Restaurant industry analysis

Competitive Analysis –A case study on Restaurants

Introduction

People enjoy eating out, and the pace of development of the modern lifestyle indicates that they will continue to eat out more in the future. Higher economic levels, more mobility and more women in the workforce will all lead to a continuing growth in the industry in the next decade (Douglas, 2003).

According to the National Restaurant Association’s 2011 Restaurant Industry Forecast, consumers today spend 49 percent of their food budget in the restaurant community, compared with only 25 percent in 1955. The economic downturn has created a substantial pent-up demand for restaurant services – more than two out of five consumers say they are not dining out or using takeout as often as they would like – which positions the restaurant industry for growth in 2011 ( National Restaurant Association, 2011 ).

Today, people eat out not just because they are hungry but also for entertainment, relaxation, to socialize, to avoid cooking at home, and sometimes to conduct business. It is convenient and fits well into our faster paced 21^st century lifestyles (Roy, 2007).

Industry overview

Dining out in restaurants is a ubiquitous, significant and growing international phenomenon. Everywhere one travels people from all ethnic backgrounds, nationalities, ages, socioeconomic groups and both genders can be observed eating and drinking out in independent, locally owned and operated establishments or in strongly branded multiunit chain outlets. The international restaurant market is benefiting from a number of trends, including rising personal disposable income and a leisure environment in which many consumers eat out more frequently. Further growth though is not guaranteed with uncertainties and threats omnipresent. Among these currently are those associated with international terrorism, reductions in international travel and the global economic slowdown? However, being optimists, in the longer term restaurant dining seems set to become increasingly popular with the corporately-owned restaurant chains expanding further, and at the expense of the independents that currently hold the predominant market share (Bob, 2003).

Types of Restaurants

Restaurants are not as easy to classify into distinct types since the food and beverage industry is constantly evolving. However, there are several classifications of food and beverage facilities that stand out. For the purpose of this work, restaurants will be classified by ownership; independent, chain, franchises, and multiunit restaurants (Bob, 2003).

 Key success factors

Access to multi skilled and flexible workforce: Access to suitably skilled and trained staff on hourly rates is required to meet peak customer demand periods.

Ability to quickly adopt new technology: Adopt new employee training, kitchen and customer related technology to increase productivity and lower labor costs.

Attractive product presentation: Atmosphere and ambience of the restaurant is important to attract and retain guests.

Proximity to key markets: Be in a good location and understand customers’ needs from your restaurant.

Ability to control stock on hand: Controlling orders, stock and food wastage, which is a major cost area.

Ensuring pricing policy is appropriate: Ensure the menu item pricing/portion control process is undertaken thoroughly to maintain costs and profit margins on meals.

Fast adjustments made to changing regulations: Monitoring changes to government regulations, including in areas such as food safety and handling.

Adoption of a commercial focus: Understanding customers’ wants, needs and desires from restaurants and always meet these. Always maintain a very high level of hospitality to ensure good word of mouth recommendations and a high level of repeat custom.

Restaurants competitive analysis

This industry is currently in a low revenue growth phase and may have reached saturation point, or is very close to it, in the domestic market. The limits of population size within a city or town which can profitably support a franchised or other outlet is starting to be reached and competition for high profile operating sites in other areas is significant. Signs of this are clearly evident with many major operators continuing to rationalize their underperforming stores.

There have been market changes and some demand for healthy foods and choices, away from high fat, high salt and super-sizes meals, as the obesity epidemic continues to be raised and recognized.

Also, significant price-based competition is continuing to occur, as operators strive to capture an increasing market share in a slow growth domestic market.

Given the state of the domestic market, major franchised operators are currently receiving most of their sales growth from expansion of their overseas operations.

However, there is currently still a growing number of households with high disposable income of $50,000 or above in the key groups 35- to 55-year-olds and baby boomers (Roman, 2010).  Many have only limited time to cook and so are searching for good value and quality meals, and convenience and service in a hospitable and friendly environment.

The implications for this stage are: a reduction in the number of opportunities for establishing competitive advantage; and a shift of these opportunities from differentiation-based factors to cost-based factors. Because of increasing buyer knowledge, product standardization, and less product innovation; and diffusion of process technology, meaning cost advantages based on superior processes or more advance capital equipment methods are difficult to obtain and sustain.

Therefore, the cost advantage strategies that would be suitable at this stage are: economies of scale, low-cost inputs, and low overhead.

The competitive environment

Restaurateurs operate in a very competitive environment. They are not only in competition with each other but are also in competition with other businesses offering convenient food including hotels, motels, pubs, convenience stores, roadside kiosks, and home meals.

In a research conducted by the National Restaurant Association (1999) in the USA and the Centre for Hospitality and Tourism Research (CHTR) at Victoria University in Australia, the issue of competition was identified as just one of the challenges which the restaurant sector will be facing between 2001 and 2010. The National Restaurant Association (1999) predicted that ‘the restaurant industry will experience intense competition’ from 2001 to 2010 and, for success, restaurant operations ‘will have to provide the highest levels of service and quality food’.

In Australia casual dining is increasing with restaurants and cafes serving a lighter style of food more suited to grazing and snacking. Simultaneously an increase in the number of new entrants to the sector has occurred leading to more intense competition. Much of the competition is price based and, together with rising costs, especially fixed overhead costs, the sector will be forced to emphasize non-price competition and seek ways of controlling costs while still achieving high standards of food and service quality.

The role of technology in restaurants has also been recognized in the USA, Australia, and elsewhere, providing opportunities for greater management efficiency and control of costs. More restaurants will have websites and consumers will increasingly use the internet for obtaining information about restaurants and making bookings. It is expected that as ‘Point of Sale’ technology becomes faster and more accurate, efficiency will be improved and costs cut (Bob, 2003).

Although there are indications of price based competition within this industry, restaurants also compete on the basis of location, food quality, style and presentation, food range and variety, ambience, hospitality and service in all other regards.

Restaurants are involved in marketing the “meal experience” and, therefore, it is important that the owner-operator understands the positioning of the restaurant in the marketplace, the clientele they are attracting, or wanting to attract, and the meal experience. Most importantly, the restaurant must consistently deliver on the customers’ product expectations. Cost advantage strategies such as; economies of scale, low-cost inputs, and low overhead would be important in competing and delivering customers’ product expectations.

Consumer trends

Consumer trends in the USA include the return of the focus on the home and family, with eating out providing a chance for break from business and the stresses of daily life and for family gatherings, eating out was seen as convenient and providing new experiences and leisure activity. Furthermore, in the USA restaurant consumers are seeking value for money and also are becoming increasingly knowledgeable and discerning about food (Bob, 2003).

In addition, the menu trends are changing; seven out of 10 consumers say they are trying to eat healthier when dining out now than they did two years ago. This trend is mirrored by restaurant operators, as two-thirds say their guests order more healthful items and pay more attention to the nutritional content of food than two years ago ( National Restaurant Association’s 2011).

Eating patterns change as people pass through the family life cycle. In households of young ‘singles’ and where women undertake paid work more convenience and ready-prepared foods are used. More food is eaten ‘on the move’ or ‘at the desk’ with popularity of hand-held foods increasing. As a result of irregular work patterns and busy lifestyles, eating at traditional meal times is declining as people eat more snacks at different times in the day. Furthermore, younger households spend more per week than older households on fast food and café meals, with children increasingly influencing family spending on food.

As consumers pattern of eating changes so also will the competition in the industry change. Meaning the competition in the industry may be shifting from price based to menu based healthy menu) or better still both, as consumers are increasingly paying more attention to what they eat.

This increasing consumer knowledge of their health will increase the intensity of competition in the industry as more consumers will prefer cooking at home (the return of home and family life) to control what they eat and maintain a healthy life style. Meaning, eating out will only be seen as a form of leisure (especially couples with kids); as a consequence, a drop in industry sales and profitability.

In the other hand,  the increase of women in the work force, will mean an increase in restaurants patronage (especially single and young couples without kids), as they will prefer to rest during their free periods and also an increase in demand for healthy food as more women get educated.

This will change the industry competition as firms (restaurants) will be competing not just on price but also on healthy meals and services to sustain consumers continuous patronage. One of the ways of winning consumers continuous patronage is by including the ingredients for each meal in their menu list. In this way, consumers will have an insight of what they are eating and as a result consumers’ health safety and confidence will be assured, leading to increase in industry sales and profitability.

Supplier trends

Suppliers to the restaurant industry are also operating in a generally very competitive situation. Supplier bargaining power is often low owing to the existence of a wide range of alternative suppliers to which the restaurant operator is able to turn if dissatisfied. Since the suppliers are in such a competitive environment they will strive to keep costs, and hence prices, down (Alison, Mike,& Claire, 1999).

For instance, there are several principal ingredients in a US burger chain’s products- meat, buns (which contains wheat and sugar). Some of the industry’s suppliers are substantial firms in their own right. Golden State Foods started supplying McDonald’s in the 1950s. it is now the largest supplier of liquid food products and the third-largest beef supplier to McDonald’s. Another major supplier to the industry is Heinz, a giant multinational corporation in its own right, whose strenuous efforts to win a share of McDanold’s supplies has included frequent visits by one of its senior executives to the company’s restaurants to observe customer behavior. This is an indication that, although there are few substitutes for a burger chain’s inputs, there are many suppliers, and individual supplier power is low (Adrian & Alison, 2008).

However, environmental factors serve to moderate restaurant’s negotiating power. In 2004, wholesale prices of chickens, beef, and ‘virtually every major protein, vegetable and grain on which restaurateurs depend’ increased by up to 27 percent, “forcing restaurants to increase their own prices and loss sales. These were the result of a combination of circumstances: hurricanes in Florida, leading to the near extinction of cherry tomatoes, a long-standing drought in the West, discovery of the USA’s first case of BSE, a ban on Canadian beef imports, and high transport costs as a result of increasing oil prices.” And because of the criticality of maintaining quality, many of the restaurants put considerable effort into ensuring that they maintain good relationships with the best suppliers, for example those who can assure traceability of beef cattle (Adrian & Alison, 2008).

The trend in the supplier side of the industry shows an intense competition among suppliers giving restaurants operators’ advantage over suppliers. This intense competition among suppliers is as a result of the availability of raw materials (inputs) for food (in the absence of natural disaster).

Meaning, restaurant operators can meet up with the increasing demand of consumers on healthy and quality food by setting up quality standards on their suppliers, so that only those suppliers who meet these standards can supply. The competition among suppliers will also drive down restaurant variable cost to a measurable extend, as suppliers will be willing to give more incentives to restaurant operators to gain more suppliers.

Restaurant operators could also gain a reduction in variable costs through good inventory management and flexibility in operations, as they could be receiving supplies every day to reduce damages and spoilage, reduction in operating cost, and increase in quality of food as raw materials would be received freshly.

All these will make it easier for restaurants to compete on price and still maintain high quality and healthy food that will attract more consumer’s patronage and increase industry sales and profitability.

Substitution trends

Restaurant industry is facing threats from substitutes such as home meals, convenience stores, hotels, etc. the effect of these substitutes are a limit placed on price increases and hence profitability (David & Brian, 2001)

Supermarkets and convenience stores are recent competitors (substitute) for restaurants. These businesses offer customers food that is freshly prepared and ready to go. The primary concern of the customer who visits these establishments is convenience, so supermarkets and convenience stores offer serious competition as substitutes for restaurants that also compete on the basis of convenience and value.

Restaurants perform a task that consumers could otherwise handle themselves. Some consumers perceive dining out as something to do only on special occasions (Jacquelyn, 2009).

This implies that, the price consumers will be willing to pay per meal will not only depends on the price for the meal, but also on the price of close substitutes, the healthiness of the meal, the level of services offered, and the environment in which a restaurant is located.

Meaning, consumers can switch to substitutes in response to price increases per meal (because demand is elastic with respect to price), also lower level of service, and location could make consumers switch to close substitutes. Because these close substitutes are offering the same services, quality, convenience, and sometimes closer to consumers as well, consumers will not find it difficult to switch.

These will affect to a greater extent, the way restaurants operate and compete as well, causing a reduction in industry sales and profitability.

Restaurants must stress how eating out can save customers the time and trouble of cooking and how customers can relax while they eat and not worry about cleaning-up afterwards.

Threat of new entrants

A threat appears when entry and exit costs to an industry are low and the technology needed to start and maintain a business is commonly available. In the restaurant industry, competition is fierce because entry costs are low. For instance, a small restaurant is threatened by new competitors. Owners of small restaurants do not require millions of dollars to start the business, food costs do not decline substantially for large volumes, and food processing and preparation equipment is easily available. When the threat of new entrants is high, the desire to seek and maintain competitive advantage to dissuade new entrants is also usually high. Therefore, a small restaurant that enters the market can be a threat to existing restaurants (Ralph, George, & George, 2009).

Restaurant industry’s barriers are low, given that an operator can lease premises and equipment, furniture and fittings, which lowers the initial capital costs, outlays and borrowings.

Operators can also enter the industry via a franchise agreement, which includes fit out and equipment, as well as training and systems being in place. Given the usual high owner/operator revenue in this industry, it may also be possible to enter through purchase of an existing business or a closed restaurant operation. Meaning an increase intensity of competition and a drop in profit.  Non-price product differentiators like quality and healthy food, excellent customer service, brand name, location, etc. Will be very important strategy focus for firms competitive advantage.

Concluion

The restaurant sector is currently facing a number of significant challenges. The greatest of these is the intensity of competition. While small businesses dominate, they do not attract a proportionate amount of the restaurant sector’s total revenue. Multiunit operations, whether chains or franchises, are becoming increasingly significant. Rising costs for the sector are leading to greater emphasis on increasing efficiency and on the design of effective operational systems. Economies of scale provide significant advantages for larger operations, although smaller operations can still benefit from advances in technology by the introduction of computerized management systems and use of modern multipurpose equipment.

The growth of casual dining has led to a decline in the number of fine dining restaurants and an increase in quick-service and midscale restaurants. This has been mainly because of the increased pace of life, more women in the paid workforce and people working longer hours. The result is that, over the past two decades, the restaurant sector has changed to accommodate the grazing and snacking consumer who leaves a busy life style and is short of time. However, despite this, the consumer is becoming more discerning and, though looking for value for money, expect to receive a quality product. These trends are expected to continue with little change in the intensity of competition. If there is further slowdown in the economies of the world, the consumer’s discretionary spending is likely to decrease and this will have an adverse effect on growth of the restaurant sector.

References

Alison, J. M., Rimmington, M. and Williams, C. (1999). Entrepreneurship in the hospitality, tourism and leisure industries. UK: Butterworth-Heinemann

Brotherton, B. (2003). The international hospitality industry: structure, characteristics and issues. UK: Butterworth-Heinemann

Christine M. Piotrowski, Elizabeth A. Rogers (2007). Designing commercial interiors. USA: Wiley

David, A.andWolfe, B. (2001). New economy-new competition: the rise of the consumer? USA: Palgrave Macmillan

Douglas, R. B. (2003). The restaurant manager’s handbook: how to set up, operate, and manage a financially successful food service operation, (3^rd ed.). USA: Atlantic Publishing Company

Haberberg, A. and Rieple, A. (2008). Strategic Management: Theory and Application. UK: Oxford University Press

Jacquelyn, L. (2009). Start your own restaurant business and more: pizzeria, coffeehouse deli, bakery, catering business. USA: Entrepreneur Press

National Restaurant Association’s 2011.  http://www.restaurant.org/research/forecast/ accessed on 27/4/2011

Ralph, M. S., Reynolds, G., and George, W. R. (2009). Principles of information systems (10^th ed.). USA: Cengage Learning

 Roy S. A. (2007). The upstart guide to owning and managing a restaurant, (2^nd ed.). USA: Kaplan Publishing

Roman, Z. (2010). Kitchen too crowded: Players consolidate or close as consumers spend less in restaurant. IBISWorld Industry Report 72211