When might a restaurant be deemed to have moat? The test is always quantitative: does the restaurant generate a return on investment that is significantly above the opportunity cost of capital and does that last for a significant number of years? ... For example, chain restaurants can create distribution networks and systems that take advantage of supply side economies of scale. Their moat is similar to a business like Costco in that way. Other factors can create moats and sometime it is the combination of factors that produces the barrier to entry. Sometimes a famous chef’s brand acquired from television appearances can help create a moat. Sometimes a location can be helpful as can longevity (the comfort food effect) and historical significance.HT: MarginalRevolution.com
Friday, November 17, 2017
Restaurant Strategy
Must read for anyone who ever thought of opening a restaurant:
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The term economic moat, popularized by Warren Buffett, refers to a business' ability to maintain competitive advantages over its competitors in order to protect its long-term profits and market share from competing firms. (investopedia) A competitive advantage is essentially any factor that allows a company to provide a good or service that is similar to those offered by its competitors and, at the same time, outperform those competitors in profits. If the restaurant has a specialty or a famous chef that draws customers into the establishment. This could create a barrier to entry where normally there wouldn't be. I'd think it would be difficult to create a moat in the restaurant industry. In a competitive industry there are three factors: (1) firms produce a product or service with very close substitutes meaning demand is very elastic, (2) firms have many rivals and no cost advantage over those rivals, and (3) the industry has no barriers to entry or exit. (Froeb et al) There is nothing that stops competition so finding a unique niche is imperative to survival of the business.
ReplyDeleteLooking specifically at pizzerias, one must wonder how so many places enter the market and stay in business. In the pizza industry, “firms produce a product or service with very close substitutes, meaning demand is very elastic” (Froeb, 2016, p. 114). For myself, there are at least five pizzerias within a five-mile radius of my house. All offer comparable food, delivery, and prices. So how do they stay competitive with each other and continue to be in business? Three of the five pizza places by me are chains, meaning they have moat in regards to supply and production of the ingredients needed to offer their services. Along with that comes the reputation of their name. The other two are family run pizza places, one which has been in business for many years. Because it is a long-standing business, that could be what provides their moat in a highly competitive market. That leaves the last pizza place. It is a newer restaurant, but in a very desirable location- easy to get to on a very busy main road, and they also offer lots of parking. Each institution offers different benefits to consumers, whether it is taste, style of crust, or uniformity of product, for the chain restaurants.
ReplyDeleteReference:
Froeb, L.M., Mikhael, S., McCann, B.T. & Ward, M.R. (2016). Managerial Economics: A
problem solving approach, 4th edition. Boston, MA: Cengage.