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BARROWS Introduction to the Hospitality Industry, 7th Edition

BARROWS Introduction to the Hospitality Industry, 7th Edition

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Chains are playing a growing role in food service in North America and elsewhere
in the world. Moreover, they are prominent among the pool of companies that re-

cruit graduates of hospitality programs and culinary programs. Both factors make them

of interest to us.

Chains have strengths in seven different areas: (1) marketingand brand

recognition,(2) site selectionexpertise, (3) access to capital,(4) purchas-
ing economies
,(5) centrally administered control and information sys-
tems
,(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 buy-

ing power when they need it.

MARKETINGANDBRANDRECOGNITION

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

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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

“tag line” 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 tag lines of the past that are still revived

from time to time:

“We do it all for you.”

“You deserve a break today.”

“Finger lickin’ good.”

Many chains are synonymous with well-known brand names. (Courtesy of Darden Restaurants.)

129

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And, more recently:

“It’s that good.”

“Pizza, Pizza.”

“Burger King, you got it.”

Television advertising, even at the local level, is very expensive. To advertise reg-

ularly 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 as a per-

centage of sales (of all kinds, including television advertising). 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. Further, restaurants that generate a higher level of

sales tend to spend a higher percentage of their revenues on marketing. Table 5.1 re-

flects spending on marketing, expressed as a percentage of sales, and categorized by

check average. In Table 5.1, it is noticeable that the median level of marketing spend-

ing 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 can be

explained by economies of scale. Quick-service company-owned and franchised chain

units are fairly close to one another in spending on marketing.1

A standard exterior
appearance gives
franchise operators
and company-
owned brands a
high recognition
value. (Courtesy of
Carlson Restaurants
Worldwide.)

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Chain Restaurant Systems

131

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

operations. Customers know what to expect in each of the units, and in an increas-

ingly 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 experi-

ence is pleasant, it will reinforce the desire to return to that sign in the local market or

wherever else it might appear.

SITESELECTIONEXPERTISE

The success of most restaurants is also enhanced by a location near the heart of ma-

jor traffic patterns. The technique for analyzing location potential requires a special

TABLE5.1

Marketing Expenditures in Food Service

LEVEL OF MARKETING EXPENSEa

LOWER

UPPER
QUARTILE MEDIAN (%)QUARTILE

RESTAURANT TYPE

(%)

(%)

Full service—check average under $15

Under $500,000 in annual sales

0.6

1.1

2.3

Between $500,000 and $999,000

0.8

1.8

3.6

Between $1,000,000 and $1,999,000

1.2

2.4

4.1

$2,000,000 and over

0.9

2.4

3.3

Table service—check average $15 to $24.99

Under $500,000 in annual sales

0.9

1.5

3.3

Between $500,000 and $999,000

1.0

1.7

2.4

Between $1,000,000 and $1,999,000

0.7

1.8

2.6

$2,000,000 and over

1.2

1.9

3.0

Limited service restaurants

Under $500,000 in annual sales

1.0

1.4

3.4

Between $500,000 and $999,000

0.6

1.1

3.7

Between $1,000,000 and $1,999,000

0.6

1.7

4.0

$2,000,000 and over

n/a

n/a

n/a

a

Ratio to total sales.
Source: National Restaurant Association, “Restaurant Industry Operations Report—2004.”

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Chapter 5Restaurant Industry Organization

kind of knowledge, and chains can afford to staff real-estate departments with people

that possess this expertise. Numerous examples abound about independent restaurants

not “doing their homework” when choosing a site. While 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 ap-

proach to it. To quote one industry observer: “Restaurant site selection is increasingly

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.”2

Sophisticated software is now available to assist operators in their decision making.

Papa John’s, Krispy Kreme, AFC, and of course, McDonald’s are all companies that are

recognized for doing an admirable job of site selection.

ACCESSTOCAPITAL

Most bankers and other lenders have traditionally treated restaurants as risky busi-

nesses, therefore making access to capital (at least from this source) problematic.

Because of this, 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, the 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 reputation 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 indepen-

dent 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 such as individ-

ual investors buying for their own account, as well as mutual funds, insurance

companies, and pension funds that invest people’s savings for them. Hospitality com-

panies with well-known brand names and well-established operating track records

enjoy a wide following among investors, and their activity is important enough to the

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133

industry that Nation’s Restaurant Newscarries a weekly section, “Finance,” featuring

a summary of approximately 100 publicly traded restaurant stocks. In addition to

funds raised through stock sales, companies can sell bonds through public markets,

raising larger sums than are typically available through bank loans. Among others,

Norman Brinker (Jack-in-the-Box, Steak n’ Ale, and Chili’s) developed a reputation

for successfully taking his restaurant companies public and thus achieving his growth

objectives.3

It should be noted here that the 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.4

PURCHASINGECONOMIES

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 spec-

ifications, 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 test-

ing products and developing new equipment.

CONTROLANDINFORMATIONSYSTEMS

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

programs 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 comput-

erized point-of-sale (POS) system to the central-office computer. There they are ana-

lyzed, problems 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 managed inspection and quality control staff review units’ efficiency and

quality regularly.

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Chapter 5Restaurant Industry Organization

NEWPRODUCTDEVELOPMENT

The quest to create newer, better, and more interesting food products continues as com-

petition in the restaurant industry only intensifies. Chains have the luxury of being able

to staff (and finance) research and development departments that champion the devel-

opment of new menu items. With adequate financial support and expertise, companies

are able to test and launch new products such as McDonald’s new Toasted Deli Sand-

wiches, Burger King’s Chicken Fries and Chicken Whopper, or Papa John’s Cheesesticker.

The development of new products for restaurant companies is a combination of culinary

expertise and food science expertise. Many of the chefs that 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

Houston’s Restaurants, a privately
owned company, is well known for its
development programs. (Courtesy of
Houston’s Restaurants.)

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135

research chef with a forum for professional and educational development.” Many chain

organizations have membership in the association including such companies such as

Starbucks and Brinker International. The ability to add new products to the menu mix is

an important quality; new products can create positive press, increases in sales and prof-

its, and increased market share.

HUMAN-RESOURCEPROGRAMDEVELOPMENT

Some restaurant chains have established sophisticated training programsfor

hourly employees, using computer-based, and increasingly, Internet-based techniques

to demonstrate the proper ways of performing food service tasks and jobs. Special train-

ing exercises 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. According to a report on training by Restaurants & Institutions, Damon’s Grill

employees can access the company’s computerized training program through their

POS system.5

Management training is also important, and large food service organizations can

usually 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 in-

cludes the trainee’s salary while in training, fringe benefits, travel and classroom costs,

and the cost of the manager’s time to provide on-the-job training. In effect, this com-

pany 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.

Because of their multiple operations, moreover, chains can instill in beginning

managers an incentive to work hard by offering transfers, which involve gradual in-

creases in responsibility and compensation. In addition, a district and regional man-

agement 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.

CHAINS’ MARKETSHARE

As Figure 5.1 suggests, chains have dramatically increased their market share (share of

sales) over the last three decades. The top chains generate over half the restaurant

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Chapter 5Restaurant Industry Organization

sales in the United States, up from less than 33 percent in the early 1970s.6

What is

particularly interesting, though, is that the chains’ market share growth seems to be

slowing, increasing less than 1 percent in the most recent year reported.

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 having

trouble weathering the economic storm. Although most experts agree that the concen-

tration of chains will continue, fierce competition from regional chains (note the

numerous examples used throughout this book), shifting consumer preferences, and

competitive patterns will ensure that few, if any, players will establish anything resem-

bling market dominance except on a local or temporary basis.

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