Restaurants
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Industry Overview
The US restaurant industry includes about 480,000 restaurants with combined annual revenue of about $400 billion. Major companies include McDonald's; YUM! Brands (KFC, Pizza Hut, Taco Bell); and Darden Restaurants (Olive Garden, Red Lobster). The industry is highly fragmented: the 50 largest companies hold just 20 percent of the market.
The industry consists of fullservice restaurants (FSR) and limited service eating places, which include quick-service restaurants (QSR); cafeterias; buffets; snack bars; and nonalcoholic beverage bars.
Competitive Landscape
Demographics, consumer tastes, and personal income drive demand. The profitability of individual companies can vary: while QSRs rely on efficient operations and high volume sales, FSRs rely on high-margin items and effective marketing. Large companies have advantages in purchasing, finance, and marketing. Small companies can offer superior food or service. The industry is labor-intensive: annual revenue per worker is less than $50,000.
Restaurants compete with companies that serve meals or prepared foods, including grocery stores, warehouse clubs, delis, and convenience stores. In addition, restaurants compete with home cooking.
Products, Operations & Technology
Products include appetizers, entrées/main dishes, desserts, and beverages. Companies may specialize in a certain type of cuisine (such as Italian, Chinese, or barbecue); entrée (sandwiches, steak, seafood); or other food item (pretzels, smoothies). Among FSRs, most establishments focus on Italian cuisine, steak, or seafood. Hamburger joints make up a majority of QSR locations, along with pizza parlors and sub sandwich shops. Industry revenue is roughly evenly split between FSRs and limited service.
At QSRs, customers generally order and pay before eating. While most QSRs are fast-food restaurants, QSRs also include fast-casual restaurants, which offer higher quality, more expensive food without table service. In FSRs, waiters take orders, serve beverages and meals, present the check, and process payment. FSRs include casual dining (full bar); family dining (limited bar); and fine dining establishments.
The industry includes national and regional chains, franchises, and independent operators. The majority of companies are independently owned and operated, although many QSRs are franchises of large national chains. Franchises allow individual owners to leverage a well-known brand name and benefit from the purchasing efficiencies and operational expertise of the franchiser. Franchise agreements generally cover a specific geographical market and outline restaurant operating requirements, such as hours of operation, menu offerings, and pricing. Annual sales average $860,000 for FSRs and $740,000 for QSRs, according to the National Restaurant Association.
The food preparation area of a restaurant is known as the "back of house," while the dining area is known as the "front of house." Food prep areas include the kitchen, cold storage, and dishwashing areas. Dining space may include bars, outdoor seating, or banquet rooms. Upscale restaurants often feature unique decor to create a distinctive ambiance. An FSR's square footage and the number of seats and tables dictate how many patrons it can serve and directly affect sales. Because the restaurant industry is highly competitive, site selection is critical: companies may consider population density, household income, competition, visibility, accessibility, and traffic.
Food preparation varies depending on restaurant type. QSRs typically offer a limited number of simple items, which allows companies to train unskilled workers to prepare food. Most chains have strict operating procedures for food preparation to ensure consistent quality and food safety. FSRs offering expensive fare or a wide variety of menu options have more complex operations and require larger staff. An executive chef, assisted by a sous chef, oversees kitchen operations and may be involved in the business end of restaurant management. Line cooks are responsible for various kitchen stations, such as the grill, sauté, or fryer. Prep cooks prepare ingredients for cooking. Pastry chefs create desserts.
Companies typically buy supplies from food distributors. Some restaurants buy directly from local farms or farmers markets. Large chains may contract with suppliers to minimize volatile commodity costs. Companies carefully manage inventory of perishable food products, such as fresh seafood and dairy goods, to reduce losses due to spoilage.
When developing menus, restaurants consider ingredient availability, cooking equipment, labor requirements, physical space, and cost. The mix of menu options must balance popularity and profitability. Some companies change menu selections seasonally, with some high-end restaurants creating new menus daily. While menu options can vary widely, frequently consumed restaurant foods include hamburgers, french fries, pizza, salads, sandwiches, chicken, and seafood. Alcoholic beverages are important contributors to total sales, particularly for FSRs and especially for high-end restaurants. Companies may offer an alternative menu for children or those with special dietary needs.
Restaurants rely on imports to get out-of-season fruits and vegetables, exotic foods, and seafood. Mexico is an important source of produce. Canada, Chile, and many Asian countries, including China, Thailand, Indonesia, and Vietnam, are major suppliers of seafood.
Computerized information systems can improve and link food preparation and serving operations. Touchscreen ordering programs ensure accurate communication of customer orders. Timing systems monitor meal progress and can alert staff if an order is running behind schedule. Reservations programs maximize traffic flow and seating. Inventory management systems track supply levels and can help reduce waste due to spoilage. Cost accounting programs help companies determine the profitability of individual menu items. Handheld point-of-sale (POS) devices allow servers to place orders and print checks tableside, improving accuracy and reducing ordering time. Some handhelds can also print customer checks and process credit card payments.
