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Organizational Analysis: BJ’s Restaurants, Inc. Nasdaq:BJRIPeter BuccolaRichard Orozco University of LaVerne, BUS 695 Fall, 2017Industry and External Environment Analysis DRAFTThe restaurant industry in the Unites States is part of a larger food service industry which infuses $2.7 trillion into the economy annually. According to Hoover’s, full-service restaurants with a “sit-down” experience with wait staff generate approximately $550 billion of total revenue-- approximately 20% of all restaurant revenues--and comprises over 245,000 establishments.. There is a tremendous level of fragmentation in the full-service restaurant industry: fine dining vs. casual; independent or local vs. chain; cuisine types; number of unit location stratification; franchised vs. company operated; and geographic tastes and cultures. Casual restaurants in the Unites States, in broad terms, are distinguished by family-friendly, seated patrons, with wait staff, who pay at the end of the meal (Hoover Industry Analysis, Casual Restaurants, 2017). The largest companies in this segment include Applebee’s ($23.6 billion sales), Darden Restaurants ($7.1 billion sales), Blookin’ Brands which includes Outback Steakhouse and Flemings Steakhouse ($4.2 billion sales), and Brinker International which does business as Chilli’s and Maggiano’s ($3.1 billion sales). Strategic HistorySince the mid-1990s, the casual restaurant industry has evolved out of two bifurcated options: only very small, local eateries and large, national chains such as Red Robin and Applebee’s. In a 1995 article published in Nation’s Restaurant News, the increased demand and competition at upscale casual restaurants fueled a trend to replace traditional Kitchen Managers with Executive Chefs to deliver “fresh menu ideas and a creative personality -- a chef who knows how to greet the guests and give validity to the food" (Vol. 29 Issue 36, p1. 2p. 1). This coincided with an expansion in new and existing eateries across regional and national geographies as Americans preferred eating out to cooking at home. By 2000, overall full-service restaurant revenue increased 30% (National Restaurant Association Factbook, 2017) but the growth curve was still on its upward ascent. As of 2003, millennials were graduating high school and college and have becoming the largest consumers of casual restaurants (First Research Industry Analysis: Casual Restaurants, 2017). The affluence and spending behavior of this key demographic, compounded by advances in mobile and software technology cooked up several innovation in the casual restaurant space: curbside delivery offerings, online reservations, online reviews (such as Yelp.com and OpenTable.com). Restaurant revenues consequently nearly doubled from 2000 to 2010 to $440 billion--of which casual dining incurred the largest increases (National Restaurant Association). Now, in the post-iPhone era, other trends are emerging which are revolutionizing how the food service industry competes for the same patrons across various industry segments. Promises of faster services, with higher quality ambiance and food items have driven significant growth in the quick casual segment, producing twice the growth than full service restaurants at 4.5% (Long Range Systems, White Paper: “The Evolution of Fast Casual,” 2017). Kiosk and booth ordering capabilities, augmenting wait staff and ordering clerks give customers more control over what they are ordering and reduce food prep and waiting times. Online ordering with more intuitive menu displays and real-time preparation monitoring, along with new food delivery channels such as Grubhub enable patrons to eat their favorite foods off-premises--putting more emphasis on convenience and food quality than ambiance and customer service, and competing with meal kit food subscription services (Hoovers Industry Trends, 2017). Some large casual chains have resorted to lowering their menu prices (also known as the average ticket price) and trying to round-out their menus with healthier alternatives (Hoovers, 2017). Despite the significant amount of innovation and focus on food quality, casual restaurants will still contend with lower same-store sales and a glass ceiling on average ticket prices, as higher end quick casual, niche restaurants, and meal kit subscriptions eat into market share. Ominously, as recently as October, 2017, Macaroni Grill filed for bankruptcy protection and burger chain Ruby Tuesday was sold to a private equity company after its parent was unable to boost sales following a recent upgrade to its menus (Associated Press. Romano’s Macaroni Grill files for bankruptcy protection, 10/18/2017).Five Forces Analysis: Casual RestaurantsBargaining Power of Suppliers: Low-Moderate. This is served by a myriad of food wholesalers and even local food growers in some markets. Food wholesalers have national, regional, and local networks which make differentiation difficult, and is a notoriously commoditized industry. However, with the trend toward non-GMO, organic, certified humane, greater emphasis on food safety, and on where and how the food was grown, could create greater bargaining power by suppliers. The increased scrutiny of food sources and handling will limit the number of available suppliers in the future, especially to national and specialty casual restaurants.Bargaining Power of Buyers: Moderate. Restaurants, because of the fresh food service aspect of the industry, are de facto highly customized, catered toward individuals (or groups for business meetings or parties, for example). Therefore there is no phenomenon in this industry of buyer groups forming to drive prices downward, or improve menu quality. However, this segment is highly influenced by societal and economic factors which influence consumer behaviors, including economic recession, and demographic shifts--and therefore, the buyer has a high degree of input on the chains’ success. Also, the switching costs are low at the individual level: they will vote with their wallets in a traditionally inelastic industry. This could force casual restaurants to further scrutinize their supply chain, nutrition facts, and ultimately foot traffic in the brick and mortar locations. 3rd party apps (i.e. Grub Hub or DiningIn.com) which intermediate the buying transactions could also play a new role in forcing commissions of the chains or sliding scale fee structures. Potential New Entrants: Moderate. The greatest growth stems from smaller regional restaurant firms, also known in the industry as the “Second 100.” These are the second-tier of restaurant chains as stack-ranked by annual revenue, which have incurred organic growth of 4% in 2016 according to the Nation’s Restaurant News’ 2017 Second 100 report. On the other hand, barriers to entry are moderate as success requires word of mouth, time, and capital in order to expand. Substitutes: High. Alternatives within the restaurant industry--namely, quick casual and niche dining, as well as a trend toward farm-to-table eateries are key alternatives. Other substitutes such as fast food and traditional grocery shopping whereby avoiding dining altogether will also be constant supply forces if dining prices are too high, wait times too long, or quality is poor, etc. Rivalry among existing competitors: High. There are many, many competitors in a shrinking growth rate overall, with negative same store sales, in which patrons have low switching costs to move from one chain to another.The resulting assessment of the competitiveness of the casual restaurant industry as illustrated by Porter’s 5 Forces is an industry which is highly competitive and difficult to achieve profitability driven primarily by the availability of substitutes and rivalry among the chains. Long-term profitability and long-term competitive advantage within competitors is very difficult.Industry Life CycleBy most measures, the casual restaurant industry has reached the maturity stage. Markets are now saturated with many competitors large and small, which makes it difficult for competitors to create new growth and instead directly compete (DME, Strategic Management, Chapter 5, page 169). Same store sales in the casual restaurant industry have shrunk year-over-year in the last 3 years as a result of recent trend toward both local, higher-quality restaurateurs and also quick casual restaurants. An industry expert recently commented:“The sector has experienced eight consecutive months of declining sales—with only February showing positive sales growth—and traffic growth has trended down at an increasing rate since the beginning of 2015, according to TDn2K, which measures data based on weekly sales from nearly 26,000 restaurant units and 130-plus brands representing $65 billion in annual revenue. Year-to-date traffic growth has fallen by 3 percent, which Fernandez categorizes as a “troubling scenario” when compared to the drop of 0.8 percent for all of 2015.” (“Casual-Dining continues to cede market share” Nation’s Restaurant News7/24/2017, Vol. 51 Issue 10, p42-43. 2p.)The future of the casual restaurant industry will be determined by competitors’ ability to leverage technology across its value chain, highly differentiate its menu and service offering, and all the while maintain price parity with substitute products.
Solution: Financial Internal Analysis - BJ's Restaurant, Inc.