Industry Profiles: Eating and Drinking Places

Overview

The restaurant industry is an important component of the domestic and world economy. According to the National Restaurant Association, the industry was expected to achieve direct sales totaling $408 billion in 2002. However, with sales in related industries like agriculture factored into the equation, restaurants were expected to contribute more than $1 trillion to the nation's economy. Rising U.S. incomes and an increase in the number of single-person and dual-income households have supported demand for restaurants and prepared food. Carryout has remained a strong growth segment of the industry, appealing to people pressed for time who seek a convenient yet economical alternative to cooking at home. Coffee houses continued to expand into the early 2000s because of demand for gourmet coffee and the need for new places to socialize.

Restaurants and restaurant chains watched their sales increase at a moderate pace throughout most of the 1990s and into 2000. However, a slumping economy and the terrorist attacks of September 11 put a significant damper on growth in 2001. Real sales growth within the industry slowed from about three percent from 1998 to 2000, and to less than one percent in 2001, according to the National Restaurant Association.

In the early 2000s, McDonald's held its position as the world's leading fast-food restaurant chain. Among U.S. hamburger chains, the company held approximately 43 percent of the market, ahead of Burger King and Wendy's, which commanded respective market shares of about 19 and 13 percent. McDonald's accelerated expansion in the 1990s eroded its profits. The company's challenges continued in the early 2000s, when it faced a saturated market with more limited expansion opportunities, customer service problems, and a lack of successful new products to entice new customers and ensure repeat visits. Additionally, the company's "Made For You" program was largely unsuccessful, according to some industry analysts. Although Wendy's was third in terms of market share, it was more successful than McDonald's and Burger King in the areas of same-store sales growth and customer service, according to the Chicago Tribune. Starbucks Corporation remained the leader of the coffee house segment of the industry.

While the eating and drinking place industry as a whole continued to grow at a steady rate during the late 1990s, the bar and tavern segment (including both alcohol and food receipts) remained flat, and in some years actually fell. According to the National Restaurant Association (NRA), sales at such establishments hovered between $9.0 and $9.5 billion during much of the decade. However, by 2001, sales were projected to reach $12.8 billion and climb to $13.3 billion the following year.

History of the Industry

For many years, the restaurant industry consisted primarily of small, regional diners and cafes. The industry has since grown from family-run restaurants and diners to the chain restaurants of today. Contributing to this growth was the increased number of single-person households, single-parent families, and dual-income families. With less time available for meal preparation, convenience became more important. Since the early 1970s, franchised eating and drinking places have almost tripled their share of the market, from 15 percent of industry volume to about 43 percent in the mid-1990s.

There were a couple of factors contributing to the expansion of eating and drinking places. Many people consider food and beverage houses easy business ventures, manageable by anyone who can cook or prepare a beverage. Therefore, an abundance of new restaurants, cafes, and bars emerge each year. However, half of these ventures fail or change management every five years, according to the U.S. Small Business Administration. Although the industry is still growing, aspiring eating and drinking place owners must recognize industry trends and market demands to stay afloat.

Most growth in the industry, however, is due to the increase in franchised establishments. The popularity of franchising stems from the parent company's ability to expand without as much expense, as start-up costs are usually paid by whomever purchases the franchise. The franchisee—the person or group starting the new branch of a restaurant chain—then pays the franchisor royalties based on sales. For the person buying the franchise, this is an extremely low-risk investment when compared with independent eating and drinking establishments, which do not have an established clientele that can be tapped. However, franchise owners trade flexibility for these advantages. Independent owners can plan their own menus, avoid royalty expenses, and run their businesses as they see fit. Franchisees are restricted by terms of the franchise agreement.

Significant Events Affecting the Industry

With a host of independent and regional dinner house and casual dining restaurants, the veteran operations such as T.G.I. Friday's, Bennigan's, and Applebee's started to recast their images and refocus their restaurants to differentiate themselves from the competition. Friday's began primarily as a singles' bar and evolved into a family-oriented casual dining restaurant that still has strong bar sales. Other such restaurants followed this pattern, attempting to offer something unique and trying to strike a balance between their bar and restaurant facets. Additionally, by the early 2000s, the difference between traditional family dining establishments and casual chains like Friday's was beginning to disappear.

Theme restaurants experienced stagnant sales in the late 1990s, after strong sales in the late 1980s and early 1990s. Although some theme restaurants continued to suffer from the lack of repeat customers, numerous other theme restaurants remained in the works, including a number of Copperfield Magic Underground in New York, Los Angeles, Paris, Tokyo, Sydney, and London, and Michael Jordan and Shaquille O'Neal restaurants, among others.

In the mid-1990s, restaurants and supermarkets introduced prepared foods for carry-out service or what they termed home meal replacements. These allowed customers to enjoy freshly cooked foods conveniently in their own homes without making an occasion out of the meal. This trend worked well with the popularity of VCRs, televisions, computers, and other electronic entertainment devices in homes around the world. It also suited the growing demographics of the country: more single-person and dual-income households that have little time for cooking meals. Restaurant Business reported that home meal replacements sales rose to $50 billion in 1997—up 13 percent from 1996—and predicted that sales would climb to $150 to $170 billion by 2005.

Key Competitors

Serving more than 46 million customers a day worldwide, McDonald's ranked as the largest eating and drinking place in the world. The company's brand name, maintained through aggressive advertising, was among the world's most highly recognized along with Coca-Cola and Marlboro. However, in the early 2000s, McDonald's was scaling back the percentage of sales that its franchisees devoted to advertising while competitors like Wendy's were significantly increasing their advertising budgets. McDonald's worldwide sales totaled $14.9 billion in 2001, approximately 25 percent of which came from the United States. At that time, it operated about 30,000 restaurants in more than 120 different countries and was adding approximately 1,300 restaurants to its chain each year. In addition to its McDonald's restaurants, the company also has ownership stakes in Boston Market, Chipotle, Donatos Pizzeria, and Pret A Manger. According to McDonald's, these "partner brands" allow the organization to offer customers a wider choice of dining experiences.

Darden Restaurants recorded sales of $4.0 billion in 2001. In 1995, General Mills spun off its restaurant holding into Darden Restaurants, which includes four restaurant chains or concepts: Red Lobster, Olive Garden, Bahama Breeze, and Smokey Bones BBQ. Together they constitute the world's largest casual-dining restaurant chain. Red Lobster dominates the United States seafood restaurant sector with 660 units in the United States and Canada. The Olive Garden leads U.S. casual Italian restaurants with 480 eateries throughout North America. Bahama Breeze serves Caribbean cuisine at 24 locations. Darden's growing line of sports bar/barbecue restaurants, Smokey Bones BBQ, had 10 locations in 2001.

Burger King had 2001 sales of $1.5 billion and 11,400 units across the globe. The company is a private subsidiary of Diageo, the result of the merger of Grand Metropolitan Public Limited Company (GrandMet) and Guinness (brewer and alcohol producer and publisher), which was planning to spin off the hamburger chain in the early 2000s. James McLamore and David Edgerton founded Burger King in Miami in 1954, Pillsbury bought it in 1967, and GrandMet acquired it in 1988. Attempting to turn the tide of slower sales, in 2001 the company was in the process of introducing new and enhanced food choices to its menu, which had remained relatively unchanged since the late 1990s. In order to spread the word about these improvements, the company also began new promotional campaigns involving well-known celebrities like blues musician B.B. King.

The leading coffee house in the United States is Star-bucks Corporation, based in Seattle, Washington. In 2001, the firm boasted $2.6 billion in sales, employed 54,000 people, and had approximately 5,400 retail locations. The company began in 1971 with one store in Seattle. Three entrepreneurs, Gordon Bowker, Jerry Baldwin, and Zev Siegl, founded the original business. They named it after a character from Herman Melville's classic novel Moby Dick who loved coffee, and they developed the now-familiar mermaid logo. Starbucks originally sold bulk tea and specialty coffee beans by the pound, and they did not add a coffee bar to sell drinks until 1984. The coffee bar idea came from Howard Schultz, who was the company's marketing director. Schultz quit the company in 1985, but he raised money from private investors and bought Starbucks from its founders for $3.8 million in 1987. The venture paid off for Schultz, whose personal fortune totaled $100 million in 1997, 75 percent of which came from Starbucks stock.

Industry Projections

During the mid- to late 1990s, the restaurant segment launched new products and services such as salad bars/dinner buffets, specialized menus (such as health food and vegetarian), and home delivery to attract consumers and boost industry growth. The continued rise in single-parent families, single-person households, and dual-income households fueled the growth of the industry worldwide, especially in mature industrialized countries. Restaurants reported that more than 50 percent of their revenues came from carry-out sales.

Although they remained nearly even in the mid-1990s, full-service restaurant sales were outpacing fast-food sales by 2001. That year, full-service sales were projected to reach $140.4 billion, while fast-food sales were projected to reach $111.1 billion. Miscellaneous food services such as cafeterias, caterers, ice cream and frozen yogurt parlors, bars, and commercial food contractors accounted for the remainder of the industry's revenues. According to National Restaurant Association forecasts, full-service sales were expected to reach $146.7 billion in 2002, and fast food sales were expected to reach $115.2 billion.

The coffee house segment of the industry took off in the early 1990s, with national chains such as Starbucks and Caribou Coffee spreading across the country as well as numerous independent cafes and regional chains cropping up in metropolitan areas. By 2000, approximately 5,850 coffee cafes were in operation across the United States, generating an estimated $3.95 billion in sales, according to the Specialty Coffee Association of America (SCAA). This represented an increase from the 5,000 coffee houses operating in 1997. Fueling future demand is America's growing love for coffee. According to Nation's Restaurant News, the National Coffee Association reported that 79 percent of the adult population consumed coffee by 2000, an increase from 1996 levels of 72 percent.

In the late 1990s, coffee houses also teamed up with retailers such as J.C. Penney, opening cafes in selected stores. According to the SCAA, the number of retail outlets selling specialty coffee numbered 12,000 in 1999. This number was expected to decline to 10,000 by 2003 and then increase to 12,000 in 2007, 15,000 in 2011, and 18,000 in 2015. In the late 1990s, the SCAA predicted that the industry's growth would crest around the year 2010, and that the number of mergers in the industry would steadily rise between the late 1990s and 2010. The SCAA expected industry consolidation to slow down around the year 2020.

Although the outlook for the bar and tavern portion of the industry was grim in the late 1990s, sales were rising again by the early 2000s and were projected to reach $12.8 billion in 2001 and $13.3 billion by 2002. Nonetheless, many hotel lounges have either been transformed into combination eating/drinking establishments or have been eliminated altogether and replaced by meeting rooms. Although they report that alcohol items have higher profit margins than food items, food was increasingly being emphasized over drinks. The decline in this segment's sales stems from greater consumer health-consciousness, stricter laws defining intoxication by blood-alcohol content, and less public acceptance of drunk driving.

Sports bars emerged in the 1980s and continued to grow in the 1990s and early 2000s. They typically serve lighter fare and have a family-oriented atmosphere, providing an example of industry adaptation to consumer health concerns. Another successful concept that was introduced in the 1990s was the brew pub. Although this is a borderline category since many brew pubs derive more than half of their sales from the food they serve, the brew pub and microbrewed beer generally have helped to revive both a beer industry on the decline and the drinking places industry itself. As of January 1998, there were 1,306 microbreweries, brew pubs, and regional specialty breweries in the United States.

Global Presence

The United States constitutes the world's largest market for restaurants and many of the world's largest restaurant chains started in the United States. The demand for American style food in other countries has presented a growing number of U.S. restaurants with opportunities for international expansion. According to Restaurants USA, Technomic, Inc. found that the leading 100 U.S. restaurant chains alone saw their international sales climb 8.5 percent in 1999, reaching $36.5 billion. This increase was almost two percent greater than sales growth in the United States. According to a report by McKinsey and Company, the entire food industry market will continue to expand, reaching $800 billion by the year 2005.

With demand slowing down domestically, U.S. companies have increased their presence across the world. Some of the top U.S. restaurants, such as McDonald's, take in a greater percentage of their overall sales abroad than at home. Nevertheless, chains like McDonald's, Kentucky Fried Chicken, Taco Bell, and Domino's have continued to add new units domestically and overseas. Furthermore, McDonald's led in the European and Japanese restaurant industries as well as the U.S. industry.

One factor that hindered progress for U.S. restaurant chains wishing to enter or expand in Asian markets was that region's economic crisis in the mid to late 1990s. However, by the early 2000s, conditions had improved. Asian countries represent a lucrative market. In the late 1990s, consumers in Japan spent the most per capita on restaurants and prepared food, averaging $1,670 a year. U.S. and French consumers spend about half as much, according to the Chicago Tribune. Because many Japanese people live in small apartments far from where they work, eating out is necessary and contributes heavily to the size of the industry. The Japanese restaurant industry changed dramatically after 1969, when it became possible for foreign companies to invest in Japan. As a result, fast food restaurants such as McDonald's and Kentucky Fried Chicken became popular, as did casual dining establishments such as Denny's.

Employment in the Industry

With an employee base exceeding 11.5 million workers, the restaurant industry is the nation's second-largest employer after the U.S. government, according to the National Restaurant Association. Because people over the age of 45 will account for 38 percent of the U.S. population by 2005, the industry has and will continue to experience strong growth since this segment of the population pumps the most money into eating and drinking places. However, with such a high percentage of the population over 45, the eating and drinking place industry faces a labor shortage because the 16 to 24-year-old segment makes up the bulk of its workers. The 16 to 24-year-old segment will remain small through the first part of the next century. U.S. restaurants reported that their applicant pools dwindled over the years and that they had difficulty finding enough employees. To ensure having a quality staff, increasingly, more restaurants instituted training programs for both general employees and managers. By 2002, hiring and retaining employees remained a leading challenge for both full service and fast food restaurants alike.

Sources for Further Study

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dorfman, michelle. "a strong segment is brewing." id: the voice of foodservice distribution, october 1996.

"in japan, cooking frenzy is boiling over." chicago tribune, 15 september 1997.

"industry at a glance." national restaurant association, 22 april 2002. available at http://www.restaurant.org.

"industry information." specialty coffee association of america, 15 april 2002. available at http://www.scaa.org.

king, paul. "family dining chains launch redesign to change image, reach new customers." nation's restaurant news, 15 january 2001.

lafrance, peter. "sports bars." tavern news, june 1990.

oetzel, donna. "the global marketplace: shopping your brand outside the united states." restaurants usa, june/july 2000.

papiernik, richard l. "$1b growth plans dashed by reality of rationalization." nation's restaurant news, 30 march 1998.

———. "operators battle to share $320.4 billion in sales." nation's restaurant news, 6 january 1997.

———. "outlook 1998: big players vie for $336.4 billion in sales." nation's restaurant news, 5 january 1998.

———. "tricon takes $530m charge to sell, shutter 1,400 units." nation's restaurant news, 22 december 1997.

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ruggless, ron. "better latte than ever: coffee players perked up over sales." nation's restaurant news, 12 february 2001.

sachdev, ameet. "wendy's sizzles as burger wars heat up." chicago tribune, 10 march 2002.

thorn, bret. "down, but not out: despite years of turmoil asian foodservice looks to recapture its former glory." nation's restaurant news, 26 november 2001.