Bus 342 External Environment Analysis Report
1
Bus 342 Analysis Report
Team Otto Zone
Abbie Hansen ___________________________________
Amanda Otto____________________________________
Joel Smith_______________________________________
Harrison Sawyer__________________________________
Matt Kalbfleisch__________________________________
Patrick Tunison___________________________________
Executive Summary
Introduction and Industry Description
The restaurant industry is a $660 billion dollar industry broken down into two parts by the
NAICS, full and limited-service restaurants. Our team chose to place emphasis on the fullservice sector. We utilized both the PEST analysis and Porter’s Five Forces to analyze the
external and macro-environment of the restaurant industry.
Trade Organization
The trade organization for the restaurant industry is the National Restaurant Association located
in Washington, D.C.
Bus 342 External Environment Analysis Report
2
Research Methodology
We summarized the research methods we used which included qualitative and quantitative data
exhumed from resources including the library and online databases.
Macro-Environment (PEST Analysis)
 Political: Many aspects of restaurant operations are regulated by political laws including
health, environmental safety, privacy, advertising and marketing.
 Economic: The restaurant’s economic state is gradually increasing as the United States
financial condition grows.
 Sociological: Demographics of the customer base are some of the major statistics considered
when analyzing the sociological breakdown of the macro environment.
 Technological: New types of technology such as LED sensors and computerized point of sale
systems are decreasing overhead costs and increasing quality.
Porter’s 5 Forces
 Threat of New Entrants: The low initial outlay of cash required to enter the industry and the
large amount of suppliers makes the threat of new entrants high.
 Buyer Power: Most single food transactions are so minute within the restaurant industry so
individual customers do not hold significant amount of buying power.
 Supplier Power: Suppliers cost burden is focused primarily on paying employees. It is
expensive to switch suppliers, but there are many suppliers in the industry. Supplier power as
a whole is seen as moderate within the industry.
 Threat of Substitutes: The combination of home cooking, and other leisure and entertainment
activities makes threat of substitutes high. This decreases profitability within the industry and
restaurants must focus on marketing.
 Existing Rivals: Multinational chains hold significant power within the industry.
Additionally, there are a high number of single owner establishments that compete for market
share, making the threat of existing rivals high.
Opportunities & Threats
 Opportunities: Low cost of entry, the ability to provide an experience, providing to the
masses, reducing overhead costs and brand names of large corporations are all opportunities
within the industry. These opportunities allow restaurants in the industry to remain highly
profitable.
 Threats: Competition, buyer switching costs, supplier power, substitutes to the industry and
regulations are all threats within the industry. These threats reduce profitability within the
industry.
Conclusion
The macro and external factors discussed in Team Otto Zone’s analysis of the restaurant industry
prove that there is a highly competitive environment.
Table Of Contents
Introduction and Industry Description
4
Trade Organization
4
Research Methodology
4
Macro Environment- Pest Analysis
5
Bus 342 External Environment Analysis Report
3
Political
5
Economic
6
Sociological
6
Technological
7
Porter’s Five Forces
8
Threat of New Entrants
8
Buyer Power
8
Supplier Power
9
Threat of Substitutes
9
Existing Rivals
Opportunities and Threats
10
11
Opportunities
11
Threats
12
Conclusion
13
Works Cited
14
Appendix A
16
Description
16
Table 1
16
Table 2
17
Bus 342 External Environment Analysis Report
4
Introduction and Industry Description:
The restaurant industry is a 660 billion dollar industry that experts at The Encyclopedia
For Business expect to continue to grow. The NAICS has broken down the restaurant industry
into two main sectors, full-service restaurants and limited-service restaurants. For this paper we
have focused primarily on the full-service sector. The full-service restaurant industry provides
sit-down dining where customers are waited on and pay the bill after eating their meal. These
establishments may be either publicly traded chains or privately owned establishments. In 2013,
the full-service restaurant sector is projected to post its third consecutive year of real sales
growth. The projected sales total for full-service is 208.21 billion dollars which is up 2.9 percent
from last year. Using information acquired from a variety of sources, Team Otto Zone analyzed
the industry and developed potential opportunities and threats within the industry using both a
macro-environmental PEST analysis and Porter’s Five Forces for the external economic
environment.
Trade Organization:
The trade organization for the restaurant industry is the National Restaurant Association,
which is located in Washington, DC, at 2055 L Street NW, Suite 700. Information about the
organization can be found at http://www.restaurant.org, or they can be reached by phone at (800)
424-5156. Our team used the trade organization’s contact information to obtain the industry
operations report.
Research Methodology:
Our research of the full-service restaurant industry analysis consisted mostly of
secondary research. Most of the data came from qualitative material that included Standard and
Poor’s, Data Monitor, UI Library database, trade organization, scholarly articles, and industry
Bus 342 External Environment Analysis Report
5
websites. For quantitative research, we found surveys and financial figures from the Financial
Intelligence Company. Otto Zone did not do any primary research. These methods of research
completed the appropriate amount of data needed to thoroughly analyze this industry.
Macro- Environment (PEST Analysis)
Political:
The Occupational Safety and Health Act (OSHA) of 1970 was created by congress to
protect laborers. As part of the United States Department of Labor (DOL), OSHA requires that
employers provide a safe and healthy workplace for their employees and customers, inform all
employees of potential hazards, keep record of work-related injuries and illnesses, and not
discriminate against any workers who use their rights under these laws (OSHA). In addition to
regulations by OSHA, the DOL has many regulations that cover hiring procedures,
discrimination, and requirements for hiring: harassment, wage laws, hour limits, and worker’s
compensation. Each state has similar laws to the DOL. The Privacy law is a regulation that all
employers must abide by. Employers are often required to gather and store information about
employees, customers, and clients whether it’s for marketing purposes or to keep the business
running. Once they have this information, they must keep it safe or dispose of it properly in order
to keep the information away from unauthorized individuals. Examples of privacy information
include children’s privacy, consumer privacy, financial data, credit report material, medical
information, and banking data. The Federal Trade Commission (FTC) is the government agency
that regulates all privacy law, especially when involving consumers (Small Business
Administration).
The FTC oversees advertising and marketing law in the U.S. as well as privacy law.
Advertising and marketing law requires companies to ensure that all advertising claims are
credible and do not deceive the consumers. Marketing and advertising are crucial for the success
Bus 342 External Environment Analysis Report
6
of a business in the restaurant industry, as long as their methods comply with the “truth-inadvertising” standards. For example, under advertising and marketing law, a restaurant
promoting alcohol must make it clear to customers that underage drinking is not allowed (U.S.
Small Business, 2013). The Environmental Protection Agency (EPA) places environmental
regulations on restaurants. The EPA controls pollutants that may be produced by a restaurant
while preparing products and cleaning, ensuring that they are not disposed of illegally. A few
examples of environmental laws enforced by the EPA are the Clean Air and Clean Water Acts,
Energy Policy Act, Federal Insecticide-Fungicide- and Rodenticide Act, and Toxic Substance
Control Act (U.S. Small Business, 2013).
Economic:
Economic factors include economic growth, interest rates, exchange rates, and the
inflation rate. Restaurants are owned by one or more individuals who subsequently make all of
the business decisions along with stakeholders (Rockwell, 2013). As far as public restaurants are
concerned, general stocks for restaurants operating in the U.S. are up by .63% for the year.
According to the Financial Intelligence Company, on average, revenues for U.S. restaurants are
down by 2.32%, but incomes are up by 4.39%. The industry’s net margin is 12.66% above
average. Compared to last year, the number of employees in the restaurant industry has increased
by 18.88% (Financial Intelligence Company, 2013).
Sociological:
In the restaurant industry, the demographics of the customer base are some of the major
statistics considered when analyzing the sociological breakdown of the macro environment. The
age, income level, marital status and size of household are often what determine whether a
family will go to a restaurant or prepare their own meal. An area’s psychographic attributes
Bus 342 External Environment Analysis Report
7
could include behavior, values, opinions, cultures, interests and lifestyles of a demographic
group. People with more income tend to eat out more frequently, while older people tend to eat
out less frequently as they age. Seniors tend to eat early and slowly, and look for good values and
smaller portions. Wealthy and well-traveled consumers, particularly wealthier baby boomers are
more likely to look for ethnic or exotic food when they eat out (Epter, 2009). Another aspect of
the restaurant industry affected by social aspects is the pressure to improve nutritional value of
the restaurant fare, including children’s meals. This nutritional trend will play a large role in the
restaurant industry this year and beyond, according to NPD group, a market research firm
(Mclynn, 2013).
Technological:
Many new types of technology are making the restaurant industry more efficient, saving
cost and time for employers. By using POS systems, commonly known as cash registers and
other payment devices, the restaurant will be able to efficiently enter orders, decreasing mistakes
and eliminating paper usage (Liddle, 2013). Geoff Alexander from Burrus Research Associates
Inc. comments on guest self-ordering, saying “counter- and full-service concepts will be done
either online prior to arriving or on-site via tabletop interface, consumer smartphone or tablet, or
by kiosk, according to several industry observers.” This technology could eventually eliminate
the need for a waiter, thus saving the restaurant money. Online server and busser training is a
relatively new technology that has helped to decrease costs for employers. These instruction
methods can be very expensive to develop, however, and are a more viable option for larger
companies. (Ruggless, 2013)
LED (Light Emitting Diode) and webcam enabled monitoring are two ways that can help
a business manager or owner monitor their employees. An LED alert system will illuminate the
Bus 342 External Environment Analysis Report
8
preparation or cleaning area to keep track of whether dishes are clean or when food is fully
prepared. Webcam monitoring will allow managers to keep an eye on employer productivity and
make sure that they are using proper preparation techniques. These types of technology keep
restaurant managers sure that each employee is practicing proper health and safety techniques,
giving insight about whether they need to reinforce training. (Pullen, 2012)
Porter’s Five Forces
Threat of New Entrants:
The NPD conducted a survey showing that in 2009 “while the industry expanded by .5
percent, consumer spending on restaurant dining rose 1 percent in the past year” (Tice, 2012).
This growth has enticed many new entrants to enter into the $660 billion industry (Tice, 2012).
There is a relatively low outlay of cash to start a restaurant and the amount of suppliers in the
industry is large enough to where prices for supplies remain relatively low. These circumstances
result in a large amount of prospective competitors due to ease of entry. Very few existing
incumbents can create a true competitive advantage over their competition, but those
corporations that do present a barrier to potential entrants. Multi-national corporations can by
offering the same product at lower prices. The FDA and USDA impose strict government health
regulations such as The Nutrition Labeling and Education Act of 1990 that increase the costs
incurred by restaurants (Guidance for industry, 2008). Even with larger companies tending to
dominate the market and amplified costs from government regulations, potential entrants into the
industry is still fairly high.
Buyer Power:
Because most single food transactions are so minute within the restaurant industry,
individual customers do not hold a significant amount of buying power. The majority of
restaurants look to have high sales and low revenue from each individual transaction. One aspect
Bus 342 External Environment Analysis Report
9
that gives consumers a degree of buying power is the fact that there is no cost to the buyer to
switch from supplier to supplier. Along with no costs associated with switching from one
foodservice to another, the industry provides a non-essential luxury good that focuses almost as
much on the experience as on the actual food being provided. Food service organizations incur
costs to help increase their branding and bring in customers. These companies, especially larger
participants, look to create a brand loyalty with their clients to stay profitable and get an edge on
the competition. Overall, there is a moderate amount of buying power within the industry
(Restaurants Industry Profile, 2013).
Supplier Power:
Labor laws are a continuously influencing factor in the supplying power of the restaurant
industry. The industry is highly labor-intensive meaning that a significant proportion of a
foodservice provider’s costs stem from paying employees for their services. In 2007, the last
time that the minimum wage was increased, 26% of restaurants postponed plans to hire and 24%
reduced the number of employees (Amador and Kearney, 2013). Outside of reducing
employment, foodservice companies find alternate means of reducing costs. One of these costs is
the cost of food supplies. Companies within the industry face several difficulties including the
potential costs brought on by switching from one supplier to another. These costs can include a
reduction in the quality of food and or a disruption in the companies supply chain. Large-scale
suppliers increase costs because they have multiple companies purchasing their products
meaning that there is little incentive to lower their prices. PepsiCo had sales of $37.618 billion in
2012 alone (“Food Processing’s,” 2013). Supplier power as a whole is seen as moderate within
the restaurant industry.
Threat of Substitutes:
Bus 342 External Environment Analysis Report
10
One of the biggest threats of a substitute to the restaurant industry is home cooking or
snacking. Most consumers realize that it is monetarily cheaper to shop at supermarkets and
prepare their meals at home. In 2009, a consumer satisfaction survey conducted by Consumer
Network revealed that restaurants consistently rate higher than supermarkets. Refer to Appendix
A: Table 1 and 2 for data. Also, refraining from eating out is a healthier alternative than
indulging in going out to a restaurant. Food provided by foodservice companies tends to be
higher in fat content, calories, and salt than the ordinary meals served within an individual’s
home (“Food consumption trends,” 2012). The USDA determined that 9.4% of personal income
was disposed on food in 2010, down 2% from 11.4% of personal income spent in 1990 ("Food
consumption trends," 2012). This study adds evidence that Americans are now more willing to
spend their incomes on substitutive areas outside of the food and restaurant industries. Potential
substitutes include social endeavors such as the movies and fun parks. Companies are forced to
increase expenditures to advertise both a brand and experience that is more enticing than other
social pursuits. There are a high amount of substitutes within the industry leading to a strong
threat of substitutes (Restaurants Industry Profile, 2013).
Existing Rivals:
Within the restaurant industry, there are a small number of large multinational chains.
While these chains own a large number of often-identical restaurants, there are many singleowner and partnership restaurants that compete with them. According to the NPD, there are a
total of 616,008 restaurants in the United States, a 0.7% increase from 611,566 in 2011 (Mclynn,
2013). Because of these figures, restaurants try to compete by differentiating the types of food
they sell and the price at which they sell their products. Organizations that already exist inside
the industry do not find it difficult to expand. The costs of purchasing or renting out venues are
Bus 342 External Environment Analysis Report
11
relatively low and the resale value of these physical structures tends to remain high. Employees
are low cost comparatively to other industries and there are little expenditures in the form of
employee severance packages when they are laid off. All of these factors add up to making the
restaurant industry extremely competitive causing profitability to decrease for most players.
Overall, the threat of existing rivals is high in the industry.
Opportunities & Threats
Opportunities:
1) Low cost of entry into the restaurant industry: Starting a restaurant requires a low initial outlay.
Once a company has a foothold within the industry, running costs stay relatively low. This
possibility of profitability along with low initial investment provides an opportunity for other
companies to enter the market.
2) Providing an experience: Besides providing basic nourishment needs, restaurants have an
opportunity to increase profits by offering services that allow them to create new markets by
reaching out to a larger group of individuals. Experiences received through the services provided
allows companies who market this quality effectively to gain an advantage in the market.
3) Providing to the masses: Since selling their product to an individual is not as high of a priority as
selling their product to the masses, companies will not incur high losses in revenue from losing a
single customer. The opportunity to provide quality and efficient service allows companies to
make more money by focusing on the overall restaurant experience.
4) Reducing overhead costs: Company costs brought on by the actual suppliers are relatively low
when compared to other industries. The low cost of food supplies compared to supplies in other
industries makes running a restaurant comparatively inexpensive to costs incurred in other
industries. At the same time, increasing technology has helped to reduce costs. Customer and
Bus 342 External Environment Analysis Report
12
server controlled computers allow the ordering process to cut costs, and safety tools such as LED
indicators allow companies to make more money by increasing quality of cleanliness and food.
5) Large corporations’ brand name: Large multinational corporations look to make large profit
margins due to their ability to create a brand name. In creating a brand name, companies can
create a loyal customer base that allows them to gain a competitive edge over their competition.
Additionally, cost of expansion and labor remains low allowing for companies to increase their
reach and name.
Threats:
1) Competition: The ease of entry that gives opportunity to companies to enter the market is also
the greatest threat both to existing companies and potential entrants. Companies can become
involved businesses quickly, increasing the amount of restaurants and thus increasing the amount
of competition. However, this leads to a decrease in profitability in the industry as a whole. The
threat of large multinational corporations who can out price and out compete low level
companies out of the industry. With over 600,000 restaurants in the industry, they are
continuously decreasing profitability by lowering prices and taking on advertising expenses to
try and gain a market advantage.
2) Buyer switching costs: Unless there is a brand loyalty created between consumer and producer,
buyers have no costs from switching from one company to another. The product that the
restaurants are producing is not essential to the consumer meaning that the foodservice
companies rely more on their customers than the customers rely on the companies.
3) Supplier Power: Larger foodservice suppliers have multiple bids from companies meaning that
they do not find it necessary to lower their prices. Smaller, non-chain restaurants are sometimes
Bus 342 External Environment Analysis Report
13
forced to pay higher prices that could potentially make them less competitive compared to other
players within the industry.
4) Substitutes to the industry: There are a significant amount of substitutes when it comes to the
restaurant industry. Companies must battle a continuously changing culture that emphasizes
instant gratification and life in motion. Customers prefer snacks or instant fast food instead of
sacrificing time for a sit-down restaurant prepared meal. Foodservice organizations are
constantly forced to compete with other substitutes of entertainment, causing them to increase
expenditures to remain a relevant means of social escape.
5) Regulations: Safety, Health, Labor, Privacy and Wage regulations provide added costs that
restaurants must budget for. Advertising law poses a threat because restaurant owners will have
to take care to accurately represent their products.
Conclusion:
The macro and external economic environmental analysis provided us with a number of
opportunities and threats. The political analysis made it evident that there are a variety of labor
and foodservice laws in place that hinder the profitability of members within the industry. Other
inhibiting factors that were exposed through the industry analysis were the incredibly large
amount of competitors totaling at over 600,000 different restaurant revenues and the number
does not look like it will decrease anytime soon. The increasing profitability of the industry and
the ability to expand continues to lure potential entrants into a market that already has a low
barrier of entry. The technology analysis showed that recent technological advancements have
helped to reduce the costs of restaurants and help improve profitability. Once in the industry,
there is a highly competitive environment created by the macro and external factors discussed.
Bus 342 External Environment Analysis Report
14
Works Cited
Amador, A., & Kearney, R. (2013, October 09). Minimum Wage - Overview. Retrieved from
http://www.restaurant.org/advocacy/All-Issues/Minimum-Wage/Overview
Enter (2009). Eating Out in Modern American Society: Why do People make the Choice to eat
Outside the Home Masters Thesis. The University of Vermont. United States
Federal Trade Commission. Bureau of Consumer Protection. (n.d.). Retrieved from
http://business.ftc.gov/advertising-and-marketing
Food consumption trends. (2012, July). Retrieved from
http://www.agmrc.org/markets__industries/food/food-consumption-trends/
Food processing's top 100. (2013). Retrieved from http://www.foodprocessing.com/top100/top100-2013/
Financial intelligence company: Restaurants industry:. (2013). Retrieved from
http://csimarket.com/Industry/Industry_Financial_strenght.php?ind=914
Mclynn, K. (2013, Janua 23). Us total restaurant count increases by 4,442 units over last year,
reports npd. Retrieved from https://www.npd.com/wps/portal/npd/us/news/pressreleases/us-total-restaurant-count-increases-by-4442-units-over-last-year-reports-npd/
National Restaurant Association. (n.d.). Retrieved from http://www.restaurant.org/NewsResearch/Research/Forecast-2013/2013-Fullservice-outlook
Orgel, D. (2009, November 02). Are restaurants winning even as they lose share?. Supermarket
News, Retrieved from
http://www.lexisnexis.com/hottopics/lnacademic/?verb=sr&csi=319328&sr=HLEAD(Ar
e Restaurants Winning Even as They Lose Share?) and date is 2009
Bus 342 External Environment Analysis Report
15
Pullen, P. (2012, September 5). 5 Technologies Changing the Restaurant Industry. Entrepreneur.
Retrieved December 3, 2013, from http://www.entrepreneur.com/article/224332
Restaurants Industry Profile: United States. (2013). Restaurants Industry Profile: United States,
1-29.
Rockwell, S. (2013). Striking back. Nation's Restaurant News, 47(18), 60.
Ruggless R. SERVICE STYLES. Nation's Restaurant News [serial online]. September 23,
2013;47(18):39. Available from: Business Source Premier, Ipswich, MA. Accessed
December 3, 2013.
SIC 5812 Eating Places. Encyclopedia of Business, 2nd. (2013) Retrieved
from http://www.referenceforbusiness.com/industries/Retail-Trade/Eating-Places.html
Tice, C. (2012, Septe 11). 1,000 New Independt Restaurants Open -- Crazy or Canny? .
Retrieved from http://www.forbes.com/sites/caroltice/2012/09/11/1000-newindependent-restaurants-open-crazy-or-canny/
United States Department of Labor: Occupational Safety and Health Administration (OSHA).
(2013). Retrieved from website: https://www.osha.gov/about.html
U.S. Department of Health & Human Services, Office of Food and Drug Administration.
(2008). Guidance for industry: A labeling guide for restaurants and other retail
establishments selling away-from-home foods(HFS-800). Retrieved from Center for Food
Safety and Applied Nutrition website:
http://www.fda.gov/Food/GuidanceRegulation/GuidanceDocumentsRegulatoryInformati
on/LabelingNutrition/ucm053455.htm
U.S. Small Business Administration. (2013). Retrieved from
http://www.sba.gov/category/navigation-structure/contact-government-agency
Bus 342 External Environment Analysis Report
16
Appendix A
Description:
In 2009, a consumer satisfaction survey conducted by Consumer Network revealed that
restaurants consistently rate higher than supermarkets. Consumers ranked restaurants above
supermarkets in twice ace many of the 35 categories.
Shoppers were asked to rate the supermarket and restaurant they visited most often based
on a list of 35 attributes, ranging from excellence to economical. Scoring was from 0 to 5.0, with
5.0 as best. Average ratings were calculated in each attribute.
Restaurants best attributes (4.7 or 4.6): Preparation excellence, freshness, waiting time,
local, easy access, service, restrooms, and delicious choices
Supermarket best attributes (4.5 or 4.4): trustworthiness, accuracy, good service,
preparation excellence, eco-friendly, ethnic, nutrition, convenience, food safety
It was most concerning that restaurants beat supermarkets 4.7 to 3.7 in freshness, an area
where Restaurants supermarkets claim to have the advantage. Restaurants ranked above
supermarkets despite trends showing that consumers are eating less at foodservice establishments
and having more meals at home.
Table 1
Data from:
Orgel, D. (2009, November 02). Are restaurants winning even as they lose share?.
Supermarket News, Retrieved from
http://www.lexisnexis.com/hottopics/lnacademic/?verb=sr&csi=319328&sr=HLEAD(Are
Restaurants Winning Even as They Lose Share?) and date is 2009
Bus 342 External Environment Analysis Report
17
Table 2
Bhardwaj, N. (2011, December 4). It's Suddenly Cheaper To Eat Out - Business Insider.
Retrieved from http://www.businessinsider.com/its-suddenly-way-more-expensive-to-eat-in2011-12