Red Robin Gourmet Burgers, Inc., together with its subsidiaries, develops, operates, and franchises casual dining restaurants that serve gourmet burgers in the United States and Canada. As of December 30, 2007, the company operated 384 restaurants, of which 249 were company-owned, and 135 were operated under franchise agreements, including 1 restaurant that was managed by the company under a management agreement with the franchisee. As of the above date, Red Robin Gourmet Burgers, Inc. had restaurants in 40 states and 2 Canadian provinces. The company was founded in 1969 and is headquartered in Greenwood Village, Colorado (RGB, 2009).
Red Robin is a member of the foodservice industry. Foodservice is defined as the sale of food and drinks for immediate consumption either on the premises from which they were bought, or in designated eating areas shared with other foodservice operators, or in the case of takeaways transactions, freshly prepared food for immediate consumption (Datamonitor, 2008).
Porter’s Five Forces Analysis
The Threat of New Entrants
This is an area that puts Red Robin under pressure. Although there are some barriers to entry, there are also many things that make this an easy market to enter. This puts them under constant pressure to differentiate themselves from all of the other foodservices facilities they are surrounded by. When people are going out to eat, they consider a lot of other restaurants in their decision. The number of substitutes in this industry is very high, and that is due to the low barriers to entry.
All of these things considered, there are still many small barriers that would deter someone from entering this industry. The three main barriers faced by possible entrants are rising food prices, economies of scale, and the fact that this is already a heavily populated market that has reached maturity. Although these are not as strict and unmanageable as government-enforced barriers, they are still strong deterrents to possible entrants.
Rising food prices is affecting everyone in this industry. It not only affects the direct substitutes (other restaurants) of Red Robin, but it also affects their indirect substitutes (grocery stores, restaurants that deliver, etc.). When the price of food is increasing, it increases the costs of operating a new restaurant, and takes away from the ability of a new entrant to offer lower prices than their competition to gain a market share. Increasing prices decreases all the competitors’ margins, and makes a low-ball strategy difficult to execute. This becomes increasingly more difficult for a new entrant because Red Robin’s expenses are much less due to economies of scale.
The issue of economies of scale is something that almost all businesses face. The more restaurants you are operating and the more food you are selling, the more food you are purchasing from your suppliers. This gives Red Robin more bargaining power over their suppliers than a smaller company would have, and this reduces their costs of sales and allows them to work on higher margins. This makes it increasingly difficult for new restaurants to enter the industry in times of rising prices.
The final consideration that possible entrants need to make is the stage that the market is in. This particular market has been around for an extremely long time and is very densely populated. It is in the mature stage of the industry life cycle. Entering a market that is fully mature and densely populated is not something that is easy to do, and you must have something that really differentiates yourself from everyone else. The nature of the food industry is that everyone does the same thing (serves food), and this makes it difficult to have any type of competitive advantage. The fact that it is near impossible to sustain a competitive advantage in this industry is a big deterrence and a barrier that all new entrants must face.
Although there are many barriers to this industry, there are also many elements that make this particular industry very enticing to possible entrants. Some of these enabling factors are low asset specificity, an abundant amount of suppliers, low levels of capital, and the inability to establish a true competitive advantage.
Low asset specificity is a big factor to consider when entering a market. This is your exit strategy. If things start going south, companies need to know that they have a way out. If they can easily get rid of their assets, this greatly reduces their exit costs. Most restaurants have a facility (which is leased a lot of the time), and these facilities can be used in many different ways and for many different purposes. This is something that is easy to get rid of if you need to. The most specified assets you will usually have are the cooking equipment and tools. Even these assets can be used to make many different types of food and moved to different locations. This allows them to be easily sold during times of liquidation. All of these things contribute to the low specificity of assets in this industry.
Another factor that makes this market appealing is the limitless amount of suppliers. There are many different places to get the supplies that you need to make your food. This allows you to search around to find you cheapest and most quality options. It also ensures that you are getting competitive prices on your supplies because the supplying industry is also mature and very densely populated. This gives possible entrants a sense of confidence that they will be able to keep variable costs low.
Another issue to consider is the fact that there are relatively low levels of capital involved in running a restaurant. This allows entrants easy access to this market, because it does not require very much cash, and less capital is at risk in comparison to many other industries. This increases the number of people that have the capabilities to enter this market. This is a large contributor to the density of this market. Low levels of required capital make it very easy to enter.
The final issue to consider is the inability to maintain a true competitive advantage. This was listed as a barrier, but it is also a contributor to the markets attractiveness. It makes possible entrants believe that they can compete with even the largest of restaurant chains. Their food can taste just as good, and their environment can be just as fun. Everything can be easily duplicated, and this allows everyone to compete with everyone.
Although there are several factors that make this industry difficult to enter, there are far more that make it a simple one to enter. Everyone can compete with everyone, and no one can truly establish a competitive advantage. It is also inexpensive compared to many other industries. The restaurant industry is a very easy one to enter, and this forces Red Robin to be continuously innovating in their marketing strategy to appear better than the rest of the competition. Without doing this, they will lose customers, and in turn, they will lose their market share.
Bargaining Power of Suppliers:
It is understood that if suppliers are giving their customers a commodity good than the suppler holds little power. This is because there are great chances of more than one supplier supplying that commodity. With that being taken into account we can now look more in depth at the bargaining power of suppliers in the foodservice industry. By doing this we can better understand why the suppliers do not hold an extreme amount of power. In the following situations the buyer is Red Robin and the suppliers consist of those providing the food to Red Robin.
If there are only a few large suppliers and they are more concentrated than the industry to which they sell then the supplier holds power. In the foodservice industry there are fewer suppliers than there are firms. In this situation the suppliers hold more power because they represent a higher percentage of the industry in comparison to an individual firm such as Red Robin.
In the foodservice industry there are a number of satisfactory substitutes available, and because of this the buyer holds power. There are a number of different suppliers in the industry that offer comparable products, thus providing the buyer with more power. For example, if the supplier of Red Robin’s hamburger buns decides to raise prices, Red Robin could either get a new style of bun or buy from a different supplier. This places power in Red Robin’s hands.
In the foodservice industry suppliers’ goods are critical to the buyer’s market place success; as a result the supplier has power. Without the food products being supplied to Red Robin they would have little success. They would not be able to stay in business if they could not get suppliers to sell them the food products needed to run their everyday operations.
The products supplied to the foodservice industry are for the most part standardized, and as a result the suppliers hold power. Like most of the industry, the food products supplied to Red Robin are standardized. The process could be very easily duplicated. If one supplier refused to supply Red Robin it would be relatively easy to find another supplier to begin supplying the products.
The products supplied to the foodservice industry are all commodities, and this means the buyer holds power. These commodities consist of many items including meat patties, hamburger buns, and chicken breasts. Since the items are commodities it is easier to find different suppliers if Red Robin is unhappy with the one they are using.
From these situations we can see that both the suppliers and Red Robin hold power. However, because the products being supplied are commodities the suppliers hold little power. Although Red Robin may hold more power, they do not have enough to completely influence the activities of the suppliers, but their option to switch suppliers would be relatively easy.
**The following is a general supply chain for the foodservice industry and is not company specific. **
Raw materials (chickens, cows, grains, potatoes, etc)
Transportation
Processing facility (butcher animals/ mix and cook grains into baked goods/ slice potatoes into fries)
Transportation
Storage facility (cold storage for meats and vegetables/ dry storage for grains)
Transportation
Red Robin restaurant (prepare the food for consumption)
Customers go to Red Robin to eat prepared food
By dissecting the supply chain for Red Robin it is clear to see that they fall towards the very end of the chain. They must realize that they are close to being the end consumer of the products being supplied, but because they buy their goods in bulk for their restaurants they do hold some amount of power in the supply chain.
Bargaining Power of Buyers:
There are many ways to tell if buyers have power in any given industry. For Red Robin, who belongs to the foodservice industry, their buyers hold a certain amount of power. The following are a number of questions taken into account to come to such a conclusion. The buyers represent Red Robin’s customers and the industry/firm represents Red Robin.
The buyers of the foodservice industry purchase a significant proportion of output from restaurants in the industry, as a result the buyers hold power. The foodservice industry relies on its great number of buyers to purchase its output as a means for funding their operation. Red Robin relies solely on its customers to purchase their output because they do not have a retail division with in their company.
The sale of the products account for a significant portion of the seller’s annual revenue, as a result the buyer holds power. Red Robin’s sales of the products (meals/drinks/etc) account for a significant portion of their annual revenues. If customers/buyers decide not to purchase food and drinks from Red Robin there would be little chance of them avoiding bankruptcy.
Buyers incur little to no cost when switching to a new product or competitor, because of this the buyer holds power. Due to the over saturation of restaurants in the foodservice industry there is little to no cost of switching. Most of Red Robin’s restaurants are located in strip malls, busy down town districts, or near tourist attractions. Due to their location they are likely located near or next to a number of other comparable restaurants. All that is involved with switching is parking on the other side of the parking lot or walking an extra block to find a different restaurant such as Ruby Tuesday or Applebee’s. If Red Robin’s food is bad, the experience was not worth the price, or they just are tired of Red Robin there is no cost to switch to a different restaurant. They could even decide to cook their own meal at home.
The foodservice industry’s products are undifferentiated and standardize, and as a result the buyer holds power. For the most part in the foodservice industry offers the same thing. Each restaurant is offering a meal for a price. The differences between restaurants in the foodservice industry are what food is offered, the style of preparation, the experience being offered, and the price of the food just to name a few. Speaking in very general terms, at every restaurant, you go through a process that includes ordering food, receiving and eating food, and payment. Because each experience is based off of this the industry is pretty standardized.
There are many fragmented buyers that have little influence on product or price in the industry and as a result the industry or firm holds power. In the foodservice industry the buyers are very fragmented, and no specific customer holds any significant portion of purchases. However, the buyer does have some influence on the product and price. If the firm ignores the buyer’s dissatisfaction for the price or even the product they may find a different restaurant to eat at.
By taking these questions and situations into account it is easy to see that both the buyers and Red Robin have some amount of power. However, the buyers clearly hold more power in the relationship. Because of this Red Robin must continue to give the customers/buyers what they are looking for when they go out to eat. If Red Robin does not do this it is easy for the buyer to switch to an alternative or a competitor.
Threat of Substitute Products:
Due to the nature of the industry that Red Robin belongs to, there is a high threat of substitute products. Because of the high threat level, Red Robin must always be proactive not only in their food products but also in their pricing. If they price products too high their customers will result to buying substitute products. The problem that arises from this is that Red Robin may not carry that specific substitute. This means they would lose that customer to a substitute.
Substitute examples for Red Robin:
Beef patties for burgers- chicken patties, turkey patties, veggie patties, etc
French fries- side salad, mash potatoes, soup, bread, etc
Soft drink- water, juice, beer, wine, etc
Red Robin tries to remain competitive and reduce the risk of substitute products by creating a menu that offers a wide variety of food types. Red Robins menu has food ranging from burgers, fries, salads, Mexican, and Italian just to mention a few. In addition, they remain reasonably priced on all their meals. By offering a wide variety of food on their menus and pricing their meals competitively, Red Robin is able to reduce the threat of substitute products. However, they are not able to totally eliminate the threat, and due to the nature of the industry they will probably never achieve that.
Rivalry
Rivalry in the foodservice industry is high due to many factors including the large number of firms within this industry. Many firms are competing for the same market which creates struggles for leadership within this market. Rivalry is also generated from businesses that are not within the foodservice industry because consumers can make the choice to not go out to a restaurant to eat at all, and simply cook their meal at home. However in today’s fast paced society, the convenience factor of going out to eat in order to save time is generating growth in the foodservice industry sector, and with low barriers to enter and exit this market, rivalry has intensified.
There are also very low switching costs within the industry which increases rivalry. A customer could freely switch from one product to the other. The foodservice industry is very large and prices can vary immensely depending on the restaurant that a consumer might choose to go to. This alone creates immense rivalry amongst competitors within this industry.
The foodservice industry also has very low levels of product differentiation. A customer can purchase a hamburger and fries at any fast food restaurant and receive a similar product from each establishment. Brand loyalty definitely comes into play here because some people may favor McDonald’s over Burger King or Applebee’s over Red Robin. However the low amount of product differentiation amongst these establishments creates even more rivalry. Within a certain price range any consumer has many different businesses to choose from to eat at. The change in preference for any consumer could change on a day to day basis depending on mood or personal tastes. If a person can get a similar product at many places, they could be more likely to go to different establishments, rather than staying loyal to one.
PEST Analysis
Political
There are many important issues to consider when thinking about the political environment surrounding the restaurant industry. There are many laws and regulations that have been put into effect that change the ways restaurants must do business. This can add expenses, time, and difficulty to all of the individuals in the industry.
The main laws involved in the food industry are those regarding child and teen labor, minimum wage, tips, overtime, taxes, and food safety. A lot of these are also related to other industries. However, food safety is one that is very industry-specific. The food safety laws are very specific and have specific rules for each type of food. This can greatly increase your expenses, because of all of the addition care that must be taken due to these laws. Also, this requires more training of your employees to ensure that the food is properly taken care of. This can be a very expensive and time-consuming set of laws and regulations to follow.
The issue of taxes and tips is also something to consider. This requires extra accounting methods and can also increase time and expenses. The treatment of these tips is something that occurs behind the scenes, and most people do not consider it. However, it must be taken care of, and companies must leave room in their budgets for these additional accounting methods to consider.
Another issue that not only applies to the food industry, but all service industries is the Americans with Disabilities Act (ADA). All of their restaurants must be handicap-accessible to treat possible employees with disabilities fairly. This is also something that can add to the expenses of a restaurant because handicap accessibility is not always easily attained. They also must comply with the public health rules at the same time.
One overshadowing issue that is potentially harmful to this industry is that of genetically altered food. The restrictions on this type of food are much stricter in Europe, but there is still a battle going on in the United States around this issue. Genetically altered food is easier to grow, grows bigger, and is less expensive to maintain. This is why this issue is important. Although many haven’t “ seen evidence that genetically engineered foods now on the market are unsafe to eat,” (Guest, 2003) there are still those that believe they are. This can influence future laws and also the amount of customers they get if they serve these types of food.
This issue greatly influences the price of crops. Genetically altered crops grow much more easily. Pests are much less of a problem for these types of crops. This increases the survival rate and decreases the expenses for the farmers, which allows them to charge less. This issue is something that must be considered in this market. It is important for restaurants to make sure they have a say in this issue, because and can greatly reduce their margins and profits in the future.
There are many political issues to consider in this market. These are just some of the main ones. These issues can add expenses and time to the processes involved in the restaurant business, and that is why they are so important to consider.
Economic
A study done by the National Restaurant Association for the coming year projects that while overall restaurant industry sales will increase in current dollars by 2. 5 percent over 2008 figures; the numbers translate to an inflation-adjusted decline of 1. 0 percent. In regards to a whole industry, it is bearing the market crisis very well. With consumer spending down, the industry shows that it may be the last place some customers are willing to cut. According to the survey done by the National Restaurant Association, “ Forty-five percent of those surveyed said restaurants are an essential part of their lifestyle. One in three said they would like to eat out, buy takeout, or have food delivered more often. In other words, customers are cutting back, but reluctantly. So there is a lot of pent-up demand that can be tapped into with the right formula”(Lesonsky, 2009). Red Robin can capitalize on this demand by continuing to be strategic within their market niche; family friendly dining. With employment down Red Robin needs to create the association with value and the meals that people receive when dining at the restaurant. Along with the value position in the market, Red Robin must also be aware of the vast economic factors that influence not only their particular business, but the industry as a whole. Within the restaurant industry there are many economic factors that are contributing to its sustained development or decline. Those include employment issues, construction and supply costs, and the rising cost of food.
Restaurants and the food and beverage industry, which includes bars and night clubs, dine in family restaurants both full service and part, in total employ around nine percent of the United States workforce. This industry, which accounts for four percent of the Gross Domestic Product, has a significant impact on the U. S. economy as a whole. With rising labor costs and new rules and regulations about workers and working conditions, this can have a major impact on the Restaurant industry. Within this industry most employees are part time workers. There are however a few positions that are full time, such as, cooks and managers. Waiters, hosts and bus-people, are typically part time workers ranging from the ages of 16-44 (Bureau of Labor Statistics, 2008). However we can see a trend of younger workers entering these fields because of the low level of skills required for hire and the flexibility of the late night shifts, as some are students. The compensation of these workers usually is the state minimum wage and no benefits such as retirement, health insurance or dental insurance are provided. An Industry average wage for a wait staff member is $7. 08, compared to an average hourly wage of a first line restaurant manager which is $12. 22. As a result the turnover rate is very high in these fields, which can add to costs overall. However, with the unemployment rate at around 7% nationally there is no shortage of willing, under-skilled workers to hire. This could work to the industry’s advantage since they are less willing to negotiate upwards in pay and benefits and more likely to attempt to retain their positions.
The General Contractor industry plays a major role in the development of the Restaurant industry. Since the construction industry is based upon business cycles we are seeing a slight downturn in building over the last year. Since expansion is based upon demand, we can see that this industry is slowing slightly and simply maintaining the current number of restaurants they are building. A growing demand for building projects that use environmentally friendly and energy-efficient materials has spurred a green movement in the construction industry as well. This is something that consumers are looking for when they patronize a new restaurant and can also give a restaurant a competitive advantage within the industry as well as reducing overhead costs. With the push to go green, builders are now trying to use recycled materials and reduce their waste during construction. Since most consumers demand transparency in the business they affiliate themselves with, restaurants could in fact, when expanding, post how much of their restaurant is recycled and how little waste they used in building that new restaurant. By exposing their carbon footprint they are gaining the trust and respect of consumers who are very concerned with the environment. Along with building is the cost of the raw materials, such as lumber and other supplies. As we see a shift to the decline of building overall, we also see a decline in the prices of these raw materials. This could be, if the market sustains it, a good time to be building new restaurants since the cost is significantly lower because of the economic times.
Executive Director, Achim Steiner of the UNEP, stated early this year, “ We need to deal with not only the way the world produces food but the way it is distributed, sold and consumed and we need a revolution that can boost yields by working with rather than against nature,” added Steiner. The United Nations predicts that in the next 10 years food costs will have gone up 30-40% (The Economic Times, 2009). In the U. S. finished food costs have risen 3. 8%, along with the rise in proteins, flours and kitchen staples. This means the restaurant industry needs to be purchasing smarter and attempting to cut costs without sacrificing quality. They can do this by consolidating the products between vendors and purchasing locally.
Social
With the food supply chain now expanding globally, health and environmental concerns are placed at the feet of not only government officials, but also restaurants. With the recent outbreaks in contaminated food, more consumers are demanding the higher standards be met when inspecting food for mass consumption. Restaurants have been petitioning congress to vamp up safety precautions and to require safety plans to be submitted not only by local growers, but foreign as well. This would ensure that if a recall was necessary the grower would now face full responsibility since they deviated from their plan. “ The National Restaurant Association and its members are increasingly involved not only in ensuring safe food preparation inside the restaurant, but in driving changes all the way back through the supply chain, to take on a more influential role across the entire life cycle of food” (Donohue, 2009).
Along with the call to ensure safety of food served in restaurants, is the demand to serve healthier options to clientele. With the growing rate of obesity in North America the lower calorie options are attracting more and more customers who still wish to eat out, but stay on their diet. This could be a great market niche to expand upon and really differentiate your restaurant in the marketplace.
Another social factor impacting the industry is the desire to buy local produce. This of course is contingent upon where your restaurant in located, however a restaurant could offer seasonal meals and side dishes depending upon their location and the time of year. This would reduce their carbon footprint, ensure the highest quality of produce, and help to support the local community, which is great public relations and a good marketing platform.
In regards to the employees of the restaurant industry, most have the attitude that this is temporary job, meant to sustain them through their education or until something better comes along. Most restaurants are doing nothing to attempt to retain their employees, such as giving benefits or extensive training. With most at minimum wage the turnover is significant and has an impact on the overall culture of the business. The job is a high stress job, which requires you to be on your feet throughout the shift dealing with customers in a friendly way that exemplifies your company. This can be hard on an employee, and thus the employee attitude must be taken into account for your competitive advantage in the industry. A restaurant that focuses on its employee will see a happier, healthier employee with a higher level of loyalty to the company.
Along with the stress of working in a restaurant are the added hazards, especially in the kitchen areas. With stoves and ovens on, the workers are cramped in a tight space working very quickly to get the orders out in a timely fashion. This can cause an unsafe work environment and thus safety issues need to be addressed. Restaurants need to have extensive safety training for all employees, and constant updates on current safety procedures as they become due. This will decrease a company’s liability and potential for lawsuits against them.
Technological
Technology plays a large role in the foodservice industry. In order for businesses to remain successful they must remain competitive with up to date technology. Many restaurants in the foodservice industry use technology to raise their standards on product and service quality and effectiveness. Technology is becoming more innovative and many key players in the foodservice industry are taking the necessary steps to remain competitive. Technological applications in the restaurant industry can be used to raise the standards on ordering, reduction of wait times, inventory management, and overall organization of the business.
One new technology, the Point-of-Sale system (POS), is the leader in creating effective foodservice management. This system has been readily adopted within the foodservice industry. The POS uses a touch-screen display to allow servers to input customer orders and send them directly to the kitchen staff. The POS system can also be used to mange inventory by recording what quantities of products have been ordered. The system can also be used to collect relevant data on consumer purchasing habits.
The foodservice industry can also remain competitive with up to date technological advances on their websites. Pizza Hut is one company who has successfully done this with their online ordering system. A consumer can go online to the Pizza Hut website at any time and order a pizza and have it delivered directly to them. By eliminating the time spent on the phone receiving orders, the company and the consumer can save time and have their needs met quickly and effectively. To remain successful in the foodservice industry, a firm must remain up to date with these technological advances to remain competitive, cut costs, and improve their bottom line.
