Finance

Financial Insights -- Restaurant Industry
Monthly Report: March 2006
By Raymond Zale

Market Share and Management: There are two types of restaurants: destination restaurants and convenience restaurants. Destination restaurants (e.g. Dave & Buster’s) are the types of places for which consumers are willing to drive out of their way. They often succeed with little or no advertising. Convenience restaurants (e.g. chain restaurants), as the name suggests, have a greater need to be surrounded by extensive "traffic generators." In addition to being in locations where consumers are likely to be, convenience restaurants will probably require more advertising and greater market penetration to raise consumer awareness.

Like most retail industries, the restaurant industry is a market share game. Markets tend to be defined in local terms such as statistical metropolitan areas, designated market areas, and areas of dominant influence. Advertising and consumer awareness are generated at the local market level. Therefore, national rankings of restaurant chains tend to be less important. Market strength favorably affects financing risk because well-penetrated chains tend to be the best positioned to compete effectively. The difficulty of establishing a strong market position is a key reason that the ease of entry into the restaurant business has become more myth than reality.

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