Well done: Restaurants conform to new trends to survive in ......Nov 14, 2014 · growing number of fast casual restaurants that serve high-quality food at reasonable prices and have

WWW.IBISWORLD.COM Chain Restaurants in the US September 2014 1

IBISWorld Industry Report 72211aChain Restaurants in the USSeptember 2014 Andy Brennan

Well done: Restaurants conform to new trends to survive in a competitive market

2 About this Industry2 Industry Definition

2 Main Activities

2 Similar Industries

3 Additional Resources

4 Industry at a Glance

5 Industry Performance5 Executive Summary

5 Key External Drivers

7 Current Performance

9 Industry Outlook

11 Industry Life Cycle

13 Products & Markets13 Supply Chain

13 Products & Services

14 Demand Determinants

15 Major Markets

16 International Trade

17 Business Locations

19 Competitive Landscape19 Market Share Concentration

19 Key Success Factors

19 Cost Structure Benchmarks

21 Basis of Competition

22 Barriers to Entry

23 Industry Globalization

24 Major Companies24 Darden Restaurants Inc.

25 DineEquity Inc.

30 Operating Conditions30 Capital Intensity

31 Technology & Systems

31 Revenue Volatility

32 Regulation & Policy

34 Industry Assistance

35 Key Statistics35 Industry Data

35 Annual Change

35 Key Ratios

36 Jargon & Glossary

www.ibisworld.com | 1-800-330-3772 | [email protected]


The industry comprises chain and franchised restaurants that provide food services to patrons who order and are served while seated (i.e. waiter or waitress

service), and pay after eating. These establishments may provide this type of food service to patrons in combination with selling alcoholic and other beverages.

The primary activities of this industry are

Full-service restaurant operation (waiter or waitress service at tables)

Chain full-service restaurant operation (directly owned and operated by owners)

Franchised full-service restaurant operation (under franchise agreements with franchisers)

72211b Single Location Full-Service Restaurants in the USBusinesses in this industry operate single restaurants usually run by the owner.

72232 Caterers in the USThis industry includes companies that provide individual event-based food services.

72241 Bars & Nightclubs in the USOperators in this industry prepare and serve alcoholic beverages. Establishments are known as bars, taverns or nightclubs.

72221b Coffee & Snack Shops in the USEstablishments in this industry provide coffee and snacks where patrons generally select items and pay before eating.

72221a Fast Food Restaurants in the USEstablishments in this industry provide food services where patrons generally select items and pay before eating.

Industry Definition

Main Activities

Similar Industries

About this Industry

The major products and services in this industry are

American food

Asian cuisine

Breakfast foods

Italian-American food

Seafood

Specialty burgers

Other food


About this Industry

Additional Resources For additional information on this industry

www.census.gov/econ Economic Census

www.franchise.org International Franchise Association

www.nrn.com Nation’s Restaurant News

www.restaurant.org National Restaurant Association

www.nccr.net The National Council of Chain Restaurants

IBISWorld writes over 700 US industry reports, which are updated up to four times a year. To see all reports, go to www.ibisworld.com


% c

hang

e

4

−2

−1

0

1

2

3

2008 10 12 14 16 18Year

Consumer spending

SOURCE: WWW.IBISWORLD.COM

% c

hang

e

8

−8

−4

0

4

2006 08 10 12 14 16 18Year

Revenue Employment

Revenue vs. employment growth

Products and services segmentation (2014)

51%American food

4%Asian cuisine

15%Breakfast foods

4%Specialty burgers

11%Italian-American food

9%Other food

6%Seafood


Key Statistics Snapshot

Industry at a GlanceChain Restaurants in 2014

Industry Structure Life Cycle Stage Mature

Revenue Volatility Low

Capital Intensity Low

Industry Assistance Low

Concentration Level Low

Regulation Level Medium

Technology Change Medium

Barriers to Entry Low

Industry Globalization Medium

Competition Level High

Revenue

$92.0bnProfit

$6.1bnWages

$29.8bnBusinesses

755

Annual Growth 14-19

1.6%Annual Growth 09-14

2.1%

Key External DriversConsumer spendingHealthy eating indexHouseholds earning more than $100,000Consumer Confidence Index

Market ShareDarden Restaurants Inc. 9.4%DineEquity Inc. 8.2%

p. 24

p. 5

FOR ADDITIONAL STATISTICS AND TIME SERIES SEE THE APPENDIX ON PAGE 35



Key External Drivers Consumer spendingFactors that influence growth in consumer spending affect the industry. During a recession, any spike in unemployment generally leads to declining consumption. Conversely, when spending is high, consumers are more likely to spend money on eating at restaurants. Consumer spending is expected to increase during 2014, providing a potential opportunity for the industry.

Healthy eating indexOver the past five years, consumers have been more aware of issues related to weight and obesity, nutrition and food safety than they were before. Therefore, as the healthy eating index rises, demand for some restaurants with fewer healthy options will decrease. The healthy eating index is expected to increase slowly over 2014 and will remain a potential threat to the industry due to the number of restaurants that

Executive Summary

The Chain Restaurants industry has slowly recovered from the recession over the past five years. During the recession, consumers cut back on discretionary spending, and meals at restaurants were among the first expenses to be trimmed. However, as per capita income has increased and unemployment has eased since 2009, consumer confidence has improved, giving rise to greater spending on sit-down meals. Although the average industry profit margin remains slim, profit margins at most chains have increased over the past five years as

revenue has grown and costs have been kept under control. Over the five years to 2014, industry revenue is expected to increase at an average annual rate of 2.1% to $92.0 billion. In 2014, growth is projected to reach 1.5% as the economy continues to show signs of strength and consumers become comfortable with increasing spending.

Full-service chain restaurants operate within the increasingly competitive food service sector. Major chains such as DineEquity Inc. (which operates Applebee’s and IHOP) and Cracker Barrel

Old Country Store compete against independent full-service restaurants, major fast food chains and a range of other establishments that offer meals to eat in or take away. Over the past five years, consumers have been seeking greater convenience at a lower cost, to the detriment of full-service establishments, which serve sit-down meals with full service. In response to greater competition, full-service restaurant chains have invested in labor-saving technology to cut down costs and have redesigned restaurant layouts to create a more modern ambiance.

The industry’s run of slow and steady growth is projected to continue over the five years to 2019. Industry revenue is forecast to grow at an average annual rate of 1.6% to $99.7 billion over the period. Consumers will increase their spending at restaurants as the economy continues to improve and unemployment dissipates. However, the industry will be weighed down by increasing competition from a growing number of fast casual restaurants that serve high-quality food at reasonable prices and have business models that are not reliant on large overheads. This will serve to keep the average industry profit margin slim. For this reason, the major full-service restaurant chains will increasingly look abroad to emerging economies for growth.

Industry PerformanceExecutive Summary | Key External Drivers | Current Performance Industry Outlook | Life Cycle Stage

Healthier menus and recovering disposable income will support future revenue growth


Industry Performance

Key External Driverscontinued

have yet to fully adapt their menus to suit the trend.

Households earning more than $100,000Full-service restaurants typically draw their customers from higher-income households. Because of this factor, growth in the number of households with incomes of more than $100,000 benefits the industry. The number of households earning more than

$100,000 a year is expected to increase during 2014.

Consumer Confidence IndexChanges in consumer sentiment have a significant effect on household expenditure on discretionary items, including restaurant dining. During a recession, demand for lower-priced products from restaurants increases. The Consumer Confidence Index is expected to increase in 2014.

%

71

67

68

69

70

1905 07 09 11 13 15 17Year

Healthy eating index


% c

hang

e

4

−2

−1

0

1

2

3

2008 10 12 14 16 18Year

Consumer spending



Improved consumer spending

The industry comprises chain restaurants that provide food services to patrons who order and are served while seated. As a consumer-focused industry, chain restaurants rely heavily on levels of consumer spending and confidence. Over the past five years, consumer spending has increased at an average annual rate of 2.3%. While consumer spending declined during the recession, more consumers have treated themselves to restaurant trips since 2010 as the economy has improved. Since the recession has ended, consumers have also been more likely to attend sit-down restaurants where the total bill is typically higher than at fast food restaurants.

However, even as consumer spending has improved, many consumers have still been less willing to spend on sit-down meals. Instead, consumers have shown a preference for cheaper fast casual concepts. In fact, Darden Restaurants Inc., the industry’s biggest player, has

characterized the full-service segment’s troubles over the period. In early 2014, Darden sold its struggling Red Lobster business, announced that it is halting expansion of its Olive Garden brand, while also stating that it plans to make no further acquisitions for the foreseeable future. The company’s same-store sales have stagnated over the past few years as consumers have flocked to restaurants that offer convenience and quality at a low price.

Increased competition has put pressure on the profit margins of full-service chain restaurants that have had limited ability to increase menu prices. IBISWorld estimates that in 2014, the average industry operator will obtain a profit equivalent to 6.6% of revenue. Despite increased competition, margins have since increased because many chains have implemented cost cutting measures and invested in technology to reduce their reliance on labor.

The Chain Restaurants industry has undergone an extended period of growth over the past five years as consumers have begun spending again following a gloomy period during the recession. Improved economic fundamentals such as a lower unemployment rate and higher per capita income have given rise to a jump in consumer confidence, which has spurred spending. However, the industry has faced increased competition from a range of food service establishments, especially those that specialize in convenient meals at a low price. Fast casual restaurants that do not offer table service but offer a higher quality of food and ambiance compared with a fast food restaurant are experiencing particularly strong growth and therefore are increasingly taking market share away from full-service chain restaurants. Nevertheless, IBISWorld

expects revenue to grow at an annualized rate of 2.1% to $92.0 billion over the five years to 2014. This includes growth of 1.5% in 2014 as the economy continues its march forward.

Current Performance

% c

hang

e

8

−8

−4

0

4

2006 08 10 12 14 16 18Year

Industry revenue




New health trends emerge

Society’s increasing awareness of the health risks associated with a diet high in fat, salt and sugar, has encouraged chain restaurants to update their menus. For many restaurants, the health factor has become a key focus of their marketing strategy and has enabled them to target a new segment of the market. The healthy eating index, which measures the degree that the average American adheres to consumption guidelines set out by the US Department of Agriculture, is expected to increase in 2014, meaning those restaurants that do

not learn to adapt to the changing American diet will likely struggle. For example, Applebee’s, a unit of DineEquity Inc., promotes its “Great Tasting and Under 550 Calories” menu. Over the past five years the chain has introduced items such as shrimp on rice and asiago peppercorn steak in response to consumer studies and focus groups that revealed guests wanted healthier choices. Many chain restaurants have also introduced gluten-free menus as consumers have become increasingly adverse to gluten.

Consolidation and profit

Over the past five years, the industry has undergone a period of increased merger and acquisition activity, with some chains divesting some their brands to focus on a few core brands. Private equity has played a bigger role in the industry as investment firms seek to turn around struggling brands. This has occurred as the industry comes under increased pressure to find avenues for growth amid increased levels of competition in the broader food service sector. For example, Golden Gate Capital, a private equity firm, has recently purchased Red Lobster from Darden in 2014, as well as the On the Border chain from Brinker International in 2010. Industry consolidation has led to new establishments (locations) growing at a faster rate than new enterprises (companies operating those locations). The number of industry enterprises is expected to increase at an average annual rate of 0.7% to 755 over the five years to 2014.

Industry employment has improved along with revenue over the past five years

as restaurants have hired to keep pace with demand.

The number of industry employees has increased at an average annual rate of 2.0% to 1.7 million people over the five years to 2019. While wages as a proportion of revenue have declined as restaurants have found ways to save on labor costs, the industry remains highly labor intensive due to its service-orientated nature. Labor is required throughout every aspect of the supply chain, from front-of-house service, to waiting tables, to cooking food. This has been one of the factors behind the industry’s losing battle with fast casual restaurants that have more ability to rationalize labor costs.

Competitive pressure and declining demand have forced restaurants to consolidate



Industry remains labor intensive

The long-term trend of declining wages due to the automation of the food preparation process is expected to continue. Therefore, wages and employment will likely experience muted growth in the five years to 2019. The average industry wage is projected to decline from $17,169 in 2014 to $16,473 by 2019. The industry mainly relies on low-skilled workers that

experience little real wage growth over time. Despite the decline in wages, however, industry employment is projected to grow at an average annual rate of 2.3% to more than 1.9 million workers over the five-year period. However, the greater use of part-time and casual employees to meet peak customer service periods will partly inflate employee numbers.

Tech-savvy operators will thrive

To cater to the increasingly digital-savvy consumer market, full-service chain restaurant operators will continue to invest in technology. Restaurateurs will use online channels such as websites and social media to communicate with customers. It has become almost mandatory for restaurant chains to have an online presence and digital marketing strategy due to the sheer amount of time people now spend on their desktops, tablets and smartphones. According to a recent National Restaurant Association (NRA) study, 20.0% of consumers use

technology when choosing a full-service restaurant. For example, according to the NRA, an estimated 67.0% of consumers use smartphones to look up restaurant directions, a number that climbs higher the younger customers are.

Industry Outlook

The Chain Restaurants industry will improve along with the economy over the next five years. A lower unemployment rate and rising per capita income will encourage consumers to increase their spending on small luxuries such as eating out. Consumer spending is forecast to increase at an average annual rate of 2.6% during the next five years. However, full-service chain restaurants will continue to face rising competition from fast food and fast casual restaurants that offer more value-oriented products. As a result, IBISWorld projects that industry revenue will grow at an annualized rate of 1.6% to $99.7 billion over the five years to 2019.

Despite the industry’s continued growth, intense competition will likely persist throughout the next five years. Fierce price-based competition from fast food and fast casual restaurants will place increased emphasis on product development. Chain restaurants will need to continually innovate their menus to stay relevant. Most chain restaurants will expand their current product lines and further shift toward healthy menu items. For example, many operators will emphasize meals options such as fresh salads and gluten-free items as they seek to expand revenue and profit.

Even with high-tech equipment, restaurants must ensure quality staff training at all levels



Industry restructuring As economic activity improves, chain restaurants will place less emphasis on value offers and specials and attempt to capture higher consumer spending. However, enterprises will continue to compete ferociously for their shares of the saturated food service sector, limiting the rollout of new locations. The number of industry establishments is expected to grow just 2.7% per year on average to 35,579 over the five years to 2019. For this reason, consolidation among establishments is expected to continue. Smaller struggling operators will be acquired by the more powerful chains and integrated into their diverse portfolio of restaurants, or will be purchased and reinvented by private equity groups seeking a quick turnaround. Another result of the slow domestic growth in profit and revenue will be continued international expansion by chain restaurants.

In the five years to 2019, many major restaurant chains are expected to continue their push overseas as domestic opportunities shrink. Fast food restaurants such as McDonald’s and Yum! Brands (owner of KFC and Pizza Hut) initially beat full-service restaurants to the overseas chase. However, most major full-service chains

now have a significant international presence and are earning a greater percentage of revenue through their overseas segments each year. For example, in September 2013, the industry’s biggest player, Darden Restaurants, signed an area-development agreement with Secret Recipe, a leading restaurant operator in Asia, to develop 13 restaurants in Malaysia under Darden’s Red Lobster, Olive Garden and LongHorn Steakhouse brands. This follows similar agreements with other master franchisers in the Middle East and Latin America. Many of these emerging economies have huge upside potential for growth and promise long-term profitability. However, chain restaurants need to be aware of differences in tastes and cultural norms, meaning all aspects of the restaurant system, including menus, marketing, restaurant design, purchasing and training need to be tailored to local conditions.

Industry operators will look to Asia and the Middle East for aggressive growth


Industry PerformanceIndustry saturation is occurring in all food service industries

Profit margins are low due to significant priced-based competition on menu items

Growth will occur only from garnering market share and revenue from other food service industries

The industry is growing at about the same pace as the overall economy

Life Cycle Stage


20

15

10

5

0

-5

-10

% G

row

th in

sha

re o

f eco

nom

y

% Growth in number of establishments

-10 -5 0 5 10 15 20

DeclineShrinking economicimportance

Quality GrowthHigh growth in economic importance; weaker companies close down; developed technology and markets

MaturityCompany consolidation;level of economic importance stable

Quantity GrowthMany new companies; minor growth in economic importance; substantial technology change

Key Features of a Mature Industry

Revenue grows at same pace as economyCompany numbers stabilize; M&A stageEstablished technology & processesTotal market acceptance of product & brandRationalization of low margin products & brands

Single Location Full-Service Restaurants

Frozen Food Wholesaling

Dairy Wholesaling

Coffee & Snack Shops

Chain Restaurants



Industry Life Cycle This Chain Restaurants industry is in a mature phase of its life cycle as it begins to reach saturation point in the domestic market. The limits of population size within a city or town that can profitably support a franchise or other outlet are being approached, and competition for high-profile operating sites in other areas is intense. Over the 10 years to 2019, industry value added (IVA), which measures an industry’s contribution to GDP, is expected to grow at an average rate of 2.1% per year. Over the same period, GDP is also expected to grow at an annualized rate of 2.5%, showing the industry is growing at a long-term rate in line with overall economic growth.

Consolidation has been a significant factor in the industry over the past decade, with major franchise operators taking over multi-establishment or franchised stores in other full-service categories to achieve growth. Significant price-based competition is continuing as well, as operators strive to capture an increasing market share of a slow-growth

domestic market. Given the state of the domestic market, major franchise operators are currently receiving most of their revenue growth from overseas expansion, particularly in emerging economies in Asia, the Middle East and South America.

The industry’s growth has been stunted by competition from the broader food services sector, especially chain fast food and fast casual restaurants with significant marketing power and financial backing. There are pockets within the food services sector undergoing rapid growth, most notably the ‘fast casual’ segment, which consists of restaurants that do not offer full table service, but promise a higher quality of food and atmosphere than a fast food restaurant. Fast casual restaurants have stolen market share from full-service chain restaurants since the recession as unemployment has remained high and income growth has been stagnant and competition for a finite consumer dollar has intensified.

This industry is Mature


Products & Services The Chain Restaurants industry is segmented based on the main type of food served. Licensed chain restaurants will typically earn between 15.0% and 25.0% of the check value through sales of alcoholic beverages. Desserts also usually account for between 10.0% and 20.0% of the check value for those restaurants that do not specialize in dessert menus. Some operators in the industry also earn revenue through non-food items such as apparel sales. The industry excludes food service chains such as McDonald’s where customers pay before eating and do not receive table service.

American foodThe Chain Restaurants industry is dominated by chains that offer a menu with a wide variety of traditional American cuisine such as burgers, steaks, sandwiches, salads, fries and deserts.

This type of food is heavily immersed into American culture and has therefore been the main driver of the industry’s growth over the past half-century. Major chains Applebee’s, Chili’s, Outback Steakhouse and T.G.I. Friday’s fit into this segment. American food can be further segmented into subcategories such as Tex-Mex (Chili’s Grill and Bar), BBQ (Famous Dave’s) and steak (Outback Steakhouse), based on the chain’s primary menu items.

Italian-AmericanItalian-American cuisine is a close variation on traditional Italian food, with recipes modified under the influence of American culture over the past two centuries. Modern Italian-American menu is heavily focused on pasta-based dishes and pizza and tend to include greater amounts of meat and garlic than traditional Italian dishes. Italian-

Products & MarketsSupply Chain | Products & Services | Demand Determinants Major Markets | International Trade | Business Locations

KEY BUYING INDUSTRIES

9901 Consumers in the US Households are the key buyers of this industry’s products.

KEY SELLING INDUSTRIES

42442 Frozen Food Wholesaling in the US This industry supplies frozen food products to restaurants.

42443 Dairy Wholesaling in the US Dairy wholesalers supply dairy products to restaurants.

42444 Egg & Poultry Wholesaling in the US This industry supplies poultry products to restaurants.

42446 Fish & Seafood Wholesaling in the US This industry supplies fish and seafood products.

42447 Beef & Pork Wholesaling in the US Beef and pork wholesalers supply meat products.

42448 Fruit & Vegetable Wholesaling in the US Restaurants get fresh fruit and vegetables from this industry.

42481 Beer Wholesaling in the US Beer wholesalers supply restaurants with beer and ales.

42482 Wine & Spirits Wholesaling in the US This industry supplies wine and distilled alcoholic and other beverages to restaurants.

Supply Chain


Products & Markets

DemandDeterminants

Demand for full-service restaurants is driven by a number of factors including household income, consumer confidence, attitudes to health and propensity to eat out, rather than at home.

Income and expenditureThis industry is sensitive to factors that affect the growth in household disposable income because disposable income is required to finance restaurant and dining

expenditures. Household disposable income growth is affected by changes in labor market growth (i.e. employment rates), in tax and interest rates, high and increasing gas prices, and changes in consumer confidence. The decline in industry revenue during the recession illustrates the extent to which the industry’s performance is reliant on positive income levels, high consumer confidence and a robust economy. For

Products & Servicescontinued

American dishes also tend to be characterized by large amounts of tomato sauce. Olive Garden and Carrabba’s Italian Grill are two prominent restaurant chains in this category.

Breakfast foodsAbout 17.0% of industry revenue is derived from chains that specialize in breakfast foods such as pancakes, waffles, omelets and French toast. While most chains in this segment also offer traditional lunch and dinner menus, breakfast food chains have developed a competitive advantage with in the food-service sector advertising their ‘all-day breakfast’ service. Well-known names in this category include IHOP, Denny’s and Waffle House.

OtherThere are a huge range of chains operating in the industry, selling a wide range of cuisines. Examples include The Cheesecake Factory, which serves dinner alongside its specialty cheesecakes; P.F. Chang’s China Bistro, a Chinese-American chain with more than 200 locations; and Red Lobster which specializes in seafood. Chains offering healthier menu options have grown at a faster rate than more traditional restaurants over the past decade due to rising awareness of the negative impacts of obesity. Specialty sit-down burger chains (as opposed to quick-service burger chains) are also on the rise, taking advantage of changes in consumer preferences towards more gourmet cuisines.

Products and services segmentation (2014)

Total $92.0bn

51%American food

4%Asian cuisine

15%Breakfast foods

4%Specialty burgers

11%Italian-American food

9%Other food

6%Seafood



Products & Markets

Major Markets

The major markets for the Chain Restaurants industry can be segmented based on a number of factors including income, age, geographic location and

family structure. Given the discretionary nature of the industry, an indication of major markets can be inferred on the basis of annual

DemandDeterminantscontinued

example, lower consumer confidence, weak levels of disposable income and rising unemployment tightened household budgets, encouraging people to save more and spend less by cooking at home rather than eating out.

DemographicsThe changing age structure of the population influences industry demand. Two broad demographic trends have encouraged industry growth in the past decade. Firstly, the baby-boomer generation has access to higher disposable incomes than previous generations, meaning they are more likely to spend on eating out. Also, young adults aged between 18 and 30 years old are delaying marriage and having children compared to previous generations; this allows them to spend a greater proportion of their income on eating out. Young adults in this age bracket spend more of their food budget on eating out than any other age group.

Health and lifestyleRising health consciousness has a direct effect on dining at full-service restaurants as consumers have become increasingly concerned about fat content, fried foods and salt content, especially when dining out. As such, rising concerns regarding the nutritional content and value of restaurant meals is likely to influence the demand for certain foods on cafe menus, encouraging industry players to alter their product mix. It is also expected to affect overall performance for industry players selling unhealthy food on menus, such as fried food or hamburgers.

Convenience, value for money and time are other important demand determinants. Recent social trends such as busy lifestyles, heavy workloads and long working hours have helped boost demand for our of home dining as time-poor consumers look to cut down cooking time.

Major market segmentation (2014)

Total $92.0bn

40.0%Highest quintile of incomes

24.0%Fourth quintile of incomes

16.0%Middle quintile of incomes

11.5%Second quintile of incomes

8.5%Lowest quintile

of incomes



Products & Markets

International Trade As a retail industry, the Chain Restaurants industry is not technically engaged in importing or exporting products, so international trade is not relevant to the industry. However, a number of industry players have overseas operations and earn a significant portion

of their revenue from abroad. Given the mature stage of this industry’s life cycle in the domestic market, and changes in customer profiles and tastes, many major operators are seeking to increase their growth in revenue and earnings through further global expansion.

Major Marketscontinued

expenditure on food and beverages consumed outside the home. According to the US Census Bureau, the average consumer spends about 5.2% of their annual expenditure on food and beverages consumed outside the home.

An estimated 40.0% of industry demand comes from consumers in the nation’s highest income quintile. In 2012 (the latest available data), the average consumer in the highest income bracket spent $5,366 on food and beverages consumed outside the home, according to the US Census Bureau. On the other hand, those in the lowest income quintiles often need to make significant sacrifices in order to afford meals away from home. The average consumer in the lowest income quintile spent $1,086 on

out-of-home food consumption in 2012. The three middle-income quintiles represent more than 50.0% of industry demand, showing how important the middle-class consumer is to the industry’s performance. While these consumers do not typically spend big on luxury food items, they contribute to steady demand for middle-of-the-range chain restaurants.

The industry’s major markets distribution has not changed dramatically over time as spending patterns within income brackets are relatively established. There was some tightening of budgets during the recession, but this occurred across all demographics, so it did not influence the industry’s major markets distribution.


Products & Markets

Business Locations 2014

MO2.0

West

West

West

Rocky Mountains Plains

Southwest

Southeast

New England

VT0.3

MA2.6

RI0.5

NJ2.9

DE0.3

NH0.5

CT1.5

MD1.4

DC0.3

1

5

3

7

2

6

4

8 9

Additional States (as marked on map)

AZ1.7

CA12.3

NV0.7

OR1.7

WA2.5

MT0.4

NE0.6

MN1.6

IA1.1

OH3.1 VA

2.7

FL6.3

KS0.9

CO2.0

UT0.6

ID0.5

TX6.9

OK1.1

NC3.2

AK0.2

WY0.2

TN1.8

KY1.1

GA3.1

IL4.0

ME0.6

ND0.2

WI2.1 MI

3.0 PA4.0

WV0.5

SD0.3

NM0.6

AR0.9

MS0.7

AL1.2

SC1.6

LA1.2

HI0.5

IN1.9

NY8.1 5

67

8

321

4

9


Mid- Atlantic

Establishments (%)

Less than 3% 3% to less than 10% 10% to less than 20% 20% or more

Great Lakes


Products & Markets

Business Locations The industry’s business locations are largely distributed according to population and income per capita. Since the industry provides a location-contingent food service to consumers, successful operators need to be located near their customer base. For this reason, the industry is heavily concentrated in the Southeast, West and Mid-Atlantic regions, mainly due to population distribution and size.

Large chains can compete with other retailers for high-profile, high-rent locations due to their high turnovers. A large proportion of operators are located along major highways or in prominent inner-city locations. The high passing foot or vehicle traffic usually guarantees a high level of business for both locals and tourists.

The Southeast has the highest concentration of industry establishments and a higher proportion of employment and revenue compared with its population. Southern states have traditionally been big consumers of food outside the home, with many of the industry’s chains originating from the South. For example, Darden Restaurants

and Bloomin’ Brands, two of the industry’s biggest operators, are based in Florida and their restaurants are heavily concentrated in the southern states. Brinkler International, owner of Chili’s Grilll & Bar and Maggiano’s Little Italy, is based in Dallas, TX, and Cracker Barrel Old Country Store, Inc. is based in Tennessee.

%

30

0

10

20

Sout

hwes

t

Wes

t

Gre

at L

akes

Mid

-Atla

ntic

New

Eng

land

Plai

ns

Rock

y M

ount

ains

Sout

heas

t

EstablishmentsPopulation

Distribution of establishments vs. population



Cost Structure Benchmarks

ProfitIndustry profit is based on earnings before interest and taxes. Profit varies depending upon the size of the company, with larger operators generally benefiting from economies of scale. IBISWorld estimates

that in 2014, the average industry operator will obtain profit equivalent to 6.6% of revenue. Profit margins were negatively affected by a drop in consumer spending during the recession, with the average industry profit margin falling to as low as

Key Success Factors Access to multiskilled and flexible workforceAccess to suitably skilled and trained staff is required to meet peak customer demand periods.

Ability to quickly adopt new technologyAdopting new employee training and kitchen and customer-related technology can increase productivity and lower labor costs.

Proximity to key marketsBeing in a good location and understanding what customers’ desire from a restaurant can drive customer traffic to an operator.

Ability to control stock on handControlling major cost areas like orders, stock and food waste can improve profit.

Fast adjustments made to changing regulationsIndustry players must monitor changes to government regulations in areas such as food safety and handling, otherwise they may face fines or risk losing their operating license.

Ability to franchise operationsFranchising both in the United States and overseas is now a significant component of this industry and can provide necessary support to owners.

Market Share Concentration

The Chain Restaurants industry has a low level of market share concentration. In 2014, the four largest industry players are estimated to account for about 26.4% of available market share. The industry is made up of a vast array of chain and franchised restaurant operators and food concepts, as well as the extensive number of sites they operate. A number of chains and franchised operators have establishments that are spread nationally and even internationally.

In the past five years, the industry’s concentration level has fallen slightly because a number of conglomerates have offloaded underperforming chains to private equity firms. Most recently in 2014 Darden Restaurants offloaded its 600-plus Red Lobster restaurants to Golden Gate Capital for $2.1 billion.

Another major transaction was Brinker’s 2010 sale of chains On The Border Mexican Grill and Cantina and Romano’s Macaroni Grill. Private equity firms play a significant role in the industry, often purchasing underperforming restaurant chains with the aim of quickly turning around their performance, increasing their profitability and selling the business at a profit. Franchising activity has also increased substantially over the past five years as many chains see more of a profit to be made in collecting royalties rather than being in the business of buying and selling food and beverages. This has also added to the industry’s fragmentation. Given the industry’s nature, particularly its fragmentation by food types, the concentration is not expected to change significantly in the near future.

Competitive LandscapeMarket Share Concentration | Key Success Factors | Cost Structure Benchmarks Basis of Competition | Barriers to Entry | Industry Globalization

Level Concentration in this industry is Low

IBISWorld identifies 250 Key Success Factors for a business. The most important for this industry are:


Competitive Landscape

Cost Structure Benchmarkscontinued

5.4% in 2009. Margins have since increased because many chains have implemented cost cutting measures and invested in technology to reduce their reliance on labor.

PurchasesFood and beverages are usually purchased from wholesalers, particularly from those that can guarantee both prompt delivery and quality foodstuffs. Fluctuations in the cost of food and liquor significantly impact industry revenue and profit. Beverages generally have higher margins than food. In the short term, many cost increases cannot be passed onto the consumer or client. Therefore, menus, portion sizes and other inputs into food service have to be continuously monitored. The other major source of inefficiency is waste due to fluctuations in demand, an oversupply of meals or excess ingredients that cannot

be used and subsequently spoil. IBISWorld forecasts that in 2013, purchases will account for 28.9% of an average company’s revenue. Since 2009, some efficiencies in production have been found, however, the prices of many inputs, especially fresh meat, has increased, leading to an overall increase in purchase costs since 2009.

WagesWages and associated labor costs represent the industry’s single biggest cost. Wages are high due to the labor-intensive nature of food preparation, cooking, serving and bussing tables. These costs include wages and benefits, such as health, workers’ compensation and unemployment insurance. Menu prices and industry profitability are affected by labor intensity, since increased labor costs cannot simply be passed directly onto consumers in the form of higher prices,

Sector vs. Industry Costs

■ Profi t■ Wages■ Purchases■ Depreciation■ Marketing■ Rent & Utilities■ Other

Average Costs of all Industries in sector (2014)

Industry Costs (2014)

0

20

40

60

Perc

enta

ge o

f rev

enue

80

100 7.3

16.4

7.52.8 4.1

39.4

22.5

6.6

19.0

6.23.0 3.9

28.9

32.4




Basis of Competition The Chain Restaurants industry exhibits a high level of competition. Restaurateurs are required to compete against each other and against other industries in the broader food service sector such as single location full service restaurants, coffee shops, bars and hotels.

Internal competitionChain restaurants compete with each other on the basis of price and quality. As a result of the high level of competition within the industry, profit margins are low for most industry operators, necessitating stringent cost and quality controls to maintain efficiency and minimize wastage. Operators also face strong competition based on quality. Premium ingredients and well-presented meals are highly regarded and can make the difference to consumers, who often

judge a restaurant by how it compares with others.

Restaurants also compete on the basis of location, style, ambience, hospitality and service. More than ever, restaurants are selling and marketing a meal experience to potential customers. As a result, it is important that the operator understands the positioning of the restaurant in the marketplace and the clientele they are attracting or wanting to attract. Significantly, the restaurant must consistently deliver on customers’ product expectations.

External competitionExternal competition arises from the broader food service sector. This includes fast-food restaurants and independent restaurants that offer dining and take-out services, as well as other retailers that

Cost Structure Benchmarkscontinued

especially given the weak economic conditions and sustained unemployment levels. Wage costs will account for an estimated 32.4% of an average company’s revenue in 2014, down slightly on 2009. As revenue has increased since the recession, operators have made an effort to keep labor costs down.

Rent and utilitiesRent and utilities expenses are high for the chain restaurants industry because of the need for locations in high traffic areas with high visibility. Many operators try to locate near a main thoroughfare or in a high foot traffic location. Rent and utilities expenses are expected to equal 6.2% of an average company’s revenue in 2014. As a percentage of revenue, rent and utilities have remained relatively constant over the past five years.

DepreciationOperators in the industry are subject to capital expenditure, such as commercial

kitchen equipment, store fixtures and fittings, furniture, and crockery and cutlery. Depreciation is much higher for operators that own the building in which they operate; consequently, during the past decade, the trend has been for operators to rent, rather than own, their stores. For this reason, depreciation has declined as a proportion of industry revenue and is expected to account for 3.9% of total revenue in 2014.

OtherOperators in the industry are subject to a range of other costs including professional fees, administrative costs and marketing or advertising. Due to the high number of franchised businesses operating in the industry, franchise royalties and other fees can account for a significant proportion of industry revenue. An additional marketing fee is sometimes paid to the franchiser as well.

Level & Trend Competition in this industry is High and the trend is Increasing



Barriers to Entry Franchise agreementsEntry to the industry can also occur through signing a franchise agreement, which includes outfitting and equipment, as well as training and computer systems. Franchisors also provide food and beverages and some financial and accounting functions for a proportional share of revenue from their franchisees. This lowers operational costs and can minimize some risks, especially for inexperienced persons entering the industry. However, individual franchisees still carry much of the day-to-day operational and management risks associated with their own business.

LocationThere is significant competition among the major franchised companies to obtain suitable sites, which has increased the cost of many prime sites. While industry regulation and licensing is significant, including health and food-service regulations, liquor licensing, and general occupational health and safety issues, these regulations do not create any

insurmountable barriers to enter or operate in this industry.

ConcentrationIndustry concentration is low, with the top four players controlling less than 30.0% of the industry’s available market share in 2014. This low concentration is an indication of the array of food concepts and styles available in this industry, with no individual major player being dominant. While it takes time and significant capital to build a brand around a new food concept, especially on a national level, there are many examples of new restaurant chains successfully entering the industry.

Basis of Competitioncontinued

serve food, such as convenience stores and supermarkets. When economic conditions are gloomy, consumers are more likely to trade-down to cheaper food options, putting pressure on chain restaurants to lower prices.

Independent restaurants can sometimes provide a more friendly

dining experience, as guests are able to directly interact with the owners or the chef, something that may be missing with standardized franchised and chain operators. Other competition is derived from consumers deciding to cook more in-home meals, which occurs particularly during difficult economic times.

Barriers to Entry checklist Level

Competition HighConcentration LowLife Cycle Stage MatureCapital Intensity LowTechnology Change MediumRegulation & Policy MediumIndustry Assistance Low


Level & Trend Barriers to Entry in this industry are Low and Steady



Industry Globalization

Level & Trend Globalization in this industry is Medium and the trend is Increasing

The majority of operators in the industry exhibit a low level of globalization because they are US-owned and earn the majority of their sales from domestic activity. There are, however, some large chain and franchised restaurant operators (including Brinker International and DineEquity Inc.) that have international operations.

Due to significant competition and the expected subdued domestic growth opportunities, a shift toward international operations will likely

continue. There are currently no major foreign operators in this industry. Global expansion is anticipated to continue as restaurants focus on specific areas of expertise and food concepts and styles held by each major operator. This move offers them the opportunity to raise the pace of revenue growth, employment and earnings, because direct competition is lower in many emerging and high-growth countries. In addition, some of these countries, like China, provide the added attraction of significantly expanding middle-income households.


Player Performance Darden Restaurants Inc. is one of the world’s largest full-service restaurant companies. The Orlando, FL-based company was first publicly listed in 1996 and served more than 441 million meals in fiscal 2013. The company employs over 200,000 staff, operates under several brands and offers a variety of food and menu items at different price points designed to meet guests’ needs. Over time, the company has expanded through new stores, concepts and acquisitions. As economic conditions weakened during the recession, however, Darden resorted to shutting down some of its underperforming stores and brands. Unlike other major restaurant chains in the United States, Darden does not franchise its restaurants.

Darden owns all of its restaurants in the United States and Canada, and has 37 licensed restaurants in Japan, Puerto Rico, Mexico and Dubai. The company derives over 98.0% of its revenue in the

United States. As of 2014, Darden operates 2,138 restaurants in the United States and Canada. In the United States alone, it operates 2,105 restaurants, including 678 Red Lobsters, 822 Olive Gardens, 430 LongHorn Steakhouses, 49 The Capital Grilles, 33 Bahama Breezes, 31 Seasons 52s, nine Eddie V’s Prime Seafood, three Wildfish Seafood Grille restaurants and a couple of dual-use Red Lobster and Olive Garden restaurants.

In early 2014, Darden agreed to sell its struggling Red Lobster brand to Golden Gate Capital for $2.1 billion. This will result in the company losing significant market share within the Chain Restaurants industry going forward. Both the Red Lobster and Olive Garden chains have struggled over the past five years with negative same-store sales as consumers have flocked to cheaper fast casual restaurants. Darden does not plan to pursue any acquisitions for the foreseeable future and is halting the

Major CompaniesDarden Restaurants Inc. | DineEquity Inc. | Other Companies

82.4%Other

Darden Restaurants Inc. 9.4%

DineEquity Inc. 8.2%


Major players(Market share)

Darden Restaurants Inc. Market share: 9.4% Industry Brand Names Red Lobster Olive Garden LongHorn Steakhouse The Capital Grille Bahama Breeze Seasons 52

Darden Restaurants Inc. (US industry specifi c) – fi nancial performance

Year*Sales

($ million) (% change)Operating Income

($ million) (% change)

2008-09 7,075.0 N/C 896.9 8.1

2009-10 6,980.5 -1.3 920.9 2.7

2010-11 7,365.6 5.5 1,039.0 12.8

2011-12 7,866.3 6.8 1,070.7 3.1

2012-13 8,419.9 7.0 1,027.0 -4.1

2013-14** 8,809.7 4.6 1,674.2 63

*Year-end May **EstimatesSOURCE: ANNUAL REPORT AND IBISWORLD


Major Companies

Player Performance DineEquity Inc. was formerly known as IHOP (International House of Pancakes), but with the acquisition of Applebee’s in November 2007, the company restructured its operations and changed its name. The company is based in Glendale, CA, and employs about 2,500 staff. Similar to other restaurant chains, DineEquity’s business model now focuses on franchising its brands rather than running restaurants. The company now earns about 50.0% of its revenue, and

most of its profit, through franchise royalties and other related fees. As a result of this shift to focus on franchising, company revenue has declined significantly over the past five years, but profit has increased. In 2012 DineEquity earned $849.9 billion in revenue.

DineEquity’s has more than 2,000 Applebee’s restaurants (1,988 franchise operators and 23 company-owned) across 49 states, 15 countries and one US territory. Applebee’s provides

Player Performancecontinued

expansion of its Olive Garden chain in order to focus on lifting same-restaurant sales at its existing locations. In 2012 the company purchased Yard House, an upscale beer-centric eatery chain with a classic rock theme, for $585.0 million, which followed its 2007 acquisition of RARE Hospitality International Inc., which owned the brands LongHorn Steakhouse and The Capital Grille.

Financial performanceOver the five years to fiscal 2014 (year-end May), Darden’s US-specific revenue is estimated to have grown at an average rate of 4.2% per year to $8.8 billion. US revenue has grown in every year since 2010, largely due to the addition of new restaurants as well as the acquisition of

Yard House. In particular, the company has aggressively expanded its number of Olive Garden and LongHorn Steakhouse locations. The company’s same-store sales have been relatively flat over the past five years; however, it has outperformed the industry as a whole over the period. While food inflation has led to higher purchase costs over the past five years, the company has managed to keep labor costs under control (which account for between 31.0% and 32.0% of the company’s revenue) and is expected to earn an operating profit of $1.6 billion in fiscal 2014. From 2015 onward, Darden’s market share within the industry will be significantly reduced due to the recent Red Lobster sale.

DineEquity Inc. Market share: 8.2% Industry Brand Names Applebee’s IHOP

DineEquity Inc. (US industry specifi c) – fi nancial performance

YearSales



2009 6,943.0 0.6 965.1 10.1

2010 6,919.7 -0.3 989.5 2.5

2011 7,081.3 2.3 970.1 -2.0

2012 7,197.9 1.6 814.8 -16

2013 7,341.9 2.0 763.5 -6.3

2014* 7,495.7 2.1 764.6 0.1

*EstimatesSOURCE: ANNUAL REPORT AND IBISWORLD


Major Companies

Other Companies Bloomin’ Brands Inc. Estimated market share: 4.6%Bloomin’ Brands is a Tampa, FL-based hospitality company that owns several restaurant chains, including Outback Steakhouse, Carrabba’s Italian Grill and Bonefish Grill. The company was founded in August 1987 as Multi-Venture Partners Inc. and first went public in 1991. Bain Capital Partners and Catterton Partners purchased the company in 2007 and relisted it in August 2012. Bloomin’ Brands owns and operates 1,344 restaurants and has 164 restaurants operating under franchise or joint venture arrangements across 48 states and 21 countries and territories and employs over 100,000 staff.

Bloomin’ Brands’ restaurants have a number of themes and serve a range of cuisine of varying quality. Outback Steakhouse, an Australian-themed steakhouse, is the chain’s cheapest concept, followed by Carrabba’s Italian Grill, which serves Italian cuisine, and Bonefish Grill, a casual seafood eatery. The average check per person in 2013 at all three chains was in the low $20 range. On the other hand, Fleming’s Prime Steakhouse and Wine Bar and Roy’s provide upscale dining with an accompanying list of highly rated wines. The average check per person at Fleming’s in 2013 was $69. Bloomin’ Brands also operates Roy’s, an upscale

Player Performancecontinued

moderately priced food to a broad customer base, with a menu focused on mainstream American dishes such as salads, chicken, pasta and its signature “riblets” dish. All Applebees restaurants feature a bar area and serve alcoholic beverages (except where prohibited by law). Meanwhile, IHOP was originally founded in 1980 in Atlanta and targets the family market through its breakfast-focused menu, featuring pancakes, French toast and omelets. The company has more than 1,400 IHOP restaurants (1,439 franchise operators and 13 company-owned) in all states and internationally in Canada, Mexico, Puerto Rico and the US Virgin Islands.

Financial performanceDineEquity has refranchised the majority of its company-operated restaurants over the past five years with the aim of becoming a 99.0% franchised company. While this has resulted in actual company revenue more than halving between 2009 and 2013, it does not reflect the performance of DineEquity’s restaurants; rather, it shows a structural change in the way the company earns revenue. The

change in business model has been undertaken in order to reduce capital investment, generate higher profit margins and reduce volatility of cash flow.

In the five years to 2014, DineEquity’s US-specific network sales are expected to increase 1.5% per year on average to $7.5 billion. In many ways, the company’s performance has mirrored broader industry performance as traffic at family dining restaurants has been down across the board. For much of the previous five years, both Applebees and IHOP stores have recorded negative or flat growth in same-restaurant sales, although IHOP recently reported growth of 2.4% in same-restaurants sales in 2013, its first positive year since 2010. The company put this increase down to successfully promoting bigger ticket menu items on prominent positions on the menu, which increased the average guest check amount. Nevertheless, DineEquity’s flat sales have halted the expansion of its retail footprint over the past five years: IHOP added just 131 new domestic locations between 2009 and 2013 and Applebee’s suffered a net loss of seven domestic locations over the same period.


Major Companies

Other Companiescontinued

eatery featuring Pacific Rim cuisine with a focus on fresh fish and seafood, steaks, short ribs, pork and chicken. As of 2014, the company plans to exit its Roy’s concept but has not yet established a specific plan to do so.

In the five years to 2014, Bloomin’ Brands’ US-specific sales are estimated to have grown at an annualized rate of 3.0% to $4.2 billion. Sales in the United States have grown due to an increase in comparable restaurant sales and the opening of new restaurant locations. Operating profit has also improved as a result of larger average check values and fewer fluctuations in the price of food. However, like many companies in the casual dining segment, Bloomin’ Brands has indicated that tough macroeconomic conditions have held back sales over the past five years and

has been forced to close a number of underperforming locations.

Brinker International Inc. Estimated market share: 4.2%Brinker International Inc. is a Dallas-based full-service restaurant group that has been in operation since 1966. At the end of fiscal 2013, the company owned or franchised 1,591 establishments internationally, with 1,309 locations in the United States. Its brands include Chili’s Grill & Bar and Maggiano’s Little Italy. Brinker has recently offloaded two of its restaurant chains to affiliates of San Francisco-based private equity firm Golden Gate Capital. In December 2008, Brinker sold a majority stake in its Romano’s Macaroni Grill while retaining a 19.9% stake. In June 2010, the company sold On The Border Mexican Grill and Cantina.

Brinker International Inc. (US industry-specifi c) – fi nancial performance*

Year**Sales



2009 3,978.0 -18.7 318.2 -352010 3,935.4 -1.1 334.5 5.12011 3,817.7 -3 343.6 2.72012 3,845.6 0.7 365.3 6.32013 3,780.9 -1.7 370.5 1.42014 3,856.5 2 377.9 2

*Estimates; **Year-end JulySOURCE: ANNUAL REPORT AND IBISWORLD

Bloomin’ Brands Inc. (US industry-specifi c) – fi nancial performance*

YearSales



2009 3,627.0 N/C 435.2 N/C2010 3,634.0 0.2 454.3 4.42011 3,793.0 4.4 477.9 5.22012 3,934.0 3.7 503.6 5.42013 4,084.0 3.8 530.9 5.42014 4,214.7 3.2 547.9 3.2

*EstimatesSOURCE: ANNUAL REPORT AND IBISWORLD


Major Companies


Chili’s Grill and Bar offers a range of American food heavily influenced by Tex-Mex cuisine, such as tacos, quesadillas and fajitas. In recent years the chain has introduced pizzas, flatbreads and a “Fresh Mex” menu, placing a greater emphasis on healthy salads in an attempt to cater to changing consumer tastes. In 2013, Chili’s average revenue per meal was about $14.0, with alcoholic beverage sales accounting for about 14.0% of sales. Brinker’s other brand, Maggiano’s Little Italy, is a full-service casual dining chain serving mainly Italian cuisine. Maggiano’s restaurant interiors are designed in the style of the classic Italian-American restaurants of New York’s Little Italy of the 1940s. The average revenue per meal at Maggiano’s was about $27.0, with alcoholic beverages accounting for about 17.0% of this amount.

Brikner has struggled over the past five years and has been forced to sell, close and refranchise a number of its restaurants; consequently, it now has a significantly smaller footprint in the industry than it did in 2009. IBISWorld estimates the company’s domestic system-wide sales have declined 0.6% per year on average to $3.9 billion. Comparable restaurant sales, particularly at Chili’s, also struggled during and following the recession as consumer spending dropped. To win back

customers, Brinker has kept its restaurant menu prices competitive, leading to an increase in guest traffic, but keeping revenue constrained.

Cracker Barrel Old Country Store Inc. Estimated market share: 2.3%Cracker Barrel Old Country Store Inc. was founded in 1969 in Lebanon, TN. As of 2014, the company operates 624 Cracker Barrel Old Country Store restaurants across 42 states, with all restaurants company owned and operated; the company has no franchised stores. Cracker Barrel’s concept is based on a country-style menu of steak and ribs, with restaurants fitted out in the manner of traditional old country stores with stone fireplaces, antique-style furnishing and other nostalgic items. Cracker Barrel earns about 20.0% of its revenue through retail sales of apparel, toys and food in store gift shops and online. In 2013 the company earned $2.7 billion in revenue and employed 71,000 staff.

Over the five years to fiscal 2014, industry-specific revenue is expected to increase at an average annual rate of 2.7% to $2.1 billion. Cracker Barrel earns a healthy operating margin of about 13.0%, with industry-specific operating income expected to reach $276.6 million in 2014. Restaurant sales have increased over the past five years due to an increase

CBRL Group Inc. (US industry-specifi c) – fi nancial performance

Year*Revenue



2008-09 1,875.7 0.2 207.9 -4.82009-10 1,911.7 1.9 249.2 19.92010-11 1,934.0 1.2 242.9 -2.52011-12 2,054.1 6.2 268.4 10.52012-13 2,104.8 2.5 274.4 2.22013-14** 2,141.1 1.7 276.6 0.8

*Year-end July; **EstimatesSOURCE: ANNUAL REPORT


Major Companies


in average menu prices, which has boosted the value of the average check. However, restaurant traffic declined in fiscal 2010 and 2011 due to continued low consumer sentiment, high unemployment and reduced

discretionary spending. In fiscal 2009, during the height of the recession, the company reported a fall in revenue, but no change in net income. Over the year, comparable store sales decreased despite higher average menu prices.


Capital Intensity The Chain Restaurants industry has a low level of capital intensity. For every $0.12 cents allocated toward using and replacing buildings and equipment, $1.00 is spent on wages. As such, labor intensity is high. The industry is heavily dependent on direct labor input across all operations, including ordering, delivery, food preparation, liquor and other beverage sales, cooking, serving, cleaning and management.

Some rise in labor productivity can occur from investment in technology, including electronic customer ordering systems that are linked to the kitchen, allowing chefs and cooks to more efficiently process and prepare orders. These advancements can help improve profit margins. Still, significant labor

input is required to meet customers’ expectations and provide a quality and hospitable dining experience. Labor costs

Operating ConditionsCapital Intensity | Technology & Systems | Revenue VolatilityRegulation & Policy | Industry Assistance

Tools of the Trade: Growth Strategies for Success


Labo

r Int

ensi

veCapital Intensive

Change in Share of the Economy

New Age Economy

Recreation, Personal Services, Health and Education. Firms benefi t from personal wealth so stable macroeconomic conditions are imperative. Brand awareness and niche labor skills are key to product differentiation.

Traditional Service Economy

Wholesale and Retail. Reliant on labor rather than capital to sell goods. Functions cannot be outsourced therefore fi rms must use new technology or improve staff training to increase revenue growth.

Old Economy

Agriculture and Manufacturing. Traded goods can be produced using cheap labor abroad. To expand fi rms must merge or acquire others to exploit economies of scale, or specialize in niche, high-value products.

Investment Economy

Information, Communications, Mining, Finance and Real Estate. To increase revenue fi rms need superior debt management, a stable macroeconomic environment and a sound investment plan.

Single Location Full-Service Restaurants

Frozen Food WholesalingFast Food Restaurants

Dairy Wholesaling

Coffee & Snack Shops

Chain Restaurants

Capital intensity

0.5

0.0

0.1

0.2

0.3

0.4

SOURCE: WWW.IBISWORLD.COMDotted line shows a high level of capital intensity

Capital units per labor unit

Chain Restaurants

Accommodation and Food Services

Economy

Level The level of capital intensity is Low


Operating Conditions

Revenue Volatility Industry revenue volatility is low to moderate due to the significant growth in demand continuing to come from time-poor higher-income households. The industry has experienced average revenue volatility of 1.8% over the past five years. The industry depends on consumer tastes and preferences, as well as levels of disposable income and consumer confidence. Restaurant spending is highly discretionary and easily substituted for lower cost options

such as home cooked meals. As a result, changes in factors affecting incomes, such as taxes and unemployment levels, directly affect industry revenue. This was demonstrated by the global economic downturn, during which fluctuating disposable incomes, low consumer confidence and rising unemployment dampened spending at restaurants. However, over the past five years, the industry has grown slowly, but consistently, lowering the industry’s volatility.

Technology& Systems

Chain restaurants regularly leverage technology to reduce labor and food costs to increase sales. They also use it to improve business processes, support growth, maintain current operations and improve meal experiences.

Quality of serviceThe majority of technological adoption by the industry aims to address new systems and processes that are designed to promote quality service and reduce customer wait time. Wireless electronic ordering systems that link front-of-the house orders to kitchen meal preparation are an example of such innovation. The increasing sophistication of the internet and mobile technology have also allowed industry players to reach wholesalers and suppliers online. This has allowed for increased efficiencies in coordinating supplies and other pre-prepared food items.

Larger chains also use data networks to send and receive business data to and from restaurants to monitor and analyze all aspect of the business. Through data analytics, operational efficiencies can be identified and

improved on throughout a company’s network of stores.

Point of sale systemsMost operators now have point-of-sale systems in stores to speed up service, which helps lead to larger purchases on average and cuts down on labor costs. Retailers are increasingly accepting credit card payments through devices such as Square, which connect directly to the store’s tablet device and facilitates ease of transaction. Customers can sign with their finger on a touchscreen rather than with a pen and have the receipt emailed to them. Some restaurants have adopted mobile technology, allowing for the ordering of coffees and food items via mobile applications and online.

Social mediaTechnology has also aided chain restaurants with marketing. Social media such as Facebook, Twitter and Instagram allows savvy operators to connect directly with customers and tailor their brand’s message to target fragmented consumer segments.

Capital Intensitycontinued

can be managed by bringing on an appropriate number of trained casual and part-time staff at peak guest periods.

Level The level of Technology Change is Medium

Level The level of Volatility is Low



Regulation & Policy The Chain Restaurants industry is subject to a medium level of regulation that is increasing. There are regulations covering a range of areas, from food safety and standards, to labor conditions and franchising requirements. Most regulation is enacted and enforced at the state level, but many federal laws also apply.

Food safety and standardsThe industry is subject to laws and regulations relating to the preparation and sale of food, including regulations regarding product safety, nutritional content and menu labeling. The main agency responsible for providing guidance and regulation is the US Food and Drug Administration’s (FDA). The FDA’s Model Food Code, which is a best-practice guide to food handling and presentation, applies to this industry and is updated each year. The FDA Nutritional Value applies as

well. Since 1996, the FDA regulations have set standards for nutritional values of individual foods and meals. If claims like “low fat” or “heart healthy” are on a menu, an owner must be able to demonstrate to officials that there is a reasonable basis for the claim. For instance, the meal may be based on a recipe from a health association or a recognized dietary group. Complete nutritional information, however, is not required to be on menus.

The Affordable Care Act requires restaurant companies to disclose calorie information on their menus. The Food and Drug Administration has proposed rules to implement this provision that would require restaurants to post the number of calories for most items on menus or menu boards and to make available more detailed nutrition information upon request.

Revenue Volatilitycontinued

The diversity of foods served by the industry helps keep any volatility under control. The industry consists of a range of food products, from Asian restaurants, to traditional American restaurants and other ethnic cuisines, meaning that if

tastes defer from one type of food towards another, the industry still captures the revenue. Industry revenue volatility is anticipated to level out over the next five years as the industry continues along a long-term low growth trajectory.


Volatility vs Growth

Reve

nue

vola

tility

* (%

)

1000

100

10

1

0.1

Five year annualized revenue growth (%)–30 –10 10 30 50 70

Hazardous

Stagnant

Rollercoaster

Blue Chip

* Axis is in logarithmic scale

Chain Restaurants

A higher level of revenue volatility implies greater industry risk. Volatility can negatively affect long-term strategic decisions, such as the time frame for capital investment.

When a fi rm makes poor investment decisions it may face underutilized capacity if demand suddenly falls, or capacity constraints if it rises quickly.

Level & Trend The level of Regulation is Medium and the trend is Increasing



Regulation & Policycontinued

Labor relationsThe industry employs a high number of young and low-skilled workers at hourly rates and, therefore, is subject to minimum wage and employee benefits regulations. Workers in the US are entitled to be paid no less than the statutory minimum wage, which as of 2014 was $7.25 per hour. Each state also formulates and regulates its own minimum wage, with some states implementing rates higher than the federal rate.

The implementation of the Affordable Care Act over the next five years will have a minor impact on the industry. Employers with 50 or more employees that work 30 hours a week will be required to provide healthcare coverage or pay a fine. However, the large majority of firms in the industry employ less than 50 staff. Most major operators are currently reviewing the potential impacts of the new law on their businesses.

Smoking bansSmoking laws are generally enforced at the state level as the US Congress has not attempted to enact any nationwide federal smoking ban. Smoking is banned in restaurants, bars and non-hospitality workplaces in many states and some local jurisdictions ban smoking in outdoor areas. Each jurisdiction has developed legislation separately; however, most laws are relatively consistent. There are some differences pertaining to the

circumstances in which ventilated smoking rooms are permitted and the distance smoking is banned outside a building. California was the first state to enact a statewide ban on smoking, with most other states imposing a ban in the mid to late 2000s.

Franchising lawsA large proportion of industry establishments are operated under franchise agreements. There are both federal and state laws governing franchising, which vary from state to state. Franchising is regulated at the federal level by the US Federal Trade Commission and applied in any region within the United States. At the state level, various state agencies regulate franchises and laws vary between states. A state’s franchise laws usually only apply if the sale of a franchise is made in the state and the business is located in the state. Laws generally fall under three categories: disclosure laws, registration laws and relationship laws.

Under the FTC Franchise Rule there are three elements of a franchise: the franchise has a trademark under which the franchisee is given the right to distribute goods and services; the franchisor has significant control of or provides significance to the franchisee’s method of operation; and the franchisee is required to pay the franchisor at least $500 before opening for business.



Industry Assistance Although the Chain Restaurants industry receives no formal assistance in the form of government aid or monetary compensation, there are industry associations that help the industry as a whole. For example, the National

Restaurant Association provides industry news, research, sponsoring events, networking opportunities, and representation, among other things. There are also organizations that provide the same services on a more local level.

Level & Trend The level of Industry Assistance is Low and the trend is Steady


Key StatisticsRevenue

($m)

Industry Value Added

($m)Establish-

ments Enterprises Employment Exports ImportsWages ($m)

Domestic Demand

Consumer spending

($b)2005 81,396.4 34,512.1 27,188 659 1,513,776 -- -- 25,465.7 N/A 9,531.82006 85,172.1 36,453.7 27,681 673 1,574,913 -- -- 26,720.1 N/A 9,821.72007 87,671.2 38,231.0 28,582 699 1,592,609 -- -- 27,889.5 N/A 10,041.62008 88,180.5 37,829.4 28,965 715 1,637,326 -- -- 28,166.9 N/A 10,007.22009 82,861.9 34,884.8 29,040 728 1,573,894 -- -- 27,171.1 N/A 9,847.02010 84,343.8 35,552.4 29,756 745 1,571,502 -- -- 27,580.4 N/A 10,036.32011 86,002.7 36,465.1 30,056 756 1,595,550 -- -- 28,122.9 N/A 10,263.52012 88,501.2 37,701.5 30,417 752 1,650,811 -- -- 28,851.4 N/A 10,449.72013 90,572.5 38,765.0 30,812 756 1,686,486 -- -- 29,436.1 N/A 10,699.72014 91,961.1 39,488.8 31,151 755 1,737,590 -- -- 29,832.9 N/A 10,964.42015 95,087.8 40,883.4 31,525 759 1,807,620 -- -- 30,709.0 N/A 11,271.42016 97,369.9 41,884.1 31,935 771 1,855,684 -- -- 31,368.2 N/A 11,585.22017 96,396.2 41,643.2 34,809 772 1,864,672 -- -- 30,997.6 N/A 11,876.62018 98,227.7 42,503.2 35,157 778 1,922,016 -- -- 31,629.3 N/A 12,174.42019 99,701.1 43,140.8 35,579 785 1,948,898 -- -- 32,103.8 N/A 12,459.8Sector Rank 5/27 5/27 11/27 22/27 4/27 N/A N/A 5/27 N/A N/AEconomy Rank 118/1291 76/1291 219/1290 804/1290 15/1291 N/A N/A 61/1291 N/A N/A

IVA/Revenue (%)

Imports/Demand

(%)

Exports/Revenue

(%)

Revenue per Employee

($’000)Wages/Revenue

(%)Employees

per Est.Average Wage

($)

Share of the Economy

(%)2005 42.40 N/A N/A 53.77 31.29 55.68 16,822.63 0.242006 42.80 N/A N/A 54.08 31.37 56.90 16,966.08 0.252007 43.61 N/A N/A 55.05 31.81 55.72 17,511.83 0.262008 42.90 N/A N/A 53.86 31.94 56.53 17,202.99 0.262009 42.10 N/A N/A 52.65 32.79 54.20 17,263.61 0.242010 42.15 N/A N/A 53.67 32.70 52.81 17,550.34 0.242011 42.40 N/A N/A 53.90 32.70 53.09 17,625.83 0.242012 42.60 N/A N/A 53.61 32.60 54.27 17,477.11 0.252013 42.80 N/A N/A 53.70 32.50 54.73 17,454.10 0.252014 42.94 N/A N/A 52.92 32.44 55.78 17,169.13 0.252015 43.00 N/A N/A 52.60 32.30 57.34 16,988.64 0.252016 43.02 N/A N/A 52.47 32.22 58.11 16,903.85 0.252017 43.20 N/A N/A 51.70 32.16 53.57 16,623.62 0.242018 43.27 N/A N/A 51.11 32.20 54.67 16,456.31 0.242019 43.27 N/A N/A 51.16 32.20 54.78 16,472.80 0.23Sector Rank 9/27 N/A N/A 21/27 6/27 2/27 16/27 5/27Economy Rank 399/1291 N/A N/A 1200/1291 298/1291 200/1290 1185/1291 76/1291

Figures are inflation-adjusted 2014 dollars. Rank refers to 2014 data.

Revenue (%)

Industry Value Added

(%)

Establish-ments

(%)Enterprises

(%)Employment

(%)Exports

(%)Imports

(%)Wages

(%)

Domestic Demand

(%)

Consumer spending

(%)2006 4.6 5.6 1.8 2.1 4.0 N/A N/A 4.9 N/A 3.02007 2.9 4.9 3.3 3.9 1.1 N/A N/A 4.4 N/A 2.22008 0.6 -1.1 1.3 2.3 2.8 N/A N/A 1.0 N/A -0.32009 -6.0 -7.8 0.3 1.8 -3.9 N/A N/A -3.5 N/A -1.62010 1.8 1.9 2.5 2.3 -0.2 N/A N/A 1.5 N/A 1.92011 2.0 2.6 1.0 1.5 1.5 N/A N/A 2.0 N/A 2.32012 2.9 3.4 1.2 -0.5 3.5 N/A N/A 2.6 N/A 1.82013 2.3 2.8 1.3 0.5 2.2 N/A N/A 2.0 N/A 2.42014 1.5 1.9 1.1 -0.1 3.0 N/A N/A 1.3 N/A 2.52015 3.4 3.5 1.2 0.5 4.0 N/A N/A 2.9 N/A 2.82016 2.4 2.4 1.3 1.6 2.7 N/A N/A 2.1 N/A 2.82017 -1.0 -0.6 9.0 0.1 0.5 N/A N/A -1.2 N/A 2.52018 1.9 2.1 1.0 0.8 3.1 N/A N/A 2.0 N/A 2.5

2019 1.5 1.5 1.2 0.9 1.4 N/A N/A 1.5 N/A 2.3Sector Rank 20/27 18/27 20/27 25/27 8/27 N/A N/A 18/27 N/A N/AEconomy Rank 844/1291 768/1291 676/1290 902/1290 374/1291 N/A N/A 749/1291 N/A N/A

Annual Change

Key Ratios

Industry Data



Jargon & Glossary

BARRIERS TO ENTRY High barriers to entry mean that new companies struggle to enter an industry, while low barriers mean it is easy for new companies to enter an industry.

CAPITAL INTENSITY Compares the amount of money spent on capital (plant, machinery and equipment) with that spent on labor. IBISWorld uses the ratio of depreciation to wages as a proxy for capital intensity. High capital intensity is more than $0.333 of capital to $1 of labor; medium is $0.125 to $0.333 of capital to $1 of labor; low is less than $0.125 of capital for every $1 of labor.

CONSTANT PRICES The dollar figures in the Key Statistics table, including forecasts, are adjusted for inflation using the current year (i.e. year published) as the base year. This removes the impact of changes in the purchasing power of the dollar, leaving only the “real” growth or decline in industry metrics. The inflation adjustments in IBISWorld’s reports are made using the US Bureau of Economic Analysis’ implicit GDP price deflator.

DOMESTIC DEMAND Spending on industry goods and services within the United States, regardless of their country of origin. It is derived by adding imports to industry revenue, and then subtracting exports.

EMPLOYMENT The number of permanent, part-time, temporary and seasonal employees, working proprietors, partners, managers and executives within the industry.

ENTERPRISE A division that is separately managed and keeps management accounts. Each enterprise consists of one or more establishments that are under common ownership or control.

ESTABLISHMENT The smallest type of accounting unit within an enterprise, an establishment is a single physical location where business is conducted or where services or industrial operations are performed. Multiple establishments under common control make up an enterprise.

EXPORTS Total value of industry goods and services sold by US companies to customers abroad.

IMPORTS Total value of industry goods and services brought in from foreign countries to be sold in the United States.

INDUSTRY CONCENTRATION An indicator of the dominance of the top four players in an industry. Concentration is considered high if the top players account for more than 70% of industry revenue. Medium is 40% to 70% of industry revenue. Low is less than 40%.

INDUSTRY REVENUE The total sales of industry goods and services (exclusive of excise and sales tax); subsidies on production; all other operating income from outside the firm (such as commission income, repair and service income, and rent, leasing and hiring income); and capital work done by rental or lease. Receipts from interest royalties, dividends and the sale of fixed tangible assets are excluded.

INDUSTRY VALUE ADDED (IVA) The market value of goods and services produced by the industry minus the cost of goods and services used in production. IVA is also described as the industry’s contribution to GDP, or profit plus wages and depreciation.

INTERNATIONAL TRADE The level of international trade is determined by ratios of exports to revenue and imports to domestic demand. For exports/revenue: low is less than 5%, medium is 5% to 20%, and high is more than 20%. Imports/domestic demand: low is less than 5%, medium is 5% to 35%, and high is more than 35%.

LIFE CYCLE All industries go through periods of growth, maturity and decline. IBISWorld determines an industry’s life cycle by considering its growth rate (measured by IVA) compared with GDP; the growth rate of the number of establishments; the amount of change the industry’s products are undergoing; the rate of technological change; and the level of customer acceptance of industry products and services.

NONEMPLOYING ESTABLISHMENT Businesses with no paid employment or payroll, also known as nonemployers. These are mostly set up by self-employed individuals.

PROFIT IBISWorld uses earnings before interest and tax (EBIT) as an indicator of a company’s profitability. It is calculated as revenue minus expenses, excluding interest and tax.

VOLATILITY The level of volatility is determined by averaging the absolute change in revenue in each of the past five years. Volatility levels: very high is more than ±20%; high volatility is ±10% to ±20%; moderate volatility is ±3% to ±10%; and low volatility is less than ±3%.

Industry Jargon

IBISWorld Glossary

AVERAGE CHECK The average amount of money spent per check at an industry establishment.

CHAIN RESTAURANTS Restaurants owned and directly operated by a single company.

COMPARABLE STORE SALES A retail measure used to assess the true performance of retail outlets by taking out the effect of new store openings and only looking at the sales growth of existing stores.

FRANCHISED RESTAURANTS Restaurant concepts sold to individual operators. Operators receive ordering, marketing, training, financial and management support from the franchisor.

Disclaimer

This product has been supplied by IBISWorld Inc. (‘IBISWorld’) solely for use by its authorized licensees strictly in accordance with their license agreements with IBISWorld. IBISWorld makes no representation to any other person with regard to the completeness or accuracy of the data or information contained herein, and it accepts no responsibility and disclaims all liability (save for liability which cannot be lawfully disclaimed) for loss or damage whatsoever suffered or incurred by any other person resulting from

the use of, or reliance upon, the data or information contained herein. Copyright in this publication is owned by IBISWorld Inc. The publication is sold on the basis that the purchaser agrees not to copy the material contained within it for other than the purchasers own purposes. In the event that the purchaser uses or quotes from the material in this publication – in papers, reports, or opinions prepared for any other person – it is agreed that it will be sourced to: IBISWorld Inc.

At IBISWorld we know that industry intelligence is more than assembling factsIt is combining data with analysis to answer the questions that successful businesses askIdentify high growth, emerging & shrinking marketsArm yourself with the latest industry intelligenceAssess competitive threats from existing & new entrantsBenchmark your performance against the competitionMake speedy market-ready, profit-maximizing decisions

Who is IBISWorld?We are strategists, analysts, researchers, and marketers. We provide answers to information-hungry, time-poor businesses. Our goal is to provide real world answers that matter to your business in our 700 US industry reports. When tough strategic, budget, sales and marketing decisions need to be made, our suite of Industry and Risk intelligence products give you deeply-researched answers quickly.

IBISWorld MembershipIBISWorld offers tailored membership packages to meet your needs.

Copyright 2014 IBISWorld Inc

www.ibisworld.com | 1-800-330-3772 | [email protected]

Documents

Well done: Restaurants conform to new trends to survive in ......Nov 14, 2014 · growing number of fast casual restaurants that serve high-quality food at reasonable prices and have