Chapter 5
Restaurant Industry Organization: Chain,
Independent, or Franchise?
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
LARGEST CHAINS
1.
2.
3.
4.
5.
McDonald’s
KFC
Burger King
Starbucks
Subway
6.
7.
8.
9.
10.
Pizza Hut
Wendys
Taco Bell
Dominos
Dunkin Donuts
CHAINS
Chains have strengths in 7 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
INDEPENDENT
RESTAURANTS
 It is one thing to look at the chain domination,
however, looking at it the other way,
independents generate a significant portion of
sales as well
 While chains have strengths that allow them
to grow and maintain profit margins,
independents have their own advantages
INDEPENDENT
RESTAURANTS
 Operating advantages

Flexibility
 Marketing and brand recognition

Unique advantages in local markets
 Site selection

Knowledge of area
 Access to capital

Unique advantages in local markets
INDEPENDENT
RESTAURANTS
 Purchasing economies
 Advantages and disadvantages
 Control and information systems
 Lack of centralized system but ability to track
first hand
 Human resources
 Lack of advancement opportunities but other
advantages
 Flexibility
 Differentiation
FRANCHISED RESTAURANTS
 Franchising is a common business format
 Franchises represent a $1.5 trillion “industry”
– others besides food service
 Business format franchising allows individuals
to operate a business under clearly specified
guidelines
 Guidelines include systems and standards of
operation
FRANCHISED RESTAURANTS
 The relationship between the franchisor and
the franchisee are dictated by the Franchise
Agreement
 Franchise agreements include use of
trademarks, location, terms, fees, obligations
and duties of both parties, restrictions and
renewal and termination of the agreement
WHAT DO FRANCHISORS
OFFER?
 Operating and control procedures

Food portioning
 Information management

Reliable and timely information
 Quality control

Via inspections
 Training

Training materials and trainers
 Field support
WHAT DO FRANCHISORS
OFFER?
 Purchasing

Co-ops or approved suppliers
 Marketing

Established marketing programs
 Advertising

National programs
 New products
 New concepts
ADVANTAGES AND
DISADVANTAGES
 Advantages, disadvantages for franchisees
 Advantages and disadvantages for
franchisors