Industry Analysis Limited Service Eating Places Industry

Part I - Industry Definition

Limited-Service Eating Places Industry

"Limited-Service Eating Places in the US" (NAICS 72221 and SIC 5812) is an industry that consist mainly of establishments that provide food service where customers usually order and pay for the items before eating. This industry, which accounts for more than one third of the entire restaurant dining industry, is categorized into three main segments (Bramhall). The first segment is limited service restaurants, which include drive thru and take out facilities. This segment currently has the largest market share. These establishments tend to specialize in limited menu items, such as hamburgers, pizza, sandwiches, and/or chicken (Basham 9). The second segment includes coffee shops, ice cream and donut shops. And the last segment consists of cafeterias. Establishments such as ice cream or yogurt shops, doughnut shops, bagel shops and cookie shops are also categorized under this industry. Key players in this industry are McDonald's Corporation, Starbucks Corporation, Yum! Brands, Incorporated and Doctor's Associates Inc.

Part II - Industry Size, Growth Rate, and Sales Projections

Limited-Service Eating Places Industry

Industry Size - Constant Prices

2002 2003 2004 2005 2006

Industry Revenue 151,934 150,270 155,010 159,350 162,856 $Mil

Number of Establishments 271,640 277,616 284,279 288,259 292,583 Units

Employment 3,579,208 3,625,738 3,676,498 3,716,940 3,754,109 Units

Industry Growth Rate

2002 2003 2004 2005 2006

Industry Revenue (1.8) (1.1) 3.2 2.8 2.2 %

Number of Establishments (1.0) 2.2 2.4 1.4 1.5 %

Employment (1.0) 1.3 1.4 1.1 1.0 %

Industry Sales Projections

2007 2008 2009 2010 2011

Industry Revenue 164,810 169,260 173,830 179,045 183,700 $Mil

Growth 1.2 2.7 2.7 3.0 2.6 %

Graphs

Source: IBISWorld Inc.

Summary

The industry is in the mature stage of its life cycle. Some of the primary reasons for this are that it's in a low growth phase, slower growth in the opening of new stores and low profitability. The industry is also nearing its saturation point (Limited-Service 14). Most the establishments being opened are franchise operations located overseas.

Although competition is very high, the amount of internal competition alone continuously increases. The main point for internal competition is food quality and consistency, but there is increased competition in the range of products being offered. The changing consumer demands of being a health conscious society have not been easy for the fast food service establishments. A trend for 2007 was an increased focus on enhancing breakfast menu items. Many establishments, such as Wendy's and Burger King, are expanding their breakfast menu items in order to try and compete with the leader, McDonald's Corporation. Even coffee giant, Starbucks Corporation, has started to offer hot breakfast sandwiches in a few of their establishments (Basham 3).

There has also been an increase in the enhancement of drive-thru services. It is becoming evident that the consumer is always on-the-go and always looking for dining options that are quick and easy. A recent survey of 1,000 consumers by QSR Magazine reported that consumers visit a drive-thru service an average of 5.7 times over 60 days, more than one third use a drive-thru service more than six times over 60 days and 45 percent prefer the drive-thru option versus dining in (Nuckolls 1). An important factor in the success of drive-thru establishments is that consumers are looking for accuracy. Consumers are simply asking that at most, the order has to be right.

Part III - Industry Characteristics

Limited-Service Eating Places Industry

Industry Structure

Even though the level of capital intensity for this industry is low, it is very labor intensive. Labor intensity occurs mainly in the ordering, food preparation and service of customers (Limited-Service 18). Since this industry is quite mature, one of the strategies of establishments has been its use of technology in their operations. Enhanced technology in this industry allows for establishments to reduce labor and food costs. Establishments can try to deliver a competitive advantage by ensuring quality service and reducing customer wait time.

While barriers to entry for this industry are low, these barriers are continuously increasing. The industry consists largely of small independently owned establishments. This is further evident in the information provided later regarding the nature of the participants. Even though many large companies hold a decent amount of the market share, many small independently owned establishments account for the largest share at 79.63%. Entry into the industry is mainly done through franchise operations. According to the National Restaurant Association, small operators run more than seven of every 10 restaurants (Basham 19).

This industry receives no government assistance and the level of regulation is high. Franchising operations are regulated through Federal and State Governments. A federal regulation that has greatly impacted this industry is the recent increase in minimum wage from $5.15 to $7.25. This of course means that the employment costs for establishments will significantly rise. In addition to this many states have enacted a minimum wage that is even higher than the federal rate. Currently seventeen states, including New York, New Jersey, Oregon and Washington, have enacted this regulation (Basham 17). And lastly, another compensation issue that continues to arise is the issue of healthcare. Many states are now looking into mandating providing healthcare to employees.

Since