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Figure 1 Outlets Variation from 1998 to 2010
Sources: Lu (2009), Effects of Country of Origin Image and Exotic Food Image on Purchase Intention.
Nowadays, the fast-food industry in Taiwan symbolizes fashion, trend, modernity, and youth. In the U.S.A., fast-food restaurants are usually considered lower-tier eating establishments. People in the U.S.A. often eat at fast-food outlets only when they are running out of time, or when they don’t have enough money for high-class restaurants.
According to different impressions from the U.S.A., this paper uses unique local data to examine whether empirical results are also different from those in the literature. Before showing empirical results using Taiwan data, some past literature will be introduced in the next part.
III. Literature Review
There is a number of literature concerning the competition and franchise decision in the fast-food industry. Among numerous issues mentioned above, this paper classifies them into three topics. The first topic is “demographic factors.” Much literature found that there are demographic factors affecting the outlet density in a given market area. The second topic is “distance to nearest competitor,” Under which some papers focus on relationships between location strategy and competition. The final topic is “franchising.” This part introduces some papers discussing the use of franchise systems to solve principle-agent problems.
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The literature of three different topics will be introduced in sequence below.
Ⅲ.1 Demographic factors
According to Rydell, Harnack, Oakes, Story, Jeffery, & French (2008), there are lots of studies which have examined the demographic characteristics of those who eat at fast-food restaurants. People’s preferences of fast-food have great effect on firms’ decision of whether or not to set up an outlet in the specific area. This paper tries to use these demographic factors to explain the different outlet densities in each administration district.
Results from these studies indicate that those who are younger are more likely to consume fast-food. Paeratakul, Ferdinand, Champagne, Ryan, & Bray (2003) showed that fast-food consumption varied with demographic factors, which are higher among children, adolescents, and young adults. Blanck, Yaroch, Atienza, Yi, Zhang, & Masse (2009) indicated that younger adults relied more on fast-food places. Since younger people seem to consume fast-food much more, firms should prefer setting up outlets in a district the population of which has higher proportions of children and adolescents.
Besides, some studies have also shown that men are more likely to consume fast-food.
Paeratakul, Ferdinand, Champagne, Ryan, & Bray (2003) mentioned that men reported more frequent consumption of fast food than women. Also, in a survey aiming towards students in Minnesota, United States, a greater proportion of females students (27%) than males (22.8%) reported never visiting a fast-food restaurant during the past week (French, Story, Neumark-Sztainer, Fulkerson & Hannan, 2001).
Ⅲ.2 Distance to the nearest competitor
The theoretical literature mostly focuses on whether firms should minimally or maximally differentiate their products (Thomadsen, 2007). Distance to another outlet is one of the most important factors that can identify the difference of firms’ products.
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Empirically, Chan, Padmanabhan, & Seetharaman (2007) used a minimum distance method to estimate the location model with a primary data of the gasoline market in Singapore. In addition, there are lots of empirical papers discussing the distance of different outlets (Netz & Taylor, 2002; Smith, 2006; Eckert, 2013). Most of them use gasoline stations and supermarkets for empirical data sets, but there are few theses using fast-food outlets as examples.
D’Aspremont, Gabszewicz, & Thisse (1979) had shown that in order to soften price competition, identical firms tend to maximize their differentiation based on a Hotelling model. Seim (2006) indicated that there is a trade-off between getting close to large demand and differentiating from other competitors geographically.
However, some improved models performed different results about firms’ geographic competition relationship. Anderson, Palma, & Thisse (1992) proposed an exception that firms will locate together at the center of Hotelling line if their consumers have heterogeneous preferences. Irmen and Thisse (1998) used Lancasterian models of product differentiation to show that standard results on prices and locations no longer hold when firms compete in a multi-characteristics space.
Ⅲ.3 Franchising
The most common explanation for franchising is the agency theory (Brickley & Dark, 1987; Lafontaine, 1992). According to the agency theory, managers (the agents) paying a fixed salary tend to shirk and make the firm (the principal) incur monitoring costs to avoid the inefficiency of company-owned outlets. To solve the principal-agent problem, firms use franchise contracts to let franchisees share the profits and risks. Since the franchised outlets are compensated by residual claims from their outlets and put their own capital at risk, they are usually more motivated to run effective operations to maximize their profits (Shane, 1998).
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Therefore, franchisors tend to franchise outlets with characteristics that increase the monitoring costs. One of the important characteristics is physical dispersion of operations.
Norton (1988) suggested that franchising should be more common with physically dispersed operations, as in rural areas, since it costs more to monitor those outlets located far from the city. Accordingly, it is expected that the more physically dispersed an outlet is, the more likely it is to be franchised.
Another factor that may affect agency costs is franchisee’s effort. Shepard (1993) mentioned that the agent’s effort may not be subject to direct control because it is unobservable. If unobservable effort is important to a specific auxiliary service, managers of outlets providing these services have greater incentive to shirk. Therefore, it is assumed that the more specific auxiliary services (which need more unobservable effort) an outlet provides, the more likely it is to be franchised.
The literature mentioned above mostly used American data for their empirical results.
One of the purposes of my paper is trying to use Taiwan fast-food industry data to test if the theory and results are robust domestically. In the next part, the data from fast-food industry and government statistical information in Taiwan are reported.