two assignments - Achiever Papers

(I DO NOT MIND IF YOU USE THE MINIMUM WORD COUNTS. 550 words total)
CheckPoint
Chain and Independent Restaurants
Compare and contrast in 200 to 300 words the advantages and disadvantages of chain restaurants and independent restaurants with regard to at least three of the following:
• Site selection
• Access to capital
• Purchasing economies
• Information systems and controls
• New-product development
• Human resources
——————————————————–

Individual
Franchising Franchising is very common in the hospitality industry. Many resources are available to assist franchisees. As you compare the information in Introduction to the Hospitality Industry with that on the website listed in the exercise, you gain a better understanding of the various aspects of franchising.
Review Exercise 2 on p. 165 of Introduction to the Hospitality Industry.
Write a 350- to 700-word paper answering the questions.
Format your paper consistent with APA guidelines.

Part

2FOOD SERVICE

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THE
RESTAURANT
BUSINESS
Courtesy of Four Seasons Hotel, London.

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Chapter

T H E P U R P O S E O F T H I S C H A P T E R

This chapter first presents an overview of the restaurant business. It then focuses on two basic markets served by restaurants: the dining market and the eating market. Under dining, we are primarily concerned with the “casualization” of fine dining and the growth of the casual and
upscale casual food service segments.

A still-growing part of the eating market is in off-premise operations, such as home meal replace-

ment (HMR). We also look at the contemporary popular-priced restaurants that are the largest segments

of the existing restaurant industry: quick-service and midscale operations, such as family restaurants.

This discussion of the major components of the restaurant industry closes with a look at restaurants

in retail settings such as malls.

TH IS CHAPTER SHOULD HE LP YOU

1. List by size the major components of the food service industry, and describe the economic impact
that the food service industry has on the economy.

2. Understand the changes that have shaped the restaurant business in recent years, such as new
delivery approaches.

3. Define the terms dining market and eating market, and describe and contrast the major kinds of
restaurant operations in each.

4. Identify the food service segments that currently are growing or declining, and explain the reasons
for these trends.

5. Describe the relationship that exists between shopping and dining and how healthy this particular
segment is.

Chapter

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68 Chapter 3 The Restaurant Business

THE VAR I ED F I E LD OF FOOD SERV ICE

The word restaurant covers a broad range of food service operations. The term comes from the French word restaurant, meaning “restorer of energy.” The term was used as
early as the mid-1700s to describe public places that offered soup and bread. Today, any

public place that specializes in the sale of prepared food for consumption on- or off-premise

can be described as a restaurant. Food service is generally used to represent the broader

term, which encompasses all sorts of public and private locations that provide food for sale.

Food service is a basic part of the North American way of life and a growing part

of life in other parts of the world. Americans now spend some 48 percent of their food

budget (or food dollar) on food away from home.1 Most of that amount is spent in
commercial restaurants, as described above. Virtually everyone in North America has

eaten in a restaurant, and, on average, roughly half the population eats in a restaurant

at least once in any given month. In fact, one study found that, on average, Americans

eat out nearly one out of every four meals and snacks.2 And consistent with our earlier

discussions of sustainability and environmental responsibility, the National Restaurant

Association reports that 70 percent of adults are more likely to choose a restaurant that

offers locally produced food items.3

Food away from home may be purchased in a variety of locations. This wide availability

speaks to the size and scope of the food service industry, which includes employee caf-

eterias, convenience stores, traditional restaurants, hotel facilities, casinos, and taverns,

among others. Even supermarkets are realizing this fact, and many suburban super-

markets now include a dining area. Most of these segments are experiencing positive

growth––a trend that has been sustained for over four decades. (The industry even

experienced positive growth in 2001 and during the recession in late 2008 and 2009.)

In 2009, even in a bad economy, full-service restaurants increased by 1.0 percent while
quick-service restaurants (QSRs) by 4 percent.4

The other major food service sector, on-site food service (sometimes referred to as

institutional or noncommercial food service), represents a smaller but equally impor-

tant part of the greater food service industry. (Chapter 7 discusses the on-site sector

of the industry in depth.) This part of the industry is composed of contractors and

caterers (who serve food in places such as manufacturing plants and office buildings,

health care facilities, sports arenas, and schools and colleges) and those institutions

that own and operate their own food service (self-ops). Managed services (the contract

side) account for 7.1 percent of total food service industry sales while those that pro-

vide their own generate 8.4 percent of sales. An additional 1.9 percent of sales are made

through vending machines. Over 15 percent of food-away-from-home expenditures are

accounted for by the on-site market. These estimates are summarized in Table 3.1.

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TABLE 3.1

Major Areas of Food Service, 2009
FOOD AND DRINK SALES (2009)a

SALES ($ BILLIONS) PERCENTAGE OF TOTAL

Eating places 377.9 66.8

Bars and taverns 17.1 3.0

Food service in lodging 27.9 4.9

Managed services 40.1 7.1

Other commercial 52.9 9.3

Institutions operating
own food service

47.8 8.4

Military 2.1 0.4

TOTAL 565.9 100.0

a Dollar amounts and percentages shown are based on estimates for 2009 made by the National Restaurant
Association.
Source: National Restaurant Association, 2009 Restaurant Industry Forecast (December 2009): 5.

Food service plays an
important role in all
environments, including
tourism destinations.
(Courtesy of LEGOLAND®
CALIFORNIA.)

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70 Chapter 3 The Restaurant Business

The relative shares of the market held by the segments identified in Table 3.1 tend

to be rather stable from year to year. Such seeming stability, however, hides important

evolutionary processes that are going on within each category. In fact, the industry is

in the throes of change.

Although food service sales overall grew 2.5 percent between 2008 and 2009,

some areas actually have decreased. Within the employee restaurant services segment

(employee cafeterias and dining rooms), there was a substantial decrease (mostly a

result of businesses outsourcing their food service to managed-services companies)

as well as decreases in self-operated secondary schools and colleges and universities

food service operations.

For some years, the biggest growth in food service has been in operations such as

takeout, drive-through, and delivery, which we will call collectively off-premise sales. In
fact, off-premise food service has accounted for the lion�s share of the growth in total

restaurant sales since the late 1980s. (McDonald’s reports that 75 percent of its sales

comes from the drive-through.) Even though on-premise (i.e., in-restaurant) sales have

increased each year since 1992, off-premise sales have done even better in recent years.

Off-premise options are no longer limited to QSRs, either. One of the growth areas is

in full-service restaurants with higher-than-average check averages, although fast food

and pizza still command a large share of this market. (The average check represents

the amount that the “average” customer spends and is calculated by dividing the total

food and beverage sales for the period by the total number of customers for the period).

Applebee’s®, a casual-dining chain, has recently added separate entrances (and service
systems) for its “Carside to Go” customers. The trend in many segments of the restaurant

industry is toward a higher proportion of takeout, delivery, and drive-through.

During the 1960s and 1970s, quick service altered dramatically the meaning of

what a restaurant was. The trend toward off-premise consumption suggests that another

fundamental change in the business definition of restaurants may be evolving.

Another set of changes involves fine dining, for years the mainstay of the upscale
restaurant segment. By and large, fine dining, with its trappings of formality, has been

declining in relative importance, whereas casual dining has been growing very rapidly.

To some degree, fine dining’s decline appears to be a result of consumers’ apparent inter-

est in value in food service and a sensitivity to the relatively high prices fine dining must

charge. Today’s consumers also are more predisposed to a casual-dining experience.

Food tastes are changing as well. All of these factors have resulted in a change in the

way that the fine-dining experience is perceived. Some suggest that the decline is just

part of a cycle, though, and that fine dining will someday achieve its previous stature.

Many of the changes in food service result from changes in the age composition

of North America’s population, as discussed in earlier chapters. Members of the huge

generation born in the 20 years following World War II, the baby boomers, are approaching

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retirement. As they do so, their lifestyles are changing. They were raised with fast food

and prefer an informal ambience. Now, as older parents or grandparents, they find a

casual atmosphere more comfortable for the whole family. More will be said about the

importance of casual dining later in the chapter.

QSR sales continue to rise also, by 4.0 percent in 2009 over 2008, partly owing to the

declining economy—people are accustomed to dining out, but need to spend less in

order to continue eating out as often. Finally, we should note that on-site sales have also

shown healthy growth, with contractors and caterers (private companies providing food

service to institutions) continuing to capture market share from self-operated units even

in segments that have traditionally been self-operated, such as public schools.

THE OUTLOOK FOR FOOD SERV ICE

The changing picture of life in the twenty-first century shows that fewer people have time

to prepare elaborate meals. This means we purchase more convenience food items and eat

more food away from home or purchase prepared food to eat at home. People recognize

Applebee’s “Carside to Go” program is a great example of how casual-dining restaurants are evolving.
(© 2009 Applebee’s IP LLC)

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72 Chapter 3 The Restaurant Business

that purchasing meals in restaurants, getting food to go, or having prepared food delivered

provides opportunities to socialize or allows more leisure time that otherwise would

have been spent on cooking and cleaning. These changes may explain the National

Restaurant Associations industry report that says even in a down economy, 45 percent

of Americans claim that restaurants are an essential part of their lifestyle.

Still, the same study reports that one of three adults say they are not eating out

as often as they would like and 35 percent are not purchasing take-out food or hav-

ing food delivered as often as they would like. What does this mean for the nation’s

945,000 restaurants? First, restaurant operators are focusing more than ever on value.

Second, keen operators are adding more healthful options to their menus, including

more healthful options for children. Finally, restaurateurs are embracing more green

initiatives, such as reducing energy and water use. Doing this saves money, is better

for the environment, and is in step with restaurant goers’ interests.

THE RESTAURANT BUS INESS

Describing the restaurant business is like trying to hit a moving target: The restaurant market is constantly changing. One could go so far as to say that it is constantly
reinventing itself. There are so many types of restaurants that it is difficult to devise a

model to fit them all. Nevertheless, we need some basic terminology to describe the

field, even if in general terms.

More customers are looking for res-
taurants that offer comfort and value.
(Courtesy of Mimi’s Café.)

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The Dining Market and the Eating Market 73

First, we need to consider the basic distinction between the dining market and the

eating market. We will look at dining operations such as fine-dining and casual-dining

restaurants, and at the other extreme, we will discuss the rapidly growing off-premise

operations, such as takeout and delivery (much of which is referred to as home meal
replacement), that are accounting for major growth in the eating market. In the next
major section of this chapter, we consider contemporary popular-priced restaurants

that represent the largest segments of the restaurant business today. These include the

QSRs and midscale operations such as family restaurants. The chapter concludes with
a consideration of restaurants as part of larger establishments.

THE D IN ING MARKET AND THE EATING MARKET

One of the twentieth century’s most innovative restaurateurs, Joe Baum (former president of Restaurant Associates), suggested that the primary role of a restaurant
is to transform the act of eating into something greater and more civilized. This is one

of the great challenges of the restaurant operator today.

Building on this idea, we can say that restaurants serve both our social needs and our

biological needs. We can divide restaurants into those serving predominantly our social

needs (the dining market) and those serving our biological needs (the eating market).
Nearly all meals eaten in the company of others have a social dimension, just as the most

formal state dinner has its biological aspect. The main purpose, however, is usually clear.

D IN ING WELL

People dine out for a variety of reasons, including to escape from boredom, to socialize,

to avoid drudgery, to be waited on, to have foods different from those served at home,

and for convenience.

Because dining (as opposed to eating) is predominantly a social event, service is im-

portant. Servers are expected to be friendly—as signified by a warm smile—and accurate.

The role of the server is, therefore, much more than a mechanical one. In the relatively

expensive restaurants serving the dining market, the operation that falls short on service

is likely to lose customers quickly. (Service is discussed in more detail in the final chapter

of the book.)

The demographics of such customers, as always, are important. The guest who

dines in a fine restaurant usually is older, is more highly educated, has a higher-than-

average income, and is well accustomed to dining out and traveling. We now try to

break the dining market into further subsegments.

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74 Chapter 3 The Restaurant Business

F I NE-D IN ING RESTAURANTS. Most full-service, fine-dining establishments—typically
having an average check of $40 or more—are small, independent operations, some

seating fewer than 100 guests, which is quite small by today’s standards. Despite their

modest capacities, these restaurants succeed (or don’t) because of their quality. Many

are staffed by trained professional chefs who have brought with them a craft tradition

that dates back to the Middle Ages.

Excellence is the absolute prerequisite in fine dining because the prices charged

are necessarily high. An operator may do everything possible to make the restaurant

efficient, but the guests still expect careful, personal service: food prepared to order by

highly skilled chefs and delivered by expert servers. Because this service is, quite literally,

manual labor, only marginal improvements in productivity are possible. For example,

a cook, server, or bartender can move only so much faster before she or he reaches

the limits of human performance. Thus, only moderate savings are possible through

improved efficiency, which makes an escalation of prices inevitable. (It is an axiom of

economics that as prices rise, consumers become more discriminating.) Thus, the clien-

tele of the fine-dining restaurant expects, demands, and is willing to pay for excellence.

These distinguished operations generally require the right combination of three

elements: a large market, skilled workers, and devoted management. First, because of

the high prices they must charge, most such establishments are located in or near large

population centers or in major tourism areas where there is a sufficiently large number

of people with high incomes to ensure a satisfactory sales volume. Fine dining accounts

for only about 2 percent of total food service sales each year, but the majority of its

customers are repeat customers. Getting and keeping customers is critical in most

segments but is particularly important in fine dining.

A second requirement of these restaurants is having qualified personnel: chefs,

servers, and the like with highly polished skills. It was, for a time, difficult to find this

kind of staff, but the growth in culinary education and training programs has reduced

the shortage somewhat. People with these skills are most likely to be found in large

metropolitan areas, although there are some obvious exceptions to this generalization.

A third and most important requirement for successful fine-dining restaurants is

a special devotion from the key operating personnel, especially the owners and/or

managers. The hours tend to be long, and the owners, although they may be amply

compensated, generally devote their lives to their work.

As we have already noted, fine-dining sales have been falling for the last two

decades due to a growing preference for all things casual. According to an article in

the Wall Street Journal, fine dining sales plummeted 12 to 15 percent in 2009 and, as we

still observe, have yet to return to pre-2008 levels.5 Although some part of this decline

may be due to price sensitivity, the recession, and health concerns about rich foods,

CH003.indd 74 23/12/10 7:04 PM

there seems to have been a basic shift in consumer service preferences as well. Older

patrons have been accustomed to the kind of service rituals that characterize these

operations. As younger customers advance in income and age to the point where they

might be customers for fine dining, they may be put off by overly formal dining. In many

instances, they prefer an upscale experience that is more casual. Although fine dining

has declined in popularity in recent years, it is certainly here to stay: Consumers are

simply viewing the fine-dining experience in a slightly different light. For a large seg-

ment of the population, casual upscale dining offers an attractive alternative.

Fine dining offers the
experience of luxury and
enhances the importance of
special occasions. (City Club
of San Francisco; Courtesy of
ClubCorp.)

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76 Chapter 3 The Restaurant Business

CASUAL UPSCALE D IN ING. The question that arises, then, is what has taken the
place of the fine-dining segment? One of the fastest-growing segments of food service

is what is referred to as “casual dining.” Casual dining appeals to consumers on many

levels. In fact, the casual segment can be further segmented by price and service level.

Casual upscale dining represents those restaurants that are at the top end of the casual

segment. They may even be referred to as “casual fine dining.” Some examples, on a

national level, include Houston’s, which is setting the standard and has a very devoted

clientele, the Cheesecake Factory, and P. F. Chang’s. Casual upscale dining, in particular,

seems to have filled part of the void left by fine dining.

The movement of the baby boomers into their peak spending years partially explains

the growth of casual upscale dining. As consumers age and more restaurant options are

available to them, taste preferences become more sophisticated. Excellence in food is

one of the appeals of these restaurants. The menus in casual upscale dining restaurants,

and in casual dining in general, have become increasingly sophisticated and interest-

ing in recent years. Another appeal is the topflight service that is offered by many

such restaurants. Although meals here are less time-consuming and elaborate than

in more formal and higher-priced restaurants, successful casual upscale restaurants

deliver professional and attentive service at a significantly lower price than in fine-

dining restaurants.

Most casual upscale restaurants have a unifying theme that is pervasive in the design

of their menu, interior decor, and often the exterior of the building. Menu specialties are

increasingly highly varied, and wine lists are extensive. Part of the reason for the more

significant role that this segment is playing is due to the increase of large chain operators.

Multiple-concept chains such as The Hillstone Restaurant Group (formerly Houston’s) play

a critical role in defining the casual-dining landscape. The Hillstone Restaurant Group

operates several concepts in addition to its flagship brand, including Bandera, Gulfstream,

Cherry Creek Grill, Rutherford Grill, Palm Beach Grill, Los Altos Grill, and Café R&D.

Concepts for a new chain operation (whether casual upscale or otherwise) are

developed through extensive market research, tested in one or more pilot operations

and, once proven, rolled out to the regional or national market. Sometimes, rather than

developing a concept themselves, multiple-concept chains purchase a promising in-

dependent operation, fine-tune the concept for a wider market, and then roll it out to

regional and national markets. Either of these strategies can prove to be a risky proposi-

tion––most successful operators have a respectable portfolio of brands that have failed

or that did not meet sales expectations and were discontinued.

In contrast to the QSR and midprice segments with their breakfast/lunch focus,

casual upscale restaurants cater to a higher-check-average clientele for the lunch and

dinner day parts. Naturally, this results in a higher dollar amount of sales. Some, such as

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Outback Steakhouse, go so far as to limit their operations to a single meal period (dinner).

Casual-upscale unit sales are also helped by the addition of alcoholic beverages, which

usually add greater profit potential.

Noting the success of the casual upscale segment, many fine-dining operators

have made changes. Because of the competitive market, many fine-dining restaurants

have made the decision to move to meet the market demand for a more relaxed

atmosphere and more reasonable prices. Other operators made the decision to balance

their fine-dining outlet with a more casual option for their customers—Emeril Lagasse

in New Orleans with his namesake restaurant, Emeril’s, and the more casual NOLA is

one example. (Lagasse also operates a second fine-dining restaurant, Delmonico, in

the same city.)

Some operators closed their fine-dining outlets outright. Kevin Taylor, the operator

of the Zenith American Grill in Denver, closed a very successful four-diamond restaurant

and opened more casual restaurants, including jou jou and Nicois.

THE EATING MARKET AND ITS DYNAM ICS

The eating market consists of those segments that cater primarily to biological needs

as opposed to primarily social needs. Quick-service restaurants, which we will look at

in more detail in a moment, constitute a sizable segment of the eating market––one

that is patronized by nearly every household. A survey by Restaurants & Institutions

magazine revealed some interesting insights into dining-out behavior. Forty-four per-

cent of respondents reported eating in a quick-service restaurant at least once a week.

Houston’s, a leading casual upscale
dining chain, pays great attention to
detail in the decor of its restaurants.
(Courtesy of Houston’s
Restaurants.)

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78 Chapter 3 The Restaurant Business

This compared with 35 percent of respondents who reported eating out at least once a

week in casual-dining outlets. Two-thirds of households patronize QSRs frequently; that

is, some member of those households buys fast food three or four times a week.6 In

other words, these quick-service and midscale restaurant customers are the heart of the

eating markets. The quick-service sector, as we noted earlier, is continuing its growth at

a compound annual rate of 4 percent from 2008 to 2009. Off-premise dining is another

segment of the restaurant business that continues to grow.

As discussed earlier, the three main components of off-premise dining are takeout,

drive-through, and delivery. HMR can include any or all of these components. HMR (or

the more current term, meal solutions) is usually meant to encompass a good portion

of this market, specifically those prepared food products that are purchased away from

the home but consumed at home. Each of these markets has maintained roughly the

same share of off-premise sales for some years. Together they account for over 50 per-

cent of the entire food service market. The largest part of off-premise sales is takeout,

with nearly two-thirds of the traffic (visits) and volume. Drive-through is the second

most frequent. Either way one views it, off-premise dining represents an important part

of food service industry sales. Although off-premise sales began with fast food, they

have spread across other segments to the point where there are now establishments

designed strictly for customers to pick up fully prepared food to be brought home.

Such examples include Foodies Kitchen (New Orleans), Tasteez (Denver), and Eatzi’s

(Dallas). Such operations are best described as a hybrid of restaurant and upscale

supermarket. Each of the three primary areas identified above are discussed in turn.

TAKEOUT. Takeout is an old, established part of food service, but its continued growth
has increased its prominence. Consumers have indicated their interest in takeout with

their growing patronage. Not surprisingly, operators have responded to this consumer

interest. Nearly all quick-service operations offer take-out meals, and quick-service

operations account for the lion’s share of takeout sales. The vast majority of mid-

scale table-service restaurants also offer takeout, as do many upscale operations (and

the number of restaurants offering takeout is only increasing). Thus, increased sales of

takeout food are fueled not only by consumer preference but by the wide availability

of takeout food service.

DRIVE-THROUGH. Initially, drive-through service was introduced as a part of an existing
quick-service restaurant, and that is still an important use of the drive-through. Since

its introduction, though, it has become an integral part of the QSR service strategy.

Further, it should be mentioned that drive-through is no longer limited to the burger

chains; it has also been adopted by such chains as Starbucks and is also being tested

by 7-Eleven.

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The Dining Market and the Eating Market 79

The drive-through came into its own, however, with the introduction of the double

drive-through. These operations enjoyed the advantage of low capital costs because of

the small building and relatively small size lot on which they could be fitted. Highly

simplified menus gave them an operating cost advantage, too, and fast delivery times

appealed to many customers.

It quickly became apparent to QSR operators that the double drive-through was a

serious competitive threat, and the competitive response was not long in coming. Exist-

ing QSRs improved their drive-through facilities and used their powerful brands in a

promotional push. Many QSRs that lacked drive-through facilities added them. In the

shakeout that followed, a number of double drive-through chains that had been growing

rapidly went out of business. Some survived, but these now serve a specialty niche. The

dominant force in the drive-through market is the branded QSRs, such as McDonald’s

and Burger King. Certain companies, such as Checkers, Sonic, and Rally’s, are defined

by the double drive-through concept.

DELIVERY. Delivery is a slightly different segment of the industry. Delivery operations
do not fit well in the same unit with table-service operations for a variety of reasons.

Not only does demand peak just when the dining room is busiest (as is also true with

takeout), but the parking lot is jammed with customers’ cars just when delivery vehicle

traffic in and out is at its peak. Moreover, the skills of the service staff are different.

A person who is very effective as a server in face-to-face service will not automatically

be effective in the telephone contact that is the typical start of a delivery transaction, at

least not without specific training and an operating system designed to handle delivery.

For these reasons, many companies have found it best to limit delivery operations to

separate delivery units. This can result in cost advantages, too, in that they can be

located on less expensive real estate.

For the reasons just identified, many of the chains that offer delivery specialize in

it. In this way, their entire operation may be based on this single business model. For

instance, many delivery chains use a single telephone number for all units. At the cen-

tral answering facility, employees take calls at computer terminals. When a customer

places an order, the operator asks for his or her phone number and address. Using this

information, the order is passed to the nearest unit for dispatch. At the same time, the

customer’s name and order go into the computerized guest history system. Then, on

subsequent calls, the operator is able to bring up the customer’s record using his or

her phone number. Thus, when John Doe calls, the operator can say, “Good to hear

from you again, Mr. Doe. Would you like to have your usual pepperoni and mushroom?

Shall we deliver it to the side door again?” The single-number system is spreading

and is being used not only for pizza but also for a wide variety of other food service

delivery products. The latest method, which offers tremendous savings for the operator,

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is Web-based ordering. Pizza Hut, for example, has leveraged technology and reports

lower labor cost, higher order accuracy, and higher customer satisfaction with its online

ordering system. The company has even taken technology another step and now offers

a free app for customers’ iPhones.7

CONTEMPORARY POPULAR-PR ICED RESTAURANTS

We have already discussed casual upscale restaurants and off-premise dining. In this section, we discuss the on-premise business of the three largest segments of
today’s popular-priced restaurant business: QSR, fast-casual, and midscale operations

(such as family restaurants and commercial cafeterias).

To compare two of the more traditional restaurant formats (full-service and quick-

service operations), QSRs account for slightly less than half of all restaurant sales (com-

pared to 28 percent in 1970) and nearly three-quarters of customer traffic. Full-service

restaurants, including both midscale and upscale, with a much lower share of traffic still

achieve just over one-half of restaurant dollar sales because of their higher check average.

The newest segment, fast casual, underscores the continually changing nature of the

restaurant business. Fast casual, sometimes considered an extension of QSR rather than

a separate segment, is a hybrid the combines the efficiency of QSR but adds a service

element from full-service operations. The customer orders at the counter, but the food

Checkers is a major
company in the
drive-through
segment. (Courtesy
of © Checkers Drive-
In Restaurants, Inc.)

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Contemporary Popular-Priced Restaurants 81

is later delivered to the customer at the table. The menu prices are slightly higher than

QSR and the food usually has a greater emphasis on freshness.

In Figure 3.1, the various types of restaurants are compared in terms of their price

level and the meal experience that is provided. The meal experience includes the

services and amenities provided as well as such factors as the time available, the impor-

tance of convenience (as in location), the degree to which the meal is utilitarian (i.e., a

biological event), and the degree to which it is tied to other activities. Utilitarian meals

(a hurried lunch during the working day) where convenience and speed are essential

would be at one end of the dining experience scale. A special occasion, perhaps a

wedding anniversary celebration, where a couple might drive 50 miles to visit a unique

restaurant and spend two or three hours dining, would be at the other end.

The full-service segment includes an important subsegment: midscale restaurants.

These operations have somewhat higher prices (about $8.00 to $12.00, compared to

$5.00 to $8.00 for QSRs).

With this overview in mind, let us now turn our attention to a more detailed consid-

eration of the basic restaurant groups identified.

Figure 3.1
Factors bearing on meal experience include time available, importance of convenience, utilitarian
as opposed to social event, and degree of subordination to other activities.

Service focusing on
dining and meeting
primarily social needs

Fine dining

Casual upscale
dining

QSR
(on
premises)

HMR

Midscale
restaurants

QSR
(off
premises)

Restaurant meal experience

Service focusing on
eating, primarily meeting
biological needs

P
ri

ce
$

Low

Midpriced

High

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82 Chapter 3 The Restaurant Business

QU ICK-SERV ICE RESTAURANTS

One managerial concern that helps to distinguish between the various segments is their

individual levels of productivity. Table 3.2 reflects productivity levels across several food

service segments. An understanding of productivity is important from a management

perspective. For instance, note that QSR operations lead the way in productivity—such

operations tend to simplify their production processes and use self-service. The result is

a drastic reduction in labor in both the front and the back of the house. Because QSRs

require less labor, they can pass on their savings to the customer in the form of lower

prices. Furthermore, these operations, even with their lower prices, have historically

earned profits substantially higher than those of other operations.

THE QUICK-SERVICE CONCEPT. Some people do not realize how long quick-service (for-
merly fast food) has been with us––QSRs are the product of a long evolution dating

back to the 1940s (e.g., Carl Karcher began with a hot dog cart in 1941 and In-N-Out, a

California institution, began in 1948). Other companies also got their start around this

same time. Despite the array of quick-service choices, any discussion of quick service

must begin and end with McDonald’s. McDonald’s began as a drive-in, selling inexpen-

sive hamburgers, french fries, and milk shakes to be consumed in the car or taken away.

The original menu was very limited. The day that McDonald’s decided to expand its

menu to include apple pie is still very fresh in one author’s mind. The company has

obviously made other, and more significant, changes in the last 25 years.

From a small production unit, McDonald’s expanded the food pickup area in the

front of the store slightly to provide a limited amount of seating. This worked well enough

that a larger seating area was added to one side––and then to both sides––of the pro-

duction unit. Originally these units were still quite simple, with plain white walls for ease

in housekeeping. The early units had a utilitarian air about them. Gradually, however,

decoration was added to the seating area, very simply at first and then more extensively.

Today, McDonald’s restaurants are generally attractively decorated, and some units are

quite elaborate. In 2002, McDonald’s announced that it would reinvest a significant

TABLE 3.2

Productivity in Food Service Establishments
FOOD SERVICE TYPE DIRECT LABOR HOURS PER 100 GUESTS

Quick-service 10.5

Cafeterias 18.3

Family restaurants 20.7

Luxury restaurants 72.3

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Contemporary Popular-Priced Restaurants 83

amount of capital into its older restaurants, focusing on physical improvements and, in

some cases, total remodeling. More recently, the international company optimized much

of the food-production equipment, allowing for an increased array of menu offerings

customized for the respective region of the world. McDonald’s is but one example of

some well-established quick-service companies that are undergoing remodeling/reno-

vation plans to their restaurants. Other companies following a similar strategy include

Burger King, Carl’s Junior, Wendy’s, and Taco Bell.

The decor and physical plant were certainly not the only things that evolved. The

early, very simple menu was gradually expanded. To attract people who wanted something

other than a variety of hamburgers, chicken and fish were added. To attract an increasingly

health-conscious public, salad and decaffeinated coffee were added. To meet demand for

service earlier in the day, breakfast was added. Although the menu still remains quite simple,

the hamburger-only menu of the early days has been replaced by much wider variety.

McDonald’s has periodically faced difficult internal and external challenges, includ-

ing crowded markets, well-heeled competitors set on taking away its customers, and

disgruntled franchisees. For a short time, its stock prices suffered as a result of these chal-

lenges, there was a change of chief executives, and the company closed some restaurant

locations. It has since refocused, upgraded some restaurants, and slowed its growth rates.

McDonald’s began to turn things around after the turn of the century, evidenced by an

increase in same-store sales, a measure of performance. Now with over $55 billion in

annual worldwide sales and even more new menu items including specialty coffees and

smoothies, McDonald’s is the best-selling food service brand in the world, with over three

times the sales of the next largest brand.8 (The second largest is Subway—see Industry

Note 3.1.) We can, therefore, safely proclaim the original concept and subsequent evolu-

tion of McDonald’s to be a resounding success.

An example of a new
Subway unit.
(Courtesy of Franchise
World Headquarters LLC.)

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I N D U S T R Y P R A C T I C E N O T E 3 . 1

Subway and Entrepreneurship

Entrepreneur Magazine named Subway the top franchise in 2006. With more than 31,500 locations in

91 countries today, the Subway brand is the world’s largest submarine sandwich franchise and equals

or surpasses McDonald’s in terms of global penetration (based on number of units), depending on the

year. Not surprisingly, it has become a highly desired franchise vehicle for entrepreneurs seeking suc-

cess in the foodservice industry.

Larry Swanger is a prime example of one of these franchisees. Larry developed a passion for sub

sandwiches as a kid. He recalls that one of his favorite childhood activities was eating a sub sandwich at

the Kmart deli in Spokane, Washington. Over the past 20 years, Larry has owned eight Subway restaurants

in eastern Washington and northern Idaho.

Larry explored a variety of markets and considered many different opportunities before launching

his successful enterprise. He opted for a franchise as opposed to launching a new concept because of

the proven systems the franchise provides. Finally, he selected the Subway brand because he saw—quite

accurately—the potential for Subway’s growth potential. He also identified the concept’s strong franchise

infrastructure, brand recognition, and considerable purchasing power.

Those who know Larry, either through his businesses or as a friend, note that he is a hard worker with

impressive ethics. Indeed, Larry cites his business philosophy of hard work and honesty as a benchmark

in everything he does. His employees respect this, and it seems to permeate the atmosphere of his

restaurants. According to Larry, this sense of honesty also is part of his restaurants’ value proposition.

Larry has been named Franchisee of the Year twice, standing impressively apart from the 110 other

units in his district. The metrics for the award include all the components of value that we discussed

earlier in this chapter. Furthermore, the strong sales that all of Larry’s restaurants enjoy are a function of

his thoughtful understanding of the marketplaces in which he operates. Without question, Larry Swanger

is an entrepreneur who understands the importance of knowing the restaurant business and delivering

value to his customers.

This evolution of the QSR concept at McDonald’s was matched in a general way by

other quick-service giants. Over time, quick-service menus came to offer a wider selection,

until they were offering enough choice to make them a serious threat to family restaurants

because of their lower prices.

The key to the success of quick service, nevertheless, is its simplicity. A key simplifica-

tion remains quick service’s limited menu. Each item on the menu has been engineered to

simplify and standardize its purchasing, production, and service. Simplification of the pro-

duction process permits the use of unskilled labor. The quick-service operation is, in many

ways, more like a manufacturing enterprise than a traditional restaurant. Even a cursory

tour of the back of the house of any quick-service restaurant will support this statement.

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Contemporary Popular-Priced Restaurants 85

UNIQUE CHARACTERISTICS. The presence of quick-service operations in every mar-
ket of any size is a key characteristic of quick service and one of the main factors

supporting its growth over the past 50 years. Because of their many locations, they

make eating out convenient. That convenience reinforces patronage. Further, quick-

service food seems to cut effectively across a variety of demographic groups. It truly

has become an integral part of living in North America and, increasingly, in other

parts of the world.

We have already noted that simplified menus and operations that use unskilled

labor result in a price that is very attractive to the consumer. This simple operating format

results in fast service and has earned quick service its name. Self-service is built into

the operating format, reinforcing both speed of service and lower cost, especially in the

absence of any tipping.

The quick-service segment is dominated by chains, which introduces an interesting

note of complexity into what appears to be a fairly simple operation. Although

the operation of any single QSR unit is relatively straightforward compared with other,

more service-intensive restaurants, the operation of the restaurant chain as a whole––

that is, as a system of interactive parts––is highly complex. With over 30,000 systemwide

restaurants (over one-half are outside of the United States), McDonald’s requires a huge

management structure to make all the parts of the system function together in a consistent

fashion that the consumer can depend on.

An interesting illustration of this complexity can be found in the area of purchasing.

When the corner restaurant adds baked potatoes or chicken to the menu, the whole

process can be accomplished by instructing the cook, ordering the necessary ingredi-

ents, and changing the day’s menu. In a complex system, however, much more is involved.

When Wendy’s first added baked potatoes to its menu, for instance, the entire U.S.

potato market was disrupted by the huge increase in demand. Similarly, when Burger

King introduced the bacon cheeseburger, those three strips of bacon (multiplied by

millions of customers) so increased the demand for bacon that it disrupted the national

commodities market in hog bellies.

Although we have asserted that a fast-food unit is a relatively simple operation, it is

not true that managing one is in any way a simple task. Managing the very tight quality

and cost controls on which QSR operations depend is, indeed, demanding. Very high

sales volumes and extreme peaks and valleys of demand throughout the day require

managers to hire numerous part-time employees whose schedules vary from day to day

and week to week. Keeping this crew properly trained and motivated is a major task,

particularly in the turbulent economy. The costs associated with turnover, such as lost

training time, as well as the management time required to hire and train new employees

must also be managed. Finally, maintaining staff morale is also a major concern. These

issues mean real leadership skills are needed.

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86 Chapter 3 The Restaurant Business

Quick service, as you will have noticed, is dominated by chain organizations (many

of which are franchises). This is true probably because there are real economies of

scale available to operations that are—within a given chain—virtually clones of one

another. These economies are achieved not only in purchasing raw product but also

in advertising and marketing and in the development of operating skills. A person new

to the business must necessarily follow a learning curve in which he or she begins

with ignorance of food service and only gradually develops sufficient know-how to

operate successfully. The concept of the learning curve is simply that, over time, with

acquisition of knowledge and experience, a person develops greater abilities. A man-

agement trainee or franchisee of a successful chain can use the systems developed by

the organization to begin well ahead on the management learning curve and to move

more quickly along that curve.

Another reason for chain dominance is the highly standardized product. How

much difference is there, really, between one hamburger and another, or between

fried chicken products? With such a simple and narrow product line, it is difficult

for an independent in this segment to achieve a viable basis for product differentia-

tion. Whatever differentiation the independent may achieve, it must then withstand the

blast of advertising deployed by its chain competitors. For all these difficulties, smaller

regional chains, however, can and do compete successfully against the market leaders—

in their own regional markets.

As we have suggested, quick service is a vital North American social institution

and one that has been adopted by many countries around the globe. In Table 3.3, we

summarize its most significant distinguishing characteristics.

TABLE 3.3

What Makes Quick-Service Food Different?

Location strategy (they are everywhere)

Relatively limited menus

Sales volume (very high and highly variable)

Fast service (high degree of self-service)

Numerous part-time employees with various schedules

Use of unskilled labor and highly skilled management

Key role for unit managers

Highly competitive prices

Chain domination

Simple unit, complex system

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Contemporary Popular-Priced Restaurants 87

QU ICK SE RV I CE’S CONTI N U I NG EVOLUTI ON. We noted at the beginning of this
section that the quick-service industry of today is the product of over 50 years of

evolution, and this process continues. Profit-oriented companies sometimes make

mistakes, but they quickly correct them if they want to survive.

One of the positive aspects of quick service’s evolution was the upgraded unit’s

physical plant and decor. Because of the high capital costs (such as depreciation and

interest on borrowed capital), however, the cost of building a unit has a major impact

on its cost structure. As investment costs began to mount in the 1980s, they drove

costs out of line. New, smaller prototype units, however, have now been developed

that reduce this investment.

New product development has also been a vital force in rejuvenating quick-service

concepts. Whenever a Wendy’s concept has become dated in consumers’ minds—and

sales have begun to fall—the company has redefined its business with new products.

Beginning with salad bars and baked potatoes, food bars, the Fresh Stuffed Pita, and,

more recently, boneless wings and deluxe salads, the company has regained its earlier

popularity—and done so repeatedly.

The quick-service business is concentrated in the breakfast and lunch day parts

and, to a lesser degree, in snack periods. All of these day parts have in common a

relatively smaller check average than dinner, and most firms are continually seeking

to enter the higher-check-average dinner day part.

DISTRIBUTION: EXPANDING POINTS OF DISTRIBUTION. Distribution refers to the marketing
problem of gaining a presence in many markets. Quick-service chains and other food

service operators began several years ago to expand the number of markets they could

serve by developing not just downsized units but special limited versions of their con-

cepts. These newer prototypes were developed to offer some of the company’s product

line in locations such as colleges and universities, shopping malls, retail outlets, hos-

pitals, and the like. These smaller points of distribution (or PODs) can be located
almost anyplace where there is consumer traffic. The large unit in which a POD is located

is called a host. Hosts provide venues for PODs. Venues are analogous to a restaurant

location, but they denote not only a place but also a particular category of guests that

the host’s premises provide: students at colleges, shoppers in a department store, work-

ers in an office complex. Hosts and food service operators benefit each other. Food

service enhances the host’s operation by providing additional service to its customers,

another revenue stream in the form of rent, and, ideally, keeping employees, shoppers, or

visitors on-site longer than they might have been otherwise. The host’s venue provides

a profitable location to the food service company. The theory behind PODs has been

dubbed “intercept marketing,” in that the idea is to offer product wherever consumers

are, intercepting them in work or play. The other side of a firm’s successful distribution

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88 Chapter 3 The Restaurant Business

is consumer convenience.9 Points of distribution are proving to be a major vehicle for

the continuing growth of quick service and are discussed further in Chapter 6.

THE FUTURE OF QUICK SERVICE. Perhaps the most difficult challenge that QSRs col-
lectively face is the shift in the composition of the population, that is, the aging of the

baby boomers. (Individually, the greatest challenge is more likely the ever-increasing

competition.) Baby boomers played a major role in creating demand for quick service

when they were children and for its gradual upscaling as they entered their teens and

20s in the years just before and after 1970. As they leave middle age, baby boomers’

tastes are naturally changing. They are able to afford a more expensive restaurant and

prefer a more upscale environment and more extensive service. This translates into

increased demand for full-service restaurants and “newer” segments, such as the

fast-casual segment.

Although quick-service operators have made every effort to adapt to changing

tastes, the traditional QSR footprint may no longer fit their needs as well as it did when

they were younger. For this reason alone, newer niche segments such as fast casual

seem to be an appropriate response.

Yet a large group of younger customers have come along––and will continue to

do so––to replace the boomers. Moreover, quick service, as we noted earlier, is a part

of the harried American lifestyle. Whatever age customers may be, when speed or cost

is especially important, quick service is the easiest choice. As a result, quick-service

management opportunities continue to be promising.

Indeed, with so many units in operation and with healthy growth, there is a need

for large numbers of new managers to replace those who are promoted or leave the

business. There is, moreover, a persistent shortage of qualified managers. QSRs are likely

to continue to offer attractive opportunities. They give significant responsibility to new

managers and generous compensation to those who can deliver results. Their many

units mean numerous opportunities for advancement.

FAST-

CASUAL RESTAURANTS

As noted earlier, fast casual is sometimes considered QSR because of the relatively

close menu-item prices. However, the differences in product offerings is now more pro-

nounced making this segment unique. It has been described as offering “full service

quality food in a quick-service format.”10 Hudson Riehle of the National Restaurant

Association states that it is “a hybrid concept that offers the convenience of a typical

quick-service establishment while combining food offerings and ingredients histori-

cally associated with more ‘casual’ table service operations.”11 Examples would include

Panera Bread, Baja Fresh, Wingstop, Au Bon Pain, and Qdoba Mexican Grill. Some of the

CAREERS IN
H O S P ITAL ITY

CH003.indd 88 23/12/10 7:04 PM

more “mainstream” quick-service companies are also investing in this new segment,

including McDonald’s (with 3’n1) and Wendy’s (with Café Express). According to

Restaurant Research, this “new” segment accounts for $3.6 billion.12

The origins of fast casual date back to the 1950s in the United Kingdom when

bakeries offered some sort of self-service restaurants. Customers became accustomed

to seeing food preparation and dining in a more richly decorated dining area than

we normally see in quick-service restaurants. Similarly, fast-casual outlets became

popular in France in the 1980s as counter service was paired with open kitchen

preparation.

In the United States, fast casual has evolved to include made-to-order food items,

often with more fresh ingredients and more food preparation performed at the individual

unit than is seen in quick service. The decor is more similar to casual dining, and other

attributes of casual dining, such as conveniences like nonplastic utensils and plates, are

commonplace.

The future of fast casual is enticing. Americans’ increased interest in healthy eat-

ing, locally produced ingredients, and nontypical ethnic cuisines suggest this segment

will continue to grow. With customers willing to spend more for food that features these

attributes, the opportunity for growth is also promising. Finally, fast-casual restaurants

have the ability to add or change menus more readily than their QSR brethren due

to the QSR’s emphasis on speed. Thus, fast-casual operators can add new items, even

nontraditional items such as beer and wine, to increase revenue and draw customers

from QSRs and casual-dining restaurants.

Panera is one of the leaders in the fast-casual segment. (Courtesy of Panera LLC.)

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90 Chapter 3 The Restaurant Business

MIDSCALE RESTAURANTS

Although midscale restaurants may not look like quick-service or fast-casual operations,

the heart of all their operating systems closely resembles the QSR format. Their produc-

tion systems have been simplified through the development of specialized menus that

serve to reduce the skill level required of employees. This, in turn, holds down wage

costs and increases speed of service. Midscale restaurants might, therefore, be called

“moderately quick service.” Although the customers in these operations are prepared

to wait a bit longer for their food, they will not have to wait that much longer than in

a QSR. We discuss three of the more common restaurant types within this category:

family restaurants, cafeterias and buffets, and pizza operations. We also discuss home

meal replacement later in this section.

FAMILY RESTAURANTS: A STEP UP. Family restaurants, such as Denny’s, Shoney’s, or
Cracker Barrel, are table-service restaurants that compete principally with QSR and

fast-casual operations and have more in common with these lower-priced operations

than with units that are more upscale. Although they provide table service, they

typically offer self-service in the form of salad bars, breakfast bars, and dessert bars.

Another distinguishing feature is that family restaurants usually offer breakfast, lunch,

and dinner.

Family restaurants
such as Piccadilly offer
a different alterative
to quick service.
(Courtesy of Piccadilly
Cafeterias, Inc.)

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Contemporary Popular-Priced Restaurants 91

Menus at family restaurants offer a wider selection than QSRs, and in this they

resemble their upscale cousins more than QSRs. This resemblance to full service is,

however, deceiving. First, the production staff is limited to one or more short-order

cooks. Almost everything is prepared to order, sometimes from scratch (as with the

sandwiches and breakfast items that give the menu much of its variety) and sometimes

from frozen or chilled prepared foods that are reheated to order. The production pro-

cess is really almost as straightforward as the quick-service process.

Furthermore, the service the customers receive is anything but elaborate. Place

settings usually consist of paper place mats and a minimum of china and flatware. Most

meals consist of a choice of soup or salad, an entrée with rolls and butter, and perhaps

a dessert. This reduction in courses simplifies service. Platters, sandwiches, and

salads are the mainstay of the menu, all attractively but simply served. Breakfast is the

largest meal for some operators and a significant one for most others. Snacks and cof-

fee breaks are also an important source of business, particularly for family restaurants

that combine a bakery with their unit. Table 3.4 shows the ten leading family chains.

In this segment, chains dominate, with over three-quarters of the market.

The relatively straightforward operating format of family restaurants helps keep

the cost of training new service employees manageable. In addition, the flexible menu

permits operations to drop menu items when their food costs advance too rapidly and

to substitute less costly items.

The guests who visit a family restaurant want to be waited on, and in choosing a

family restaurant, they are opting for an informal, simple, relatively inexpensive style

TABLE 3.4
Ten Largest Family Restaurant Chains

Denny’s www.dennys.com

Cracker Barrel www.crackerbarrelocs.com

IHOP (International House of Pancakes) www.ihop.com

Bob Evans Farms www.bobevans.com

Waffle House www.wafflehouse.com

Perkins Family Restaurants www.perkinsrestaurants.com

Steak ’n Shake www.steaknshake.com

Friendly’s Restaurants www.friendlys.com

Shoney’s www.shoneys.com

Marie Callender’s www.mcpies.com

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92 Chapter 3 The Restaurant Business

of service. These operations generally offer a pleasant, modern restaurant located

near high pedestrian or vehicular traffic and convenient to shoppers and suburban

family diners.

Family restaurants, with their more varied menus, table service, and modest price

level, offer considerable appeal to the aging baby boomer. For families, children’s menus

are available that often cost less than feeding the same child at a QSR. In addition, many

chains offer kids’ programs that may include a free meal on a particular night of the

week. Many family restaurants offer budget menus or special selections for seniors.

To appeal to all these market segments, family restaurants are offering expanded menus

featuring selections that are lighter and healthier.

On the downside, the food service “pie” is only so big. That is to say, customers

are willing to spend only a certain amount of their disposable income on food outside

of the home. Family restaurants have been losing market share to their competitors:

primarily casual restaurants and QSR operations. Customers can choose a QSR that

offers fewer menu choice and less service but lower prices and an ambience and food

quality often equal to that offered by a family restaurant, or customers may choose a

fast-casual restaurant due to the perceived freshness or healthiness of the menu items.

At the other extreme, family restaurants face competition from casual, full-service

restaurants, some of which offer prices that are not much higher. Like any operation

in the middle, family restaurants have to watch out for price competition from those

below and value competition from those on the next rung up. In the past, customers

have shown substantially greater satisfaction with the value received in moderately

priced restaurants than in QSRs or higher-priced restaurants. This finding suggests

that customers recognize the quality of the midprice operations, but perhaps their

real preference is for something more upscale—or else they are pressed financially

and must choose the lower-cost alternative. They recognize value in the midprice seg-

ment, but the greater growth goes to that segment’s up- and downscale competitors.

Whatever is going on in the guests’ minds, family restaurants seem to be caught in a

competitive middle ground.

COMMERCIAL CAFETERIAS AND BUFFETS . Commercial cafeterias and buffets pri-
marily are limited to certain regions of the United States, but between them, they

represent a sizable portion of the restaurant industry. There are some slight but rather

important differences between cafeterias and buffet restaurants and the category of

family-oriented restaurants that we just discussed. Cafeterias are popular in the southern

United States, whereas buffet-style restaurants seem to be most popular in the American

Midwest, Northeast, and Mid-Atlantic regions. Both styles of restaurants cater to con-

sumer markets similar to those for restaurants in the family category—that is, young

families and seniors. Cafeterias became known for serving value-laden home-style meals

throughout the southern states. Customers are able to choose from a wide variety of

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Contemporary Popular-Priced Restaurants 93

food as they proceed down the cafeteria line. Piccadilly Cafeterias, for instance, offers

customers over 130 items daily, with different core items offered each day. Other large

cafeteria companies include Luby’s and Furr’s. Most of the activity that has occurred

in this segment of late has been the result of mergers and acquisitions as opposed to

expansion.

Cafeterias offer value, selection, a comfortable atmosphere, and a family environment—

characteristics that appeal to several different demographic groups. The segment

faces many of the same challenges that we discussed with respect to family restaurants,

however.

A segment that is closer to cafeterias than it is to family restaurants is buffet-style

restaurants. Buffet restaurants are similar to commercial cafeterias operationally but

differ from the customers’ perspective. Their main differentiating quality is the scatter

buffet concept, where restaurant guests go to different “stations” in the dining room

to retrieve their food. Each station offers different types of foods. The scatter system,

among other things, eliminates some of the bottlenecks that can occur as a result of

customer lineups along traditional cafeteria lines. Some of the larger buffet companies

include Golden Corral, Ryan’s Grill, and Shoney’s. One of the largest operators of this

style of restaurants is Buffets, Inc., which operates the Old Country Buffet, Hometown

Buffet, and Country Buffet brands, among other concepts. According to Glenn Drasher,

the executive vice president of marketing for Buffets, Inc., the company’s different

concepts tend to attract a broad customer base that includes families with kids, baby

boomers, and seniors. Many of the company’s special programs are developed with

this customer base in mind. For instance, it offers special pricing for kids based on

how old they are (50 cents per year for lunch). It also changes its menu at 3:30 in the

afternoon for those who are interested in eating an early dinner.13

Cafeterias and buffets, together, account for approximately $5 billion in sales

each year.

OTHER M IDSCALE RESTAURANTS. There are numerous other types of restaurants
that we could include in the midscale category—for instance, pizza, seafood, Mexican

food, and Asian food. They generally fit the pattern already described: limited menus,

highly efficient productivity, limited service, and a product characterized by a relatively

low-food cost. Pizza restaurants will be described here briefly.

PIZZA RESTAURANTS. Pizza is big business. Among the major chain concepts stud-
ied by Restaurants & Institutions in its annual chain restaurant study, “The Top 400

Restaurant Concepts” (hereafter R&I 400), several are pizza chains—in fact, four pizza

companies are billion-dollar-a-year companies.14

Pizza restaurants once depended almost exclusively on a single item. In recent

years, however, pizza restaurants have extended their product line to appeal to more

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94 Chapter 3 The Restaurant Business

customers. New items include deep-dish, Chicago-style pizza; pizza with thick or thin

crust; specialty two-crusted pizza, as well as non-traditional toppings; and, at lunch,

individual-size pizzas. All have added variety and choice to the pizza menu. Newer

items that have appeared on the menus of national pizza chains in recent years include

breads, salads, chicken wings, pastas, and sandwiches. Some chains, such as California

Pizza Kitchen, have totally reconceptualized the traditional pizza offerings with top-

pings such as barbecue chicken, Peking duck, and goat cheese. Despite all their menu

and service expansion, however, these operations are still principally pizza restaurants.

The cost of their food product itself is relatively low, and these operations also have

low labor costs, making them attractive investment opportunities. Another chain, Papa

Murphy’s, has blurred the lines even more. This chain offers food that customers cook

at home. Thus, these units need no cooking equipment, which makes the investment in

opening each one relatively low.

HOME MEAL REPLACEMENT. The final category of food service that we will discuss in
the midscale category is home meal replacement, which has been mentioned earlier.

Unlike the previous examples discussed, HMR is not a restaurant type but rather a

delivery method. The reason it is included in this section is that much of HMR occurs

in the midscale segment. Pizza is perhaps the original North American HMR product.

However, several nonpizza chains, as discussed next, have capitalized on the popu-

larity of HMR.

Operations such as Kenny Rogers Roasters and Boston Market have helped to

pioneer a new kind of takeout/eat-in operation, featuring a kind of food different from

the burger, sandwich, and pizza that have dominated the take-out market for years. HMR

features (but is not limited to) American “comfort foods” such as chicken, turkey, and

ham prepared in a way that consumers might make at home. HMR food not only tastes

good but also fits the image of family food and is often referred to as “home cooked.”

(The concept of “truth in menu” suggests it should be called “home-style cooking,” and

in some jurisdictions advertising “home cooking” in a restaurant could lead to criminal

charges under the laws covering fraud.)

At one time, Boston Market was a real growth phenomenon, expanding from a single

unit to 1,200 units in six years. The chain was purchased by McDonald’s but was sold

again to an investment group in 2007. The menu continues to emphasize such “comfort”

foods as chicken, turkey, ham, meatloaf, and pot pies.

Grocery store and delicatessen chains have long featured variants of the HMR

concept, and they, too, are expanding their take-out offerings aggressively. We should

recognize as well that take-out operations of all kinds are competitors with HMR

operators. A number of new HMR concepts have entered the field, some featuring

colocation with an existing brand.

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Contemporary Popular-Priced Restaurants 95

CASUAL RESTAURANTS

Casual restaurants have been an important component of the restaurant industry in recent

years. Casual restaurants provide a relaxed atmosphere and reasonably priced menus

that appeal to baby boomers and multiple other demographic segments. The types of

restaurants, and affiliated chains, that are a part of this segment are becoming almost as

recognizable as certain quick-service chains; Chili’s, Red Lobster, Applebee’s, T.G.I. Fri-

day’s, and California Pizza Kitchen have all become a familiar part of the dining landscape.

Several of these companies have active franchising programs that allow them to continue

to expand domestically and internationally. Some are part of companies that operate

multiple concepts, such as Brinker (Romano’s Macaroni Grill, On the Border Mexican Grill

and Cantina, Chili’s Grill, Bar and Maggiano’s Little Italy) and Darden Restaurants (which

include Red Lobster, Bahama Breeze, Olive Garden, Longhorn Steakhouse, Seasons 52).

SPECIALTY RESTAURANTS. Specialty restaurants featuring a specific kind of food constitute
a significant component of the casual restaurant segment. Most of these offer a theme

related to the food specialty, such as steaks, seafood, or pasta. With a slightly more relaxed

view of diet than the one that prevailed just a few years ago, customers are flocking to

steakhouses, for instance. To give an indication of just how popular steak restaurants have

become, some of the R&I 400 top concepts are steakhouse chains (Outback Steakhouse,

Longhorn Steakhouse, and Ruth’s Chris Steak House, just to name a few). Many steak-

houses feature a western decor that adds a themed element to the dining experience.

Seafood restaurants are another specialty segment that is demanding of attention

(witness the popularity of Red Lobster). Seafood restaurants provide a combination of

Seafood restaurants represent a popular
specialty segment. (Courtesy of Las
Vegas News Bureau.)

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Image Intentionally Removed

96 Chapter 3 The Restaurant Business

a healthy, low-fat image with a popular food product. The sea offers plenty of nautical

themes for an ambience to enhance the diners’ experience. Diners have become much

more knowledgeable about seafood in recent years, and seafood-oriented restaurants

such as Landry’s (based in Houston) have been able to capitalize on this. It should also

be noted that the seafood segment continues to include many independent restaurant

operators, some of which are among the busiest independent restaurants in the United

States, including Joe’s Stone Crab (Miami), Bob Chinn’s Crab House (Wheeling, Illinois),

Atlanta Fish Market (Atlanta), and Anthony’s Pier 4 (Boston).

Pasta is also proving its continuing popularity, offering not only a healthy, low-fat

product but also one that has a relatively low cost. Pasta restaurants, which are not

necessarily Italian, have begun to spring up around North America. One such example

is Semolina’s, a chain of pasta-themed restaurants clustered in the southern United

States whose menu focuses on international pasta dishes.

Another type of restaurant that we can include in the specialty category are brew-

pubs, which feature a combination of food and beer made in the operation’s own

facility. Beer continues to be a popular beverage and accounts for much of the alcoholic

beverages that accompany meals. According to the Association of Brewers, the number of

brewpubs almost reached 1,000 (979) in the United States in 2009 while dollar growth

from craft brews was around 9 percent. In total, there are some 1,500 breweries (including

brewpubs, microbreweries, regional craft breweries, and large breweries) in the United

States. There are now even several brewpub chains, including Rock Bottom (Louisville,

Colorado), Gordon Biersch Brewery Restaurant (Chattanooga, Tennessee), and Hops

Grill and Bar (Tampa, Florida). The segment is still dominated by smaller independently

owned operations, though, such as Goose Island in Chicago, Crescent City Brewhouse

in New Orleans, and Copper Tank Brewing Company in Austin, Texas.

ETHN IC RESTAURANTS. Ethnic restaurants offer a cuisine and theme that combine
to provide a “getaway” experience. Ethnic restaurants are a mainstay in the U.S. restaurant

industry, and Americans continue to explore new types of foods from around the world.

Although the most popular ethnic cuisines continue to be Italian, Chinese, and Mexican,

some of the ethnic restaurants that have been gaining ground in recent years include

Thai, Ethiopian, and Indian. Ethnic restaurants have long been dominated by independents

but are now seeing the proliferation of chains as well.

“EATERTA INMENT.” For the specialty restaurants discussed earlier, the focus of the
guests’ experience is the food, often enhanced by a related ambience. Ethnic restaurants,

too, feature a specialized food, with a matching ambience playing a somewhat larger role.

There are, however, eatertainment, or theme, restaurants, in which the diner’s experience
is centered on the entertainment provided by the restaurants’ stage-set-like decor. Here, the

food is an important but secondary consideration. One of the best known of these operations

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A restaurant’s theme
serves to augment
diners’ surroundings
and creates an exciting
experience. (Courtesy of
Rainforest Cafe.)

Food, service, theme,
and entertainment all
contribute to the overall
experience of the guest.
(Courtesy of Rainforest
Cafe.)

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CA S E H I S TO RY 3 . 1

Quark’s Restaurant
Serves Earthlings Too

To walk into the Star Trek-themed restaurant, originally at the Las Vegas Hilton and now planned for a

dedicated location—is to be transported to another time and dimension. The theme is different from that

of many other themed restaurants: It is based exclusively on the Star Trek television series (and movies).

The restaurant is one part of a larger complex within the hotel that also features a museum, a simulated

ride, and an extensive gift shop. In this way it is different from many “stand-alone” theme restaurants.

The restaurant entrance is located off of the Promenade on Deep Space Nine (a Star Trek space station);

features futuristic tables, lighting, and ambience; and offers menu items named after intergalactic specialties,

such as “The Wrap of Khan” and “Glop on a Stick.” Specialty drinks include “Romulan Ale” and “Klingon

Warnog Ale,” both named after famous Star Trek villainous alien races. As with many theme restaurants,

the menu plays an integral part of the dining experience.

Diners are greeted by Star Trek characters who roam the dining room, including Klingons and Ferengi.

The characters freely interact with diners and humorously insult the guests. This feature alone distin-

guishes the restaurant from theme restaurant chains.

In short, the restaurant provides the total experience for Star Trek fans. Like other theme restaurants,

it is also unique in another way: Fans must go to Las Vegas to enjoy it, since it is the only restaurant

(and attraction) of its kind. The restaurant is part of a $70 million complex operated by Paramount Parks.

is the Hard Rock Cafe, which in 1971 first introduced this concept. The Hard Rock Cafe, and

its competitors in this segment, offers a combination of the typical restaurant experience

with the addition of the atmosphere and ambience (which may include entertainment,

props, etc.) appropriate for the theme that is being conveyed. These operations offer movie-

quality special effects, professional actors, and audio-animatronic creatures to create their

atmosphere. And the atmosphere, or theme, ranges from undersea submarines (DIVE!) to

race cars (NASCAR) to movies and television shows (Star Trek). For additional information

about Quark’s Restaurant at Star Trek: The Experience, see Case History 3.1.

The economics of theme restaurants call for big investors. The operators of Dave

and Buster’s typically spend $10 million on each unit, which includes not only multiple

food and beverage operations but also computer and virtual-reality games. In addition

to food sales, these units offer alcoholic beverages and sometimes charge an entrance

fee. Sales of branded merchandise, such as T-shirts, caps, and sweaters, are also a

major source of revenue for most theme operations. Some chains derive as much as

60 percent of their revenues from merchandise. Rainforest Cafe’s president notes that

a large staff as well as heavy investment combine to make a 200-seat restaurant the

minimum size feasible. Many are much larger.

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Contemporary Popular-Priced Restaurants 99

The experience offered by the restaurant is the center of the concept. At Rainforest

Cafe, thunderstorms regularly pass through the restaurant, but operators agree that the

“wow” factor is good for only the first visit—or perhaps one or two more. After that,

the quality of food and service becomes critical. The danger of obsolescence is a real

problem for these high-investment operations unless food and service are excellent—

and perhaps even if they are. Accordingly, these operations are located in high-

population areas and near major tourist attractions, where there is a high audience

turnover. Not every concept will make it, but the idea of a popular restaurant featuring

entertainment and food—as well as liquor—has been validated by Hard Rock Cafe’s

four decades of successful growth. It should be noted that at the time of this writing,

several chains within this category are experiencing financial difficulties and the

segment, as a whole, is reevaluating how it is viewed by customers.

H IGH-CHECK-AVERAGE RESTAURANTS

Now, let’s go back to the other end of the dining spectrum and revisit high-check-

average operations. As we indicated earlier, fine dining, if it is defined as an elaborate

ritual of service combined with a European-style kitchen, appears to be in decline. If,

however, it is defined simply as restaurants with a check average over $30 (per person),

fine dining in a new “casualized” version is still very much with us. These high-check-

average restaurants, however, account for only a small percentage of restaurant sales.

High-check-average operations are primarily found in large U.S. cities, such as New

York, Chicago, and Los Angeles (and other large cities worldwide). These operations

are also associated with areas that have a high per capita income. Certain cities, such as

West Palm Beach and Boca Raton, Florida, for instance, are relatively small markets but

may in fact have more high-end restaurants than such large cities as Chicago. A third

factor that supports demand for this kind of operation is tourism. In tourism centers,

visitors can create a demand local people might not be able to sustain. For example,

New Orleans, a tourism center, had almost 70 restaurants (prior to Hurricane Katrina)

with a check average over $30, despite Louisiana’s relatively low per capita income.

Las Vegas is a classic example of a tourism-dependent city that has successfully added

several new high-check-average restaurants in recent years. Several high-profile chefs,

such as Emeril Lagasse, Wolfgang Puck, Todd English, and Mark Miller, have all opened

restaurants in Las Vegas. Others are sure to follow.

One substantial reason for the growth in high-check-average restaurants—but one

that doesn’t show up in the statistics—is the great expansion in programs preparing

skilled culinarians. Programs such as these are supplying a native-born cadre to an indus-

try that a generation ago relied mostly on Europe for skilled cooks. Now North America is

able to prepare its fair share of professional culinarians. (See Global Hospitality Note 3.1.)

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100

G LO BA L H O S P I TA L I T Y N OT E 3 . 1

Culinary Preparation

As reported in Restaurants & Institutions magazine, there are more than 500 culinary schools globally, many

of which are in North America. Some of the better-known ones hardly need mentioning: the Culinary Insti-

tute of America, the California Culinary Academy, and Johnson & Wales. Numerous programs exist outside

of North America as well. Le Cordon Bleu, which began in Europe, operates campuses around the world,

including in Australia. Le Cordon Bleu actually has two campuses in Australia—in Adelaide and at Ryde

TAFE in Sydney. Other culinary programs in Australia include the Academy Sofitel in Melbourne and the

Inter-Continental Hotel School in Sydney. Institut Paul Bocuse, located in Lyon, France, offers a diploma in

culinary arts and a bachelor’s degree in culinary arts and restaurant management. The institute, housed

in a nineteenth-century chateau on the outskirts of Lyon, has state-of the-art facilities including Saisons,

a teaching restaurant. Famed chef Paul Bocuse is the founder and honorary president.

Aside from stand-alone programs, there are also many other culinary schools located at community

and technical colleges—far too many to mention here. Many are regional or local in scope, serving the

surrounding areas, while others draw internationally. The growth in culinary programs is a result of

the (renewed) interest in careers as a chef. Many students quickly recognize that attending culinary school

is an effective way to accelerate a career. Also, more and more employers are recognizing the importance

of some sort of formalized education.

Perhaps the most recent trend in culinary education is the movement toward layering management

education on top of the culinary component, since the management side is becoming ever more impor-

tant at every culinary level from supervisor on up. Mike Zema, coordinator of the Culinary Management

Program at Elgin Community College in Elgin, Illinois, puts it succinctly when he says: “The chef’s role has

dramatically changed in the last 20 years. . . . Most executive chefs in large hotels don’t cook anymore.

Their focus is on managing food costs, labor costs and other operational expenses.”

Aside from providing students with applicable skills, culinary programs are also able to offer the

opportunity for networking, on-the-job work experience, and placement opportunities. Further, the jobs

seem to be there for students upon graduation, at least for the foreseeable future. The Bureau of Labor

Statistics is predicting double-digit growth in back-of-the-house positions through the decade. This bodes

well for culinarians and culinary programs alike.

Source: The information in this note was gathered from Allison Perlik, Restaurants & Institutions, October 1, 2001.

RESTAURANTS AS PART OF A LARGER BUS INESS

Thus far, this chapter has examined primarily freestanding restaurants—separate and distinct operations. A substantial part of the food service industry, however, is made
up of operations that are the food service units of larger centers. A major area that

we should consider briefly are restaurants in retailing. Some of these are located in

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Restaurants as Part of a Larger Business 101

department stores and shopping malls. It is interesting to see how trends in these

catering establishments match those in the restaurant business elsewhere.

RESTAURANTS I N RETA I L STORES

Restaurants in retail stores (usually department stores and drugstores) were originally
built as a service to shoppers. After all, a shopper who had to leave the store for lunch

might resume shopping in some other store. The restaurants, therefore, helped keep the

shoppers in the store and often helped attract them there in the first place. Over time, some

stores downsized their food service operations, contracted the restaurants to food service

companies, or eliminated them entirely, instead choosing to focus on their core business.

It seems that restaurants in retail stores have come full cycle again—more companies are

rethinking their role in the retail shopping experience. Increasingly, in-store restaurants

are themselves becoming worthwhile businesses in that they often generate higher profit

margins than do the store’s other retail sales. In fact, if properly merchandised, restaurants

can bring shoppers into the store, not just keep them there. To give some examples of retail

restaurant operations, first consider those retail stores that provide space to large restaurant

companies, as with Wal-Mart and McDonald’s. A similar example is the partnership that

exists between Starbucks and Barnes & Noble. IKEA, Old Navy, and Golfsmith are other

examples of chains that entice shoppers with dining options.

Restaurants exist in other types of stores as well, including upscale department

stores. Two such examples include RL, the restaurant at Ralph Lauren in Chicago,

and Café Bistro, the restaurant at Nordstrom. RL is currently the only restaurant of its

kind at a Ralph Lauren location. Located just off the “Magnificent Mile” in Chicago, RL

serves lunch, dinner, and Sunday brunch—and features an impressive wine list—in an

upscale environment. Nordstrom is another retail company that offers its customers a

dining option. It currently has five dining concepts (along with specialty coffee bars)

in several locations. It is interesting, too, that Nordstrom restaurants and specialty cof-

fee bars have integrated a variety of environmentally friendly practices that include

composting and recycling; 100% compostable, biodegradable hot paper cups; and

napkins made of 100% postconsumer waste, free from bleach and dyes.

It appears that “upscale” dining in these types of shopping environments is experiencing

a renewal as shopping becomes an increasingly important part of the American lifestyle.

Research indicates that Americans spend $4 trillion each year on goods and services. In short,

the future looks promising for retail dining operations as long as consumers keep spending.

RESTAURANTS I N SHOPPING MALLS

A generation ago, Americans did 5 percent of their shopping in malls. Today, malls

account for well over half of nonautomotive retail sales. Malls have become a place

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102 Chapter 3 The Restaurant Business

to relax as well as shop. Insulated from the weather, with excellent security, they are a

clean and comfortable place to stroll. Malls have been thought of as places to buy, but

they are also places to be. Consumers visit malls, in large part, to browse. And as food

service retailers know, when people browse, they also eat. As a result, one of the major

attractions of the larger malls is their food service establishments. The food court idea,

first developed in malls, offers the consumer significant choices yet gives each operator

a chance to specialize and achieve high productivity because of the large volume of

customers provided. In fact, the food court concept has been adopted in a number

of other settings, such as hotels, casinos, hospitals, airports, and expressway food service.

The composition of mall food service is quite similar to the restaurant industry as a

whole, where QSRs account for the majority of customer traffic and midscale restaurants

for a lesser amount. The balance is accounted for by the more upscale table service con-

cepts (which are recognizing the business opportunities in malls). Mall locations have

been growing faster than the rest of food service for several years. Less traditional units

and ethnic units have fared the best in malls. Chains such as A&W have targeted malls as

their primary growth vehicle. This is probably because the mall provides a basic volume of

visitors, and the smaller operator does not have to support major advertising expenditures.

There is also the added benefit of being able to service mall employees, who can account

for a large amount of the volume. Based on the success that some chains have had with their

mall locations, other restaurant chains are following suit. Ruby Tuesday’s, California Pizza

Kitchen, and Cheesecake Factory have targeted malls for new-restaurant development.

SUMMARY

Food service is an integral and vital part of the North American way of life. Table 3.1 summarizes the major components of the food service business. Gains in restaurant
traffic have outpaced population growth in recent years, and experts are forecasting

continuing growth. Food service can be divided into the dining market and the eating

market. Fine-dining restaurants require a large market, skilled workers, and devoted

management. Fine-dining restaurant sales have been falling since the late 1980s, probably

as a result of some combination of changing tastes, price sensitivity, and health con-

cerns about rich foods. Casual upscale restaurants, however, have become very popular.

The most dynamic part of the eating market is the off-premise segment, made up of

takeout, drive-through, and delivery. Other contemporary popular-priced restaurants are

quick-service restaurants, fast-casual restaurants, and midscale restaurants such as family

restaurants, cafeterias, and buffets. QSRs are characterized by wide distribution, limited

menus, and the use of unskilled labor. Other characteristics are summarized in Table 3.3.

Even wider distribution is made possible by the development of PODs, downsized units

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Summary 103

that can provide food service in a host’s venue, following a strategy of intercept marketing

and a philosophy of maximum convenience for the customer. Fast-casual restaurants are a

hybrid of QSR and midscale; they promise higher-quality food, often considered fresher

and healthier, than QSRs, and include partial table service with enhanced atmosphere

in the dining room. Midscale restaurants use a simplified menu and production system

that resembles quick service, but these operations offer table service. (Cafeterias and buf-

fets fill a similar niche but differ in their operations.) Family restaurants are in a difficult

competitive position, caught in the middle between quick-service and casual restaurants.

Fine dining, which has redefined itself to fit contemporary customers’ preferences for

casual restaurants, takes a variety of forms. “Eatertainment” operations, which combine

food with various kinds of entertainment, are relatively new on the scene, and their

long-term viability is questionable.

Some restaurants are part of a larger enterprise, such as a department store or a

mall. Their success usually is dependent on the success of the larger unit.

Key Words and Concepts

Food dollar
Food away from home
Full-service restaurants
Quick-service restaurant
(QSR)
Fast-casual restaurant
Takeout
Drive-through
Delivery
Off-premise
Casual dining

Fine dining
Home meal replacement (HMR)
Family restaurants
Dining market
Eating market
Distribution
Points of distribution (PODs)
Specialty restaurants
Ethnic restaurants
“Eatertainment”
Restaurants in retail stores

Review Questions

1. How do the dining market and the eating market differ?

2. What kinds of restaurants are included in the dining market and the eating market?

3. What are the growth concepts in the dining market and the eating market?

4. Do you agree or disagree that quick service is a part of the American lifestyle?

5. What is the outlook for fast-casual restaurants?

6. How are midscale restaurants different from QSRs? How are they similar?

7. What are the risks inherent in “eatertainment”?

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104 Chapter 3 The Restaurant Business

8. What are the prospects for fine dining?

9. What larger businesses do restaurants serve?

Internet Exercises

1. Site name: Mimi’s Cafe
URL: www.mimiscafe.com

Background information: Mimi’s Cafe serves classic American dishes, made from scratch,

in a colorful, French New Orleans–inspired atmosphere with locations in ten states.

Site name: Hillstone Restaurant Group

URL: www.hillstone.com
Background information: Hillstone is a private restaurant organization operating in
various cities throughout the United States. While it is a nationwide organization, it

does not consider itself a “chain” in the traditional sense––rather, it is a collection

of restaurants. Its restaurants have one of the highest per unit sales averages of any

restaurant company in America.

Site name: P. F. Chang’s China Bistro

URL: www.pfchangs.com

Background information: P. F. Chang’s serves fresh, contemporary Chinese cuisine.

Founded in 1993, the P. F. Chang’s experience is a unique combination of Chinese

cuisine, attentive service, wine, and tempting desserts all served in a stylish, high-

energy bistro.

Exercises:

a. Most casual restaurants have a unifying theme that is pervasive in the design of

their menu, decor, and Web site. Identify the theme for each of the restaurants listed

above. How do the menu, interior decor, and building exterior support their theme?

b. Which of the above companies provides a means for applying for jobs via its

Web site?

c. Which of the above companies provides information regarding its menus and

plans for new menu items?

d. After viewing all three Web sites, choose the site that has the most useful information

and discuss why you chose that Web site.

2. Site name: Fuddruckers
URL: www.fuddruckers.com

Background information: Fuddruckers operates and franchises restaurants that special-

ize in upscale hamburgers cooked to order. It encourages guests to garnish their own

entrées by providing an array of fresh produce and condiments. Some restaurants

have a butcher shop where beef is ground fresh every day, and some have on-premise

bakeries where bread and dessert items are baked fresh daily. Fuddruckers operates

more than 200 restaurants throughout the United States and around the world.

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Summary 105

Site name: Wendy’s

URL: www.wendys.com

Background information: When Dave Thomas opened the first “Wendy’s Old Fash-

ioned Hamburgers” restaurant, he had created something new and different in the

restaurant industry. He offered high-quality food made with the freshest ingredients

and served the way the customer wanted it. Wendy’s is a quick-service restaurant

that has over 5,000 stores.

Site name: McDonald’s

URL: www.mcdonalds.com

Background information: McDonald’s is the world’s leading food service retailer, with

more than 31,000 restaurants in 119 countries serving 47 million customers each

day. It is one of the world’s most well-known brands and holds a leading share in

the globally branded quick-service restaurant segment of the informal eating-out

market in virtually every country in which it does business.

Exercise: All three of the above restaurants are “burger joints,” but they differ in
many ways. Discuss how each restaurant tries to differentiate itself from the other

two, especially with respect to target market, menu, interior/exterior decor, and

corporate goals.

Notes
1. National Restaurant Association, June 16, 2009, www.restaurant.org.
2. National Restaurant Association “2009 Restaurant Industry Pocket Factbook,” http://www

.restaurant.org/pdfs/research/2009Factbook .
3. National Restaurant Association, “2009 Restaurant Industry Forecast,” p. 5.
4. Ibid., p. 2.
5. Katy McLaughlin, “Recession Hits Upscale Restaurants,” Wall Street Journal, January 14, 2009,

http://online.wsj.com/home-page.
6. www.pizzahut.com
7. QSR Magazine, “QSR 50 by 2009,” September 25, 2010www.qsrmagazine.com/reports/

qsr50/2009/charts/09rank.phtml.
8. This is a somewhat simplified statement of the problem of distribution. For a more extended

discussion, see Cathy Hsu and Tom Powers, Marketing Hospitality, 3rd ed. (Hoboken, NJ:
John Wiley & Sons, 2001), especially Chapter 9.

9. Sarah Smith Hamaker and Beth Panitz, “In Vogue: What’s Hot in the Restaurant Industry.”
Restaurants USA (May 2002) www.restaurant.org.

10. Ibid.
11. Restaurant Research, LLC, Restaurant Research Journal (February 2003) www.restaurantresearch

.info.
12. Interview with Glenn Drasher, executive vice president of marketing, Buffets, Inc., February

25, 2003.
13. “Top 400,” Restaurants & Institutions, July 1, 2009 http://www.rolypoly.com/news/articles/

R&I%202009%20Top%20400%20Restaurant%20Chains .

CH003.indd 105 23/12/10 7:04 PM

RESTAURANT
OPERATIONS

Courtesy of Bon Appétit Management Company.

CH004.indd 106 23/12/10 7:05 PM

Chapter

T H E P U R P O S E O F T H I S C H A P T E R

T
he best opportunities for advancement in food service are in operations. Staff specialists, such

as marketers, accountants, and human resources people, all play an important role in the food

service industry, but most restaurant chains and on-site operations have operations people in the

top jobs. An independent restaurant operator is, first and foremost, an operations executive who often

does most of the staff specialist work as well. Indeed, many senior executives boast of having started

at the bottom in food service operations; for instance, this is a common trait among McDonald’s execu-

tives. Although their time spent washing dishes or performing other unskilled jobs may have been only

a few months—perhaps during a summer vacation—many executives feel that that kind of operational

experience helps them understand the work of the employees they lead.

In this chapter, we develop an overview of the all-important topic of restaurant operations. The opening

section reviews the key responsibilities in major operational areas and describes a typical day in the life

of food service. This should help you to start thinking about the paths to advancement that best suit you.

The chapter concludes with a section on profitability in food service operations and a summary

of the elements of financial statements. These statements are used to track operating results, that is,

income, expenses, and profit.

T H I S C H A P T E R S H O U L D H E L P Y O U

1. Identify the three main divisions of activity found in restaurant operations, and summarize their

respective roles.

2. Explain the two basic approaches to making a profit and how these approaches affect the various

stakeholders.

3. Understand the primary tools used to measure financial results in food service operations.

4. Appreciate the various aspects of the restaurant business that make it both challenging and

rewarding.

Chapter

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108 Chapter 4 Restaurant Operations

R E S TA U R A N T O P E R AT I O N S

The best way to become familiar with operations in a restaurant or other food service organization is to work in one. The following discussion, however, should give you
useful background and a framework for thinking about your experiences. We focus on

three areas of the restaurant: the front of the house, the back of the house, and the “office.”

Within each section, we look at the principal responsibilities of each area, the tasks

that are performed there, and the kinds of roles played in the food service drama by

employees working in that area. Finally, we look at the general supervisory and

managerial positions typical of that area.

Because our concern is with the whole range of restaurants, from quick-service

restaurants (QSRs) to fine dining, the amount of detail we can deal with is limited.

In general, we’ll take as our model a medium-price, casual table-service restaurant.

Where there are substantial variations in quick service or fine dining, we will note those.

T H E F R O N T O F T H E H O U S E

The front of the house is the part of the operation with which everyone is familiar

because we can see it. It is more complex, however, than it appears at first. The front of

the house is at once an operating system, a place of business, and a social stage setting.

As an operating system, it is laid out to provide maximum efficiency to workers and ease

of movement to guests. As a business, it is a marketplace that provides an exchange of

service for money, which requires appropriate controls. Finally, it is a social place where

people not only enjoy their meals but enjoy one another’s company, good service, and

a pleasing atmosphere.

R E S P O N S I B I LITI E S. The key responsibility of the front of the house is guest satisfaction,

with particular emphasis on personal service. Chapter 15, “The Role of Service in the

Hospitality Industry,” discusses service in more detail, but here we note that service goes

beyond the mechanical delivery of the food to include the way the guest is served by

the people in the restaurant.

The kind of service that should be delivered has a great deal to do with what the

guest wants and expects. In a quick-service restaurant (QSR), for example, guests expect

economy and speedy service at the counter and self-service—even to the point of

discarding their own used disposables after they are finished eating. Although there is

emphasis on speed and economy, the guest still expects a friendly greeting, accuracy in

order filling, and a cheerful willingness to handle any problems that occur. In midscale

restaurants, the table service provided raises the level of interaction with the guest.

C A R E E R S I N
H O S P I TA L I T Y

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Restaurant Operations 109

Although speed of service is still usually expected, the success of the guest’s experience

is more dependent on the server’s personal style. A grouchy server can ruin a good meal

while a server’s pleasant disposition can help immensely when things do go wrong.

In casual, casual upscale, and fine dining, guest satisfaction and service require-

ments have a considerably different frame of reference. As a rule, casual dining implies a

leisurely meal, and that is even truer for fine dining. Accordingly, speed is not always as

important as the timely arrival of courses—that is, when the guest is ready. The higher

price the guest pays raises the level of service he or she expects. A server in a coffee

shop may serve from the improper side or ask “who gets which sandwich” without

arousing a strong reaction. Errors should not happen there, either, but when the price

is modest, guests’ expectations are usually modest. When people are paying more for a

meal, however, they expect professional service and a high degree of expertise on the

part of the staff.

Although service provision is the most obvious job of the front of the house, those

who work there share in the responsibility for a quality food product as well. This means

that orders should be relayed accurately to the kitchen. It also means food shouldn’t be

left to get cold (or baked dry under heat lamps) at a kitchen pickup station. If there is

an error in the way food is prepared, the front of the house is where it is likely to show

up in a guest complaint. People in the front of the house, therefore, need to be prepared

to deal with complaints. Doing this requires at least two things. First, there must be a

willingness to listen sympathetically to a guest’s complaint. Second, a system must be in

place that permits the server or a supervisor to correct any error promptly and cheerfully,

a process known as service recovery. In other words, employees must be empowered

to satisfy guests’ needs. (Empowerment, which is discussed in the final chapter of the

book, refers to an approach to managing people that gives employees discretion over

as many decisions as possible affecting the quality of the guest’s experience.) Because

customers represent potential future sales and powerful word-of-mouth advertising, an

unhappy guest is much more expensive than a lost meal.

The front of the house is also the place where the exchange of goods and services

takes place. As a result, a lot of money changes hands. Thus, the “control” aspects of the

operation, such as check control, credit card control, and cash control, are very im-

portant. Guest check control—being sure that every order is recorded—prevents servers

from going into business for themselves. An unscrupulous server might take orders, serve

the food, and pocket some or all of the money. Today, point-of-sale systems make this

kind of scam much more difficult, but there are ways around even the most scientific

system. Because money is the most valuable commodity, ounce for ounce, that a person

can steal, extreme vigilance is called for in controlling cash. Further, servers must take

responsibility for securing payment for meals served on behalf of the restaurant. Every-

thing that is ordered by customers must be bought and paid for, or at least accounted for.

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110 Chapter 4 Restaurant Operations

TA S K S . From the preceding description of responsibilities, you can see the kinds of

tasks performed in the front of the house:

• Greeting the guest

• Taking the order

• Serving the food

• Removing used tableware

• Accepting payment and accounting for sales, charge as well as cash

• Thanking the guest and inviting comments and return business

R O L E S . The tasks are performed quite differently in different levels of restaurants.

The hostess or host (in more upscale operations, the headwaiter or waitress or maître

d’hôtel) greets guests, shows them to their table, and, often, supervises the service. Some

large, very busy restaurants separate greeting and seating, with hostesses or hosts from

several dining rooms (seaters) taking guests to their table after the guests have been

directed to them by the person at the main entrance, sometimes called the greeter. At

the opposite end of the scale, in QSRs, the counter person is the greeter/order-taker and

change-maker, thus making the smile and personal greeting there more important

than casual observation might suggest.

The cashier’s main duty is taking money or charge slips from guests and giving

change when the check is paid. In some smaller operations, however, the cashier doubles

as a host or hostess. The cashier is also sometimes responsible for taking reservations and

making a record of them. Having a separate cashier to perform this function is one of

the original “controls” evident in the restaurant industry. By separating the cash function,

accountability is placed solely on one person.

In table-service operations, the food server takes the order and looks after the guest’s

needs for the balance of the meal. The server is the person who spends more time with

the guest than any other employee. What the guest expects regarding service is based

on the type of operation. More elaborate service, potentially longer interactions with

the server, and highly considerate behavior on the part of the server are all expected in

more expensive operations. In family restaurants and quick-service operations, although

the length and intensity of interaction are much lower, guests are entitled to certain

minimum—and reasonable—expectations: a genuine interest in them on the part of

the server, a friendly and cheerful manner, and competence in serving the right food

promptly. At all levels of restaurant service, excellent service is crucial to success in an

increasingly competitive market.

Servers are generally assigned to a specific group of tables, called a station. In some

restaurants, servers work in teams to cover a larger station, often with the understand-

ing that only one will be in the kitchen at a time so that at least one of them will be

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Restaurant Operations 111

in the dining room and available to the guests at all times. In European dining rooms

and those in North America patterned after them, a chef de rang and commis de

rang—effectively, the chief of station and his or her assistant—work together in a team.

In less formal operations, food servers are supported by a busperson who clears and

sets tables but provides no service directly to the guest, except perhaps to pour water

or coffee. The busperson’s job is basically to heighten the productivity of the service staff

and to speed table turnover and service to the guest. The busperson’s personal appear-

ance and manner, however, are a part of the guest’s experience. (Many operations fall

somewhere in between the two extremes and use different types of service teams.)

S U P E R V I S I O N . Front-of-the-house supervision ideally is exercised by the senior

manager on duty. The importance of having a management presence cannot be overstated.

It is important from the view of employees, and it also provides greater confidence to the

customers. Most managers should be expected to devote the majority of their time to

Cash control is a critical
function in front-of-the-
house operations.
(Courtesy of
PhotoDisc, Inc.)

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112 Chapter 4 Restaurant Operations

the front of the house during meal hours to ensure that guests are served well (although

adequate attention must also be paid to the back of the house). Doing this enables the

manager to greet and speak with guests. In this sense, the manager is expected to be a

public figure whose recognition is important to the guest—“I know the manager here.”

At the same time, she or he can deal with complaints, follow up on employee training,

and generally assess the quality of the operation. In some cases, of course, the manager

finds it necessary to spend more time in the back of the house.

In larger operations, the general manager delegates responsibility to a dining room

manager to manage service in a specific area or in the whole front of the house. In many

operations, the job of host or hostess includes supervisory responsibility for the service

in the room or rooms for which he or she is responsible.

In addition to supervising service, managers in the front of the house have responsibility

for supervising cleaning staff and cashiers and for opening and closing procedures

in the restaurant. Opening and closing duties are sometimes discharged by a lead

employee.

T H E B A C K O F T H E H O U S E

In many ways, the back of the house is like a factory, of which there may be two vari-

eties. Some factories are virtually assembly plants. Others manufacture goods from raw

materials. A similar distinction can be made regarding restaurants. Some are really

assembly operations, where food is simply finished and plated by kitchen staff. This

is true of operations that use a lot of prepared foods, such as portioned steaks, or a

sandwich operation such as a QSR. In others, the product is actually manufactured on

the premises or, as we more commonly say, cooked from scratch.

R E S P O N S I B I L I T I E S . The principal responsibility of the back of the house is the

quality of the food the guest is served. This is a matter not only of food taste; food safety,

sanitation, food cost control, inventory management, and so on are also significant

responsibilities of the back of the house. Because prompt, timely service is dependent

on being able to get the food out of the kitchen on time, the kitchen also has a major

responsibility with regard to service.

TA S K S . Food production stands out as the predominant work done in the back of

the house. Controlling quality and cost are usually parallel activities. In other words,

standardized recipes and carefully thought-out procedures, used consistently, will

produce food that has the correct ingredients, thus ensuring both quality and cost.

An important dimension of cost control is portion control. Say a sandwich that

calls for 2 ounces of ham has 2.5 ounces. Although the portion may be “only” .5 ounce

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Restaurant Operations 113

overweight, that is 25 percent additional meat and probably represents an increase of

20 percent in cost. Portion control has a quality dimension as well. Assume two guests

order fish, and the planned portion is 8 ounces. One receives a 7-ounce portion and

the other, a 9-ounce portion. Although the average is the same and so cost won’t be

affected, the guests are likely to notice the discrepancy. Portions should be the same

for a guest at every visit—and they should be the same for every guest. Needless to say,

controlling costs has a direct impact on the profitability of a restaurant.

Dishwashing and pot washing are not skilled jobs, but they are certainly important

work. Anyone who has been in a restaurant that ran out of clean dishes in the middle of

the meal or pots during a heavy preparation period can testify to this. These are activities

that use a significant amount of labor in any operation that serves food on permanent

ware and has a varied menu (i.e., most operations outside of quick service). Labor cost

control is, therefore, an important element in planning ware washing. Because detergent

Quality control is important
in all types of food service
operations. (Courtesy of
Domino’s Pizza, Inc.)

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114 Chapter 4 Restaurant Operations

is a commodity that restaurants use in large quantity, the cost of supplies is a significant

concern. Quality work, which relates not only to the workers’ performance but also to

adequate water temperatures and soap solutions, is absolutely essential.

Cleanup work is important in both the front and back of the house, but because it

is more clearly related to sanitation, back-of-the-house cleanup is especially significant.

Although in most operations workers clean up as they go during the day, the heavy

cleanup is usually done at night, when the restaurant is closed.

R O L E S . Cooks and chefs come not only in all sizes and shapes but also with varying

skill levels. In fine dining, cooking is generally done by people with professional chef’s

credentials, received only after serving a lengthy apprenticeship or a combination of for-

mal education and on-the-job experience. The much-talked-about “hamburger flippers”

of quick-service operations are at the other end of the scale. It is not surprising that the

work that this group performs can be learned quickly, because the operation has been

deliberately designed to reduce the skill requirements. In between these extremes lie the

short-order cook, the grill person, the salad preparation person, and many others who

have a significant amount of skill but in a narrow range of specialized activities. Whatever

the skill level, it is crucial to the success of the operation that this work is done well.

Dishwashers are often people who have taken the job on a short-term—and often

part-time—basis. Because the job is repetitive, monotonous, and messy, it is not surprising

that it has a high turnover. We ought to note, however, that an inquisitive, observant

person working in the dish room—or on the pot sink—is in a position to learn a lot

about what makes a restaurant run. Many successful restaurant operators (and college and

university professors) got their start in this position.

Some operations employ people with disabilities in dish and pot work as well as in

salad and vegetable preparation. Employees with mental disabilities often find the routine,

repetitive nature of the work suited to their abilities. Not surprisingly, they find that their dig-

nity as individuals is enhanced by their success in doing an important job well. As a result,

employers such as Marriott, which has developed successful programs for workers with

disabilities, have experienced a significantly lower turnover among this group of workers.

An important role we haven’t touched on yet is that of the person (or persons)

responsible for receiving the shipments of food at the back door as they are delivered.

It is the receiver’s responsibility to accept shipments to the restaurant and to check them

for accuracy in weight or count as well as quality.

In large operations, such as hotels, resorts, and casinos, the receiver may report

directly to the accounting department because the work relates to control. The receiver

needs a good working relationship with the kitchen staff, whatever the formal reporting

procedure. In most operations, the receiver has duties closely involved with kitchen

operations, such as storing food and keeping storage and receiving areas clean and

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Restaurant Operations 115

sanitary. Some restaurants distribute the tasks of the receiver between two or more

people. In a hotel one of the authors ran, for instance, counting and weighing of

goods received was done by the pot washer, whereas verifying quality was the re-

sponsibility of the restaurant manager on duty. Responsibilities vary greatly from

operation to operation.

Food production is generally headed by a person carrying the title of chef, execu-

tive chef, or food production manager. In smaller, simpler operations, the title may be

head cook or just cook. In these latter operations, the general manager and her or his

assistants usually exercise some supervision over cooks, so it is important that they have

cooking experience in their own backgrounds. In fact, one of the trends in casual dining

has been to eliminate the position of chef and replace it with several cooks and a

kitchen manager who is responsible for back-of-the-house administrative duties. The

role of chef continues to evolve. One association for a certain type of chef, a culinologist,

is profiled in Industry Practice Note 4.1.

Closing (cleaning up, shutting down, and locking up) responsibility is very much

related to food-production activities but deserves separate discussion because of its

importance in relation to sanitation and security. The closing kitchen manager is

responsible for the major cleanup of the food production areas each day (and prob-

ably has the same responsibility in the front of the house). This person also oversees

putting valuable food and beverage products into secure storage at the end of the day

and locking up the restaurant itself when all employees have left. The job is not a very

glamorous one, but it is clearly important. In this day and age of security concerns, the

position takes on added importance and responsibility.

T H E “ O F F I C E ”

We have put “office” in quotation marks because it has many organizational designations,

from “manager’s office” to “accounting office.” The functions relate to the administrative

coordination and accounting in the operation.

R E S P O N S I B I L I T I E S A N D TA S K S . The office has as its first task administrative

assistance to the general manager and his or her staff. The office staff handles corre-

spondence, phone calls, and other office procedures. These activities, although routine,

are essential to maintaining the image of the restaurant in the eyes of its public. Ideally,

managers should not be bogged down in this time-consuming work. It is essential to

have office staff to free managers to manage.

A second major area of responsibility is keeping the books. Often the actual books

of account are kept in some other place (a chain’s home office or an accountant’s office

for an independent), but the preliminary processing of cashier’s deposits, preparation

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116

I N D U S T R Y P R A C T I C E N O T E 4 . 1

Research Chefs Association

The Research Chefs Association (RCA) is an organization for professionals who are involved with food prod-

uct development and have a specific interest in the future of food. Its mission is focused on the concept of

Culinology®, which is “the blending of the culinary arts and food science.” The association was formed in

1996 by a group of food professionals interested in food, culinary arts, new product development, and food

science. The association attempts to bring all of these dimensions together for practitioners, educators, and

students. There are now approximately 2,000 members spread across the United States among various

regions. The approximate breakdown of members by type is 42 percent chefs, 31 percent affiliates (food

scientists and affiliated fields); 14 percent associates (sales fields), and 13 percent students. Many of the

students are studying Culinology at one of the seven academic institutions offering programs in this area.

One of the ways that the RCA is able to accomplish its objectives is through education and professional

development (and certification). RCA-approved Culinology degree programs are housed in such univer-

sities as Cal Poly Pomona, Clemson University, and the University of Massachusetts. The University of

Massachusetts, which has a particularly renowned food science program, provides extensive information

about Culinology as an academic area and offers it as a degree program. An excerpt from its Web site states:

Today, when consumers enter the grocery store they not only expect foods to be inexpensive and

safe but also to have a wide variety of flavors and textures that are often inspired by ethnic food

traditions and unique innovations. In addition, books such as On Food and Cooking: The Science

and Lore of the Kitchen by Harold McGee and television shows like Good Eats starring Alton Brown,

have been instrumental in expanding cooking beyond the traditional Culinary Arts into the world

of Food Science. These developments have made Culinary Science one of the hottest areas of

the Food and Food Service Industries. The Department of Food Science has developed a unique

concentration in Culinology that has been recognized by the Research Chefs Association. This

program combines Culinary Arts and Food Science by accepting students with a 2-year culinary

arts degree and providing them with a science-oriented framework that enables them to obtain a

B.S. in Food Science from the University of Massachusetts in three years. . . .

The great benefit of Culinary Science training is that it outweighs all the competition because

it’s the best of both worlds. As a culinologist, one not only has the scientific understanding of

food processing but also the much-valued understanding of culinary arts. Combined together,

this opens a spectacular opportunity to work in the food industry. The passion of food shared

of payrolls, and approval of bills to be paid are all included in this function. Prompt

payment of bills is very important to a restaurant’s good name in the community; so

whether this is done in-house, at a home office, or by a local bookkeeping service,

it deserves careful and prompt attention. Regular cost control reports must be prepared,

either on the premises or off, usually including the statement of income and expenses

(which is discussed later in this chapter).

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117

by culinarians allows them, through their research and development, to impact the food culture:

a great example is Chef Boyardee, who started his career as a chef and with the help of technology

brought canned pasta and sauce to where it is today.

The food science world is a unique industry offering a great working experience in its many

kitchen-laboratories. Included in this environment are all the benefits of corporate America with

endless opportunity for individual career advancement and most of all, the satisfaction of a food

lover’s passion of working in the kitchen.1

Besides formal education through their links with academic institutions, the RCA also does a lot of

work in the area of professional development of its members. Certification programs that the association

provides include Certified Research Chef (CRC) and Certified Culinary Scientist (CCS) credentials. Both

certifications require that certain qualification standards be met before a candidate can sit for the exam.

The standards include formal education and professional experience in both food service and product

research and development.

The RCA is fulfilling its mission in several other ways as well, including quarterly newsletters, outreach,

sponsoring student scholarships, hosting regional meetings, and hosting the annual RCA Conference and

Culinology Expo.

Culinology is an expanding field as a result of the growing interest in food in today’s society as well as

the continued professionalization of the industry. Interest in food, food development, and Culinology cuts

across industry segments to include suppliers, quick service, casual dining, and others. Food companies,

for instance, are allocating more money to research and development than ever before as commercial-

ization within the industry grows. Some of the latest trends and developments in food-related products

(all of which were covered at a recent RCA conference) include umami flavors, packaging technologies,

astronaut food, sustainable agriculture, baking science, and hospital haute cuisine.

For students who are interested in combining their interests in food, culinary arts, and food science, a

degree (or a career) in Culinology allows them to put these skills to work. Potential employers include food

service companies, manufacturers, distributors and suppliers, research companies, and academic institutions.

1. University of Massachusetts Department of Food Science, Culinary Science program, www.umass.edu/nre/majors/index.php/food/.

Sources: Correspondence with the Research Chefs’ Association, www.culinology.com; University of Massachusetts Department of

Food Science, www.umass.edu/foodsci/.

ROLES. The manager’s administrative assistant often functions as office manager.

Independent operators commonly employ a bookkeeper or accountant full or part

time or use an outside service. Chains handle most accounting centrally. Often the

secretary or office manager is responsible for filling out forms that serve as the basis

for the more formal reports.

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118 Chapter 4 Restaurant Operations

SUPERVISION. As noted previously, the person who supervises on-premise clerical work

usually reports to the general manager, as does any in-house accountant. We should

note, however, that there are many smaller operations whose low sales volume will

not support clerical staff. In these cases, the clerical and accounting routines are usu-

ally handled by the managers themselves. In chains, particularly QSR chains, reporting

systems have become highly automated. Here, most reports are prepared from routine

entries made in the point-of-sale register and automatically transmitted directly to

the central accounting office.

G E N E R A L M A N A G E M E N T

We should now add one additional category to our framework for observing a restaurant—

the general managers and their assistants. It is essential that there be someone in charge

whenever an operation is open. One possible schedule (for a full-service casual res-

taurant that is open for the lunch and dinner periods) is: An assistant manager comes

in before the restaurant opens and oversees all the opening routines. These include

turning on equipment, unlocking storage areas, and seeing to it that all of the crew has

shown up and that all the necessary stations are covered. The general manager arrives

in midmorning and stays at least through the evening meal rush. The closing manager

arrives sometime in the afternoon and is usually the last person to leave, locking up

for the night. Effective managers, and restaurant companies, often use checklists as

reminders, which are good ways to document tasks. An operation with different hours

of operation would have a different schedule in some of the details, but the essential

functions identified here would all have to be covered in some way. The key point is

that someone in the unit is in charge at all times.

In talking about management, we have really been describing management

presence. We may not always see the title “manager” used, however. Many of the duties

of management are carried out by supervisors. In quick-service (as well as smaller)

restaurants, managers and their assistants are often supplemented by crew chiefs and

lead employees. Whatever the title, the responsibility of managing these various tasks

must be taken care of.

We have used the title “general manager” in this section but should note that this

is a title used principally in larger operations. The function of overall direction, how-

ever, is the same even if the title used is “unit manager” or “store manager” or simply

“manager.” Because the general manager can’t be present every hour of the day, her

or his assistants, whatever their titles, stand in for the manager when she or he cannot

be physically present. A key point is that managers act as a team to give direction

to the unit, to maintain standards (quality and cost), and to secure the best possible

experience for their guests.

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119

D A I LY R O U T I N E . As we have already mentioned, opening and closing a restaurant

involves specialized work. The highest levels of activity, of course, occur during the meal

periods. Between the rush hours, a lot of routine work is accomplished. The following

is a look at the major divisions of a restaurant’s day.

Opening. Somebody has to unlock the door. In a small operation, it may be a lead

employee; in a large operation, it will probably be an assistant manager. As other

employees arrive for work, storage areas and walk-ins must be unlocked. If a junior-level

supervisor was in charge of closing the night before, it is especially important that the

first manager on duty inspect the restaurant and especially the back of the house for

cleanliness and sanitation. One additional note that must be added here: It seems that

restaurants have recently become targets of robberies, particularly in large U.S. cities. As

a result, many restaurant companies are and have been reevaluating their opening and

closing procedures. One strategy used to increase safety in restaurants is changing opening

and closing procedures to ensure the safety of restaurant employees; for instance, some

restaurants are requiring that restaurants be opened and closed by pairs of managers

instead of individuals. Other safety measures include installing cameras and additional

lighting at entry points (including the loading dock).

In larger restaurants, a considerable amount of equipment has to be turned on.

Sometimes this process is automated, but in other operations, equipment is turned

on by hand, following a carefully planned schedule. One element of a utility’s charge

relates to the amount of power used, but another relates to the peak demand level.

The work of managers
in food service puts a
high priority on
communication.
(Courtesy of Sodexo.)

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120 Chapter 4 Restaurant Operations

If someone throws all the electrical panel switches, turning on air conditioners, lights,

exhaust fans, ovens, and so forth all at once, this will create a costly, artificially high

demand peak. The person who opens may follow schedules to phase in electrical

equipment over a longer period to avoid this problem.

As noted earlier, it is important to be sure that all stations are covered, that is, that

everybody is coming to work. If an employee calls in at 6:30 A.M. to say he or she can’t

make it, or if somebody just doesn’t show up, appropriate steps must be taken to cover

that position. This could mean calling the appropriate supervisor at home to let that

person know of the problem. Alternatively, the opening manager might also handle it

more directly by calling in someone who can cover the position. (Having an “on-call”

person each day helps to alleviate this problem.)

Before and after the rush. Much of the work done outside the meal period is routine. Prob-

ably the most important is “making your setup,” that is, preparing the food—the mise en

place (defined by the Culinary Institute of America as “everything in its place”)—that will

be needed during the next meal period. In a full-menu operation, this will likely involve

roasting and baking meats, chopping lettuce and other salad ingredients, and performing

other food preparation tasks. In more specialized operations, it may involve slicing prepared

meats or simply transferring an appropriate amount of ready-to-use food from the walk-in to

a working refrigerator. It is essential that safe food-handling procedures always be followed

to prevent food contamination. In some QSRs, a key portion of the setup actually occurs

just as the meal period is about to begin, when product is prepared and stored in the bin,

ready for the rush that is about to commence. The key element in making the setup is to

do as much as possible before the meal to be ready to serve customers promptly.

Sidework is another important activity done by servers on a regular schedule. Side-

work includes such tasks as cleaning and filling salt and pepper shakers, cleaning the

condiment stands, and, in many restaurants, some cleaning of the dining room itself. This

is work that can’t be done during the rush of the meal hour. The front of the house has

a sidework setup for every meal period too. Side stands must be stocked with flatware,

napkins, butter, sugar packets, or whatever guest and food supplies might be needed

during the coming rush.

Other routine work, such as calling in orders, preparing cash deposits and reports

on the previous day’s business, and preparing and posting work schedules, is tended to

by management staff or under their supervision. It is important that this routine work be

done during off-peak hours so that managers on duty can be available during rush

hours to greet guests, supervise service, and help out if a worker gets stuck. When

you see a manager moving through the dining room pouring coffee, that manager is

(or should be) using that opportunity as a way of greeting guests, observing operations,

and helping busy servers rather than covering a shortage in the service staff.

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Making a Profit in Food Service Operations 121

The meal periods. Not every meal is a rush in terms of the restaurant’s seating capacity.

Employees are scheduled, however, to meet the levels of business, so there should be no

extra help around. Accordingly, those who are there probably will experience most meal

periods as a rush. Each meal has its own characteristics—probably somewhat different

in different operations—and the service offered needs to be adapted to that style. In a

hotel one of the authors ran, breakfast guests came from the hotel. They were slightly

distracted, thinking about the day ahead, and were more interested in their newspa-

per or breakfast companion than in visiting with dining room staff. Lunch was mostly

local businesspeople on a business lunch with clients or in a party of coworkers. The

emphasis at both breakfast and lunch was on speed and efficiency. Most guests had to

go somewhere else on a fairly tight schedule.

In contrast, dinner was a more relaxed meal. The day was over and people were

not in as much of a hurry. There were more single diners, and many were quite happy

to visit for a few minutes with staff.

Closing. We have already discussed the importance of the housekeeping, sanitation,

and security duties involved in closing activities. We should note that there is also

guest contact work, that is, easing the last few people out of the restaurant without

offending them or waiting until they’re ready to leave, depending on house policy.

Special care must be employed, in operations serving alcohol, with guests who may

be intoxicated, to avoid potential liability to the operation for any harm they might

do to themselves or others. There should be written house policies covering this

contingency.

M A K I N G A P R O F I T I N F O O D S E R V I C E O P E R AT I O N S

Restaurants have three basic stakeholders. One is the customers. Another is the employees, who seek a good place to work and a decent living. Ultimately,
though, the purpose that underlies the logic of any business is to make a profit.

Without profit, funds to renew the business—to remodel, to launch new products

or services, to expand to serve a changing market—and keep employees on the

payroll are just not available. Moreover, the third stakeholder is the owners, who,

like all of us, need some reward for their effort and risk. Profit, then, serves a vital

role in any business.

There are two basic approaches to increasing profit. One is to increase sales; the

other is to reduce costs. Most commonly, operators try to do both to the limits of what

will make sense for all stakeholders.

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122 Chapter 4 Restaurant Operations

I N C R E A S I N G S A L E S

The two basic approaches to increasing sales are to sell to more people or to sell more

to your present customers—or to do both. (The term revenue management is preferred by

some.) Increasing the customer base is usually thought of as the job of marketing (and

specifically, advertising and promotion). A superior operation that achieves a good reputa-

tion may build its customer base through word-of-mouth referrals. For instance, Houston’s

Restaurants do not do any mass-media advertising but have a very loyal following.

Another approach is to increase sales to the customers you now have—that is, to

increase the check average. One obvious way to do this is simply to raise prices. Unless

the price level of the competition is also going up, however, this method most probably

will result in a loss of customers (the result of something called price resistance). Some

effective approaches to increasing the average check are menu redesign, “bundling” of

food items, and suggestive selling.

Menu redesign can be accomplished through the actual redesign of the menu,

repositioning the menu items to draw attention to high-profit items or changing

(or removing) menu items. Each of these strategies can contribute to encouraging

the customer to spend more and to purchase higher-profit items.

Bundling is another strategy that can result in the same thing. One of the most

common bundling strategies is the combination meal. Several items that are sold

separately—for instance, a hamburger, french fries, a soft drink, and dessert in the

quick-service arena—are sold together for a price that is less than the price of each

sold separately. If this is a good value to customers, it is likely to persuade a certain per-

centage to buy more than they might otherwise have done. In a table-service restaurant,

this kind of combination is referred to as a complete dinner (or lunch) or table d’hôte.

A related approach, one very common in Europe, is the prix fixe menu, which is simply

a collection of predetermined items offered as a multicourse meal at a set price The

higher check average results in an increase in sales. Another result is likely to be a

slightly higher food cost percentage because the selling price is reduced but the food

cost remains the same. Because total dollar sales have increased and, almost certainly,

no additional labor has been scheduled, the labor cost percentage will be lower.

The intent is that the higher food cost will be more than offset by the reduced labor

cost percentage.

Suggestive selling is another potentially effective technique for increasing sales.

Common targets for increased sales are appetizers, side dishes, wine, desserts, or after-

dinner drinks, although main courses should not be overlooked. The service staff is

crucial to this effort: “May I suggest something from our wine cellar? A bottle of Pom-

mard would complement the roast beef perfectly.” These techniques can be applied

to most every menu category. For instance, with certain segments of the population

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Making a Profit in Food Service Operations 123

who are reducing their alcohol intake, suggestive selling of premium bottled water is

a simple way of increasing sales. Operators often offer prizes or bonuses for the server

most effective in selling.

R E D U C I N G C O S T S

Just as raising prices faster than the competition will drive off customers, so will cheap-

ening quality through the use of inferior ingredients or smaller portions. Customers

inevitably notice such changes. Thus, reducing costs must result from improved ef-

ficiency, which is a fit subject for not one but several books. We will content ourselves

here with noting that some of the most common techniques for reducing costs in food

service involve more careful scheduling of employees, improved portion control, and

more careful monitoring of the issue and use of supplies such as soap, paper goods,

and other disposables. Generally, the key to reducing costs is a careful review of the

operation to find places where waste can be reduced without loss of quality. Following

such a review, realistic standards are set, and performance is monitored against those

standards. Figure 4.1 shows some common techniques for monitoring cost performance

with examples of the kind of measurement used.

If cost reductions come from improved efficiency rather than cheapening

quality, they will have a greater impact on profit. A dollar saved in cost, after all, is

a dollar more profit. An increase in sales, however, will be accompanied by some

increased cost—the variable cost, such as food cost, for instance—and so will not

produce as much profit.

Figure 4.1

Some common cost-control techniques.

C O S T G R O U P T E C H N I Q U E E X A M P L E O F M E A S U R E M E N T

Food Yielding Dollar cost or weight per
portion served

Labor Productivity standards Number of guests served per
server hour

China, glassware,
and silver

Breakage/loss counts Guests served per
broken/missing piece

Supplies Usage monitoring Gallons/pounds of soap used
per 100 guests

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124 Chapter 4 Restaurant Operations

K E E P I N G T H E S C O R E I N O P E R AT I O N S : A C C O U N T I N G

S TAT E M E N T S A N D O P E R AT I N G R AT I O S

A discussion of operations is not complete without a brief review of the common scorekeeping methods used in the field. Elsewhere in your hospitality curriculum,
you will undoubtedly study the subject of control at more length. As part of your

introduction to the hospitality field, however, this section discusses briefly some key

food service control terms, accounting statements, and operating statistics.

C O S T O F S A L E S

The cost of sales refers to the cost of products consumed by the guest in the process

of operations. The principal product costs include:

• Food cost. The cost of food prepared for and consumed by guests

• Beverage or bar cost. The cost of alcoholic beverages and other ingredients, such

as juices, carbonated water, or fruit, used to make drinks for guests

Note that these (and all other) costs are customarily stated both in dollar amounts

and as a percentage of sales. For example, if your food cost is $25,000 and your food

sales are $75,000, then the food cost percentage will be $25,000/$75,000, or 33.3 percent.

Although dollar costs are essential to the accounting system, the percentage of the cost

(i.e., its size relative to the sales level) is more useful to managers because the percent-

ages for one month (or for some other period) can readily be compared with those of

other months, with a budget, and with industry averages.

C O N T R O L L A B L E E X P E N S E S

Controllable expenses are costs that may be expected to vary to some degree and over

which operating management can exercise direct control. Controllable expenses include:

• Payroll costs. Payroll costs are the wages and salaries paid to employees.

• Employee benefits. Employee benefits include social security taxes, workers’

compensation insurance, and pension payments.

• Other variable costs. Other costs that generally vary with sales are laundry, linen,

uniforms, china, glassware and silver, guest supplies, cleaning supplies, and menus.

Some costs in the category of controllable expenses have both a fixed and a variable

component (utilities cost), but others are fixed by management decision, which is

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125

Considering the tax
consequences of financial
decisions can improve a
company ’s net income.
(Courtesy of PhotoDisc, Inc.)

subject to change (advertising and promotion, utilities, administrative and general,

and repairs and maintenance).

C A P I TA L C O S T S

This group of costs varies with the value of the fixed assets, usually land, building, furni-

ture and fixtures, and equipment. The higher the asset value, for instance, the higher the

property taxes or insurance. The same is true of depreciation, which is a bookkeeping

entry to write off the cost of a capital asset. Interest varies, of course, with the size of

the debt and the interest rate.

By categorizing cost information in this way, we focus attention on the operation’s

key variables. The cost percentages also reflect the efficiency of various segments of

an operation. Food costs reflect management pricing and the kitchen crew’s efficiency.

Labor costs reflect efficiency in employee scheduling and the adequacy of sales volume

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126 Chapter 4 Restaurant Operations

Figure 4.2

Restaurant statement of income and expenses.

STATEMENT OF INCOME AND EXPENSES

Suburban Restaurant

Year Ending December 31, 20XX

SALES

Food $962,400 80.2%

Beverage 237,600 19.8

Total sales 1,200,000 100.0

COST OF SALES

Food $348,400 36.2%

Beverage 66,100 27.8

Total cost of sales 414,500 34.5

GROSS PROFIT 785,500 65.5

CONTROLLABLE EXPENSES

Salaries and wages $338,400 28.2%

Employee benefits 62,400 5.2

Direct operating expenses 64,800 5.4

Music and entertainment 3,600 0.3

Marketing 22,800 1.9

Utility services 38,400 3.2

Administrative and general 46,800 3.9

Repairs and maintenance 21,600 1.8

Total controllable expenses 598,800 49.9

INCOME BEFORE CAPITAL COSTS $186,700 15.6%

CAPITAL COSTS

Restaurant occupancy costs (including rent,
property taxes, and property insurance)

$84,000 7.0%

Interest and depreciation 46,800 3.9

Total capital costs 130,800 10.9

NET PROFIT BEFORE INCOME TAXES $56,400 4.7%

Number of covers served 74,918

Food check average $12.85

Beverage check average $3.17

Total check average $16.02

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Keeping the Score in Operations 127

in proportion to the operation’s crew size. Results can be improved by either reducing

employee hours or increasing sales.

Two key operating statistics are covers and check averages. The number of covers

refers to the number of guests. (Guest count is an alternative term.) The check average

can be what it sounds like, the average dollar amount of a check. Because parties

(a group of guests seated together) vary in size, however, the check average is usually

quoted as the average sale per guest. This figure is found by dividing the total dollar

sales by the number of guests served during the period and is sometimes referred to

as the average cover.

Figure 4.2 shows an example of a restaurant statement of income and expenses

(also called an operating statement or a profit-and-loss statement). This statement shows

the relationship of the costs we have just discussed and also how the check averages are

computed.

As a final way to compare and contrast differing restaurants, Table 4.1 presents

selected average operating ratios for the kinds of restaurants we described in the

previous chapter.

TABLE 4.1

Comparison of U.S. Restaurant Operating Statistics

LIMITED SERVICE
FULL SERVICE
(UNDER $15)

FULL SERVICE
($15 TO $24.99)

FULL SERVICE
($25 AND OVER)

Food costa 30.4% 33.0% 34.5% 32.6%

Beverage costb 33.4% 28.0% 29.3% 28.2%

Product costc 30.4% 31.9% 33.1% 32.4%

Payroll and
related costsd

28.6% 32.5% 33.5% 34.5%

Prime coste 59.0% 64.4% 66.6% 66.9%

Occupancy and
capital costsf

10.5% 9.0% 9.3% 10.0%

Profit before
income taxes

9.7% 5.6% 3.6% 10.5%

a Food cost as percentage of food sales.
b Beverage cost as percentage of beverage sales.
c Total food and beverage cost as percentage of total food and beverage sales.
d Includes employee benefits.
e Total of product cost and labor cost.
f Includes occupancy costs, depreciation, and interest expense.

Source: National Restaurant Association, “Restaurant Industry Operations Report—2008.”

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128 Chapter 4 Restaurant Operations

L I F E I N T H E R E S TA U R A N T B U S I N E S S

The decision of whether to work in the restaurant business is really a decision about the kind of life you want to lead. Weekend and holiday work is common, and work-
weeks of 50 and 60 hours are, too, especially while you are climbing your way up in

management. The work is often physically demanding because you are on your feet,

under pressure, and in a hurry for most of the working day. However, it is an exciting

business. It involves working with people—both employees and guests—in a way that

is very rewarding. Every day—every meal—is a new challenge, and there are literally

hundreds of opportunities to make people feel good. Few things are as pleasant as

the end of a meal when a restaurant crew can take satisfaction in the success of its

joint efforts.

S A L A R Y L E V E L S

According to the Bureau of Labor Statistics, the median salary for food service managers

in 2008 was just over $46,000. Keep in mind that the salary level is obviously dependent

on geographic location, the restaurant company, length of service, sales volume, and so

forth. Some segments are known to pay more than others; for instance, managers in the

casual/theme segment are among the highest paid. The average salary for unit managers

of family restaurants tends to be on the lower side.

Bonuses can also add an additional $2,000 to $10,000 at the unit level, again depending

on the segment and individual company policies; other bonuses may include a car

allowance and free meals.1 Restaurant companies tend to compensate their general

managers significantly better than they do managers at the assistant level. After all, it

is the general manager who is ultimately responsible for the performance of the unit.

Employers tend to view the assistant manager’s position as an entry-level management

position. The salary data on a popular job-search site (www.indeed.com) indicates that

in 2008 a typical general manager earned $47,000 while assistant managers earned

only $34,000. The typical experience requirement for this position is between one and

three years. The time that it takes to achieve the level of general manager has gotten

progressively shorter over time but is between three and six years for most chains. On

the lower end of the spectrum are management trainees, earning $25,000, and at the

upper end, regional managers (of chains), earning $81,000. Chefs’ earnings ranged from

$34,000 for a banquet sous chef to $52,000 for executive chefs.2 In looking at your career

farther into the future, it is worthwhile to note that another salary survey by Hospitality

Valuation Services looked at the compensation of higher-level managers and found the

median salary for hotel chief executive officers in 2007 was $946,107!3

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Summary 129

As we are dealing with averages, there are many people earning both more and

less than these amounts. There is a considerable range in earnings because pay depends

on the size of the operation, profit levels, and responsibilities involved. Nevertheless, the

figures give benchmarks that you may find useful.

S U M M A R Y

A good way to structure your observation of food service is around the major divisions of the front of the house, the back of the house, and the office or the administrative
function, which is the way we have organized this chapter. Guest satisfaction, personal

service, and accounting for sales are the major responsibilities of the front of the house.

Food quality as well as food safety, sanitation, and food cost control are crucial in the

back of the house. The office staff provides administrative assistance to managers and

handles routine accounting and cost control functions. It is vital to ensure that there is

some kind of management presence whenever an operation’s employees are at work. The

food service day revolves around opening and closing routines and rush periods at meals.

We covered a variety of issues relating to revenues and costs. Food service operations can

be made profitable by increasing revenues or decreasing costs. Sales can be increased

by selling more to existing customers or by broadening the customer base. Costs must be

reduced through greater efficiency rather than by cheapening the product and service. In

operations, the effectiveness of results is measured with financial statements, particularly

the statement of income and expense, and in operating statistics and ratios.

Key Words and Concepts

Front of the house

Back of the house

Guest satisfaction

Service recovery

Check control

Credit card control

Cash control

Reducing costs

Cost of sales

Controllable expenses

Management presence

Opening and closing

Food safety

Sanitation

Mise en place

Prix fixe menu

Increasing sales

Bundling

Table d’hôte

Covers

Check average

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130 Chapter 4 Restaurant Operations

Review Questions

1. What are the most important elements of quality in food service? How are they

attained?

2. What is meant by the term management presence? Why is it important? Have you

seen it provided in operations in which you have worked? What are some of the

consequences of a lack of management presence?

3. What characteristics do you think are important in a person who chooses to work

in food service operations?

4. What pitfalls can you see in the attempts to increase sales? To reduce costs?

5. What are the major approaches to increasing profit? Which is the best way? Why?

What are its dangers?

6. What are the main controllable costs? Why are they called controllable?

Internet Exercises

1. Site name: All Food Business

URL: www.allfoodbusiness.com/job_descriptions.php

Background information: Provides food service industry information and resources

free of charge.

Site name: Famous Dave’s

URL: www.famousdaves.com/careers/

Background information: Famous Dave’s is a chain of barbecue restaurants head-

quartered in Minnetonka, MN.

Site name: Zoe’s Kitchen

URL: www.zoeskitchen.com/MANAGER_OPERATOR

Background information: Zoe’s is a small chain of restaurants headquartered in

Birmingham, AL.

Site name: Red Lobster

URL: www.redlobster.com/jobs/management_positions.asp

Background information: Red Lobster is a chain seafood restaurant and is part of

Darden Restaurants, Inc. It was built on the promise of offering great-tasting seafood

at a value price.

Exercises:

a. Review the management job descriptions for each of the restaurants above.

Describe the differences and similarities among the restaurant groups and compare

them with those discussed in the textbook.

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Summary 131

b. What training is provided by the restaurants to prepare entry-level managers for

positions in their organization? Which restaurant company seems to provide the

best training?

c. Based on the job descriptions indicated on the Web sites above, describe what

you need to do to prepare yourself for a restaurant manager position between

now and graduation.

2. Site name: PayScale.com

URL: www.payscale.com/research/US/Job�Restaurant_Manager/Salary/show_all

Background information: PayScale is an online salary and benefit information source,

providing reliable and accurate compensation data for both employees and employers.

Site name: Bureau of Labor Statistics

URL: http://www.bls.gov/oco/ocos024.htm

Background information: The Bureau of Labor Statistics is the principal fact-finding

agency for the federal government in the broad field of labor economics and statistics.

Site name: StarChefs.com

URL: www.starchefs.com/features/editors_dish/salary_survey/index.shtml

Background information: StarChefs™ is an award-winning online magazine, serving

the food service industry and food aficionados since 1995.

Exercises:

a. Using the Web sites above, compare the salary levels for food service managers.

Describe any differences and why you believe there is a difference.

b. Describe the difference that location in the United States makes for basically

the same job. Other than cost of living, what would account for differences in

salaries in various locations?

Notes

1. National Restaurant Association, “State of the Industry Workforce” (September 2008).

2. www.indeed.com/salary.

3. HVS International, CEO/CFO Compensation Report, 2007.

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RESTAURANT INDUSTRY
ORGANIZATION:

CHAIN, INDEPENDENT, OR FRANCHISE?

Courtesy of Rainforest Cafe.

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Chapter

T H E P U R P O S E O F T H I S C H A P T E R

T
his chapter is concerned with the relationship between the form of ownership of the restaurant and

the likelihood of success. Chains have many advantages, but so do independents. The advantage—or

disadvantage—often depends on the situation; factors such as location, type of operation, and the

operation’s relationship to the community all have a bearing.

Somewhere between private ownership and chain ownership is the franchised operation. Franchisees

have some of the independence of ownership but agree to give up much of it for the right to be a part

of a successful concept. Because franchises play such an important role in food service, it is essential

for you to assess this means of organizing ownership too.

We sometimes hear that the days of the independent restaurant are past. Although this is certainly

not true, the role of the independent restaurant in the industry is changing. Chains have advantages in

some industry segments, but independents have strengths that are hard to match in others. It is useful,

therefore, to discuss the competitive advantages of both independents and chains. Most restaurant

chains include company-owned units as well as franchised units. Franchised units have some aspects

in common with chain operations and others in common with independents. For that reason, the chapter

concludes with a discussion of franchised restaurant systems.

T H I S C H A P T E R S H O U L D H E L P Y O U

1. List the relative advantages and disadvantages of chains and independents in the following key

areas: marketing and brand recognition; site selection; access to capital; purchasing economies;

control and information systems; new product development; and human resources.

2. Identify the independent’s imperative for success; provide an example of this imperative; and

identify the independent’s unique market advantage.

3. Explain the difference between product franchising and business format franchising, identify

which is most commonly used in the hospitality industry, and understand the advantages and

disadvantages of franchising to both the franchisor and the

franchisee.

Chapter

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134 Chapter 5 Restaurant Industry organization

C H A I N R E S TA U R A N T SY S T E M S

C hains are playing a growing role in food service in North America and elsewhere in the world. In the United States, more than a quarter of all restaurants are chain-
affiliated; these chains also represent about half of all restaurant revenues.1 Moreover,

they are prominent among the pool of companies that recruit graduates of hospitality

programs and culinary programs. Both factors make them of interest to us.

Chains have strengths in seven different areas: (1) marketing and brand recognition,

(2) site selection expertise, (3) access to capital, (4) purchasing economies, (5) centrally

administered control and information systems, (6) new product development, and

(7) human resource development. All of these strengths represent economies of scale:

The savings come, in one way or another, from spreading a centralized activity over a

large number of units so that each absorbs only a small portion of the cost but all have

the benefit of specialized expertise or buying power when they need it.

M A R K E T I N G A N D B R A N D R E C O G N I T I O N

More young children in America recognize Santa Claus than any other public figure.

Ronald McDonald comes second. Because McDonald’s and its franchisees spend

well over $2 billion on marketing and advertising, it’s no wonder more children

recognize Ronald than, say, Mickey Mouse, Donald Duck, or the Easter Bunny. Indeed,

McDonald’s has created a generic item—the Big Mac. The company has done for

the hamburger what Coke did for cola, Avon for cosmetics, and Kodak for film. The

reasons for this success are threefold: simplicity of message, enormous spending

on marketing, and the additive effect. Ideally, for a company, the spending results in

brand recognition.

The message of modern advertising is affected by the form in which it is offered:

10-, 30-, or 60-second television commercials, for instance. Even in the print media, the

message must be kept simple, because an advertisement in a newspaper or magazine

has to compete with other ads and news or feature stories for the consumer’s casual

attention. The message of the specialty restaurant resembles its menu. It boils down

to a simple statement or a catchphrase. In fact, marketing people generally try to design a

“tagline” that summarizes the benefits they want an advertising campaign to tell the con-

sumer. Some years ago, Wendy’s used the slogan “Ain’t no reason to go anyplace else.”

Although this slogan set off a letter-writing campaign complaining about the grammar

(apparently organized by high-school English teachers), Wendy’s officials judged it

effective in “breaking through the clutter.” Of the many other advertising messages

that assail the consumer, you will remember classic taglines of the past that are revived

from time to time:

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135

Many chains are synonymous with well-known brand names. (Courtesy of Darden Restaurants.)

“You deserve a break today.”

“Finger lickin’ good.”

“Pizza, Pizza.”

And, more recently:

“It’s that good.”

“When you’re here, you’re family.”

“Eatin’ good in the neighborhood.”

“Have it your way.”

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136

Television advertising, even at the local level, is very expensive. To advertise regularly

on national or even regional television is so expensive that it is limited to the very largest

companies. Chains can pool the advertising dollars of their many units to make television

affordable. Few independents, however, can afford to use television.

Independent restaurants generally spend less than chains on marketing (of all

kinds, including television advertising) as a percentage of sales. Chains have a need to

establish and maintain a brand name in multiple markets and to maintain a presence

in the regional and national media. Furthermore, restaurants that generate a higher level

of sales tend to spend a higher percentage of their revenues on marketing. Table 5.1

reflects spending on marketing, expressed as a percentage of sales, and categorized by

check average. In the table, it is noticeable that the median level of marketing spending

for restaurants with check averages of $15 to $24.99 is greater than other categories.

Also, full-service restaurants spend more than limited service restaurants. This fact can

A standard exterior appearance gives franchise operators and company-owned brands a high recognition value.
(Courtesy of Carlson Restaurants Worldwide.)

CH005.indd 136 23/12/10 7:06 PM

Chain Restaurant Systems 137

be explained by economies of scale. Quick-service company-owned and franchised

chain units are fairly close to one another in spending on marketing.2

All this advertising will be effective only if consumers get exactly what they expect.

Therefore, chains also concentrate on ensuring consistency of quality and service in opera-

tions. Customers know what to expect in each of the units, and in an increasingly mobile

society, that is important. For those on the go, such as tourists, shoppers, or businesspeople,

what is more natural than to stop at a familiar sign? If that experience is pleasant, it will

reinforce the desire to return to that sign in the local market or wherever else it might appear.

TABLE 5.1

Marketing Expenditures in Food Service
LEVEL OF MARKETING EXPENSEa

RESTAURANT TYPE
LOWER

QUARTILE (%) MEDIAN (%)
UPPER

QUARTILE (%)

Full service—check average under $15

Under $500,000 in annual sales 1.1 2.5 4.6

Between $500,000 and $999,000 0.7 1.3 2.5

Between $1,000,000 and $1,999,000 0.9 1.9 3.4

$2,000,000 and over 0.8 2.3 6.0

Table service—check average
$15 to $24.99

Between $500,000 and $999,000 0.7 1.6 2.9

Between $1,000,000 and $1,999,000 1.0 1.9 3.4

$2,000,000 and over 0.9 1.8 2.9

Table service—check average
$25 and over

Between $500,000 and $999,000 1.0 1.8 2.6

Between $1,000,000 and $1,999,000 0.8 2.0 2.7

$2,000,000 and over 1.7 2.4 3.2

Limited service restaurants

Under $500,000 in annual sales 0.8 2.3 3.6

Between $500,000 and $999,000 1.0 2.6 5.6

Between $1,000,000 and $1,999,000 0.5 0.8 2.5

aRatio to total sales.

Source: National Restaurant Association, “Restaurant Industry Operations Report—2008.”

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138 Chapter 5 Restaurant Industry organization

S I T E S E L E C T I O N E X P E R T I S E

The success of most restaurants is also enhanced by a location near the heart of major

traffic patterns. The technique for analyzing location potential requires a special kind

of knowledge, and chains can afford to staff real estate departments with people who

possess this expertise. Numerous examples abound about independent restaurants

not “doing their homework” when choosing a site. Although there is no exact formula

that will guarantee the absolute best site, and success, chains have both experience

and expertise backing them. Site selection, most experts would agree, is only getting

more complex, and successful companies are becoming more sophisticated in their

approach to it. To quote one industry observer: “Restaurant site selection is increas-

ingly complicated business these days. Demographic studies, focus groups, consumer

surveys, consultants, and endless number crunching are all part of the formula. No

restaurateur—single shingle, multiconcept operator, or large chain—can afford to open

an eatery today without spending time and money on some or all of the above.”3

Sophisticated software is now available to assist operators in their decision making.

Papa John’s, Krispy Kreme, and, of course, McDonald’s are all companies that are

recognized for doing an admirable job of site selection.

A C C E S S T O C A P I TA L

Most bankers and other lenders have traditionally treated restaurants as risky businesses,

making access to capital (at least from this source) problematic. Because of this fact, an

independent operator who wants to open a restaurant (or even remodel or expand an

existing operation) may find it difficult to raise the needed capital. However, a banker’s

willingness to lend increases with the size of the company: If one unit should falter, the

banker knows that the company will want to protect its credit record. To do so, it can

divert funds from successful operations to carry one in trouble until the problems can

be worked out. Although franchisees are not likely to be supported financially by the

franchisor, franchise companies regard a failure of one unit as a threat to the reputa-

tion of their whole franchise system and often buy up failing units rather than let them

go under. In any case, failure is much less common among franchised restaurants than

among independent operations. Not surprisingly, banks not only make capital available

to units of larger companies and to franchised units but also offer lower interest rates

on these loans.

Publicly traded companies, whose stocks are bought and sold on markets such

as the New York Stock Exchange, can tap capital from sources including individual

investors buying for their own account as well as mutual funds, insurance companies,

and pension funds that invest people’s savings for them. Hospitality companies with

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Chain Restaurant Systems 139

well-known brand names and well-established operating track records enjoy a wide

following among investors, and their activity is important enough to the industry that

Nation’s Restaurant News, the popular trade magazine, carries a weekly section, “Finance,”

featuring a summary of approximately 100 publicly traded restaurant stocks. In addi-

tion to funds raised through stock sales, companies can sell bonds through public

markets, raising larger sums than are typically available through bank loans. Among

other industr y leaders, Norman Brinker (Brinker International, which includes

such chains as Macaroni Grill) developed a reputation for successfully taking his

restaurant companies public and thus achieving his growth objectives.4

It should be noted that evidence suggests restaurant failure rates tend to be greatly

exaggerated. Without publishing the commonly touted failure rates, we can say that

recent research indicates that the failure rate is relatively similar to other types of

businesses—somewhat lower than 60 percent over a three-year period, according to

one study.5

P U R C H A S I N G E C O N O M I E S

Chains can centralize their purchasing, thereby creating purchasing economies. This

is accomplished either by buying centrally in their own commissary or by negotiating

centrally with suppliers who then deliver the products, made according to rigid speci-

fications, from their own warehouses and processing plants. Chains purchase in great

quantity, and they can use this bargaining leverage to negotiate the best possible prices

and terms. Indeed, the leverage of a large purchaser goes beyond price. McDonald’s,

for instance, has persuaded competing suppliers to work together on the development

of new technology or to share their proprietary technology to benefit McDonald’s. In

addition, chains can afford their own research and development laboratories for testing

products and developing new equipment.

C O N T R O L A N D I N F O R M AT I O N SY S T E M S

Economies of scale are important when it comes to control and information systems

as well. Chains can spend large sums on developing procedures for collecting and

analyzing accounting and marketing information. They can devise costly computer pro-

grams and purchase or lease expensive computer equipment, again spreading the cost

over a large number of operations. Daily reports often go from the unit’s computerized

point-of-sale (POS) system to the central office computer. There they are analyzed, prob-

lems are highlighted, and reports are sent to area supervisors as well as to the unit. This

means follow-up on operating results can be handled quickly. Moreover, centrally man-

aged inspection and quality control staff review units’ efficiency and quality regularly.

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140 Chapter 5 Restaurant Industry organization

N E W P R O D U C T D E V E L O P M E N T

The quest to create newer, better, and more interesting food products continues as

competition in the restaurant industry only intensifies. Chains have the luxury of be-

ing able to staff (and finance) research and development departments that champion

the development of new menu items. With adequate financial support and expertise,

companies are able to test and launch new products, such as McDonald’s new Angus

Third Pounders, Burger King’s Burger Shots 6-pack, or Pizza Hut’s pasta dishes. The de-

velopment of new products for restaurant companies is a combination of culinary ex-

pertise and food science expertise. Many of the chefs who head culinary development

departments for restaurants are enthusiastic members of the Research Chefs Association.

The association currently has over 1,000 members and is devoted to “providing the re-

search chef with a forum for professional and educational development.” Many chain

organizations, including such companies such as Starbucks and Brinker International,

have membership in the association. The ability to add new products to the menu mix

is an important quality; new products can create positive press, increases in sales and

profits, and increased market share.

H U M A N R E S O U R C E P R O G R A M D E V E L O P M E N T

Some restaurant chains have established sophisticated training programs for hourly

employees, using computer-based and, increasingly, Internet-based techniques to dem-

onstrate the proper ways of performing food service tasks and jobs. Special training exer-

cises are also now available to subscribing companies through closed-circuit television.

The standardized procedures emphasized in company training programs, in turn,

lower the cost of training and improve its effectiveness. This saving is especially

advantageous in semiskilled and unskilled jobs, which traditionally experience high

turnover rates and, therefore, consume considerable training time. Companies that are

leading the way in computer-based training include Captain D’s, Sonic, and Damon’s

Grill. At the Cheesecake Factory, recipes are developed at the corporate office, and then

the unit chefs are trained simultaneously using streaming video. Management training

is also important, and large food service organizations usually can afford the cost of

thorough entry-level management training programs. One food service company, for

instance, estimates the costs for training a management trainee fresh out of college to

be about $20,000 over a 12- to 18-month period. This is in addition to the trainee’s salary

while in training, and covers fringe benefits, travel and classroom costs, and the cost

of the manager’s time to provide on-the-job training. In effect, this company spends as

much as or more than a year of college costs on its trainees, a truly valuable education

for the person who receives it.

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141

Houston’s Restaurants, a privately owned company, is well known for its development programs. (Courtesy of
Houston’s Restaurants.)

Because of their multiple operations, chains can instill in beginning managers

an incentive to work hard by offering transfers, which involve gradual increases

in responsibility and compensation. In addition, a district and regional management

organization monitors each manager’s progress. Early in a manager’s career, he or

she begins to receive performance bonuses tied to the unit’s operating results. These

bonuses and the success they represent are powerful motivators.

C H A I N S ’ M A R K E T S H A R E

As we mentioned at the beginning of the chapter, chains have dramatically increased

their market share (share of sales), representing over half of all domestic restaurant sales.

This is up from less than 33 percent in the 1970s.6 Of these sales, the ten fastest-growing

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142 Chapter 5 Restaurant Industry organization

chains (see Table 5.2) accounted for $4.9 billion in 2008, which is some 65% of

all chain sales.

Because successful chains usually have deep pockets (i.e., adequate financial

reserves), they are able to ride out recessions. Indeed, some larger chains look on a

recession as a time when they can purchase smaller or less successful chains that

are having trouble weathering the economic storm. Although most experts agree

that the concentration of chains will continue, fierce competition from regional chains

(note the numerous examples used throughout this book), shifting consumer prefer-

ences, and competitive patterns will ensure that few, if any, players will establish

anything resembling market dominance except on a local or temporary basis.

I N D E P E N D E N T R E S TA U R A N T S

Although chains undeniably have advantages in the competitive battle for the con-

sumer’s dollar, independent restaurants also enjoy advantages that will ensure them a

continuing place in the market—a place different from that of the chains, perhaps, but

TABLE 5.2

The Ten Fastest-Growing Chains with Sales over $200 Million

RANK CHAIN
2008 U.S. SALES
($ MILLIONS)

% SALES
CHANGE

% UNIT
CHANGE

1 Five Guys Burger and Fries $302 59% 49%

2 Jimmy John’s Gourmet
Sandwich Shop

497 29 28

3 Potbelly Sandwich Works 225 27 18

4 Noodles & Company 200 25 19

5 Wingstop 255 24 19

6 Peet’s Coffee & Tea 230 23 11

7 Buffalo Wild Wings 1,229 21 14

8 Chipotle 1,275 21 19

9 Pei Wei Asian Diner 278 19 19

10 BJ’s Restaurant & Brewery 377 18 20

Total $4,869 24% 22%

Source: Data from Technomic Inc., Chicago.

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Independent Restaurants 143

significant nevertheless. It is also important to remember that many of the successful

independent restaurants of today represent the chains of tomorrow.

O P E R AT I N G A D V A N TA G E S

We can use the same method to analyze the strengths of the independents that we

used to examine the chain specialty restaurants. The advantages of the chains derive

basically from the large size of their organization. The advantages of the independent

derive from a somewhat different common core but in many ways also claim size as

their advantage. The independent’s flexibility, the motivation of its owner, and the

owner’s presence in the operation affect its success.

In large organizations, a bureaucracy must grow up to guide decision making.

Although this is a necessary—and in some ways healthy—development, it does result

in a slower and more impersonal approach to problem solving in larger organizations.

In contrast, to survive and prosper, the independent must achieve differentiation:

The operation must have unique characteristics in its marketplace that earn consumers’

repeat patronage. Flexibility and a highly focused operation, then, are the independent’s

edge. Differentiation is the independent’s imperative.

Although the following analysis does not deal directly with the issue, we should

note that economies of scale are important in the independent restaurant also. The

small operation, the mom-and-pop restaurant, finds itself increasingly pressed by rising

costs. We cannot specify a minimum volume requirement for success, but National

Restaurant Association figures show that in each size grouping, the restaurants with

higher total sales achieve not only a higher dollar profit but a higher percentage of

sales as profit.

M A R K E T I N G A N D B R A N D R E C O G N I T I O N

Ronald McDonald may be a popular figure, but he is not a real person (even though he

has been named Chief Happiness Officer). The successful restaurant proprietor, however,

is real. In fact, successful restaurateurs often become well known, are involved in com-

munity affairs, and establish strong ties of friendship with many of their customers. You

can probably think of a local restaurant operator who fits this very profile. In a sense,

these operators take on celebrity status. This local “celebrity” can be especially effective in

differentiating the operation in the community, generally being visible, greeting guests by

name as they arrive, moving through the dining room recognizing friends and acquain-

tances, dealing graciously with complaints, and expressing gratitude for praise. “Thanks

and come back again” has an especially pleasant ring when it comes from the boss—the

owner whose status in the town isn’t subject to corporate whim or sudden transfer.

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144 Chapter 5 Restaurant Industry organization

Although chains may have advantages among transients, the operator of a high-

quality restaurant enjoys an almost unique advantage in the local market. Moreover,

word-of-mouth advertising may spread his or her reputation to an even larger area.

The key to recognition for the independent is more than just personality; it is, first and

foremost, quality.

Chains clearly have the advantage when it comes to advertising because of their na-

tional or regional advertising, which can create brand recognition. In contrast to chains,

however, many independents spend relatively little on paid advertising, relying instead on

personal relationships, their reputation, and, as noted, word of mouth. Moreover, indepen-

dents begin with an advantage that chain units must work very hard to achieve: local identity.

S I T E S E L E C T I O N

The chain operation continually faces the problem of selecting the right site as it seeks

new locations for expansion. It may seem that site selection would not be a problem

for an independent operation because that operation is already in place. Successful

independents sometimes expand by moving to a newer and larger location or by add-

ing locations. These may be full-scale operations or, quite commonly in recent years,

scaled-down versions such as the points of distribution (PODs) discussed in Chapter 3.

Another occasion when independents need to make location decisions is when evolving

urban patterns and real estate values change a location’s attractiveness. In some cases, a

neighborhood goes into decline, bringing a threatening environment that is unattractive

to guests. Alternatively, a restaurant may have a lease (rather than outright ownership)

in an area that has become too attractive—at least in terms of rising rents. When the

lease comes up for renewal, the owner may decide to move.

When the topic of relocation or adding a location arises, however, the independent

operator begins with her or his own knowledge of the area and can add to that by

hiring one of the consulting firms that specialize in location analysis. This can be an

expensive service, but such services are generally available and the added expense

probably will be worthwhile.

A C C E S S T O C A P I TA L

In most cases, chains will have the readiest access to capital. Sources of capital, how-

ever, are also available to small businesses. As noted earlier, banks are often hesitant

to lend to restaurants because they are viewed as high-risk enterprises (although their

willingness tends to move in cycles, just like everything else). If an operator has a well-

established banking relationship and a carefully worked out business plan covering a

proposed expansion, however, the local bank may be happy to make the loan.

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145

I N D U S T R Y P R A C T I C E N O T E 5 . 1

Working with the SBA

The key to securing an SBA loan is being prepared and finding the right lender, knowing your needs, and

being able to explain how you arrived at the amount you are requesting.

A successful loan application package provides a financial history of the restaurant. It also includes a nar-

rative background on the operation, the principal participants, and goals for the restaurant. Personal financial

statements and tax returns for the owners are required. Most important are monthly cash flow projections.

However, the SBA counsels that if you can obtain a conventional loan, that’s what you should do. The SBA is

authorized to back loans only where credit is not available on the same terms without a guarantee and only

up to 85 percent. According to the National Restaurant Association, about 5,000 U.S. lenders grant SBA loans.

SBA loans can take a variety of forms including the 7(a) loan. According to the SBA, “7(a) loans are the most

basic and most used type loan of SBA’s business loan programs. Its name comes from section 7(a) of the

Small Business Act, which authorizes the Agency to provide business loans to American small businesses.”1

There are certain things about the loan process you can control; the amount of preparation and how you

approach a bank are two of them. The SBA recommends contacting your bank and asking what elements

it requires in a loan request package. Once you have pulled together all the necessary materials, deliver

the package to your banker a few days in advance of your meeting, so that there will be adequate time

for him or her to review your request. That way, the banker is ready to respond to your request. Four

common criteria used to determine the viability of a loan request are: previous management experience,

net worth, collateral, and cash flow projections.

Whatever you, as a borrower, can bring to the table to calm the fears of the lender and show that you are

well prepared to run your own business helps. That includes training, education, and experience. Knowing

the business is not all it takes to be successful; you also need to have management and financial skills.

One successful borrower contacted four banks in his hunt for financing and spent nearly two years

preparing his business plan. The plan included recipes, sample menus, equipment prices, and sources

of supplies.

If your banker doesn’t handle SBA-guaranteed loans, call the SBA district office in your area to locate

banks in your state that are approved SBA lending sources. To find the district office’s telephone number,

consult the Small Business Administration listings under “United States Government” in the telephone

book, call the SBA at (800) 8ASK-SBA, or consult its Web site (www.sba.gov).

1. Small Business Administration, www.sba.gov.

The bank, however, is more likely to become involved if the operator can gain

support from the U.S. Small Business Administration (SBA). Participation by the

SBA does not eliminate risk for the bank, but it reduces it by guaranteeing a percentage

of the loan against loss. An SBA loan is likely to be for a longer period, thus lowering

the monthly payments required from the borrower. Industry Practice Note 5.1 discusses

how operators can gain SBA participation.

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146

I N D U S T R Y P R A C T I C E N O T E 5 . 2

Why Go Public?

The decision to take a restaurant company public can be a tough one for many operators. “There are

really only two strong reasons for restaurant companies to go public,” says Barry M. Stouffer, a restaurant

analyst for the Nashville-based investment banking and brokerage firm, J. C. Bradford. “You go public to

raise capital or you go public for liquidity reasons, [meaning] you go from private to public ownership

so that investors can get better valuation and can readily sell some of their interest.”

Initial public offerings did generate excitement early in the 1990s, including those of the Lone Star

Steakhouse and Outback Steakhouse. Although restaurants are still going public in the current decade,

getting backing from a private equity firm seems to be a more attractive option than ever before. According

to Scott Pressly, a partner with Roark Capital Group, “You’re seeing larger companies go public but not

seeing smaller concepts with 10 units going public. You’re seeing liquidity being provided by private

equity firms. In the 1990s, restaurants went public with 10 or 20 units. You’re not seeing that today.” 1

Although the decision to go public is usually predicated on the need to raise capital or to provide an

exit strategy for private investors (i.e., a way to convert their ownership in a private corporation into

stock that can be sold for cash if they wish to leave the business), public offerings do provide other

competitive advantages for companies. Customers often feel more comfortable doing business with a

public company, banks are more likely to make loans to interested franchisees, and management can add

stock option plans to its arsenal of employee incentives. Yet with the additional capital come increased

expectations. Some suggest that restaurants and the stock market are not good partners. In fact, some

food service companies have gone public but decided to go private again—Rock Bottom Restaurant and

ARAMARK, among others.

1. Jamie Popp, Scott Pressly, All Business, July 1, 2006. http://www.allbusiness.com/food-beverage/restaurants-food-service-restaurants-

sector/8498763-1.html

SBA loans vary widely, from $5,000 to $2 million, according to the National Res-

taurant Association. Due to the poor economic conditions in the latter part of the last

decade, the number of loans guaranteed to restaurants has declined. Still, the SBA

had a budget of $28 billion in its primary small business financing program for 2009.

It should be noted, too, that some of these funds are specially earmarked for minority

entrepreneurs, including those looking to enter the restaurant business.

Attracting outside equity capital involves giving up a share of ownership in the

business by selling stock. Although such sales are generally limited to small chains, an

independent with a concept that can form the basis of a viable chain may be a can-

didate for equity investment through a venture capital group. Industry Practice Note

5.2 discusses reasons for obtaining additional equity (i.e., ownership) capital.

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Independent Restaurants 147

Venture capital groups are made up of wealthy individuals who pool their funds

under the direction of a manager with financial experience and expertise. A venture

capital group will expect to have a considerable voice in the running of the business

and may take a significant share of ownership in the company without necessarily

increasing the value of the owner’s equity in the way that a stock offering normally

does. Initial public offerings (IPOs) involve the sale of stock through an underwriting

firm of stockbrokers. An IPO would be very difficult for any but the largest independent.

This method does, however, apply to successful independents that have expanded

to the point where they are now small chains. Well-known restaurant companies that

achieved their early expansion through IPOs include Buca di Beppo, P.F. Chang’s, and

California Pizza Kitchen. In recent years, the number of IPOs has decreased a bit with

private equity firms becoming more involved in the financing of restaurant chains. In

2005, there were only three restaurant IPOs—Ruth’s Chris Steak House, Caribou Coffee,

and Kona Grill.7 More recently, the high unemployment, cash-strapped customers, and

volatile stock markets have made going public even more difficult. The silver lining is

that the situation will improve as the economy renews its strength.

P U R C H A S I N G E C O N O M I E S

The chain enjoys substantial advantages in its purchasing economies. The independent’s

problem, however, may differ somewhat from the chain’s. Because of the importance of

quality in the independent operation, the price advantages in centralized purchasing

may not be as important as an ability to find top-quality products consistently. Thus,

long-standing personal friendships with local purveyors can be an advantage for the

independent.

C O N T R O L A N D I N F O R M AT I O N SY S T E M S

Chains can use centralized cost control systems. These systems also yield a wealth of

marketing information. This practice is, in fact, essential to companies operating many

units in a national market. Independents are able to purchase POS systems that have

standardized but highly complex software, which will generate management reports that

are on a par with those available in chains. Moreover, the complex menu of the single,

independent, full-service restaurant lends itself to the operator’s subjective interpreta-

tion, impressions, and hunches about the changing preferences of the guests. In the

end, the one difference may be in the effectiveness with which a restaurant utilizes

the information provided in the reports.

Cost control procedures may be more stringent in the chain operation, but if an

owner keeps an eye on everything from preparation, to portion sizes, to the garbage

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148 Chapter 5 Restaurant Industry organization

can (the amount of food left on a plate is often a good clue to overportioning), effective

cost control can be achieved even when a POS system to fit the operator’s needs is

not available or when the cost of such a system is prohibitive. By using the Uniform

System of Accounts for Restaurants, published by the National Restaurant Association,

and professional advice available from restaurant accounting specialists, independents

can readily develop control systems adequate to their needs.

This description of the independent operator suggests what has become a food ser-

vice axiom: Anyone who cannot operate successfully without the corporate brass looking

over his or her shoulder will probably be out of business as an independent in a short time.

H U M A N R E S O U R C E S

The independent proprietor can, and usually does, develop close personal ties with the

employees, a practice that can help reduce turnover. Even though “old hand” employees

can act as trainers, the cost of training new workers tends to be higher for the independent

because of the complex operation and because he or she lacks the economies of a

centralized training program.

Although advancement incentives are not as abundant in independent operations

as in the chains, some successful independents hire young people, train them over a

period of several years to become effective supervisors, and then help them move on to

a larger operation. Often, too, the independent finds key employees whose life goals are

satisfied by their positions as chef, host or hostess, or head bartender. These employees

may receive bonus plans similar to those offered by the chains.

Independents have a special attraction for employees who are tied by family

obligations or a strong personal preference to their home community. The problem of

being transferred is unlikely to arise with independents. With chains, however, the

probability is that advancement is dependent on a willingness to relocate.

T H E I N D E P E N D E N T ’ S E X T R A : F L E X I B I L I T Y

Perhaps the key that independents can boast of is the flexibility inherent in having only

one boss or a small partnership. Fast decision making permits the independent to adapt

to changing market conditions. In addition, because there is no need to maintain a

standard chain image, an independent is free to develop menus that take advantage of

local tastes. Local restaurants can also easily incorporate local products, which makes

for a sustainable operation that also supports the local economy. Finally, there are many

one-of-a-kind niches in the marketplace, special situations that don’t repeat themselves

often enough to make them interesting to chains. Yet these situations may be ideally

suited to the strengths of independents.

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149

T H E I N D E P E N D E N T ’ S I M P E R AT I V E : D I F F E R E N T I AT I O N

One element of the independent’s differentiation, as we have seen, is the personal identity of

its owner, and another is its reputation as a local firm. Strategically, it is important to choose

a concept—that is, a menu, service style, ambience, and atmosphere—that is fundamentally

different from what everybody else is doing. Ninety percent of hamburger sandwich sales

are made by the major chains. Logically, then, the quick-service hamburger market (or fried

chicken, etc.) is not one for an independent operator unless it has a unique advantage. There

is a good chance that KFC’s brand appeal will be more powerful than any product differen-

tiation an independent can achieve in a fried chicken take-out unit. Instead, independents

must present a menu and dining experience that is uniquely their own. Independents rely

on the differentiation provided by unique foods, outstanding service, pleasing ambience,

and personal identity to achieve clear differentiation and consumer preference.

B E T W E E N I N D E P E N D E N T A N D C H A I N *

Between the independent and the chain lie at least two other possibilities. Some in-

dependent operations are so successful that they open additional units—without,

however, becoming so large as to lose the hands-on management of the owner/operator.

Mimi’s Cafe was privately owned
and grew to the point of being
acquired by Bob Evans. (Courtesy
of Mimi’s Cafe.)

*The authors would like to acknowledge the assistance and guidance of Udo Schlentrich in the development of this

section. Professor Schlentrich is Associate Professor in the Department of Hospitality Management at the University of

New Hampshire and director of the William Rosenberg Center of International Franchising.

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150

Nation’s Restaurant News refers to these as independent group operators. They are

not exactly chains but, because of their success, they are no longer single-unit operators.

Some examples include Richard Melman’s Chicago-based “Lettuce Entertain You,” Drew

Nieporent’s New York–based Myriad Group, Danny Meyer’s New York–based Union

Square Hospitality Group, and Wolfgang Puck’s restaurants. All of these concepts started

as a single neighborhood restaurant. Some, such as Lettuce Entertain You, operate many

different concepts, but each is few in number. Operating dissimilar concepts under a

single umbrella has been a successful business format for these operators.

A regional example of this is Tutta Bella Neapolitan Pizzerias, located in the Pacific

Northwest. In 2009, the concept was selected as one of the five Hot Concept awards at

the Nation’s Restaurant News’ 50th annual Multi-Unit Foodservice Operators conference.

In addition, Restaurants & Institutions named Tutta Bella’s seasonal summer pizza as one

of the most innovative menu items.

Another busy night at one of the newest Tutta Bella Neapolitan Pizzerias. (Courtesy of Tutta Bella.)

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Franchised Restaurants 151

Another operating possibility, and one that is pursued by thousands of businesspeople,

is a franchised operation, which is discussed next.

F R A N C H I S E D R E S TA U R A N T S

F ranchising has become a common business format. According to a study by the Educational Foundation of the International Franchise Association, it is estimated
that through the decade franchises will generate over 45 percent of all retail revenues

in the United States.8 Franchising also generates over 18.1 million jobs in the United

States, which represents 13.7 percent of direct and indirect private sector employment.

Franchises also earn $1.53 trillion annually, representing 9.5 percent of America’s total

private sector output. As a point of reference, franchised businesses generate about the

same number of jobs in the United States as do the manufacturers of durable goods.

In addition, franchised establishments represent the greatest percentage of all line-of-

business establishments in quick-service restaurants, lodging, and retail food.

A conversation with a franchisee is likely to yield this contradiction: The franchi-

see clearly thinks of him- or herself as an independent businessperson but is likely

to refer to the franchisor in the course of the conversation as “the parent company.”

To some, franchises offer the best of both worlds. As William Rosenberg, founder of

Dunkin’ Donuts, said, franchising allows one to be “in business for yourself, but not

by yourself.”9

Many people automatically think “restaurant” when they hear the word franchising.

This is not surprising, since roughly one-half of restaurant sales in the United States are

made by franchised units. Quick-service restaurants featuring hamburgers make up the

largest category of franchised units. Pizza, steak, full-menu operations, and restaurants

featuring chicken also constitute a large number of franchised operations.

There are two basic kinds of franchising: product or trade name franchising and

business format franchising. Trade name franchising, such as a soft drink or au-

tomobile dealership, confer the right to use a brand name and to sell a particular

product.

The type of franchising found in the hospitality industry, however, is called busi-

ness format franchising. Business format franchising includes use of the product (and

service) along with access to, and use of, all other systems and standards associated

with the business.

The franchisee has a substantial investment (ownership of the franchise and very

possibly of land, building, furniture, and fixtures or a lease on them). Beyond that, he or

she has full day-to-day operating control and responsibility. For instance, franchisees are

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152 Chapter 5 Restaurant Industry organization

responsible for hiring employees, supervising the daily operation (or managing those

who do that supervision), and generally representing themselves in the community as

independent businesspeople. The degree of franchisee control over key issues varies

from one franchise group to another, but many franchisees share considerable freedom

of advertising, choice of some suppliers, and the ability to add to and renovate the physical

plant. Although some aspects of the unit’s budget are governed by the franchise agree-

ment, the franchisee retains significant budgetary discretion under most agreements

and in practice exercises even more.

The essence of almost all franchises in the hospitality industry is an agreement

by the franchisee to follow the form of the franchisor’s business system in order to gain

the advantages of that business format. The franchisee has, indeed, relinquished a great

deal of discretion in the management of the enterprise and is a part of a system that

largely defines its operation. The restaurant franchisee’s relationship is neither that of

an employee nor that of an independent customer of the franchisor.

The most common characteristics of a franchise agreement include:

Use of trademarks

Location of the franchise

Term of the franchise

Franchisee’s fees and other payments

Obligations and duties of the franchisor

Obligations and duties of the franchisee

Restrictions on goods and services offered

Renewal, termination, and transfer of franchise agreement10

Additional topics that may be included are operating procedures and advertising

and promotion. Other services that may be provided by the franchisor on a fee basis

(such as training or accounting services) are also included.

T H E N E W F R A N C H I S E E

The franchisor offers to an investor, who often has no previous experience, a proven way

of doing business, including established products, an operating system, and a complete

marketing program.

A well-developed franchise minimizes risk, but this may not be true of a new,

unproven franchise concept. Moreover, a franchise cannot guarantee a profit commen-

surate with the investment made—nor even guarantee any profit at all. SBA studies

indicate that somewhere between one-quarter and one-third of all businesses fail

during their first year, and 65 percent fail within their first five years.11 The International

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Franchised Restaurants 153

Franchise Association estimates failure rates among franchised quick-service restaurants

at 19 percent and just over 11 percent for other types of restaurants.12

In addition to an overall concept, the franchisor provides a number of specific

services to the newcomer. Next we discuss the most common of these services.

S C R E E N I N G . Being screened to see whether you are an acceptable franchisee may

not seem like a service. A moment’s reflection, however, will show that careful franchisee

selection is in the best interest not only of the company and other, existing franchisees

but of the prospective franchisee as well.

FINANCING. Because franchising minimizes the risk of business failure, potential franchisees

are generally able to obtain financing for established franchise concepts more readily than

entrepreneurs who want to launch an independent business concept. This applies especially

to the financing of hotels and restaurants, which are particularly high-risk ventures. In addi-

tion, some franchisors offer direct financial assistance through formal financing programs.

S I T E S E L E C T I O N A N D P L A N N I N G . Franchisors maintain a real estate department

staffed with site selection experts. The franchise company also has its pooled experience

to guide it. Given the importance of location to most hospitality operations, the avail-

ability of expert advice is important. The physical layout of the operation, from the site

plan to the building, equipment, and furnishings, and even a list of small wares (e.g., ladles

and spatulas) and opening inventory, will be spelled out in detail.

P R E O P E N I N G T R A I N I N G . Virtually all franchise organizations have some means of

training the franchisee and his or her key personnel. This service ranges from McDonald’s

Hamburger University to simpler programs based on experience in an existing store.

OPERATIONS MANUALS. The backbone of the operating system is typically a set of com-

prehensive operations manuals and a complete set of recipes that cover all products

on the menu. The operations manual sets forth operating procedures from opening to

closing and nearly everything in between. All major equipment operations and rou-

tine maintenance are described in the operations manual or in a separate equipment

manual. Industry Practice Note 5.3 outlines questions a prospective franchisee should

keep in mind when assessing a franchisor.

C O N T I N U I N G F R A N C H I S E S E R V I C E S

Once a unit is open and running, the first year or two of advice and assistance are the

most crucial. Even once a franchisee is sufficiently experienced to manage his or her

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154 Chapter 5 Restaurant Industry organization

unit without close assistance, the advantages of a franchise are still impressive. These

services relate to operations and control and to marketing.

O P E R ATI N G A N D C O NTR O L P R O C E D U R E S. The franchisor strives to present operating

methods that have control procedures designed into them. For instance, McDonald’s not

only specifies the portion sizes of its french fries but also has designed packages and

serving devices to ensure that the portion sizes will be accurately maintained. Similarly,

Long John Silver’s specifies a procedure for portioning fish to minimize waste.

The essential ingredient in a successful franchisor’s proven way of doing business is

not just a great idea but an operational concept. The concept works and is accepted by

customers, and its results can be tracked so that its continuing success can be measured

and assessed. We should note here, too, that the product and service that underlie the fran-

chise must be redeveloped continually to remain current in the marketplace. Franchisor

services in several specialized areas related to operations and control are discussed next.

INFORMATION MANAGEMENT. Accounting systems furnished by franchisors normally

integrate the individual sales transactions from the POS terminal with both daily

management reports and the franchisee’s books of account. This makes current man-

agement and marketing information available in a timely way and helps hold down

the cost of accounting services. This system also provides the franchisor with reliable

figures on which to compute the franchisee’s royalty payments and other charges such

as the advertising assessment.

QUALITY CONTROL. Inspection systems help keep units on their toes and provide the

franchisee with an expert—if sometimes annoying—outsider’s view of the operation.

Quality control staff use detailed inspection forms that ensure systemwide standards.

Inspectors are trained by the franchisor, and their work is generally backed up by

detailed written guidelines.

T R A I N I N G . In addition to the opening training effort, franchisors prepare training

materials such as videotapes and CD-ROMs that cover standardized ways of accomplish-

ing common tasks in a unit. The franchisor’s training department also prepares training

manuals and other training aids.

FIELD SUPPORT. There is general agreement on the importance of field support and

how it ultimately can determine the quality of the company. Further, the backbone

of field support is an experienced franchise district manager. One of the most

serious problems with unsuccessful franchise systems is a lack of field staff or field staff

lacking in expertise.

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155

I N D U S T R Y P R A C T I C E N O T E 5 . 3

Interested in Becoming a Franchisee?

Here are seven basic questions for a prospective franchisee:

1. Is the company itself reasonably secure financially, or is it selling franchises to get cash to cover

ongoing expenses?

• Is the company selective in choosing franchisees?

• Is it in too big a hurry to get your money? Is this deal too good to be true? Today, sweetheart deals

are few and far between.

2. Does the company have a solid base of company-owned units? If it does:

• Is the company in the same business as its franchisees?

• Does the company concentrate on improving marketing and operating systems?

If your primary business is operations and the company is selling franchises, the system is headed

for trouble.

3. Is the system successful on a per-unit basis? To find out, look at several numbers:

• Comparable average sales of stores that have been open longer than one year (sometimes first-year

sales are very high and then drop off).

• Unit-level trends: What is really needed are sales data adjusted for inflation or, better yet, customer

counts at the unit level.

A business is really only growing when it’s serving more people.

4. Is the franchisor innovative across all parts of its business?

• The company should be working on operating and equipment refinements.

• Ask what it is doing in purchasing, recruiting, training, and labor scheduling. Is anyone working to

make uniforms more attractive, durable, and comfortable, for instance?

The best companies are consistently trying to upgrade every component of their business.

5. Does the company share sufficient support services with its franchisees?

• In general, the company should provide guidance and strategic direction on marketing and excellent

operations training. In addition, every franchisee should have contact with a company employee

whose primary responsibility is a small group of franchised restaurants.

• There are some services that a company can’t provide, such as setting prices. In addition, others

are risky, such as getting involved in franchisee manager selection.

Support services must be shared in such a way that they respect the franchisee’s independence.

6. Does the company respect its franchisees?

• In addition to formal publications, there should be regular informal forums or councils in which selected

franchisees meet face-to-face with top management to discuss both problems and opportunities.

Continues on next page

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156

I N D U S T R Y P R A C T I C E N O T E 5 . 3
Interested in Becoming a Franchisee?

• Corporate staff should collect ideas, test them, and, if they look good, involve franchisees in

expanded testing.

Franchisees should actually participate in the development of any change that will affect their units.

7. Does the franchisor provide long-term leadership for the entire system?

• Franchisee participation is no excuse for the franchisor’s abdication of its leadership responsibilities.

Somebody has to make the formal decisions, and that must be the franchisor.

• A primary function of the franchisor is to protect the value of each franchise by actively and

aggressively monitoring operations, demanding that each unit live up to system standards.

Perhaps a necessary long-term decision is not popular. Making tough decisions and following through

may be the best real test of leadership.

Source: Adapted from Don N. Smith, Burtenshaw Lecture, Washington State University. 1985

Continues from previous page

P U R C H A S I N G . Most franchised restaurant companies have purchasing cooperatives.

The co-op offers one-stop shopping for virtually all products required in the operation:

food, packaging, and equipment, and, often, insurance programs. In addition, the co-op

periodically publishes a price list that the units can use in negotiating prices with local

distributors. The co-op may also publish a newsletter containing information on pricing

and trends in equipment, food products, and supply.

Although attractive price and the convenience of one-stop shopping are important

franchisee purchasing benefits, particularly with the co-ops, perhaps the most important

advantage in the purchasing area is quality maintenance. The lengthy product develop-

ment process includes careful attention to each product ingredient and the development

of detailed product specifications. Often the franchisor will work with the research

department of a supplier’s company to develop a product to meet these specifications

and to anticipate market fluctuations. Moreover, it is common for franchisors to maintain

quality control staff in a supplier’s plants and institute rigorous inspection systems that

monitor the product from the fabrication plant to regional storage centers and then to

the individual operating unit.

M A R K E T I N G . Second only in importance to providing franchisees with a unique way

of doing business is provision of a well-established brand and the ongoing develop-

ment and execution of the system’s marketing plan. Although franchisees usually are

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Franchised Restaurants 157

consulted about the marketing program, the executive responsibility for developing and

implementing the system’s marketing program lies with the franchisor’s top management

and marketing staff.

ADVERTISING. In addition to developing and executing a national or (for smaller chains)

regional advertising program, most franchisors assist in operating advertising co-ops that

are funded with franchisees’ advertising contributions. National advertising co-ops typically

provide copies of the company’s television and radio commercials to franchisee members

for a nominal price as well as templates for both black-and-white and color newspaper

ads. Co-ops also develop point-of-purchase promotional materials, such as window banners

and counter cards. Regional and local co-ops devote their efforts to media buying and to

executing the advertising program in their area. The pooling of media buys at the local level

yields substantial savings, makes advertising dollars go further, and secures a frequency of

advertising that heightens effectiveness. Local and regional co-ops also often coordinate

local promotional programs, such as those using coupons, games, or premium merchandise.

N E W P R O D U C T S . The marketplace changes constantly, and it is the franchisor’s respon-

sibility to monitor and respond to those changes. The company’s marketing department

carries out a program of continuing market research. When a new product emerges,

from research or from suggestions from franchisees, the company develops the new

product in its test kitchens and tests it for consumer acceptance with taste panels and

for fit with the operating system in a pilot store or stores. If test marketing in selected

units is successful, the product will be rolled out systemwide with standard procedures

for operation and extensive promotional support.

N E W C O N C E P T S . Some franchisors have developed or acquired entirely new concepts.

Sometimes this effort is undertaken to offer existing franchisees opportunities for new

store growth without moving outside the franchisor’s system. Increasingly, however,

new concepts are used to build volume in an existing store much the same way as adding

a new product to the menu. These major changes in the franchisor and franchisee’s

product line are achieved through co-location of two or more concepts (known as co-

branding or dual branding). Wendy’s, for instance, acquired a coffee and doughnut chain,

Tim Horton’s, clearly a noncompetitive product line for Wendy’s main brand. (At the time

of this writing, Wendy’s is in the process of selling it off as a separate public company.)

The Tim Horton’s menu draws many customers in the morning, when the Wendy’s

menu isn’t even offered. The concepts work synergistically. By each occupying half

the space, Wendy’s and Tim Horton’s save about 25 percent on building and site costs

at each shared site. In some locations, Tim Horton’s products are offered at a kiosk

adjacent to the Wendy’s operation. Although the saving on site costs is important, the

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158 Chapter 5 Restaurant Industry organization

greatest benefit is incremental sales. These are achieved, first of all, through the new

concept. Equally important, however, is the exposure. In the preceding example, Tim

Horton’s breakfast customers are exposed to a Wendy’s as a possible lunch site and, of

course, lets Wendy’s lunch and dinner customers know where they can get a quick break-

fast. The dual branding of Miami Subs and Baskin-Robbins represents a similarly beneficial

arrangement. The concept of dual branding has recently taken another step forward with

some companies offering multiple brands in one location. The grouping of Dunkin’ Donuts,

Baskin-Robbins, and Togo’s is an example. The grouping of multiple concepts creates

more choice for customers as well as greater profit potential for the company.

Dual branding is not the only strategy that companies use to boost revenues. Some

restaurant companies, such as CKE (Carl’s Jr. and Hardee’s) and Yum! Brands (KFC, Taco

Bell, Pizza Hut, Long John Silver’s, and A&W) offer food products from other companies

(or from other restaurants within the same group).

T H E F R A N C H I S E E ’ S V I E W

Some of the more obvious drawbacks of obtaining a franchise have been implicit in our

discussion: loss of independence and payment of substantial advertising assessments

and franchise fees. If the franchisee has picked a weak franchising organization, field

support and other management services may be inadequate and could result in under-

performance or failure of the franchise unit. There are numerous factors to consider, as

outlined in the sections that follow.

ADVANTAGES TO FRANCHISEES. The primary advantages of franchising from the perspective

of the franchisee are the provision of a recognizable brand, attested and refined product

and service concepts, technical assistance in the areas of site selection, construction, interior

design, training, marketing, and ongoing operational support. In addition, franchisors often

assist franchise applicants in obtaining financing and/or lease agreements.

The U.S. Trade Commission has issued extensive regulations in order to protect

potential franchisees from misrepresentation by franchisors. These regulations are

contained in a document called the Uniform Franchise Offering Circular (UFOC). UFOCs

include 23 important disclosure statements, such as details about a franchisor’s business

experience, its key employees, its litigation history, fees and investment requirements,

franchisee and franchisor obligations, territorial rights, trademark regulations, and renewal

and termination terms. Inaccuracies or misrepresentations by franchisors in their UFOC

can result in civil or criminal penalties. There are also ranking of franchises that are

the result of franchisee input. One of these is the Franchisee Satisfaction Awards.

In the food category in 2009, several foodservice chains were highly ranked including

Auntie Anne’s Pretzels, Bruegger’s, Great Wraps! and Simple Simon’s Pizza.13

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159

Expansion is an important activity for
franchise companies. (Courtesy of
Domino’s Pizza, Inc.)

F R A N C H I S I N G I S N O T R I S K – F R E E : D I S A D V A N TA G E S T O F R A N C H I S E E S . The

franchisee is generally completely dependent on the franchisor not only for marketing

but often for purchasing and other operations-oriented assistance. If a franchise con-

cept is not kept up-to-date—as many argue was the case some years ago for Howard

Johnson’s restaurants, for instance—or loses its focus, it is difficult for the franchisee to

do much about it.

What happens when things really go wrong is illustrated by the case of Arthur Treach-

er’s Fish and Chips. A successful and growing franchise in the mid-1970s, Treacher’s then

had serious difficulties that ended in bankruptcy. Its national marketing efforts virtually

ceased. Its product quality control system broke down, yet the franchisees were contrac-

tually obligated to purchase only from approved suppliers. The franchisees also were

required to pay both advertising fees and royalties but claimed they received few or no

services in return. Many franchisees withheld payment of fees and royalties and then

became involved in lengthy lawsuits that were expensive in both executive time and

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160 Chapter 5 Restaurant Industry organization

attorney’s fees. Although some Treacher’s franchisees weathered the series of setbacks,

virtually all suffered serious losses, and many left the restaurant field. Although the

Treacher’s franchise system has begun to grow again, the turnaround took a number

of years.

Franchisors normally charge franchisees a one-time initial fee when a contract

is signed. For quick-service franchises, the initial fee normally ranges from $10,000 to

$75,000, with a median fee of $25,000. In addition, franchisors charge an ongoing adver-

tising fee and a royalty fee (which covers the use of the brand trademark, the operational

systems, and marketing support). Advertising and royalty fees are based on a percent-

age of gross sales, with the percentage varying from system to system. For quick-service

franchises, the average royalty fee is about 5 percent and the average advertising fee is

about 2 percent.14

T H E F R A N C H I S O R ’ S V I E W

ADVANTAGES TO FRANCHISORS. The franchisee makes most—often, all—of the investment

in a new unit. As a result, franchising gives the franchisor the means to expand rapidly

without extensive use of its own capital. By expanding rapidly, the franchising organiza-

tion achieves a presence in the marketplace that is, in itself, an advantage. Moreover,

the more units a company has in a market, the more advertising media it can afford to

buy. In addition, the better the geographic coverage, the easier it will be for people

to visit often; the restaurants are simply closer and more convenient. Finally, continuous

exposure of all kinds—seeing television commercials, driving past the sign and building,

as well as actually visiting the restaurant—contribute to “top-of-mind awareness,” that

is, being the first place that comes into people’s minds when they think of a restaurant.

Being in place in a market is a crucial advantage and one more readily secured quickly

through franchising.

The franchising organization also gains highly motivated owners/managers who

require less field supervision than company-owned units do. A district manager super-

vising owned units is usually responsible for four to eight units. A supervisor (or franchise

consultant, as they are sometimes called) overseeing franchised units is likely to cover

somewhere between 15 and 30 units. (This number has been increasing gradually over

the last several years as companies have reorganized and tried to improve communica-

tions between the field and the home office.) This permits a large company, such as

McDonald’s, to operate with a much smaller organization than would be possible if it

had to provide close supervision to all of its thousands of units.

Franchising companies also draw on franchisees as a source of know-how. Numer-

ous examples exist where franchisees have come up with a better way for the company

to do things or have come up with new products that made sense for the company to

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161

I N D U S T R Y P R A C T I C E N O T E 5 . 4

Rosenberg International Center of Franchising

The Rosenberg International Center of Franchising (RICF) was created according to the vision of William

Rosenberg, a franchising pioneer and the founder of Dunkin’ Donuts. Mr. Rosenberg saw the need for a

specialized center that would advance the field of franchising through relevant research and innovative

teaching. Educational and research guidance is provided by a top-level advisory board representing

the various segments of the franchise community. The mission of RICF is:

• To produce a broad range of franchise-related research that addresses issues of present and potential

future interest

• To educate students and entrepreneurs about franchising and business issues relevant to the franchise

community

• To stage periodic international symposia allowing for the interaction of academic and business leaders

in the field of franchising

The center’s research focuses on the analysis of the financial performance of franchise companies,

both in the United States and internationally. The center publishes a quarterly Franchise 50 Index that

tracks the performance of the top 50 publicly listed U.S.-based franchise companies against that of the

Standard & Poor’s (S&P) 500. In addition, the center publishes articles that highlight current issues of

interest to the academic, franchise, and financial communities. Key topics include international expan-

sion strategies, risk and opportunity assessment, and valuation of franchise companies. In addition, the

Center maintains the world’s most extensive Web-based Franchise Bibliography & Database in cooperation

with EBSCO Information Systems.

The center teaches a franchise course at the Whittemore School of Business and Economics and hosts

franchise-specific seminars to senior executives from the hospitality industry. In addition, guest lectures

are offered at select universities in the United States and abroad. Franchise case studies are written by

the center’s faculty in order to bring the complexity of real business world issues into the classroom.

RICF maintains a close relationship with the International Franchise Association, the largest representative

body of franchisors and franchisees in the world, and its Educational Foundation. The center is also

actively involved in advising individuals who are interested in acquiring a franchise or starting their

own franchise system.

offer systemwide. Some of these examples include the Egg McMuffin (McDonald’s) and

the gun that Taco Bell uses to dispense sour cream.

D I S A D V A N TA G E S T O F R A N C H I S O R S . The bargain struck with franchisees has its

costs to franchisors. Although their experience varies, many franchise companies find

that their owned stores yield higher sales and profit margins. In addition, if the company

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162 Chapter 5 Restaurant Industry organization

owned all its units—if it could overcome the organizational difficulties of a much larger,

more complex organization—the profits earned from the same stores would be higher than

the royalties received from a franchised store.

From time to time, franchising companies are struck by the amount of profit they

are giving up. In the late 1980s and early 1990s, PepsiCo embarked on an ambitious re-

purchase program in its restaurant divisions, then made up of KFC, Taco Bell, and Pizza

Hut. The effect, however, was to tie up a lot of capital without improving returns enough

to justify the investment. PepsiCo and then Yum! Brands (the company that now owns

KFC, Taco Bell, and Pizza Hut) and others have more recently followed an aggressive

program of refranchising the units they purchased earlier.

We should note that not all franchise royalty income is profit. Usually, 2 percent

of sales is needed to service a franchise system. Because of start-up costs for a new

franchised unit for the franchisor, it may be three years before the royalties begin

to contribute to the franchisor’s profit. In addition, the franchisor will already have

made a considerable investment in legal and accounting costs as well as execu-

tives’ time.

F R A N C H I S O R – F R A N C H I S E E R E L AT I O N S

We have said that franchisees are independent in some ways and yet subordinate in

other ways. It is hardly surprising that this somewhat contradictory relationship some-

times leads to problems. To secure better communication between the parties, most fran-

chisors have a franchisee council—KFC, for example, calls it a Service Council—made

up of representatives elected by the franchisees. This council meets with the franchisor’s

top management to discuss major marketing and operational issues.

F R A N C H I S I N G : A M I D D L E W AY

The franchisee is not fully independent, but neither is he or she as much at risk as the

independent. Taking part in a larger organization that provides vital services while

still allowing a considerable measure of financial and managerial independence has

much to say for it. A person who is unable to work within a tightly prescribed system

would be uncomfortable as a franchisee. Those who can live within such a frame-

work, however, can reap significant rewards with less risk than they would have in

their own business.

Franchising is receiving more attention both from industry and academia. Industry

Practice Note 5.4 describes the work of the William Rosenberg Center of International

Franchising at the University of New Hampshire and the various services it provides to

the franchising community.

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Summary 163

S U M M A R Y

Restaurants are organized into groups in chains or franchise organizations or stand alone as independents. Chains and independents can be compared on the basis
of brand recognition, site selection, access to capital, purchasing economies, informa-

tion and control systems, and human resource programs. The strengths of chains come

largely from economies of scale. The independent’s advantages lie in flexibility and

the closeness of the owner/manager to the operation. To be successful, however, inde-

pendents must differentiate their operation so that they stand out from the crowd.

Franchising offers operators a degree of independence but requires a willingness

to work within a defined operation. Franchisees must give up some control over the

operation, but in return their risks are lowered dramatically. Franchisees generally pay a

development fee, a royalty fee, and an advertising assessment. The franchisor provides

a proven system of operation and expert field staff as well as a marketing program.

Services that are especially helpful to new franchisees include screening, site selec-

tion and planning, preopening training, and complete documentation of the operating

concept in an operations manual. The chapter identifies ten areas of support to continuing

franchisees: operating and control procedures, information management, quality control,

training, field support, purchasing, marketing, advertising, new products, and new concepts.

There are positive and negative aspects of franchising for both partners in the

arrangement. Franchisees gain a proven format and the assistance described previ-

ously but give up much of their independence and are required to pay substantial fees.

Moreover, the franchisee is completely dependent on the franchisor. The franchisor can

expand rapidly, largely on the franchisee’s investment and organization, and has in the

franchisee a highly motivated manager and a rich source of innovative ideas. However,

company stores—those operated by the franchisor—often yield higher sales and better

profits, which the franchisor must give up along with a significant degree of opera-

tional control. Given the close and somewhat ambiguous nature of their relationship—

neither that of employee and employer nor that of independent partners—there is often

conflict within the franchise community, which franchisors are moving to contain with

franchisee councils.

Key Words and Concepts

Marketing

Brand recognition

Site selection

Access to capital

Purchasing economies

Control and information system

Publicly traded companies

Market share

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164 Chapter 5 Restaurant Industry organization

Training programs

Independent restaurants

Small Business

Administration (SBA)

Venture capital

Business format franchising

Initial public offering (IPO)

Franchise agreement

Co-branding

Review Questions

1. How do you rate the advantages of the chain (and independent) on the seven

factors cited in the text? Are there other factors that should be considered?

2. What is the trend in market share of chains in food service? Explain this trend.

3. What are the major services provided by the franchisor to the new franchisee?

Contrast them with the continuing services provided to established franchisees.

4. How do you assess your prospects as a franchisee? What characteristics do you

think would be important to being a successful franchisee?

5. What does the franchisor gain from franchising? What advantages does the franchi-

sor give up by franchising instead of owning units?

Internet Exercises

1. Site name: William Rosenberg Center of International Franchising

URL: wsbe.unh.edu/centers_wrcif/home.cfm

Background information: The William Rosenberg International Center of Franchising

was created according to the vision of William Rosenberg, a franchising pioneer and

founder of Dunkin’ Donuts. Mr. Rosenberg saw the need for a specialized center

that would advance the field of franchising through relevant research and innova-

tive teaching. His generous grant to the University of New Hampshire along with

his vision and drive provided the foundation upon which the center was launched

in the fall of 2002.

Exercises:

a. Analyze the entire Web site, and describe the resources available to a potential

franchisee.

b. Examine several stock market quarters listed on the Franchise 50 Index page.

Which hospitality companies are identified as gaining or losing for the quarter

being reviewed?

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Summary 165

c. What might account for the increase or decrease of the stock of a publicly traded

restaurant chain in any given three-month period?

2. Site name: International Franchise Association

URL: www.franchise.org

Background information: The International Franchise Association (IFA), founded in

1960, is a membership organization of franchisors, franchisees, and suppliers. Its

Web site is dedicated to providing members and guests with a one-stop shopping

experience for franchise information.

Exercises:

a. Analyze the entire Web site, and list and describe the resources available to assist

the potential franchisee. Include both information that is free to the general public

and courses that are available through the IFA-University for a fee.

b. On the Web site, choose a food-related franchise that is available in your

state. Identify the following for that franchise: when the business was first

established, when it began franchising, the number of units that are currently

franchised, the number of company-owned units, estimated start-up costs, total

investment needed, training provided, and the qualifications of the potential

franchisee.

3. Site name: Small Business Administration

URL: www.sba.gov

Background information: The U.S. Small Business Administration (SBA) was created

by Congress in 1953 to help America’s entrepreneurs form successful small en-

terprises. Today, SBA’s program offices in every state offer financing, training, and

advocacy for small firms. These programs are delivered by SBA offices in every

state, the District of Columbia, the Virgin Islands, and Puerto Rico. In addition,

the SBA works with thousands of lending, educational, and training institutions

nationwide.

Exercises:

a. Surf the SBA Web site and identify the programs provided by the SBA for entrepre-

neurs who wish to start their own business.

b. Describe in detail three SBA programs that may be helpful to you, if you were

starting your own business.

c. You want to start your own restaurant but need financing in order to start. Describe

in detail what the SBA can do to help you obtain financing.

d. The SBA provides over 65 online training courses for the aspiring entrepreneur.

Lead a class discussion on the categories of training provided by the SBA, and

discuss some of the courses you think would be most beneficial.

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166 Chapter 5 Restaurant Industry organization

e. The SBA hosts seminars nationwide that would assist an individual who wishes

to start his or her own business. Click on your state, and identify the workshops

that are being offered in your area.

f. Identify the elements of a model business plan, and write a sentence or two

describing the information required for each element.

g. The SBA provides information on managing your new enterprise. Describe the

leadership traits it considers important for an entrepreneur to be effective.

h. Discuss how the SBA supports women and minorities.

i. Describe the information the SBA provides on franchising.

j. Review an example of a restaurant, food service, bar, or nightclub business plan.

Lead a class discussion on how effectively the author addressed all of the elements

of a model business plan.

4. Site name: Top 100 Restaurant Chains

URL: http://www.technomic.com/Resources/Industry_Facts/dynTop_100.php

Background information: This site lists the top chain restaurants and is updated each

year. It includes changes in sales from the prior year.

Exercises:

a. Explore Web sites from three independent restaurant sites in your area and three

chain restaurant sites from the “ Top 100” list. Describe the differences and similari-
ties among the independent and the chain groups.

b. After reviewing their Web sites, is there a significant difference between the “look

and feel” of the chain Web sites and the independent operator’s Web sites?

5. Site name: National Restaurant Association

URL: http://www.restaurant.org/pdfs

Background information: The National Restaurant Association has been the industry’s

leading association since 1919.

Exercises:

a. Click on the link to the latest industry fact sheet. Do you find any reason to believe

chains are growing more than independents?

b. Click on the research tab. From the information on the site, what changes do you

anticipate we will see in the industry?

Notes

1. Dennis Reynolds and Robin DiPietro, “Chain Operations,” in P. Jones (Ed.), Operations

Management in the Hospitality Industry (Oxford, U.K.: Elsevier, 2008).

2. National Restaurant Association, 2008 Restaurant Industry Operations Report (Washington,

DC: Author, 2009).

3. Deborah Silver, “Site Seeing,” Restaurants & Institutions, January 15, 2000.

CH005.indd 166 23/12/10 7:06 PM

Summary 167

4. Clayton Barrows, “A Profile of Norman Brinker,” in Linda Shea and Chris Roberts (Eds.),

Pioneers of the Hospitality Industry, Vol. 1, 2009.

5. H. G. Parsa, Tiffany King, and David Njite, “Why Restaurants Fail,” paper presented at the

CHRIE conference, August 2003.

6. 2009 Technomic Top 500 Chain Restaurant Report (Chicago: Technomic, 2009).

7. Susan Spielberg, “More Operators Expected to Charge into IPOs,” Nation’s Restaurant News,

January 23, 2006.

8. National Economic Consulting, Economic Impact of Franchised Businesses, 2008, Prepared

for the International Franchise Association Educational Foundation.

9. William Rosenberg, Time to Make the Donuts (New York: Lebhar-Friedman Books, 2001).

10. International Franchise Association, “Introduction to Franchising,” August 26, 2003, www

.franchise.org.

11. www.score.org/small_biz_stats.html#TOP

12. International Franchise Association, “The Profile of Franchising” (February 2000)

13. topfranchises.franchisebusinessreview.com/category/Food

14. IFA Special Report, “The Profile of Franchising 2006: Series II—Initial Investment, Series

III—Royalty and Advertising Fees.”

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