Buying a Restaurant Business - The Industry Outlook and Market Trends
Buying a restaurant can be both rewarding and challenging. The industry is still growing strong and many owners remain optimistic even as they are faced with rising labor costs, employee recruitment and complex business regulations. New technologies are continually being introduced and adopted. Food trends are becoming more concept-based than ingredient-based, with more focus on production, sourcing and preparation. Additionally, as food decisions become more complex, diners will increasingly expect menus to meet their dietary preferences.
Is there a strong demand for restaurant businesses?
Overall growth for restaurant businesses remains steady and there is an incredible opportunity for growth in the future. Americans are increasingly interested in dining out more often. Even as consumers remain budget conscious, they still want to dine out and many are looking towards alternative options, such as pop-up restaurants and food trucks.
- Labor market remains steady. As job growth continues to remain steady, wages and household disposable income are expected to rise accordingly. As this trend continues, we could expect to see an increase in restaurant spending.
- Franchise restaurants are catching on. Chain restaurants make up of more than a third of restaurant businesses in the US. Franchises that offer a variety of dietary needs and healthy alternatives are in higher demand. Young and old alike are looking for these brands to offer fresh, local ingredients as well as a dining out “experience.”
- Pent-up demand remains elevated. Consumer, though more relaxed than in the past, remain more cautious with their spending habits. Many say they would like to visit restaurants more often. This elevated pent-up demand, which has continued into economic recovery, cuts across all income levels, but is higher among baby boomers and low income households.
- Millennials are more discerning. Millennial consumers have brought an increase demand for more dynamic brands and standalone restaurants.
Where is the biggest market for restaurants?
The restaurant business serves all types of demographics, yet millennials are driving the trends. Most of the growth has been in the Pacific, South Atlantic and Mountain states and at “eating places” which includes buffets, limited and full-service restaurants. Restaurant sales also largely correlate in areas with wealth, large disposable incomes and lax consumer spending habits.
- Pacific, South Atlantic and East North Central states seeing the most growth. Florida, California and Texas are the top three states for growth and revenue in the restaurant industry. These also happen to be the ones with higher employment rates and real disposable personal income.
- Educational and lodging places are major players. Aside from full service restaurants, the food service sector is also seeing growth. Many of these establishments reside in office buildings, colleges and hotels.
How do restaurant businesses generate most of their revenue?
Most restaurants make their profits off beverages and lowering food costs. Yet, consumer tastes are changing. More than two thirds of consumers say that they’d prefer to spend their money on experiences, including dining out. They have higher expectations for what they want out of the dining experience and restaurant operators are keeping up with trends, at the expense of rising food costs.
- Finding and maintaining talent. Recruiting and retaining quality employees will remain competitive as restaurants look to improve consumers' dining experience. As employment levels rise and the economy improves, more vacant spots will need to be filled.
- Managing food costs. For many restaurant operators, food costs are a major concern and influences what they offer on their menus to maintain a healthy profit.
- Creating an experience for diners. The establishments itself is what often first attracts customers, such as a rustic coziness, soft lighting, comfortable seating and interesting decor. Pleasant surrounds with good food and good service attract more sales.
- Continually modify or expand the menu. To keep with discerning tastes, restaurant businesses continually revamp or add items. This includes trends in ethnic ingredients, consumer interest in diet-specific foods, and more menu variety.
- Using innovative ways to attract customers. As pent-up demand remains elevated, owners are using creative ways to encourage customer spending, such as social media marketing, highlighting exceptional food quality, value, and other marketing tactics.
What types of services do restaurant businesses provide?
The restaurant industry is comprised of three sectors: commercial restaurant services, non-commercial restaurant services and military restaurant services. According to the National Restaurant Association, the majority of commercial restaurant food service sales are generated from eating places, the majority of which are full-services restaurants. Yet, quick-serve and fast-casual restaurants are the growth leaders.
- Eating and drinking places: 70% of all food service sales are in commercial eating and drinking places, including full-service restaurants, limited service and quick-serve restaurants, cafeterias, buffets, fast-casual restaurants, as well as bars and taverns.
- Managed services: This commercial sector includes food services at manufacturing plants, commercial and office buildings, hospitals, educational institutions, in-transit services (airlines), as well as recreation and sports centers.
- Lodging places: This commercial sector includes hotel restaurants and other accommodation restaurants.
- Non-commercial services: This sector includes employee restaurant services, educational institutions, transportation, hospitals, nursing homes, clubs, sporting and recreation camps, and community centers.
- Military restaurant services: This sector includes officers’ and NCO clubs (open mess) and military exchanges.
As the economy grows and disposable income rises accordingly, the restaurant industry is expected to remain strong. Yet, discerning tastes and customer demand for better dining experiences continue to put pressure on profitability. Restaurant businesses can expect to cater to dietary needs, food trends, as well as integrating the use of technology in order to keep up with growing competition.
Understanding the restaurant business and the outlook of its industry is a great step in the right direction. Continuing on, it would be prudent to start looking at restaurants on sale, or think about buying a food and restaurant franchise.
“2017 State of the Industry,” National Restaurant Association, Print edition: 978-1-931400-94-7, Digital edition: 978-0-9978029-0-0, National Restaurant Association 2017.
“Total U.S. Restaurant Count at 660,755 in Spring 2018, a One Percent Drop From Last Year, Reports NPD”, NPD, 22 August 2018, NPD Group, Inc., https://www.npd.com/wps/portal/npd/us/news/press-releases/2018/total-us-restaurant-count-at-660755-in-spring-2018-a-one-percent-drop-from-last-year-reports-npd/, Accessed September 2018.