The purpose of this study was to perform a concentration analysis of the fast-food segment of the restaurant industry with a view toward developing an explanation for shifting growth and investment trends within the industry. The significance of this study may extend beyond the narrow realm of the fast-food segment of the restaurant industry, as the analytical model developed for use in this study may be applicable as well to other industries or industry segments.
One research question was investigated and one hypothesis was tested in relation to the research question. The research question investigated was as follows: Is profitability associated positively with concentration in the fast-food segment of the restaurant industry. The hypothesis was stated as follows: Profitability (net income as a proportion of sales) varies positively with concentration ratios (market share squared) above 50 in the fast-food segment of the restaurant industry.
The analytical model used in the research performed as a part of this study was based on the traditional regression model used in industry concentration analysis, in which the independent variable is market share and the dependent variables is profitability. In the traditional regression model, the concentration ratio, as the independent variable, is stated as a market share based on sales levels, which is expressed as a percentage. Profitability, as the dependent variable, also is expressed a percentage, and reflects EBITDA as a proportion of sales. A newer approach to measuring market concentration, however, is the Herfindahl-Hirschman Index (HHI) that is used by the United States Department of Justice in making antitrust determinations.
The results of the statistical analyses supported the hypothesis. The larger firms in the industry, as indicated by the support of the hypothesis, dominate the industry because they are more efficient. This finding is consistent reports in the l...