Differentiating restaurant startups: a conceptual framework.

Crandall, Rick ; Vozikis, George S. ; Sparks, Donald L. 等

INTRODUCTION

Vesper's five key ingredients are important if the research uses a "shot gun" or multi-industry wide approach. But generally it is necessary to use a "rifle" or "industry specific" approach to add further credibility to this multi-industry based research. Sexton & Smilor (1986) call for industry specific research by stating, "The development of these studies should not only relate to an overall framework of individual entrepreneurship but should also be targeted to a specific population or sample instead of all venture firms, all small businesses, etc." (p. 325). This paper attempts to answer the call for industry specific research by developing a framework for researching startup and survival strategies in the restaurant industry. Because of the unique variables which make the restaurant industries operate differently from the traditional streams of entrepreneurial research, this industry needs to be studied in greater depth.

THE RESTAURANT INDUSTRY

The restaurant industry is one of the most competitive industries in the world today. It can cost a half a million dollars for a restaurant just to open for business. Owners work 70 hours a week, including holidays and weekends, and still 10 percent of them fail. Although the competition is fierce and the success rate for restaurants is extremely low, restaurants keep springing up.

The fastest-growing segment of the restaurant industry is casual dining, where sales are increasing at double-digit rates. This nomenclature includes such settings as Chili's, Applebee's, and Outback Steakhouse, where the food comes with a relaxed atmosphere. The concept here is "not-so-fast food for aging boomers who may still crave a burger but now want to sit down and eat it from a plate, perhaps with a glass of wine." Nina Zagat, co-publisher of Zagat Restaurant Survey guides calls such new spots BATH restaurants--better alternatives to home--in that they are part of a national phenomenon of eateries designed to appeal to families where both partners work. The convenience shoppers don't weigh whether to spend food dollars at a restaurant or at a supermarket. Rather, they are shopping for meals, and they will go to whatever retailer provides the best solutions to the problem of feeding the modern, average American household. This meal-replacement segment, as it is now known, is a $70 billion to $80 billion market. If half that volume comes out of the supermarkets, their sales will shrink 10% (Saporito, 1995).

The restaurant industry is extremely important to the national economy. For example, according to the National Restaurant Association, in 1994 the foodservice industry sales reached some $275 billion, accounting for 4.1 percent of Gross Domestic Product (GDP), and is growing by about 4 percent annually (National Restaurant Association, 1994). Further, more than one of every four retail outlets is an eating establishment, over 9 million people are employed in the industry, and employment is expected to reach over 12 million by 2005 (ibid.)

STARTUP AND SURVIVAL IN THE RESTAURANT

Before discussing startup/survival variables in the restaurant industry, it would be useful to take a step back and examine the current research on startup/survival in general. Hofer (1987) identifies three areas critical to the survival of a new firm: 1. industry structure, 2. venture strategy, and 3. the behavioral characteristics of the founding entrepreneur. Hofer maintains that the new venture strategy should take advantage of the current structure of the industry as opposed to attempting to change it. Also, entrepreneurs should steer clear of ventures in industries that offer few chances of success. For example, opening a small, independently owned hamburger store on a crowded boulevard where the hamburger "giants" also have stores may be a suicide attempt unless the independent has some extraordinary characteristics which gives it a distinctive advantage or it can somehow differentiate its product.

Another important variable in the startup process is the entrepreneur's level of formal education. This variable is different from experience in that it focuses on the mechanics of entrepreneurship such as what is taught in business schools. Miller (1987) addresses this issue by stating the importance of education and stressing that business schools must be more aggressive in teaching these skills.

Because the restaurant business is such a risky type of business, banks are reluctant to lend to entrepreneurs opening eateries without ironclad guarantees. Consequently, the restaurant industry is the largest single beneficiary of Small Business Administration loan guarantees receiving $392.9 million in 1992. The SBA guaranteed 22,459 business loans and 1,791 restaurant loans, which was 8% of the total number of loans and 7% of the total loan amount (Oleck, 1993).

Labor and materials are the two biggest and most important expenses that restaurant businesses have in their budgets. Another challenge facing all types of restaurants is the type of menu they offer their customers. The wider the menu variety, the higher the cost is for the restaurants.

There is one absolute constant about the restaurant business whether it be a chain restaurant or an independent restaurant. That absolute constant is the need to go back to the basics. The basics in the restaurant or food service business is knowing how to control costs. Of course the necessity for them to focus on the needs of their guests is always present. The fundamentals of hospitality will always be the same: "a favorable location offering consistently appetizing food, friendly and attentive service, and an inviting, clean decor" (Main, 1991). Restaurants must focus their main emphasis on the customer's dining experience. If restaurants make their customers happy, the profits will take care of themselves. There are three distinct dimensions to a comprehensive cost-control appraisal: product, people, and property. Controlling food cost is the most difficult "hands-on" task in the restaurant industry. Payroll is by far the most flexible of the operating costs and provides the most immediate source of new cash flow when effectively managed (Martin, 1911). There are several other solutions to cost-control: staff cuts, earlier closing hours, more haggling with suppliers, and reduced market expenditures (Farrell, 1991)

The inverse to cost-cutting is to expand margins by generating a larger overall gross profit contribution by carefully merchandising certain menu items. Here, the idea is to develop a selling strategy that focuses on specific menu items: those that yield a more favorable gross profit margin. This type of selling strategy is developed through the menu: the size, layout, format, design, and style. All of these elements affect the customer's decision to choose one item over another. The trick is to construct a menu that will display those items that deliver a lower food cost or a higher gross profit contribution as to increase the bottom line of a restaurant. Several techniques can be used to do this: Price rounding, using a basic box technique, and reviewing menu item placement orders (Main, 1991).

The implementation of any restaurant-merchandising concept must be managed by appropriately setting prices. In order to do this, restaurant personnel must grasp the idea behind menu-item demand and the elasticity of that demand. That is, not only should they know how strong the demand is for a given item, but they should have an idea of how the demand for that item will change as the price changes (Burdett, Kelly and Kiefer, 1994). Menu pricing should also be considered as a method of managing revenue, because increasing prices without loss of volume is an important method of boosting profitability. Considering the restaurant industry's high fixed costs, a one percent improvement in price can yield as much as a 20-percent improvement in profits. (ibid). Another important reason restaurants must pay particular attention to price is because customers may be focusing their main attention on the quality food instead of the price and vice versa, and customers are ready to spend when they are dining out.

Typical menu-pricing schemes include a fixed markup over food cost, a markup over total cost, and pricing to meet a gross margin requirement. The importance of knowing demand in setting prices determines an effective pricing strategy and how well restaurants understand their customers' responses to change.

For a startup to be successful, key personnel within the organization must possess certain characteristics. Olson (1987) addresses this issue by stating that these employees should display the following characteristics: 1. a sense of role orientation, 2. a high tolerance for ambiguous, unstructured situations, 3. an ability to take the long view, 4. an acceptance of moderate risk, 5. both intuitive and analytical abilities, and 6. a high need for achievement.

A more general approach to startup has included the use of flow charts and models to describe the process. Webster (1976) designed a simple six stage startup process. Long and Ohtani (1986) conceived a more detailed ten stage model. Perhaps the most elaborate model is Swayne and Tucker's (1973) fifty seven step (in three stages) "roadmap" of entrepreneurial startup. While all of these models are useful, they are multi-industry in nature and none of them address the specifics of the restaurant industry. In fact, research in this area is vastly under-represented. For example, in Sexton and Smilor's (1986) review of the literature on entrepreneurship, only one study was found that exclusively dealt with the restaurant industry. This under-representation of the restaurant industry illustrates another reason why it is important to construct a framework by which we can begin to better research it. This industry is extremely important to the national economy.

A CLASSIFICATION FRAMEWORK FOR STARTUP AND SURVIVAL

Dukas (1973) and Kahrl (1973) offer classic textbook approaches to operating in this industry. These sources are good at identifying key variables in the restaurant industry but they do not differentiate to any great degree the different types of establishments that operate in this field.

As discussed earlier, restaurants play an important role in our economy. While there are about 30,000 supermarkets and 93,000 convenience stores today, there are over 400,000 restaurants, ranging from fast food to fine dining. This range of restaurants makes it difficult to classify for research purposes. There are several ways of classifying foodservice establishments within the restaurant industry, and this distinction should be made when conducting meaningful research. The approach used here is to distinguish the operation in terms of degree of service and quality of food. The degree of service can range from a walk-up counter, (e.g., MacDonalds) to an elaborate sit-down service restaurant with a maitre d' and wine steward. The quality of the food refers to the degree of preparation needed to "manufacture" the menu item from its position in the kitchen to its appearance in front of the customer. It can include freshness, quality of ingredients and presentation and also refers to the relative cost of the item compared to other menu items. For example, a hamburger is considered lower in quality than a London Broil because the skill needed to prepare the latter is more labor intensive. Also, the cost of a flank steak (from which a London Broil is made) is higher than the cost of ground beef used in a hamburger. Quality, as used in this example does not mean that one product is inferior to another.

The paper classifies restaurants into four groups based on the criterion discussed above. Figure 1 illustrates this classification by showing that fast food restaurants (also known as quick service restaurants) will appear in the lower left quadrant.

[FIGURE 1 OMITTED]

These restaurants can be national or regional chains, or locally owned operations. These establishments provide a minimum amount of customer service and a low quality (not necessarily inferior) product. Operations in this category include Wendy's and Hardee's. Cafeterias are differentiated next because of the increased amount of customer service offered and a higher quality menu. These establishments include Morrison's and Picadilly. The next category is theme/family (sometimes called casual dining) and contains a large number of sit down establishments with various types of food themes. The more familiar family operations include Po Folks and IHOP. Theme restaurants tend to focus more on unusual decor and tend to attract a younger clientele. Some of these establishments include Bennigan's and Hastings Place. The final category, fine dining, contains restaurants that offer the ultimate in high quality food and extensive service. This category generally includes locally owned and operated restaurants and not chains.

Obviously, this categorization is not all conclusive but it does serve as suitable starting point for the analysis of startup and survival variables in the restaurant industry. These variables are: location, management style, cost control, creativity and innovation, and capital requirements.

In the restaurant industry--as in all others--it is possible to have the right product, but to be in the wrong location. Kahrl (1973) lists thirty three items which need to be considered before selecting a location. Some of these include: population density, potential for growth, direction of street traffic, speed limit, access, investment cost, and competition. Even locating in the right metropolitan area should be a consideration for future operators (Birch, 1988). Out of the four classification of restaurants, location is probably most important for the fast food operator. These restaurants must be easily visible and accessible for quick entry by the customer. An establishment which is on the wrong side of the street and does not take advantage of traffic flow could be doomed for failure unless the unit is a well established chain. According to Tannenbaum, (1995) restaurant companies have begun to promote two or three themes so that consumers will still choose one of their restaurants. For example, Apple South owns the popular Applebee's and Tomato Rumba's, often in close proximity to each other. Generally the customer doesn't know that they are owned by the same franchiser, as marketers rarely advertise the linkages. Location is still a critical factor for cafeteria style restaurants, but probably not to the extent of fast food establishments. Because cafeterias are fewer in number, regular cafeteria patrons do not require the quick access that fast food patrons do. The main problem for theme/family style restaurants is that prime locations are harder to find (DeLuca, 1989). As a result, some of these restaurants such as Garfield's and TGI Friday's are working out arrangements to locate in hotels. This arrangement is especially attractive because of the lower startup costs involved. Relative to the other three classifications, location is probably the least important to fine dining operators. This type of clientele is usually willing to drive the distance as part of the "dining experience." There are examples of favorite restaurants which are located in the "middle of no where," yet are no less appealing because of the commute.

Hands-on management typically refers to the degree that the manager is involved in the day-to-day operations of the establishment. Restaurants are unique because, they require a more hands-on manager than in many other industries. The reason is that the functions of production and consumption of the product are carried out under one roof. This is rare in most other industries and as a result, greater levels of hierarchy are allowed which means the general manager does not have to get as involved in the production process. But in a restaurant, there are few levels of hierarchy which means the manager must be involved in all phases of the operation. Cole (1988) addresses this issue by citing a manager who admitted the reason his restaurant concept failed when expanding to multiple locations was because he did not stay involved in the day-to-day activities of the business.

Fast Food, Cafeteria, and Theme/Family Restaurants use hands-on managers who are actively involved in the production process. Many of these restaurants are run by chains and, as a result, have built-in controls written within their standard operating procedures (SOPs). This has the effect of letting unit managers delegate much of the control to assistant managers. Relative to the other three categories, fine dining establishments require the most aggressive hands-on management policies, because these restaurants are usually not part of a chain, but operate as independents. SOPs are less utilized and the managers are also frequently the owners. With more of a financial stake in the restaurant, these manager/owners are less willing to delegate responsibility at the risk of losing control of the operation.

Cost Control is closely related to hands-on management since the manager who is more active in the production process is consequently more involved in cost control. Cost control is critical to the success of fast food operators since their revenues are based on smaller average checks compared to the other three categories of restaurants. Strict portion control and minimum wage labor have been traditional routes this phase of the industry has taken to build up profit margins. Cost control is still important for cafeterias, but to a lesser extent because of the higher average checks which are obtained relative to fast food operators. Those establishments which serve liquor have an added boost to profit margins and as a result, are not as dependent on controls (although controls are still necessary). Also, higher average checks on food items usually allow these types of restaurants to serve larger portions than their fast food and cafeteria counter parts. Fine Dining restaurants have the advantage of obtaining the highest average check in the industry but still must practice strict portion control because of their independent status. Large chains have cash reserves to fall back on, but the fine dining independent is up against a fickle market and few cash reserves. Lindsey (1985) discusses several such operators including Wolfgang Puck, owner and chef at Spago's in Hollywood, California. Chef Puck exercises strict cost control in the area of purchasing, often buying directly from local farmers as opposed to established produce houses, which carry a higher mark up.

The entrepreneurial process has been described as having two phases, consisting of an invention phase and an innovation phase (Olson, 1985). The invention phase involves creating new ideas. Innovation involves taking those ideas and developing them into a useable form in the marketplace. The restaurant industry requires a high degree of creativity because of the changing tastes of consumers; therefore, this variable is considered an important factor in the survival of the firm. Innovation is also important because at some point successful ideas need to be translated into bottom line profits. Creative ideas are not as numerous in Fast Food restaurants, but high cost of research and development (innovation) requires that those ideas which are generated be readily profitable. Cafeteria establishments allow a greater degree of creativity in menu planning and merchandising. Because there is less emphasis on a limited menu, innovation need not be stifled if an item is not successful because the manager can simply eliminate it from the menu. Creativity is probably more stressed in Theme/Family restaurants since food items usually revolve around flexibility menus and daily specials. Innovation is important, but not as time consuming as fast food since R & D usually takes place in a regular restaurant kitchen as opposed to a food laboratory kitchen like those used in the fast food industry. Fine Dining restaurants are the most creative of the four relative to the other three groups. Daily specials and the whim of the chef often dictate what items will be featured on the menu. At the same time, innovation barriers are low since the chef usually possesses the skills to both create and innovate at the same time.

Vesper (1990) cites several examples where the lack of initial capitalization contributed to the failure of the firm. This same threat hangs over restaurant operators. Fast Food, Cafeteria and Theme/Family establishments typically require high start-up costs, and thus require large amounts of initial capital because of the amount of space, building, and equipment needed to construct the restaurant. For example, cafeterias especially need a vast amount of dining area because of the steady flow of customers exiting the serving line. Fine Dining restaurants have opened in hotels (which permits leasing), old houses, and existing sites of closed down businesses. A vast dining area is not as important since service and a higher average check are emphasized. As a result, capital requirements can be much lower compared to the previous three categories.

Figure 2 summarizes this discussion. On the matrix, the high, medium, and low classifications are relative. However, within each variable a ranking of importance is given relative to the other four restaurant classifications. For example, this discussion has identified location as an important startup and survival variable for the restaurant industry. However, among the four types of restaurants, location is the most important for fast food establishments (a high ranking) and least important for fine dining operations (a low ranking).

The matrix has also grouped startup and survival variables together as opposed to distinguishing between the two because startup is basically meaningless unless survival follows. No reputable restaurant operator would concentrate exclusively on startup variables without also considering the importance of the survival variables. In this matrix, the startup variables could be considered as location and capital requirements while the survival variables could consist of hands-on management, cost control, creativity, and innovation. However, these variables should not be considered as mutually exclusive but rather as interdependent. For example, the best location in the world along with high capitalization will not insure a successful restaurant if cost controls and innovation are not up to par.

The significance of this matrix is that it further defines the importance of each variable relative to the type of restaurant that is being considered for startup. For example, the fast food operator who seeks to enter and survive should put a greater emphasis on location, cost control, R & D, and capital requirements. On the other hand, the entrepreneur who wishes to specialize in a fine dining establishment should focus on hands-on management, creativity, and cost controls. Cafeteria and theme/ family operators need to concentrate on all the variables to a certain degree, but they especially need to have the high capital requirements needed to make their types of restaurants successful.

CONCLUSION

This paper has attempted to provide a framework from which future entrepreneurial research can be launched in the area of restaurant startup and survival. The purpose of this model is to distinguish which variables are important for each type of restaurant category. Other variables will need to be added or deleted for each specific restaurant classification. The model is conceptual so that empirical testing is needed to determine if indeed these variables are significant. Up to this point, entrepreneurial research has not sufficiently addressed this issue in the restaurant industry.

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Rick Crandall, Concord College

George S. Vozikis, University of Tulsa

Donald L. Sparks, The Citadel

Figure 2

A Framework of Startup and Survival Variables
in the Restaurant Industry

 Fast Cafeteria Theme/ Fine
 Food Family Dining

Location High Medium Low Low
Hands-on Management Medium Medium Medium High
Cost Control Required High Medium Low High
Creativity Required Low Medium Medium High
Innovation Barriers High Low Medium Low
Capital Requirements High High High Medium