The
Restaurant Business
Entry Barriers
The
Restaurant Business
Entry Barriers
The
restaurant business is vast and varied from the sidewalk vendor or canteen
truck to
The conceptual barrier for most entrepreneurs is the hardest
hurdle to overcome especially if they are going to develop their own
distinctive theme. To better understand
the conceptual barrier one must just look at the restaurant business and see
the signature foods. Signature foods in
the restaurant business are a competitive advantage between businesses
operating at the same level. Examples of
signature foods include McDonalds Big Mac, Burger Kings Whopper,
Taco Bells Chalupa, Hooters Hot wings, TGIFriday’s Jack
Daniels Grille, and Chili’s Baby Back Ribs. Along with the signature foods are signature
themes including Steak-n-Shakes 1950’s diner, McDonalds Ronald McDonald and
Friends, and Chi Chi’s Mexican cantina.
The conceptual barrier is a non-issue if the decision is to enter into a
franchise agreement. The conceptual
barrier is a determinate of the type restaurant and level of service one is to
offer.
If you are going to compete with McDonalds, Burger King, etc.
then your general concept will follow along the same lines; limited service,
quick guest turnover, and low end pricing, average guest expenditure under
seven dollars; with a signature food.
There are common concepts throughout the fast food industry based
on the primary food sold, burgers/sandwiches (Burger King and Chic-Fil-A),
fried chicken (Popeye’s and Kentucky Fried Chicken), Deli (Subway and
Schlotzsky’s), Ethnic (Taco Bell and Sabarro), Bakery (Panera and Atlanta Bread
Company), etc.; individual businesses within each niche have a recognizable
theme. No one would confuse a McDonalds
for a Burger King. Even as you move up
the level of service ladder, going from limited service to full service, common
themes still exist, the conceptual barrier resides more in the menu and
developing recipes for the restaurant.
Common themes at the full service run the gambit from Bar and Grille
(TGIFriday’s and Applebee’s) to Ethnic (Chi Chi’s and Olive Garden) to Fine
Dining (“Five” star restaurants) to Family Style (Village Inn and
Denny’s). Competing at any service level
requires a theme or concept distinctive, not always in the general theme, but
different enough overall to attract new customers and create repeat customers.
The theme includes the menu items, the interior appearance, the exterior
appearance, the uniforms, the signage, etc.
According to Berlind, restaurants are the great melting pot by spawning
the popularization of ethnic foods; Pizza Hut founder Frank Carney would only
open a store where pizza was pronounced as “piz-a” (p.12).
Financing is the next hurdle the potential restaurant
entrepreneur has to consider. The
straight out cost of opening a restaurant can range from around ten thousand
dollars to several million dollars.
Financing and available funds often are the main determinant in the type
of restaurant the potential restaurant entrepreneur is planning to open. At this stage, the decision is still between
franchising or developing something new.
In going the franchising route the cost are predetermined by the
franchisor and can range from $100,000 (Larry’s Giant Subs and Blimpie) to over
$1.5 million (Applebee’s and Panera’s).
Restaurants can be a capital-intensive business depending on the size,
location, amount of specialized equipment (broilers, deep fryers, bread ovens,
confection ovens, etc.), refrigeration and frozen storage, computerized
equipment (POS terminals, cash registers, etc.), and fixtures (tables, chairs,
etc.), etc. It is understood the
restaurant business is labor –intensive, someone to cook and someone to serve
even if they are the same individual.
Other expenditures include new accounts with non-food, food and beverage
suppliers, prepaying accounts usually is not necessary for franchised
operations, and employer paid payroll expenses.
The last group of barriers is the legal environment in which
the business operates. The legal
environment at the local/county/state level includes liquor licensing, land
use/zoning laws, fire codes, sanitation and disposal requirements, food service
sanitation certification, smoke free establishments (currently only in
California), “Happy” hour liquor sale laws, etc. The legal environment at the federal level
includes Equal Employment Opportunity Commission laws, American Disabilities
Act compliance, Fair Labor practices, I-9 employment verification, and
taxes.
Given the conceptual, financial, and legal barriers to entering
the restaurant business it seems as on the surface franchising is the easier
route but there are drawbacks. Some
drawbacks to franchising include exclusive regional/state/city contracts to
limit intracompany (franchisor) competition, preselected or exclusive
distributors, predetermined regional/national menu’s, pricing limitations, and
maintenance of corporate standards. The
drawbacks make it sound as if the parent company, a.k.a. franchisor, is big
brother looking into everyone’s business.
According to Silver (2002), the relationship between the franchisor and
franchisee is at times hostile due to unprofitable discount campaigns and
strong-arm tactics by corporate management (p. 48) but it does not have to be
that way. Several franchisor operations
use a committee comprised of franchisees in idea generation and problem
recognition/solution teams. There are
benefits to franchising as opposed to striking out new. Benefits include regional/national
advertising, name recognition, preconceived themes/menus, proven recipes, and
proven operational techniques.
In conclusion, barriers of entry into the restaurant business
are conceptual, financial, and legal.
General themes or restaurant concepts unlike patented products are
duplicated rather easily and often, and are dependant upon the level of service
offered and type of restaurant.
Financial barriers are dependant upon the level of service offered and
type of restaurant. The legal barriers
are not unique to the restaurant business but are still dependant upon the
level of service offered and type of restaurant. The impact of the entry
barriers is dependant upon the size, level of service, type (menu), and
location of the restaurant.
References:
Anonymous. (
Berlind, J. (January 15, 2002). Yesterday and tomorrow. Restaurants and Institutions v. 112 no
2. p. 12, 14. Retrieved
Berta, D. (
Doss, L. (
lagrassa, k. (March 2001). entrpreneur of the year. franchising world v.33 no2. p. 8-9. Retrieved
LaHue, P. (october 2000). atlanta bread co. on the rise. restaurant hospitality v. 81 no10. p. 132.
Retrieved
Myres, K. (February/March 2002). franchising 101: the most important decision
you can make. franchising world v. 34
no2. p. 38, 40. Retrieved
Mcgraw, K., Cobe, p., Bryant, k.,
Amer, s., & romeo, p. (
Ruggless, R. (
Silver, D. (