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Restaurant Industry Overview

According to United States Census Bureau, there were 326 million people in the United States in 2016. United States GDP has been growing for the past 6-7 years at a rate of 2-4% a year. The unemployment rate has also been very stable at an average of 4-5% in the past years. We are living a strong economy and many opportunities, people are seeking the American dream. However, in order keep the dream alive, the population people need food to survive, and according Maslow’s theory, food is essential for survival.

We notice a diversity in the United States population as gender, race, culture, age, money, demographic and other factors influence customer’s behaviors and spending. The concept of food has drastically changed as a revolution in food has created new tastes, habits, and trends. Recent technology has developed new systems for restaurants to adapt to survive. These systems accepts orders online and through apps to quickly deliver the food to your home. However, one of the target markets that the industry has missed are people conscious about their health, which avoid fast food chains to maintain their healthy habits.

Competitive Structure:

Due to relatively low barriers to entry and high profitability, participants in industry operate in a extremely competitive environment. These Competing companies vary in size, from big Fortune 500 companies to locally operating companies. Two of the largest companies account for around 13.8% of total sales for chain restaurants. The top players in this industry are DineEquit (7.1%), and Darden Restaurants (6.7%).

Mergers and Acquisitions describes that the industry’s major players focus on strategic acquisitions and product development, eagerly buying smaller companies with specialties in growing niches. Industrialization and urbanization of emerging markets are expected to increase demand, thereby increasing growth and revenues. The market in the U.S. is quite saturated, but there is also high potential abroad.

Strengths:

  1. The economy is performing well. People’s confidence in the U.S economy helps restaurants chains boost in sales. People’s lifestyles are changing and many are spending less time at home, consequently leaving less time to cook. Low prices on food are further incentivizing people to eat out.

 

  1. There is greater growth by expanding brands overseas and conquering open markets in other countries. Economy of scales helps to reduce costs of primary products, increasing the margins against low competitors. employees require little education, thereby reducing costs and specialization. As emerging countries grow economically, people around the world can afford to purchase more food at restaurants. For larger food chains, sales to customers outside of the United States typically represent about one quarter of total sales.

 

  1. Exit opportunities are huge, because we are having examples of financial players who are buying chains and expanding them. Two examples are Burger King and Popeye, which were bought out from 3G Capital. Competitors are investing in small to medium size chain restaurants to increase the number of stores generating value to the business.

Weaknesses:

  1. Competition for restaurants have made it difficult to generate sales and surpass investor’s expectations.

 

Many restaurants went public in the past few years and are struggling to regain confidence in the market. Sales decreased and many have started losing market share and profits.

  1. States have been implemented laws to increase minimum wages. So, the cost for labor has increased and their profit have decreased (because the fixed costs associated with salaries). Wages are already responsible for almost 30% of all costs of the industry.
  1. People are changing behavior and following new trends. These changes are influencing people, like healthy food habits, have brought new competition in the already dense market. The new competition has decreased revenue recently, compared to past years. Companies need to innovate and change their menu, because times has changed.

Opportunities/Trends:

  1. The use of mobile devices to facilitate transactions and save time in customer’s orders. Investing in technology and providing rewards incentive will increase the number of sales, generating more revenue. Marketing is the key for this super competitive market.
  1. M&A is an option to grow and invest in small and medium size restaurants and use synergies to reduce cost and increase value to the business. Another option is to expand abroad and open franchises in other countries to increase your market share and increase in sales to prove investors your business is growing and it is sustainable.

Threats:

  1. Diversity in the United States population as gender, race, culture, age, money, demographic and other factors are influencing customer’s behaviors and spending. When prosperity comes, people start to level-up their meal.
  1. Have a clear target market to prevent the mistake of investing as if everyone is your customer, and not a specific group.

Justin Leo contributed to this report.

Carl Christensen
Carl Christensen is a Principal with Deal Capital Partners, LLC and InvestmentBank.com. Before joining InvestmentBank.com Carl served as CFO for a $50M consumer events company. He is a former employee of both Goldman Sachs and Deloitte. He brings both breadth and depth to the M&A advisory team here at InvestmentBank.com.