Porter’s five forces is a valuable tool to understand the dynamics of an industry. The application of the five forces on restaurant industry is discussed as below:
Threat of New Entrants
Setting up a new restaurant requires moderate level of investment, making it an easy to enter industry. Another factor which affects the ease of entry for new restaurants is economies of scale, which can be established once the production and other operations achieve efficiency (Lee-Ross & Lashley, 2010). The new entrants also have to consider the fixed cost and operating cost, making sure that they are able to establish cost advantage (Hill & Jones, 2014). One possible way the new players in this industry attain cost advantage is through making bulk purchases and getting discounted prices. However, the high fixed cost remains a concern for the new entrants, who have to manage their operations, despite having low profitability in the initial stage of business. Keeping these points into view, it can be stated that the restaurant industry has moderate threat of new entrants.
Bargaining Power of Buyers
Besides the new entrants, the bargaining power of buyers is another important factor to consider. Since the buyers hold the power to influence the pricing decisions of a company, the restaurant industry is also affected by the buyer’s choice and switching behavior (Adhikari & Rao, 2013). Some of the ways through which buyers can effect a restaurant are the changes in prices, the items offered by a restaurant, the quality of the items offered etc. However, the restaurants can’t offer over priced items, because that will limit their number of customers. The prices need to be adjusted according to the target market and the affordability of that segment of the market. Based on this analysis, it can be concluded that buyers have a moderate bargaining power in the restaurant industry.
Bargaining Power of Suppliers
The suppliers in this industry include the companies provide raw material to the restaurants. According to Chong et al. (2001), the number of suppliers in an industry determine the influence a supplier can have on the purchase decisions of its buyer companies. The regions which are marked with a high number of suppliers of similar raw ingredients, the suppliers have lower power as compared to regions where suppliers are fewer in number. The size of a restaurant is also a determining factor when it comes to the bargaining power of suppliers. Small scale restaurants create a higher supplier power because of the limited order they can generate, while the suppliers have a weaker negotiating position with large scale restaurants which place bulk orders. In order to maintain their business ties with the large firms, the suppliers have to adjust the price of raw material according to the demand of these businesses.
Threat of Substitute Products
The restaurant industry has various entities, making it easier for the customers to make a choice while switching from one restaurant to another. The low switching cost is another factor which makes it easier for a customer to shift their loyalty from one brand to another (Chong, Chen & Chen, 2001). The restaurants can charge a premium price from customers who are focused on quality and amazing dine in experience, while those customers looking for more economical choices opt for a cost effective outlet (Solomon, 2018). The ease of switching from one restaurant to another, in case if the experience is not according to customer expectations makes this industry having a high threat of substitute products.
Competitive Rivalry
The higher the number of competitors, the more intense would be the competitive rivalry in the restaurant industry (Chong et al., 2001). These players in the industry strive to keep a larger share in the market than their rivals, while maintaining a flow of profit and supporting the business towards growth. Therefore, the restaurant industry has high threat of rivalry, which makes it hard to maintain high profitability for smaller restaurants. The restaurant industry has intense competition owing to the presence of fast food franchises and numerous small scale establishments. The fast food giants having greater budget of marketing and product innovation are able to maintain an edge over their smaller counterparts. Moreover, there is little customer loyalty so people switch from one restaurant to another according to their demand and preference.
References
Adhikari, A., & Rao, A. K. (2013). Individual preference and bargaining behavior in families’ buying decisions of restaurant service. Cornell Hospitality Quarterly, 54(3), 248-261.
Chong, P. P., Chen, Y. S., & Chen, C. J. (2001). IT induction in the food service industry. Industrial Management & Data Systems, 101(1), 13-20.
Hill, C. W., & Jones, G. R. (2014). Strategic management: theory: an integrated approach. USA: South-Western Cengage Learning.
Lee-Ross, D., & Lashley, C. (2010). Entrepreneurship and small business management in the hospitality industry. USA: Routledge.
Solomon, M. (November 18, 2018). Only The Customer Gets To Decide What Matters In Customer Service And Customer Experience. Forbes. Retrieved from https://www.forbes.com/sites/micahsolomon/2018/11/18/the-customer-gets-to-decide-what-matters-in-customer-service-and-the-customer-experience/#4f5bd3b069db