SIC 5812 Eating Places

 
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SIC 5812

This category includes establishments primarily engaged in the retail sale of prepared food and drinks for on-premise or immediate consumption. Caterers and industrial food service establishments are also included in this industry.

NAICS CODE(S)

722110

Full-Service Restaurants

722211

Limited-Service Restaurants

722212

Cafeterias

722213

Snack and Nonalcoholic Beverage Bars

722310

Foodservice Contractors

722320

Caterers

711110

Theater Companies and Dinner Theaters

INDUSTRY SNAPSHOT

According to the National Restaurant Association, there are over 900,000 restaurants in the United States with sales for 2005 expected to top $476 billion. This represents a 4.9 percent increase over 2004, the fifteenth year in a row the industry increased. Eating out has become a stable part of the American lifestyle. In 1955 consumers spent approximately 25 percent of their food money at restaurants. By the turn of the century, in a single day an average of 4 out of every 10 people frequented an eating establishment, and the total portion of the American food dollar spent eating out had grown to 45 percent.

Despite being dominated in the advertising media by the mega fast-food chains, such as McDonald's, most restaurants are small operations. More than 70 percent are independent, single unit businesses with fewer than 20 employees and one out of every three are owned by a sole proprietor or a partnership. According to the National Restaurant Association, a full service food-and-drink establishment had average annual revenues of $676,000 in 2004, and a fast-food restaurant took in an annual average of $599,000.

ORGANIZATION AND STRUCTURE

The classification for eating places encompasses a wide variety of eating establishments, including five-star gourmet restaurants, roadside cafes, fast-food joints, soda fountains, casual dining establishments, pizza parlors, hot dog stands, tea rooms, and oyster bars, to name but a few. The sector for full-service restaurants was the largest in the industry in 1998, with sales of $112 billion, or 33 percent of the total food service market, according to the National Restaurant Association. One of the strongest areas within this market was casual dining, which is defined as moderately priced dining houses offering a comprehensive menu at a reasonable price. Chains of casual dining houses, such as Olive Garden and Red Lobster, had combined sales of more than $3 billion in 1998, up significantly from 1997. This sector of the industry began to experience a slowdown in growth in the late 1990s due to maturity, competition, and consolidation.

Fast-food restaurants constituted the second largest and fastest growing sector of the industry, with projected 1999 sales of $110.4 billion, or 31 percent of industry sales. Over the preceding two decades this sector's success provided much of the entire industry's growth, and in 1998, about 78 percent of U.S. households used some form of fast food establishment each month.

The biggest companies operating eating places include those operating single concept chains, like McDonald's, and those operating a number of different fast-food businesses, such as TRICON Global Restaurants Inc., which runs Pizza Hut, KFC, and Taco Bell. Previously run by Pepsi Co, the company spun off its restaurant division into the separate, publicly traded company TRICON in 1997.

Chain-owned restaurants in general have overtaken independently owned outlets in terms of number of units, possibly due to their greater stability and lower failure rate. This trend was expected to continue during 2000 through mergers and acquisitions, according to the National Restaurant Association's Food Service Industry 2000 report.

For 1999, projected sales were as follows: eating places, $238 billion; drinking places, $11 billion; managed services, $23 billion; hotel/motel restaurants, $19 billion; and retail, vending, recreation, and mobile projected sales, $30 billion.

BACKGROUND AND DEVELOPMENT

The eating place industry grew from family-run restaurants and diners to giant chain restaurants of the 1990s. With few exceptions, the best-known names in the business operated company-run or franchised chains. This has long been the case with fast-food restaurants but was becoming true in other sectors of the industry as well. The general wisdom seemed to be that if a concept is successful, it should be duplicated.

Perhaps more than any other single factor, the growth of franchising has been responsible for the proliferation of eating place chains. Since the early 1970s, franchised eating places have almost tripled their share of the market, from just 15 percent of industry volume in 1970 to about 43 percent in 1995, when one in four eating establishments, about 110,000, were franchises.

The popularity of franchising stems from its many advantages, from the point of view of both the franchiser and franchisee. The franchiser company is able to expand rapidly without the expense of acquiring land, plant, and equipment. These costs are normally covered by the person buying the franchise, who pays a royalty to the franchiser of about 5 percent of sales and gives a percentage toward advertising costs. In return for this outlay, the franchisee is assured of name recognition, which normally guarantees high sales. Although buying a franchise may increase a businessperson's start-up costs compared with those of an independent restaurateur, the returns render it a worthwhile investment. Franchised restaurants offer an extremely low risk, compared with independent eating establishments. Failure rates within the first year are low. Franchisees also benefit from the training and marketing support of the parent company.

The price to be paid for franchise security is a loss of flexibility. Independent restaurant owners are able to plan their own menus, avoid paying a royalty, and create and run their businesses as they see fit, whereas franchisees are restricted by the normally rigid and formulaic terms of the franchise agreement.

Though many of the best known fast food and casual dining chains are franchised, including McDonald's, Wendy's Old Fashioned Hamburgers, Burger King, and Pizza Hut, many other successful chains are not. Sales for the largest of the nonfranchised chains, the Red Lobster and Olive Garden casual dining houses, both owned by Darden Restaurants, was nearly $3 billion in 1995. Of course, even in the case of the heavily franchised chains, such as McDonald's and Wendy's, the parent company owns a considerable share of the outlets.

The exit of packaged food companies from the restaurant business, a trend that reached its peak by early 1997, created more room for franchisers. After Hershey, Sara Lee, and Ralston Purina had jettisoned their restaurant operations, General Foods did the same in May 1995 when it spun off its Red Lobster, Olive Garden, and China Coast (which later closed) restaurant chains to form a new public company, Darden Restaurants. Similarly, in early 1997, Pepsi Co announced that it would spin off its restaurants division, which included Pizza Hut, KFC, and Taco Bell, into a publicly traded company. With Pepsi Co's exit, no U.S. packaged food company had a significant presence in the restaurant industry.

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