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Chapter 3 The Restaurant Business Copyright © 2010 by John Wiley & Sons, Inc. All Rights Reserved  THE RESTAURANT BUSINESS The word “restaurant” covers a broad range of types of operations The term “food service” is even more far reaching and will be more clea...

Chapter 3 The Restaurant Business Copyright © 2010 by John Wiley & Sons, Inc. All Rights Reserved  THE RESTAURANT BUSINESS The word “restaurant” covers a broad range of types of operations The term “food service” is even more far reaching and will be more clearly defined in later chapters The most important thing for you to take away from this module is how different restaurant types are classified and characterized THE VARIED FIELD OF FOOD SERVICE Restaurants are those public places that specialize in the sale of prepared food for consumption on- or off- premise Sometimes, it is not even easy to discern what is and what is not a restaurant Restaurants (and the larger food service industry) represent an important part of North American society – for most of us it is an everyday activity Think of your last “restaurant occasion” Breakfast? Lunch? Dinner? Coffee? Snack? THE VARIED FIELD OF FOOD SERVICE Together, Americans spent over $550 billion in food service establishments in 2009, which is double the amount spent some 20 years ago That represents 48% of American’s “food dollar” (or food budget) This amount is expected to increase into the foreseeable future as Americans continue to seek convenience and activities that suit the typical lifestyles THE VARIED FIELD OF FOOD SERVICE There have been some recent “dips” in food service performance but overall the industry has shown steady growth for the last 10-15 years Some of the major trends that are occurring are increases in “off-premise” dining, new and emerging segments (such as “fast-casual”), and a blurring of the commercial and on-site sectors Overall, the industry continues to grow and is striving to meet consumers ongoing needs THE VARIED FIELD OF FOOD SERVICE Some segments of the industry with which you should be familiar include: Quick-service restaurants (QSR) Fast Casual Casual dining Fine dining Others include ice cream, coffee shops, food courts, etc.  CLASSIFICATIONS There are many ways to classify restaurants in the industry. We can classify them by price, service level (of type), menu, etc. In the next segment, we will classify them into “dining” and “eating”  THE DINING MARKET VS. THE EATING MARKET Restaurants serve both social needs (dining) and biological needs (eating); some restaurants serve one or the other while some serve both markets The dining market is defined as including those restaurants that primarily serve our social needs People will eat in restaurants (that makeup the dining market) to escape from boredom, to socialize, to be waited on, to have a different experience, and for convenience  THE DINING MARKET Certain elements of the dining market distinguish these restaurants from the eating market: the importance (and sophistication) of service, the customer, and the occasion as well as others The most obvious example of a restaurant type that makes up this market is fine dining Fine dining restaurants tend to be characterized as: full-service, small, independent, high-quality food and service, nice ambience, and expensive  THE DINING MARKET Largely due to the economy, the demand for fine dining has decreased, resulting in the increasing popularity of “casual upscale” dining In addition, some well-known fine dining restaurants have even closed Casual upscale restaurants are characterized by sophisticated menus, excellence in food, strong management (typically run by chains), and good wine lists but are slightly less expensive and more casual than traditional fine dining restaurants  THE DINING MARKET Examples of casual upscale chains would include Houston’s, Mimi’s, Cheesecake Factory, and McCormick & Schmick’s Because of their ambience and the overall experience that they provide, many of these concepts appear as if they are independent restaurants Interestingly, because of the success of these chains, they have been the targets for acquisitions by other companies  THE EATING MARKET The eating market is differentiated from the dining market in that it caters more to meeting biological needs The best (and most obvious) example would be quick-service restaurants or QSR The other primary segment is the family dining segment which offers table seating and full service (examples, Denny’s, IHOP, and Cracker Barrel)  THE EATING MARKET The eating market can be sub-divided into (1) on-premise and (2) off-premise dining Off-premise can be further classified into: – Takeout (or take-away) – Drive through – Delivery Together, these three areas have grown tremendously as a result for customers’ demand for speed and convenience  CONTEMPORARY POPULAR-PRICED RESTAURANTS When we use the term contemporary popular- priced restaurants, we are referring to the restaurants that cater to the eating market As you will recall, the two primary segments in this market are QSR and Family Dining restaurants We will also include casual restaurants which provide a bridge between the eating and dining markets  THE EATING AND DINING MARKETS Upscale Family Dining Casual Vending QSR Fast Casual Fine Dining Casual Dining  QSRS The Quick Service segment is a very unique segment for a variety of reasons QSRs have a very long history, are among the most productive types of restaurant operations in the entire industry and have a history of leading the industry in terms of innovation  QSRS Even though many believe that QSR begins and ends with McDonald’s, it is generally believed to have begun in the 1920s with White Castle and then began to develop in the 1940s with Carl’s Jr. and In-N-Out The industry has undergone many changes in the past 60 years including the domination by chains and the emergence of McDonald’s as the leader  QSRS The QSR industry is characterized by a variety of things including: Location Use of unskilled labor Limited menus Key roles for unit Sales volume managers Fast service Highly competitive Types of employees menu prices (many part-timers) Chain domination Simple unit, complex system  QSRS Some changes have occurred over the last few years including: Going more “upscale” Companies diversifying (changing again?) Introduction of healthy items Expansion of menus Nontraditional locations  FAST CASUAL Full-service quality in a quick-service format Hybrid that combines convenience with higher- quality ingredients Examples include Panera Bread, Baja Fresh, and Qdoba Mexican Grill  MIDSCALE RESTAURANTS Midscale restaurants include those restaurants that have simplified production systems (requiring lesser skilled employees), specialized menus and moderately priced food This category of restaurants include: Family restaurants Cafeterias and buffets Pizza (sit-down)  CASUAL RESTAURANTS Casual restaurants are a “step-up” from Midscale Restaurants These restaurants have become more popular in recent years driven by their popularity with a number of demographic groups These restaurants are characterized by a relaxed atmosphere, more varied menus and reasonable prices  CASUAL RESTAURANTS Casual restaurants include: “Mainstream” casual restaurants such as Applebee’s, Chili’s, Ruby Tuesday, and Friday’s Specialty restaurants such as those focusing on steak (Outback), seafood (Red Lobster) or pasta (Semolina’s) Ethnic restaurants include, among others, Chinese, Italian and Mexican Theme restaurants including Hard Rock Cafe HIGH CHECK AVERAGE RESTAURANTS High check average restaurants also known as fine dining restaurants, have a special place in American society Fine dining restaurants are solidly established as serving the dining market The “average check” begins at about $30.00 and goes up from there – a notable $200 meal in New Orleans comes to mind HIGH CHECK AVERAGE RESTAURANTS These restaurants are typically found in high income and densely populated areas (although there are exceptions) Several large US cities are known for fine dining including New York, Chicago, and LA They are also typically found in large tourist areas such as New Orleans, Vail, and Las Vegas HIGH CHECK AVERAGE RESTAURANTS Although this type of restaurant is in decline, some are as popular as ever: Excelsior, Restaurant L, Seasons, Aujourd’hui, Julien, and L’Espalier They cater to people going out for special occasions (birthdays and anniversaries), celebrations (end of the school year) and business meals Even some of these have become more casual (although not necessarily less expensive) RESTAURANTS AS PART OF A LARGER BUSINESS The restaurants in this category do not really fit neatly into another category These restaurants exist to serve another business or businesses Examples include: restaurants in retail stores such as Nordstrom and Lord and Taylor, and restaurants in shopping malls We differentiate these because they are not “free standing”  Chapter 4 Restaurant Operations June 6, 2024 1  RESTAURANT OPERATIONS This module looks more closely at the actual operations of a restaurant This module should reinforce the notion that to understand the restaurant business, one must not only study it but also work in it Even though there are many different types of restaurants, much of the actual work that is performed in them is common across segments June 6, 2024 2  RESTAURANT OPERATIONS The typical restaurant can be divided into three general areas: (1) the front-of-the-house; (2) the back-of-the-house and; (3) the office The front-of-the-house is where the customer is serviced; the back-of-the-house is where the food is produced/prepared and; the office is where much of the planning and management takes place June 6, 2024 3  THE FRONT-OF-THE-HOUSE The front-of-the-house is the part of the restaurants with which most of us are familiar because it is the most visible It is where the customer and service staff come together—as a result it is referred to as the “marketplace” portion of the restaurant It goes beyond this however; the front-of-the- house encompasses an operating system, a business place, and a social setting June 6, 2024 4  THE FRONT-OF-THE-HOUSE The primary responsibility of the front-of-the- house is assuring guest satisfaction This comes down to several factors including: offering a quality product knowing what the guest wants having a properly planned service system having a properly trained staff empowering staff to make decisions taking care of problems when they arise June 6, 2024 5  THE FRONT-OF-THE-HOUSE Remember that errors will happen but what matters is how (and how quickly) they are corrected Managers should also be present in the front- of-the-house, not just to supervise staff, but to assist them in performing their jobs, to monitor sales control, and to interact with guests It is critical for all food service managers to have an understanding of the organization of the front-of-the-house June 6, 2024 6  THE FRONT-OF-THE-HOUSE FOH servers are also responsible for coordinating efforts with the BOH in placing accurate orders, picking them up in a timely manner and, in some cases, preparing some food and beverage products (salads, desserts and drinks) Other responsibilities of FOH staff include maintaining control of sales including cash, checks and credit card sales POS systems have simplified systems, provide greater control and have created a higher degree of efficiency June 6, 2024 7  THE FRONT-OF-THE-HOUSE Specific tasks include: Greeting the guest Taking the order Serving the food (and beverages) Checking with the table Removing used tableware Accepting payment Thanking the guest (last opportunity for internal promotion) June 6, 2024 8  THE FRONT-OF-THE-HOUSE Roles and positions for various FOH staff include: Hosts/Hostesses Counter person Servers Cashier Bussers June 6, 2024 9  THE FRONT-OF-THE-HOUSE Supervision entails the direct presence of management in the FOH. It is important for the employees and customers alike Sometimes, depending on the company, supervision responsibilities are combined for the FOH and BOH June 6, 2024 10  THE BACK-OF-THE-HOUSE To take a production analogy, the back-of-the- house can be likened to a factory Some restaurant kitchens prepare everything from scratch, some prepare a few items from scratch, and others simply assemble pre- prepared foods that may have been prepared several hundred miles away The primary responsibility of the BOH is to prepare “quality” food June 6, 2024 11  THE BACK-OF-THE-HOUSE Various BOH tasks include: Purchasing and receiving Food “prep” Food production Portion control Quality control Safety and sanitation Dishwashing, etc. June 6, 2024 12  MANAGEMENT What is a manager? What does a manager do? Some thoughts: – Someone who is “in charge” – Someone who assigns tasks – Someone who supports employees – Someone who opens and closes the restaurant – Someone who looks after the financial concerns June 6, 2024 13  MANAGEMENT Different operations use different titles – General manager – Unit manager – Assistant manager – Manager on duty Responsibilities will differ as well In all forms, there is a hierarchy June 6, 2024 14  FINANCIAL CONSIDERATIONS Making a profit can be a very challenging objective The average restaurant makes about 4% on the dollar Managers must be adept at increasing sales (revenue management) and controlling (or reducing) costs June 6, 2024 15  FINANCIAL CONSIDERATIONS Operating ratios used on a daily basis: Expense ratios usually focus on variable costs: – Food cost – Beverage cost – Labor cost Sales/customer statistics commonly used include: – Number of covers – Average check June 6, 2024 16  DEFINITION OF COST Accountants define a cost as a reduction in the value of an asset for the purpose of securing benefit / gain. June 6, 2024 17  As we in F&B controls use the term, Cost is defined as the expense to a hotel or restaurant for goods or services are when the goods are consumed or the services are rendered. F&B are considered “consumed” when they have been used, wastefully or otherwise, and are no longer available for the purpose for which they were acquired. June 6, 2024 18  CLASSIFICATION OF COSTS All operating costs are under three headings based on their nature / function. Material costs Labour costs Overhead costs The total of Material costs (MC) + Labour costs (LC) + Overhead costs (OH) = Total cost (TC). June 6, 2024 19  A. MATERIAL COST is the raw material cost. May refer to the three principal costs – food cost, beverage cost and cost of sundry sales (such as cigarettes, tobacco, net, telephones). The formula for calculation of food cost = Opening Stock + (Purchases - Staff meals) – Closing Stock The formula for calculation of Beverage cost = Opening stock + (Purchases – Entertainment / Internal transfers) – Closing Stock June 6, 2024 20  B. LABOUR COST Refers to cost incurred towards manpower at all levels – entry, supervisory, middle, and top management. Remuneration to employees (salary, wages, payroll) and bonus, gratuity, PF, staff meals, accommodation, non-cash benefits if any, are all included in labor cost. June 6, 2024 21  C. OVERHEADS Are all costs other than material and labor costs are overheads. E.g. Rent, rates, commission, depreciation, conveyance, stationary, printing, marketing, etc. June 6, 2024 22  D. TOTAL COST The total Cost = Material costs (MC) + Labour costs (LC) + Overhead costs (OH) June 6, 2024 23  Material Cost 30% Labour Cost 30% Total Cost 80% Overhead Cost 20% Net Profit 20% Total Sale - (Material cost + Labour Cost + Overhead Cost) = Net Profit 100 – (30 + 30 + 20) = 20 June 6, 2024 24  THE LIFE OF A MANAGER IN THE RESTAURANT INDUSTRY Consider: Weekend, holiday and evening work Long work weeks Staying until the work is complete Salary levels (median in 2008 was just over $46,000) Wide range of responsibilities June 6, 2024 25  Chapter 5 Restaurant Industry Organization: Chain, Independent, or Franchise? Copyright © 2010 by John Wiley & Sons, Inc. All Rights Reserved  RESTAURANT INDUSTRY ORGANIZATION This chapter will focus on restaurant company organization—that is, how companies are organized This is important to know because there are significant differences between chains (corporate), independents, and franchises Currently, the industry growth is being driven by chains so we will start with them  CHAINS Chains have strengths in seven areas: Marketing and brand recognition Site selection Access to capital Purchasing economies Centrally administered control and information systems New product development and Human resource development  CHAINS Marketing and Brand Recognition Chains are able to achieve a high level of brand recognition by keeping their messages simple, large marketing budgets and the additive effect (repeating the message) The large cost of the marketing a national company is spread among a large number of units  CHAINS Site Selection Expertise Much of a restaurant’s success is owed to choosing the proper site It has become much more competitive to identify suitable sites Choices are based upon a thorough examination of the feasibility of the site  CHAINS Access to Capital This can be a challenge because of the rising costs of opening a restaurant coupled with lenders’ view that the restaurant business is risky Options include loans from banks, friends and family, personal savings, limited investors, “going public”  CHAINS Purchasing Economies The power of purchasing large quantities for distribution among different locations or entering into a contract with a company for multiple individual purchases When one considers that food is a primary expense, the savings of 1% – 2% can be significant  CHAINS Control and Information Systems Chains can also afford to purchase expensive systems with the justification that the cost will be spread across multiple units Contrast this with the challenge of an individual operator purchasing a system beyond his or her means  CHAINS New Product Development This is only becoming more important as competition increases Large chains can afford to staff and equip development kitchens  CHAINS Human Resource Program Development Again, the cost of recruiting, hiring, training, and developing is spread across multiple units Also, human resource expertise can be centralized There can also be disadvantages  CHAINS Largely as a result these strengths, chain domination (as measured by market share) has grown over the last several years The top 100 chains alone generate over 50% of all restaurant sales This domination has increased from just 33% in 1975 ADVANTAGES AND DISADVANTAGES Advantages, disadvantages for franchisees Advantages and disadvantages for franchisors  Chapter 6 Competitive Forces in Food Service Copyright © 2010 by John Wiley & Sons, Inc. All Rights Reserved  COMPETITIVE CONDITIONS IN FOOD SERVICE Managers must pay attention to competition now more than ever because of the following: There are more competitors than ever The “pie” is only so big The market is growing more slowly than in the past Markets are changing  COMPETITIVE CONDITIONS Some notes to consider: Slim profit margins at risk Shortage of prime locations left Entry of more domestic competitors Entry of international competitors Continued dominance of chains New business environment—some companies have left food service  COMPETITION = MARKETING Companies must try harder than ever before through their marketing efforts Marketing is not just advertising….. Marketing is “communicating to and giving…customers what they want, when they want it, where they want it, at a price they are willing to pay” (Lewis, 2000) PRODUCT LIFE CYCLE RESTAURANT CONCEPT LIFE CYCLE  COMPETITIVE CONDITIONS The Marketing Mix consists of four main activities (the 4 Ps – sometimes the 6 Ps): Promotion Product Price Place  PROMOTION Two major forms of Promotion (paid communications) are: – advertising – sales promotion Recent data show full-service restaurants (check averages between $15 and $24.99) spent 1.8% of sales on marketing while QSRs spent 2% In total, the food service industry spends over $5 billion each year on advertising (most is still radio and television) Less is spent on the Internet (only about 10%)  PROMOTION Sales promotion consists of paid activities other than advertising and include: Coupons (Applebee’s, Doug’s Fish Fry) Games/Contests (“Roll up the Rim”) Promotional merchandise (QSR - toys, DVD’s) The use of all three are increasing in restaurants ADVERTISING MEDIA  PRODUCT The “product’ in hospitality is actually the guest experience This represents some combination of the tangible and intangible aspects of that experience Food and service are large parts of the experience  PRODUCT The product (food) is obviously a very important part of what a restaurant has to offer Elements of this P may include: variety, creativity, quality, etc. Because of the importance of product, adding new menu items is becoming increasingly important Restaurants have added salads, wraps, and more international items recently.  PRODUCT The process of adding a new menu item to a restaurant menu can be quite extensive: Idea Development Test Screening generation and testing marketing  PRODUCT Taking a broader view, the “Product” can also be viewed as the overall concept To capitalize on additional markets (and to combat maturity), some chains have developed or purchased new concepts  PRICE Price is also important and not just in the eating markets The eating markets is often the one that gets attention in this area though because of price wars One could argue that price is a more important differentiating factor in the eating market  PRICE Price is the only P that produces revenue (others incur cost) Changing prices is a key strategic decision, and can have critical consequences However, there is always pressure from internal and external forces to adjust price  PRICE Price is often determined based upon three factors: Cost Competition Demand  PLACE Place refers to the location – or where the product/service is sold/delivered Place is also known as Distribution As we have discussed, the notion of place is changing – from traditional locations to “alternative” locations Essentially, restaurants are looking to bring their product to the customer  COMPETITION WITH OTHER INDUSTRIES Is food service a “generic” industry? If we take a more limited view, we can accept that there are more competitors than there have ever been: convenience stores ($13 B), supermarkets (becoming a main source for take-out food) and home!