Michigan State University Extension
Tourism Educational Materials - 33702004
06/06/02
Restaurant Market Analysis
University of Wisconsin-Extension
1994
Goodpasture, John; Ryan, Wm.; Boger, Carl;
Buergermeister, James; Way, Wm.; Kempen, Alice; Weyer,
George
Market conditions in your area have a significant impact
on the profitability of your restaurant. The strength of
the local market affects how many customers you will
serve and the menu prices that you can charge. This
guidebook will help you analyze your market so that you
can gauge the potential of your existing or proposed
operation and make more informed operating and investment
decisions.
On the pages that follow are a series of checklists to
help you collect and analyze information as part of a
restaurant market analysis. The checklists, tailored to
the restaurant industry, will serve as a learning tool to
help you understand the many market factors that impact
your profitability.
Types of Questions Answered
By conducting a market analysis, you will be able to
answer questions such as:
* What trends are emerging in the food service industry?
* What are the strengths and weaknesses of my
competition?
* Is my location suitable?
* Does my concept fill a niche in the market?
* What is the potential number of customers I can serve
per year?
This guidebook is designed to provide you with an
industry-specific market analysis format that can be used
in a feasibility study, business plan or marketing plan.
It can be used to analyze the market potential of an
existing operation, an expansion or a new development.
Existing operators can use a market analysis to identify
opportunities to improve sales. The analysis can provide
valuable information on market conditions to help in
forecasting and budgeting. It also provides a foundation
for an effective marketing plan.
Prospective operators can use a market analysis to
project sales volume for a new restaurant venture. The
analysis can provide essential information required
in a business plan or feasibility study. The risks of a
business investment are lessened by careful analysis of
the market.
Using your market analysis findings, you can estimate the
financial potential of your venture by creating financial
projections. If you are a prospective restaurateur, these
projections will help you determine if your venture
is feasible. Guidebooks and software for developing
restaurant financial projections are available through
University of Wisconsin-Cooperative Extension.
Conducting Your Analysis
The sections that follow include data collection
checklists and work sheets. While the section on
projecting sales should be the final step, the other
sections can be completed in any order. Remember that
your efforts in studying the market will provide you with
information to make better, more informed decisions. Good
luck.
I.Industry Trends
Studying industry trends is one of the first steps in
conducting a market analysis. It will help you identify
opportunities and threats in the industry that may affect
your profitability. Consider the following Food Service
Industry 2000 Trends, reported by the National Restaurant
Association:
* Consumers will spend a greater portion of their food
dollars away from home;
* Competition in the food service industry will be more
intense as growth continues;
* Major food service chains will increase their shares of
both sales and units;
* Independent operators will be the main source of new
restaurant concepts;
* Nutritional concerns will be critical at all types of
food service operations; and
* Service will become a more important point of
differentiation.
Studies on consumer eating and drinking patterns are
available from various sources. Such studies report
trends in consumer attitudes and behaviors regarding food
away from home.
The following are some of the sources of industry trends
data available to you:
* National Restaurant Association (for publications, call
800-526-6662);
* State and local restaurant associations*;
* Industry groups (such as the International Food Service
Manufacturers Association);
* Hospitality Industry Databases (available at many
colleges and universities that offer a hospitality or
tourism program);
* Industry publications (such as the Cornell Hotel and
Restaurant Quarterly, Restaurant Business, and Wisconsin
Tourism Digest).
* In Wisconsin, contact the Wisconsin Restaurant
Association, 31 South Henry, Suite 300, Madison, WI
53703-3243, 608-251-3663.
The industry trends checklist provides a sample of topics
you might want to study as part of your market analysis.
INDUSTRY TRENDS CHECKLIST:
Growth in Industry Sales
- Quick-service vs. table-service
- Chain vs. independent
- Types of restaurants (steakhouses, ethnic,...)
- Catering
- Deli, bakery and takeout operations
- Monthly/seasonal dining out patterns
- Industry sales outlook
Market Demand
- Economic trends
- Consumer confidence
- Demographic trends
- "Food away from home" trends
- Factors that motivate one to dine out
- Eating habits of different market segments
Menu Preferences
- Appetizers/soups
- Entrees
- Sandwiches
- Desserts
- Nutritional concerns
- Menu pricing
- Alcoholic beverage consumption
- Seafood, red meat and poultry trends
- Vegetarian trends
Restaurant Success Factors
- New and popular concepts/themes
- Customer service innovations
- Pricing practices
- Food production methods
- Labor saving techniques
- Debt-to-Sales ratios and other statistics
Legislative and Regulatory Issues
- Business meal tax deductibility
- Health insurance
- Wage and hour requirements
- Americans with Disabilities Act
II. Market Area
Demographic and economic statistics will help you
determine the restaurant sales potential of your market
area. By comparing your area with other areas and the
state, you will be able to evaluate the strength of your
market area.
The first step in this analysis is to define the
geographic size of your market area. Be reasonable in
estimating how far people are willing to travel to your
site.
Once your geographic market area is defined, you should
obtain demographic data that describes the people who
live and work in the area. Are there many affluent
singles? Elderly with discretionary income? Families?
Descriptions of the population's age, income, education
and gender will help you understand the area you plan to
serve.
Obtain economic statistics on business growth, eating and
drinking place sales and tourism visitation. They
indicate the overall economic health of the market area.
This is important since restaurant sales are related to
local economic conditions.
Data on your market area is available from various
sources such as:
- Bureau of Census, U.S. Dept. of Commerce;
- State and local economic development agencies and State
Data Centers;
- Small Business Development Centers;
- County Extension offices;
- Local Chambers of Commerce;
- Source book of Zip Code Demographics; and
- Sales and Marketing Management.
In addition, you should also determine the dining out
behaviors and preferences of local residents. By
listening to local residents, you can learn about their
favorite foods, frequencies of dining out, and preferred
restaurants.
The market area checklist will help you collect data to
evaluate your market area. Expand this checklist so that
it includes all information relevant to your proposed
restaurant.
MARKET AREA CHECKLIST:
Geographic Market Area
- Market area radius (one-, two-, three-miles, etc.)
- Plot market area boundaries on a map
Demographic Characteristics*
- Population
- Age distribution and median age
- Gender
- Ethnic groups
- Household income distribution
- Marital status
- Dwelling types
- Households with children
- Education
Economic Characteristics*
- Eating and drinking place sales
- Restaurant Activity Index (RAI)**
- Restaurant Growth Index (RGI)**
- Employment levels
- Types of employment
- Number of and growth in business establishments
- Local developments planned
- Seasonality and tourism visitation
Labor Market Characteristics
- Local wage rates
- Availability of labor
- Types of labor available
Dining Out Preferences and Lifestyles of
Local Residents
- Interview with local residents
- Observe eating habits in other restaurants
* County Extension offices often have access to
this data for local communities. In Wisconsin, the
WISPOP system provides historic data and projections
compiled by the Applied Population Lab in Madison.
** RAI compares food store sales to restaurant
sales to indicate a population's likelihood to dine away
from home. RGI describes an area's restaurant supply
and demand situation. These statistics may be obtained
from industry associations and from trade publications.
Ill. Competition
Existing market area restaurants can provide valuable
information to help you analyze demand and market
opportunities. You can assess their competitive strengths
and weaknesses and learn from their successes and
failures.
First, identify how many restaurants are in your market
area. Then, identify those restaurants that appeal to the
types of customers (market segments) that you plan to
serve. You should also identify all other restaurants
located in your immediate area because they can also
impact your business. Consider including bar and grills,
catering services, food delivery services, grocery stores
with deli, etc. Refer to the Yellow Pages and your local
Chamber of Commerce for listings of area food-service
operations.
It is important to identify any market area restaurants
that have closed, and for what reasons. Also, learn what
new restaurants are planned for the market area and
determine how they might affect your operation.
After identifying your competition, visit and evaluate
each restaurant. Speak with the manager of each
operation, if possible. Use the competition checklist as
a guide for taking notes.
Competition Checklist:
Location
- Community traffic patterns
- Proximity to sources of demand
- Accessibility
- Visibility
- Surrounding neighborhood
- Parking availability
- Sign visibility
Appearance/Comfort
- Exterior appearance and theme
- Interior appearance and theme
- Atmosphere
- Cleanliness
- Heating and ventilation
Menu
- Theme
- Variety and selection
- Signature items
- Price range and value
- Beverage service
Food Quality
- Taste
- Presentation
- Portion size
- Consistency
Service
- Days open
- Hours of operation
- Service style
- Quality of service
- Speed of service
- Extra services offered
General Information
- Seating capacity
- Number of customers by meal period
- Types of guests served (age, income, origin..)
- Is business increasing or decreasing?
- Banquet facilities
- Entertainment
- Franchise affiliation
- Reviews by food Critics/Ratings
- Local reputation
- Advertising and promotion methods used
Overall
- Strengths
- Weaknesses
IV. Location
Location is a critical consideration because it affects
your ability to draw customers. It is important that your
site be visible, accessible, convenient and attractive to
your market. How you evaluate your location will depend
on the type of restaurant you are operating or planning
and the type of customers you hope to serve.
Two major choices face prospective restaurateurs: What
kind of restaurant should I open and where should I open
it? Typically you will have already selected either a
location or a concept for your restaurant. It is
important that your location and concept complement each
other. It is critical that a site be chosen based on
market factors, not because of a low price or rent.
Different types of restaurants will have different
location requirements. However, certain elements should
be analyzed regardless of the type of restaurant you are
planning. Consider the factors listed on the location
checklist. Be sure to consider other location criteria
relevant to your particular restaurant idea.
Location Checklist:
Description of immediate Area
- Residential and commercial profile
- Adjacent land uses
- Proposed developments
- Safety
- Special appeal of location
- Map of area (identify sources of demand, competition
and other relevant landmarks)
Proximity to Customers and Competition
- Major demand generators (retail, offices, lodging,
hospitals,...)
- Number of potential customers by segment within one-,
two-, three-mile radius, etc.
- List of direct competitors
Traffic Volume
- Street and road patterns
- Speed limit and traffic signs/lights
- Highway/street traffic counts
- Pedestrian traffic counts
- Peak and off-peak traffic periods
Accessibility
- Proximity to major streets and highways
- Ease of entrance and exit
- Parking (guests and delivery)
- Pedestrian accessibility
- Americans with Disabilities Act (ADA) compliance
Visibility
- Visibility from road
- Effectiveness of sign
- "Curb appeal" of building
- Landscaping
- Exterior lighting
Other Issues
- Zoning
- Environmental issues
- Easements and restrictions
- Growth patterns of surrounding areas
V. Concept Refinement and Evaluation
If you are a prospective restaurant operator, it is
essential that you understand customer preferences when
developing a concept. It is important to realize that
concepts appropriate for one area may not be appropriate
for another. Using data already gathered, this section
will help you refine your concept and evaluate its
suitability for your market area.
Refining your Concept
Concept involves the entire dining experience, not just
the type of food offered. Elements that define a
restaurant's concept include the name, decor, lighting,
menu, food preparation and presentation, service, price,
location, and size.
To help you refine your restaurant idea, write a concept
statement that describes your proposed operation in one
or two sentences. Then, use the elements in the concept
refinement work sheet to expand upon your concept
statement.
Evaluation of Concept in Market Area
The following questions will help you determine if your
concept is suitable for your market area. Use information
from earlier sections to answer them. Conduct additional
research if necessary.
* What segments of the population are you targeting with
this concept? Consider age, income, marital and family
status, and other relevant demographic characteristics.
* How large are these market segments within your market
area? Is the market growing?
* What share of the market can you reasonably expect to
capture?
*Will this customer base be large enough to support your
operation?
Concept Refinement Statement:
Concept Statement:___________________________
_____________________________________________
_____________________________________________
Restaurant Name:_____________________________
Independent or Chain Affiliation:____________
Theme (ethnic, regional,..):_________________
_____________________________________________
Atmosphere/Decor:____________________________
_____________________________________________
Menu (sample appetizers/soups, entrees and desserts):
____________________________________________
____________________________________________
____________________________________________
Signature Items on Menu:____________________
____________________________________________
Food Preparation/Presentation/Portions:_____
____________________________________________
____________________________________________
Beverage Service:___________________________
____________________________________________
Service:____________________________________
____________________________________________
Banquets/Catering:__________________________
____________________________________________
Entertainment:______________________________
____________________________________________
Price Range:
Breakfast:_______________________
Lunch:___________________________
Dinner:__________________________
Number of seats:_________________
Hours of Operation:______________
Overall, concept is different and unique because:
________________________________________________
________________________________________________
________________________________________________
VI. Projecting Your Sales Potential
At this point in your market analysis, you have completed
your data collection. You have analyzed industry
trends, market area demographic and economic statistics,
competition, the suitability of your location and
restaurant concept. You are now ready to estimate your
sales potential based on these factors.
Sales in a restaurant are a function of the number of
customers you serve (covers) and spending per person
(average check). A key indicator of future sales
performance is past sales performance. Existing
restaurants can rely on their historical records for this
information. Prospective operators must look to
comparable restaurants for data on their past
performance.
While there are no formulas for calculating your sales
potential, your prior research will help you make more
informed and reasonable estimates. The steps that follow
will help you estimate your covers, average check and
sales potential.
1. Review Your Competitive Position
A review your restaurant's relative strengths and
weaknesses will help you to determine your competitive
position in the market area. Compare your operation with
your competition using the criteria below. Be sure to
keep in mind your concept and the types of customers you
hope to attract.
Competitive Strength<-----------> Competitive Weakness
Concept/Theme
Proximity to Customers
Traffic Volume
Accessibility
Visibility
Atmosphere
Menu Appeal
Food Quality
Service Quality
Entertainment
Reputation/Reviews
Franchise Affiliation
Pricing
Hours of Operation
Management
_______________
_______________
_______________
2. Project Customer Volume
With an understanding of your competitive position in the
market and with estimates of volume of other operations,
you are ready to make projections of your customer volume
potential. The customer volume projection work sheet will
help you estimate how many customers, or meal "covers,"
you will serve. The following instructions will help you
complete the work sheet.
1. Divide your operating year into seasons that describe
the variability of your business (peak-season,
middle-season and off-season). Enter the number of weeks
in each season in the appropriate box.
2. For each season, estimate the number of daily covers
for each meal period. Sum the daily covers to determine
the weekly totals.
3. Calculate the number of covers per season by
multiplying the projected number of weekly covers by the
number of weeks in that season.
4. Sum the totals from each season to determine your
annual covers.
Breakfast Lunch Dinner Total
Covers Covers Covers Covers
Peak Season: # Weeks___
Monday
Tuesday
Wednesday
Thursday
Friday
Saturday
Sunday
Weekly Total
Peak Season Total
Middle-Season: # Weeks___
Monday
Tuesday
Wednesday
Thursday
Friday
Saturday
Sunday
Weekly Total
Middle-Season Total
Off-Season: # Weeks___
Monday
Tuesday
Wednesday
Thursday
Friday
Saturday
Sunday
Weekly Total
Off-Season Total
Total Year
3. Project Your Average Check
Average Check includes both food and beverage sales. It
should be projected for each meal period as there can
be significant variations among breakfast, lunch and
dinner menu prices.
Be sure your average check for each meal period
represents an affordable and acceptable price-value that
is consistent with your concept and the target markets
you hope to attract. Pricing should be competitive with
other similar restaurants in your market area.
4. Project Your Sales
Sales are calculated for each meal period by multiplying
your projected number of covers by the average check.
Use the following work sheet to calculate your projected
annual sales.
Breakfast Lunch Dinner Total
Covers _______ ______ ______ _______
x Average Check______ _______ ______ _______
= Annual Sales ______ _______ ______ _______
When you are done, compare your annual covers, average
check and sales projections with industry averages of
similar. operations. If reasonable, use your sales
projections as performance goals for the future.
The Next Step: Financial Projections
Once you complete your market analysis, you will be
better equipped to develop realistic financial
projections for your proposed restaurant. If you are an
existing operator, these projections serve as a financial
plan or budget. If you are a prospective operator, these
projections will help you determine the financial
feasibility of your venture. To help you develop
restaurant financial projections, guidebooks and
spreadsheet software templates are available through the
University of Wisconsin Cooperative Extension. For more
information, contact the Tourism Research and Resource
Center, University of Wisconsin Cooperative Extension,
610 Langdon Street #233, Madison WI 53703.
This guidebook was written by John Goodpasture and
William Ryan, Tourism Research and Resource Center,
University of Wisconsin Cooperative Extension, with help
from Carl Boger (University of Wisconsin-Stout), James
Buergermeister (University of Wisconsin-Stout), Alice
Kempen (University of Wisconsin Cooperative Extension,
Rhinelander), William Way (University of Wisconsin-Stout)
and George Weyer (University of Wisconsin-LaCrosse,
Business Outreach).
Assistance was provided by Karen Marvin of the Tourism
Research and Resource Center. Support was provided by the
University of Wisconsin-Extension, Small Business
Development Center.
UW-Extension provides equal opportunities in employment
and programming, including Title IX requirements.
University of Wisconsin-Extension, United States
Department of Agriculture and Wisconsin Counties
Cooperating. A partner in education with the University
of Wisconsin-Extension and the U.S. Small Business
Administration. If you need this material in an
alternative format, please contact the program
coordinator or the UWEX Affirmative Action Office.
William Ryan
Center for Community & Economic Development
University of Wisconsin - Extension
1327 University Avenue
Madison, WI 53715-1054
E-mail - ryanw@aee.wisc.edu
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