2014). Retrieved from www.subway.com.au Subway Financial Information (2014). Retrieved from www.subway.com.au/About/Franchisee/Financials Sun, L. B., & Nijite, D. (2012). Wealth Effects on Consumer Spending: Investigation of Casual Dining and Quick Service Restaurant. Journal Of Foodservice Business Research, 15(3), 215-225. Weyant, L. E. (2011). THE ROLE OF WORKPLACE LEARNING WITHIN THE FULL-SERVICE CASUAL RESTAURANT INDUSTRY. Journal Of Business, Society & Government, 3(1), 31-47.

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