Fast food chains like to be close to the competition

March 01, 2004

Rather like buses - first there are no fast food outlets to be seen, then two or three come along almost together, according to new research sponsored by the ESRC.

Commonly, the presence of a McDonalds increases the probability that a Burger King will arrive, says a study led by Professor Michael Waterson of the University of Warwick.

At a time when there is increasing interest in the fast food industry, his research gives fascinating insight into how, where and why these restaurants and take-away outlets appear in the streets of Britain.

Professor Waterson said: "One surprise is how unconcerned these big organisations appear to be about the impact of competition on their outlets.

It is remarkable how closely they locate to each other in shopping districts."

He found that McDonalds and Burger King both use the rival presence to revise their expectations of market size upwards.

The study revealed a strong London and south-east of England bias to the spread of the fast food chains and restaurants studied. For example, McDonalds had been in the UK for 13 years before it opened a site in Scotland. Overall, the spread is surprisingly slow.

And there is very little difference between franchised and company-managed outlets when it comes to choosing locations.

Among other things, the study analysed the pattern of development of the McDonalds chain from when it started in the UK in 1974 until 1990. The aim was to assess the probability of one of its outlets opening in any particular local authority district where it was not already based.

The study found that the larger the population in an area, the sooner a McDonalds would be opened, though with this effect tailing off as population increases.

Less expected was that the number of outlets the company had in neighbouring districts had a strong, positive impact on how soon a new one might open, indicating economies of scale and the effects of local experience and knowledge.

Probably the most significant analysis was into the interaction between McDonalds and Burger King in how they developed their outlets.

This aspect of the study examines the period between 1991 - a year after Burger King came into being in its present form - and 1995.

As expected, the characteristics of the district had an impact on decisions, so that for both chains, aggregate business rateable value - a measure of economic activity - made opening up more likely. For McDonald's, a high proportion of pensioners in an area reduced those chances.

The study says that in all areas where McDonalds has more outlets, there are positive and significant marginal effects for Burger King. So the company is consistently more likely to develop outlets where McDonalds is larger than itself than where there is no presence of either firm. At the same time, McDonalds are more likely to grow in areas where they or Burger King are already present.

Locally, Burger King consistently locates closer to the first McDonalds outlet to be opened than would be expected if McDonalds were attempting to pre-empt them. The longer the McDonalds has been there, the smaller the likely distance.

Professor Waterson said: "Notwithstanding the importance of competition in markets with a small number of key players, watching and learning from rivals seems to be of overriding importance when it comes to deciding on a new location."

Economic & Social Research Council

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