Term Paper on "Opening a New Restaurant"

Term Paper 15 pages (3983 words) Sources: 25 Style: MLA

[EXCERPT] . . . .

Restaurant Business Plan

Marketing & Advertising's Effect on the Restaurant Industry

Creating a more fragmented market while capitalizing on its many audiences, restaurant marketing has caused the micro-segmenting of markets on demographic and psychographic criteria more than ever before. The level of differentiation required in those geographic areas of high restaurant density force many restaurants to move into highly differentiated and often high niche-oriented approaches to defining their core value propositions. What has become abundantly clear from much of the research however is the fact that for any restaurant to survive there needs to be highly unique differentiation and a well-crafted unique value proposition or vision. The role of advertising and marketing to create that vision is analyzed here.

Pricing as a Differentiator

Research completed by (McKinsey and Company) shows that the impact of pricing strategies is far greater on profitability than differentiation. (Preslan) discusses the need for pricing execution, pricing enforcement, and pricing optimization throughout restaurant and broader retail operations varies by the need for pricing accountability based on the business model used. In the case of franchised operations the need for the highest levels of pricing enforcement are critical for sustaining profitability and the ability of franchisees to pay their operating expenses and franchise fees.

Research into pricing has also shown the need for having a more integrative approach to managing identity and differentiation, making pricing an integral component of a pricing management strategy. While many franchises have analysts and managers on staff who specifically focus on pricing's contributory role in the total brand mix of a restaurant, many independent restaurant operators treat it as an isolated variable in the marketing mix. (Langdoc and Newmark 2004) have defined a retail pricing model including the challenges of making a total pricing strategy work. Figure 1 shows their analysis of the integrative aspects of pricing on the business model in the context of marketing strategies.

Figure 1: Langdoc & Newmark's Retailing Challenges Defined

Much research has been completed in the hospitality industry overall and in restaurants specifically on the price/quality relationship, including the conceptual models and role of service in relation to price (Kim, Lee, Yoo 143-164) and their model of relationship quality, shown in Figure 2, A Conceptual Model for Relationship Quality, Its Predictors and Consequences. What is noteworthy about these researcher's efforts is the focus on how pricing is just one of the many intangible factors that influence a customers' perception of relationship quality with a restaurant. Other intangible factors include the employee's customer orientation, communication, relationship benefits (this could also be construed as trust in the server and the overall restaurant to deliver consistently high levels of results both in service and quality of food) and the perception of price fairness.

The fact that for any restaurant their customers' perception is their reality, a concept that (McKenna) has discussed in many of his books and writings, comes to light in the model by (Kim, Lee, Yoo 143-164).

Figure 2: A Conceptual Model for Relationship Quality, Its

Predictors and Consequences

From the work of (Langdoc and Newmark 2004) and (Kim, Lee, Yoo 143-164) and others, the role of pricing in the total product mix isn't isolated, it's integral to both the perception of value and most importantly, profitability. The powerful combination of pricing seen as reasonable and service being customer-centered helps many restaurants attain repeat customers, which are critical for long-term growth (Matilla 2001).

In summary pricing as part of the broader marketing mix for restaurants is undergoing a major revolution due in large part to its integrative nature with all other strategies affecting the performance of any restaurant. An entire literature review on pricing alone would also capture such critical aspects as the role of bundling, the effectiveness of coupons on the perception of product quality, and pricing of new offerings and services.

Product Differentiation and Uniqueness

Of all aspects of the restaurant industry, the most product-competitive area is that of Quick Service Restaurants (QSR) and in the context of the marketing mix this specific segment of the market is analyzed here. Product strategies in this market are driven primarily by the increasingly hectic lifestyles of westernized nations and the fragmented approaches families are taking to eating dinner with one another. Given the hectic schedules of so many families, their time is their most precious commodity with the majority not planning more than two hours ahead for dinner (Domino's Pizza 2005). A countervailing trend has been the focus on health and dieting, and according to Roper (2005) and (2006) the battle between diet and convenience.

Another aspect of product definition is the menu mix definition, where the gross margin of individual menu items, categories of menu offerings and meal periods by business categories is defined (Bayou and Bennett 49-55). In their analysis the focus on using food-cost percentage, contribution margin, weighted contribution margin and the Hayes and Huffman approach to defining P&L for menus highlights how menus must be aligned perfectly with the financial objectives of the restaurant, specifically the standard costs attributable to each item, and resulting contribution margin. From this the authors define a total cost, total contribution margin, and cost percentage analysis. Figure 3, Levels of Profitability Analysis, shows the framework the authors have created (Bayou and Bennett 49-55).

These researchers provide an in-depth approach to defining menu planning and aligning those decisions with costing structures. In the interest of completeness, the authors also surveyed the managers of 103 table-service restaurants operating in southeastern Michigan, the area they reside in. The found that 72% of these restaurants break down their costs into variable and fixed costs, and 55% of these use a direct-cost approach to completing menu planning.

Figure 3: Levels of Profitability Analysis,

Challenges Restaurants face in the first 12-18 Months of Operation

Despite many rumors to the contrary, the majority of restaurants actually succeed in their first year of operations. According to research completed by researchers (Parsa et.al. 304-322) who used Dun & Bradstreet data in addition to a series of quantitative measures including bankruptcy rates, ownership turnover and variations in business models including franchise operations and independent operators in the analysis. (Parsa et. al.) state from their analysis that the inability of a new restaurant to align with family lifecycle patterns in their customer base and maintaining quality-of-life issues. These researchers make a significant departure from the majority of research that begins with bankruptcy as the fundamental precept of failure, or the most volatile of all business issues for new restaurateurs to manage, (Ross) has shown in correlations that predict a positive correlation between the extent of leverage in a new restaurant and the propensity of go bankrupt. Researchers have gone directly to the effect, bankruptcy, without doing enough exploratory research behind the causes of new restaurants failing. That's because bankruptcy is a very public event, easily traceable through federal, state and local records. Exacerbating this heavy reliance on bankruptcy begs a fundamental question however of restaurant failures in general: Just what constitutes a business failure? Researchers (Parsa et. al.) specifically looked beyond the bankruptcy definition and found fascinating results behind restaurant failures have more to do with internal inefficiencies and lack of business judgment than with external factors. The challenges of a restaurant in its first twelve to eighteen months are defined in this section of the literature review.

Explaining Restaurant's Challenges to Viability

The following are the factors that researchers have found to be the best predictors of a restaurants' ability to survive its first twelve to eighteen months of operation. These factors have been derived from Dun & Bradstreet research, research completed at Cornell University's Center for Hospitality Management.

The larger and more financed the restaurant the greater the likelihood it will be able to survive. Research from multiple sources validates the fact that the greater the size of any given restaurant the greater the ability to afford unforeseen expenses during the first five years of operation. (Parsa et. al.) state that based on their Dun-Bradstreet analysis that once a restaurant achieves over seven years of uninterrupted business the chances of being overtaken by unforeseen economic forces drops dramatically.

The authors present Figure 3, A Model of Restaurant Viability, which successfully captures both the qualitative and quantitative aspects of factors that contribute and detract from a restaurant's ability to survive long-term. What is noteworthy about this analysis is the inclusion of the family lifecycle.

Figure 3: A Model of Restaurant Viability

Despite the convenience of using bankruptcies as the definition of a failed restaurant, the reality is, according to (Parsa et. al.) is the inability of restaurant operators (both from independent and franchisees) to manage the many requirements of their roles in a family lifecycle relative to the intensive time demands of starting, running and maintaining a restaurant. Researchers have found that the passion an owner has for the restaurant, their ability to manage financially through the "liability of newness" as defined by (Bruderl and Schussler 530-547) are two attributes of those young establishments that survive.… READ MORE

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