Restaurants
SIC 5812
NAICS 722110
Restaurants are involved in retail sale of prepared foods and beverages for on-site or immediate consumption, such as fast-food restaurants, diners, refreshment stands, and full-service restaurants. Caterers and institutional food service establishments are also included in this category.
Large fast-food chains lead the restaurant industry, which by 2005 consisted of approximately 8 million restaurants worldwide in an extremely competitive environment. Most restaurants were single unities, independently owned and operated, while about 300 companies were involved in chain restaurants. McDonald's was the world's leading restaurant chain in terms of sales and the second largest based on number of sites. Yum! Brands, formerly Tricon Global Restaurants Inc., was the world's second largest restaurant company in terms of sales, with 33,000 units in 100 countries, and the largest in terms of restaurant units. Its major brands were also global leaders in their markets: KFC (chicken), Pizza Hut, and Taco Bell (Mexican-themed). In the food service sector, Compass Group PLC ranked as the world's largest company, followed by Sodexho Alliance SA.
Worldwide, the restaurant industry saw considerable growth in 2003 as the economy began to stabilize and consumer confidence increased. According to Euromonitor, the industry grew 4.5 percent in the United States, reaching US$189.9 billion. In the United Kingdom, the industry grew 3.0 percent, to US$23.1 billion. China also experienced growth of 9.4 percent to US$110.4 billion. The market in France held steady at US$33.9 billion, but the Japanese market decreased 7.5 percent to US$138.8 billion.
Traditionally, the restaurant industry has consisted of two main sectors: full-service restaurants (including family restaurants, casual dining establishments, dinner houses, and grill-buffets) and quick service restaurants (QSR), also known as fast-food restaurants. The QSR sector typically serves hamburgers, chicken, sandwiches, pizza, Mexican dishes, and breakfast and snack items. The National Restaurant Association (NRA) of the United States breaks the industry down further, into restaurants that provide full menus with table service, limited menus with table service, and limited menus without table service. Of establishments with a limited menu and providing table service, most are small, independently owned operations.
The restaurant industry is a mature industry, and in many countries, such as the United States and in Western Europe, competition is very tough as many markets are saturated. In addition, restaurants must compete with expanded supermarket offerings that include a vast array of frozen foods, deli foods, and other fully or partially prepared meals for at-home dining. As a result, many large restaurant companies have turned to acquisition to expand their menu offerings, to increase their number of locations, and to capture market share in a region or niche that previously was unavailable to them.
Since the 1970s, the growth of franchising has propelled the growth of the larger restaurant industry. The popularity of franchising stems from the parent company's ability to expand without as much expense, as start-up costs are usually paid by whoever purchases the franchise. In addition to a license fee and equipment and stock purchases, the local owner, or franchisee, pays the franchiser royalties based on sales. For the person buying into a well-known franchise, this is an extremely low-risk investment, when compared with independent eating establishments, which do not have an established clientele to be tapped. However, franchise owners lose flexibility. Independent restaurant owners can plan their own menus, avoid royalty expenses, and run their business as they see fit. Franchises are restricted by terms of the franchise agreement. Ultimately, independent restaurant owners—who rely largely on "word-of-mouth," local newspapers, and radio spots for their advertising—find it nearly impossible to compete against the huge, national marketing budgets of the large chains that advertise heavily on television and through promotional tie-ins with movies and sports.
The degree of franchising offered throughout the restaurant industry varies. Some companies, such as Subway, prefer nearly all their outlets to be operated by franchisees, while Darden does not offer franchising domestically in the United States. Others strive for a combination. For example, 61 percent of McDonald's 2001 revenues were derived from franchisees, 27 percent from company-owned sites, and 12 percent from affiliates. The franchisor may also change the percentage of its company- versus franchisee-operated locations as part of restructuring efforts or to better position its brands. For example, in Fortune Brian O'Keefe reported that Tricon Global Restaurants, later known as Yum! Brands, shuttered franchisees in England where sales had slumped and opened company-owned restaurants in France, Holland, and Germany to spur franchisee interest there. As O'Keefe wrote, "part of the trick for any large franchise operator is to allow local flexibility while maintaining quality control and a central marketing message."
Although the restaurant industry consists primarily of small, local, independently owned diners and cafes, the number of well-known, large, mega-chain restaurants has continued to increase. Contributing to this growth was the increased number of single-person households and single-parent families, as well as the increasing numbers of working women throughout the world. Less time was allotted for meal preparation and convenience became more important. Since the early 1970s, franchised eating-places have almost tripled their share of the market, from 15 percent of industry volume to about 43 percent in the mid-1990s.
Several factors contributed to the expansion of the restaurant industry. Restaurants were considered easy business ventures by anyone who could cook; thus, there was a proliferation of new restaurants. However, half of these ventures fail or change management every five years, according to the U.S. Small Business Administration.
Most growth in the restaurant industry, however, is due to the increase in franchised establishments, both fast food and casual dining. In particular, the late twentieth century saw tremendous growth in the global expansion of American brands, such as McDonald's, KFC, Starbucks, and Applebee's. Since its beginnings in 1997, when PepsiCo spun off its fast-food chains—KFC, Pizza Hut, and Taco Bell—to form Tricon Global Restaurants, Tricon opened more than 5,100 restaurants, nearly 63 percent of which were outside the United States. According to an article in Fortune, the U.S. mega-chains tailored their menus to reflect local customs and tastes when opening new locations abroad. For example, KFC (formerly Kentucky Fried Chicken) serves tempura crispy strips in Japan, potatoes and gravy in northern England, rice and soy sauce in Thailand, and potato-and-onion croquettes in Holland.
By the late 1990s, competition cooled down in mature markets as some analysts warned that the chain restaurant market was saturated—especially the fast-food segment. As a result, some restaurant chains announced their plans to reduce their expansion, in contrast to the ambitious multinational expansion plans touted by leading chains in the early and mid-1990s. In addition, with the influx of independent and regional dinner house and casual dining restaurants, veteran operations such as T.G.I. Friday's, Bennigan's, and Applebee's started to recast their images and refocus their restaurants to differentiate themselves from the competition. Friday's began as primarily a singles' bar and evolved into a family-oriented casual dining restaurant that still has strong bar sales. Other such restaurants followed this pattern, trying to offer something unique and attempting to strike a balance between their bar and restaurant facets.
Restaurants and their investors gravitated toward themed formats in the late 1980s and early 1990s, as the popularity of these restaurants surged among consumers. However, by the latter part of the 1990s some theme restaurants proved to be largely a fad as the sales of some of the largest operations such as Planet Hollywood began to wilt and investors pulled out.
In the mid-1990s, restaurants and supermarkets introduced prepared foods for carry-out service or what they termed "home meal replacements" (HMR). These allowed customers to enjoy freshly cooked foods in the convenience of their own homes. This trend boded well with the proliferation of VCRs, TVs, computers, and other electronic entertainment devices in homes around the world. HMR sales rose to US$50 billion in 1997, up 13 percent from 1996, and were expected to climb to US$170 billion by 2005. Other product and service trends of the mid to late 1990s were salad bars/dinner buffets, specialized menus (e.g., health food and vegetarian), and home delivery. The...
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