Tourism Economics TRM 490 Dr. Zongqing Zhou Chapter 4: Restaurant Economics

Chapter 4: Restaurant Economics (1) Overview –About 25% of the $254.9 billion of restaurant sales in the US in 1992 can be attributed to the travelers (fifty miles away from home). –Restaurant depends heavily on tourists for sales. –Expansion abroad is the trend –Restaurant chains dominate the restaurant sales (about 47% of the sales)

Chapter 4: Restaurant Economics (2) Classification of restaurants –Fast food Fast food chains Convenient stores Supermarket Pizza take-out stores (can be part of the fast food chains) –Other kinds Family restaurants (many of them offer fast food service like a coffee shop) Dinner houses Fine dining restaurants Ethnic restaurants like Chinese and Mexico food Casual dining like Hard Rock Cafe

Chapter 4: Restaurant Economics (3) Fast food restaurants: –$75.6 million sales in 1992 as compared to $98.8 million sales for other types of restaurants –The big fortunes in the food service business have been made in fast- food. Fast-food franchising builds on three well-established business phenomena –Product standardization (cookie cutter approach) –Economies of scale –Mass marketing McDonald’s is a build-on system-a system for doing everything: –High profile advertising –Low labor costs (30% of the sales) –Standardization (purchasing and portion control)

Chapter 4: Restaurant Economics (4) Technology in the franchising management: –Manually in the old days –Network today: computers are linked from the franchisors to the franchisees Efficiency in fast food chains –McDonald’s is a build-on system: three well-established practice –See P83 top of the page and P87, Fig.4-1 (profit before income taxes) –Competition to the fast food chains Food at home –Factors: gas, time, health, taste, food cost at home Other kinds of restaurants Convenient stores and supermarkets

Chapter 4: Restaurant Economics (5) Other types of restaurants –Family: e.g. Denny’s –Fine dinning (under 100 seats) –Dinner house (considered luxury) –Casual dinning (Hard Rock Café) –Ethnic restaurants High Risk of Failure –High failure rate Reasons –Too many restaurants (supply outpaces demand) –Easy entry –Owners are typically not well-educated and know how to manage 27% fail during the first year 50% at the end of three years 60% by the end of five years

Chapter 4: Restaurant Economics (6) Economic measures in restaurant operation –Prime costs Food Labor Profitability: keep the prime cost below percent of sales. (see p. 86 for more details) –Breakeven analysis –Seat Turnover –Employee theft –Foresting restaurant sales –Restaurant Finance

Chapter 4: Restaurant Economics (7) Breakeven Analysis: estimation of the sales volume needed to break even and the profit that can be made at various levels of sales –Identify various types of costs (see p. 87 for examples) Fixed cost: not changed with sales Variable cost: changed with sales Semi-variable cost: partially fixed, partially variable –Breakeven chart (see p. 89)

Chapter 4: Restaurant Economics (8) Seat Turnover: the number of times a table is reoccupied by a customer –It is a widely used measure for the restaurant operator. –Could be as high as seven times during the rush lunch hour and as low as once or twice an evening in a luxury restaurant. –The fast-food operator wants the customer in, served and out as soon as possible –The luxury restaurant, on the other hand, wants the customer to linger, select expensive wine and order a complete meal. –Serving speed correlates with check average; mid range priced restaurants about 2-3 times of seat turnover in an evening. The luxury ones may be just once or twice.

Chapter 4: Restaurant Economics (9) Forecasting restaurant sales –Varies with the week and season. Table service restaurants high on weekend; as high as account for one-half of all weekly sales. –Purpose of sale forecast For food purchase Labor scheduling Revenue control marketing

Chapter 4: Restaurant Economics (10) Restaurant Finance –Larger restaurant chains raise capital through stock sales –Independent operator gets funds wherever possible. –Restaurant buildings and equipment are more often leased than purchased.