two assignments




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Copyright © 2012 John Wiley & Sons, Inc.

THE RESTAURANT BUSINESS Courtesy of Four Seasons Hotel, London.

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This chapter first presents an overview of the restaurant business. It then focuses on two basic markets served by restaurants: the dining market and the eating market. Under dining, we are primarily concerned with the “casualization” of fine dining and the growth of the casual and upscale casual food service segments.

A still-growing part of the eating market is in off-premise operations, such as home meal replace-

ment (HMR). We also look at the contemporary popular-priced restaurants that are the largest segments

of the existing restaurant industry: quick-service and midscale operations, such as family restaurants.

This discussion of the major components of the restaurant industry closes with a look at restaurants

in retail settings such as malls.


1. List by size the major components of the food service industry, and describe the economic impact that the food service industry has on the economy.

2. Understand the changes that have shaped the restaurant business in recent years, such as new delivery approaches.

3. Define the terms dining market and eating market, and describe and contrast the major kinds of restaurant operations in each.

4. Identify the food service segments that currently are growing or declining, and explain the reasons for these trends.

5. Describe the relationship that exists between shopping and dining and how healthy this particular segment is.



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68 Chapter 3 The Restaurant Business


The word restaurant covers a broad range of food service operations. The term comes from the French word restaurant, meaning “restorer of energy.” The term was used as early as the mid-1700s to describe public places that offered soup and bread. Today, any

public place that specializes in the sale of prepared food for consumption on- or off-premise

can be described as a restaurant. Food service is generally used to represent the broader

term, which encompasses all sorts of public and private locations that provide food for sale.

Food service is a basic part of the North American way of life and a growing part

of life in other parts of the world. Americans now spend some 48 percent of their food

budget (or food dollar) on food away from home.1 Most of that amount is spent in commercial restaurants, as described above. Virtually everyone in North America has

eaten in a restaurant, and, on average, roughly half the population eats in a restaurant

at least once in any given month. In fact, one study found that, on average, Americans

eat out nearly one out of every four meals and snacks.2 And consistent with our earlier

discussions of sustainability and environmental responsibility, the National Restaurant

Association reports that 70 percent of adults are more likely to choose a restaurant that

offers locally produced food items.3

Food away from home may be purchased in a variety of locations. This wide availability

speaks to the size and scope of the food service industry, which includes employee caf-

eterias, convenience stores, traditional restaurants, hotel facilities, casinos, and taverns,

among others. Even supermarkets are realizing this fact, and many suburban super-

markets now include a dining area. Most of these segments are experiencing positive

growth––a trend that has been sustained for over four decades. (The industry even

experienced positive growth in 2001 and during the recession in late 2008 and 2009.)

In 2009, even in a bad economy, full-service restaurants increased by 1.0 percent while quick-service restaurants (QSRs) by 4 percent.4

The other major food service sector, on-site food service (sometimes referred to as

institutional or noncommercial food service), represents a smaller but equally impor-

tant part of the greater food service industry. (Chapter 7 discusses the on-site sector

of the industry in depth.) This part of the industry is composed of contractors and

caterers (who serve food in places such as manufacturing plants and office buildings,

health care facilities, sports arenas, and schools and colleges) and those institutions

that own and operate their own food service (self-ops). Managed services (the contract

side) account for 7.1 percent of total food service industry sales while those that pro-

vide their own generate 8.4 percent of sales. An additional 1.9 percent of sales are made

through vending machines. Over 15 percent of food-away-from-home expenditures are

accounted for by the on-site market. These estimates are summarized in Table 3.1.

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Major Areas of Food Service, 2009 FOOD AND DRINK SALES (2009)a


Eating places 377.9 66.8

Bars and taverns 17.1 3.0

Food service in lodging 27.9 4.9

Managed services 40.1 7.1

Other commercial 52.9 9.3

Institutions operating own food service

47.8 8.4

Military 2.1 0.4

TOTAL 565.9 100.0

a Dollar amounts and percentages shown are based on estimates for 2009 made by the National Restaurant Association. Source: National Restaurant Association, 2009 Restaurant Industry Forecast (December 2009): 5.

Food service plays an important role in all environments, including tourism destinations. (Courtesy of LEGOLAND® CALIFORNIA.)

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70 Chapter 3 The Restaurant Business

The relative shares of the market held by the segments identified in Table 3.1 tend

to be rather stable from year to year. Such seeming stability, however, hides important

evolutionary processes that are going on within each category. In fact, the industry is

in the throes of change.

Although food service sales overall grew 2.5 percent between 2008 and 2009,

some areas actually have decreased. Within the employee restaurant services segment

(employee cafeterias and dining rooms), there was a substantial decrease (mostly a

result of businesses outsourcing their food service to managed-services companies)

as well as decreases in self-operated secondary schools and colleges and universities

food service operations.

For some years, the biggest growth in food service has been in operations such as

takeout, drive-through, and delivery, which we will call collectively off-premise sales. In fact, off-premise food service has accounted for the lion�s share of the growth in total

restaurant sales since the late 1980s. (McDonald’s reports that 75 percent of its sales

comes from the drive-through.) Even though on-premise (i.e., in-restaurant) sales have

increased each year since 1992, off-premise sales have done even better in recent years.

Off-premise options are no longer limited to QSRs, either. One of the growth areas is

in full-service restaurants with higher-than-average check averages, although fast food

and pizza still command a large share of this market. (The average check represents

the amount that the “average” customer spends and is calculated by dividing the total

food and beverage sales for the period by the total number of customers for the period).

Applebee’s®, a casual-dining chain, has recently added separate entrances (and service systems) for its “Carside to Go” customers. The trend in many segments of the restaurant

industry is toward a higher proportion of takeout, delivery, and drive-through.

During the 1960s and 1970s, quick service altered dramatically the meaning of

what a restaurant was. The trend toward off-premise consumption suggests that another

fundamental change in the business definition of restaurants may be evolving.

Another set of changes involves fine dining, for years the mainstay of the upscale restaurant segment. By and large, fine dining, with its trappings of formality, has been

declining in relative importance, whereas casual dining has been growing very rapidly.

To some degree, fine dining’s decline appears to be a result of consumers’ apparent inter-

est in value in food service and a sensitivity to the relatively high prices fine dining must

charge. Today’s consumers also are more predisposed to a casual-dining experience.

Food tastes are changing as well. All of these factors have resulted in a change in the

way that the fine-dining experience is perceived. Some suggest that the decline is just

part of a cycle, though, and that fine dining will someday achieve its previous stature.

Many of the changes in food service result from changes in the age composition

of North America’s population, as discussed in earlier chapters. Members of the huge

generation born in the 20 years following World War II, the baby boomers, are approaching

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retirement. As they do so, their lifestyles are changing. They were raised with fast food

and prefer an informal ambience. Now, as older parents or grandparents, they find a

casual atmosphere more comfortable for the whole family. More will be said about the

importance of casual dining later in the chapter.

QSR sales continue to rise also, by 4.0 percent in 2009 over 2008, partly owing to the

declining economy—people are accustomed to dining out, but need to spend less in

order to continue eating out as often. Finally, we should note that on-site sales have also

shown healthy growth, with contractors and caterers (private companies providing food

service to institutions) continuing to capture market share from self-operated units even

in segments that have traditionally been self-operated, such as public schools.


The changing picture of life in the twenty-first century shows that fewer people have time

to prepare elaborate meals. This means we purchase more convenience food items and eat

more food away from home or purchase prepared food to eat at home. People recognize

Applebee’s “Carside to Go” program is a great example of how casual-dining restaurants are evolving. (© 2009 Applebee’s IP LLC)

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72 Chapter 3 The Restaurant Business

that purchasing meals in restaurants, getting food to go, or having prepared food delivered

provides opportunities to socialize or allows more leisure time that otherwise would

have been spent on cooking and cleaning. These changes may explain the National

Restaurant Associations industry report that says even in a down economy, 45 percent

of Americans claim that restaurants are an essential part of their lifestyle.

Still, the same study reports that one of three adults say they are not eating out

as often as they would like and 35 percent are not purchasing take-out food or hav-

ing food delivered as often as they would like. What does this mean for the nation’s

945,000 restaurants? First, restaurant operators are focusing more than ever on value.

Second, keen operators are adding more healthful options to their menus, including

more healthful options for children. Finally, restaurateurs are embracing more green

initiatives, such as reducing energy and water use. Doing this saves money, is better

for the environment, and is in step with restaurant goers’ interests.


Describing the restaurant business is like trying to hit a moving target: The restaurant market is constantly changing. One could go so far as to say that it is constantly reinventing itself. There are so many types of restaurants that it is difficult to devise a

model to fit them all. Nevertheless, we need some basic terminology to describe the

field, even if in general terms.

More customers are looking for res- taurants that offer comfort and value. (Courtesy of Mimi’s Café.)

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The Dining Market and the Eating Market 73

First, we need to consider the basic distinction between the dining market and the

eating market. We will look at dining operations such as fine-dining and casual-dining

restaurants, and at the other extreme, we will discuss the rapidly growing off-premise

operations, such as takeout and delivery (much of which is referred to as home meal replacement), that are accounting for major growth in the eating market. In the next major section of this chapter, we consider contemporary popular-priced restaurants

that represent the largest segments of the restaurant business today. These include the

QSRs and midscale operations such as family restaurants. The chapter concludes with a consideration of restaurants as part of larger establishments.


One of the twentieth century’s most innovative restaurateurs, Joe Baum (former president of Restaurant Associates), suggested that the primary role of a restaurant is to transform the act of eating into something greater and more civilized. This is one

of the great challenges of the restaurant operator today.

Building on this idea, we can say that restaurants serve both our social needs and our

biological needs. We can divide restaurants into those serving predominantly our social

needs (the dining market) and those serving our biological needs (the eating market). Nearly all meals eaten in the company of others have a social dimension, just as the most

formal state dinner has its biological aspect. The main purpose, however, is usually clear.


People dine out for a variety of reasons, including to escape from boredom, to socialize,

to avoid drudgery, to be waited on, to have foods different from those served at home,

and for convenience.

Because dining (as opposed to eating) is predominantly a social event, service is im-

portant. Servers are expected to be friendly—as signified by a warm smile—and accurate.

The role of the server is, therefore, much more than a mechanical one. In the relatively

expensive restaurants serving the dining market, the operation that falls short on service

is likely to lose customers quickly. (Service is discussed in more detail in the final chapter

of the book.)

The demographics of such customers, as always, are important. The guest who

dines in a fine restaurant usually is older, is more highly educated, has a higher-than-

average income, and is well accustomed to dining out and traveling. We now try to

break the dining market into further subsegments.

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74 Chapter 3 The Restaurant Business

F I NE-D IN ING RESTAURANTS. Most full-service, fine-dining establishments—typically having an average check of $40 or more—are small, independent operations, some

seating fewer than 100 guests, which is quite small by today’s standards. Despite their

modest capacities, these restaurants succeed (or don’t) because of their quality. Many

are staffed by trained professional chefs who have brought with them a craft tradition

that dates back to the Middle Ages.

Excellence is the absolute prerequisite in fine dining because the prices charged

are necessarily high. An operator may do everything possible to make the restaurant

efficient, but the guests still expect careful, personal service: food prepared to order by

highly skilled chefs and delivered by expert servers. Because this service is, quite literally,

manual labor, only marginal improvements in productivity are possible. For example,

a cook, server, or bartender can move only so much faster before she or he reaches

the limits of human performance. Thus, only moderate savings are possible through

improved efficiency, which makes an escalation of prices inevitable. (It is an axiom of

economics that as prices rise, consumers become more discriminating.) Thus, the clien-

tele of the fine-dining restaurant expects, demands, and is willing to pay for excellence.

These distinguished operations generally require the right combination of three

elements: a large market, skilled workers, and devoted management. First, because of

the high prices they must charge, most such establishments are located in or near large

population centers or in major tourism areas where there is a sufficiently large number

of people with high incomes to ensure a satisfactory sales volume. Fine dining accounts

for only about 2 percent of total food service sales each year, but the majority of its

customers are repeat customers. Getting and keeping customers is critical in most

segments but is particularly important in fine dining.

A second requirement of these restaurants is having qualified personnel: chefs,

servers, and the like with highly polished skills. It was, for a time, difficult to find this

kind of staff, but the growth in culinary education and training programs has reduced

the shortage somewhat. People with these skills are most likely to be found in large

metropolitan areas, although there are some obvious exceptions to this generalization.

A third and most important requirement for successful fine-dining restaurants is

a special devotion from the key operating personnel, especially the owners and/or

managers. The hours tend to be long, and the owners, although they may be amply

compensated, generally devote their lives to their work.

As we have already noted, fine-dining sales have been falling for the last two

decades due to a growing preference for all things casual. According to an article in

the Wall Street Journal, fine dining sales plummeted 12 to 15 percent in 2009 and, as we

still observe, have yet to return to pre-2008 levels.5 Although some part of this decline

may be due to price sensitivity, the recession, and health concerns about rich foods,

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there seems to have been a basic shift in consumer service preferences as well. Older

patrons have been accustomed to the kind of service rituals that characterize these

operations. As younger customers advance in income and age to the point where they

might be customers for fine dining, they may be put off by overly formal dining. In many

instances, they prefer an upscale experience that is more casual. Although fine dining

has declined in popularity in recent years, it is certainly here to stay: Consumers are

simply viewing the fine-dining experience in a slightly different light. For a large seg-

ment of the population, casual upscale dining offers an attractive alternative.

Fine dining offers the experience of luxury and enhances the importance of special occasions. (City Club of San Francisco; Courtesy of ClubCorp.)

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76 Chapter 3 The Restaurant Business

CASUAL UPSCALE D IN ING. The question that arises, then, is what has taken the place of the fine-dining segment? One of the fastest-growing segments of food service

is what is referred to as “casual dining.” Casual dining appeals to consumers on many

levels. In fact, the casual segment can be further segmented by price and service level.

Casual upscale dining represents those restaurants that are at the top end of the casual

segment. They may even be referred to as “casual fine dining.” Some examples, on a

national level, include Houston’s, which is setting the standard and has a very devoted

clientele, the Cheesecake Factory, and P. F. Chang’s. Casual upscale dining, in particular,

seems to have filled part of the void left by fine dining.

The movement of the baby boomers into their peak spending years partially explains

the growth of casual upscale dining. As consumers age and more restaurant options are

available to them, taste preferences become more sophisticated. Excellence in food is

one of the appeals of these restaurants. The menus in casual upscale dining restaurants,

and in casual dining in general, have become increasingly sophisticated and interest-

ing in recent years. Another appeal is the topflight service that is offered by many

such restaurants. Although meals here are less time-consuming and elaborate than

in more formal and higher-priced restaurants, successful casual upscale restaurants

deliver professional and attentive service at a significantly lower price than in fine-

dining restaurants.

Most casual upscale restaurants have a unifying theme that is pervasive in the design

of their menu, interior decor, and often the exterior of the building. Menu specialties are

increasingly highly varied, and wine lists are extensive. Part of the reason for the more

significant role that this segment is playing is due to the increase of large chain operators.

Multiple-concept chains such as The Hillstone Restaurant Group (formerly Houston’s) play

a critical role in defining the casual-dining landscape. The Hillstone Restaurant Group

operates several concepts in addition to its flagship brand, including Bandera, Gulfstream,

Cherry Creek Grill, Rutherford Grill, Palm Beach Grill, Los Altos Grill, and Café R&D.

Concepts for a new chain operation (whether casual upscale or otherwise) are

developed through extensive market research, tested in one or more pilot operations

and, once proven, rolled out to the regional or national market. Sometimes, rather than

developing a concept themselves, multiple-concept chains purchase a promising in-

dependent operation, fine-tune the concept for a wider market, and then roll it out to

regional and national markets. Either of these strategies can prove to be a risky proposi-

tion––most successful operators have a respectable portfolio of brands that have failed

or that did not meet sales expectations and were discontinued.

In contrast to the QSR and midprice segments with their breakfast/lunch focus,

casual upscale restaurants cater to a higher-check-average clientele for the lunch and

dinner day parts. Naturally, this results in a higher dollar amount of sales. Some, such as

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Outback Steakhouse, go so far as to limit their operations to a single meal period (dinner).

Casual-upscale unit sales are also helped by the addition of alcoholic beverages, which

usually add greater profit potential.

Noting the success of the casual upscale segment, many fine-dining operators

have made changes. Because of the competitive market, many fine-dining restaurants

have made the decision to move to meet the market demand for a more relaxed

atmosphere and more reasonable prices. Other operators made the decision to balance

their fine-dining outlet with a more casual option for their customers—Emeril Lagasse

in New Orleans with his namesake restaurant, Emeril’s, and the more casual NOLA is

one example. (Lagasse also operates a second fine-dining restaurant, Delmonico, in

the same city.)

Some operators closed their fine-dining outlets outright. Kevin Taylor, the operator

of the Zenith American Grill in Denver, closed a very successful four-diamond restaurant

and opened more casual restaurants, including jou jou and Nicois.


The eating market consists of those segments that cater primarily to biological needs

as opposed to primarily social needs. Quick-service restaurants, which we will look at

in more detail in a moment, constitute a sizable segment of the eating market––one

that is patronized by nearly every household. A survey by Restaurants & Institutions

magazine revealed some interesting insights into dining-out behavior. Forty-four per-

cent of respondents reported eating in a quick-service restaurant at least once a week.

Houston’s, a leading casual upscale dining chain, pays great attention to detail in the decor of its restaurants. (Courtesy of Houston’s Restaurants.)

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78 Chapter 3 The Restaurant Business

This compared with 35 percent of respondents who reported eating out at least once a

week in casual-dining outlets. Two-thirds of households patronize QSRs frequently; that

is, some member of those households buys fast food three or four times a week.6 In

other words, these quick-service and midscale restaurant customers are the heart of the

eating markets. The quick-service sector, as we noted earlier, is continuing its growth at

a compound annual rate of 4 percent from 2008 to 2009. Off-premise dining is another

segment of the restaurant business that continues to grow.

As discussed earlier, the three main components of off-premise dining are takeout,

drive-through, and delivery. HMR can include any or all of these components. HMR (or

the more current term, meal solutions) is usually meant to encompass a good portion

of this market, specifically those prepared food products that are purchased away from

the home but consumed at home. Each of these markets has maintained roughly the

same share of off-premise sales for some years. Together they account for over 50 per-

cent of the entire food service market. The largest part of off-premise sales is takeout,

with nearly two-thirds of the traffic (visits) and volume. Drive-through is the second

most frequent. Either way one views it, off-premise dining represents an important part

of food service industry sales. Although off-premise sales began with fast food, they

have spread across other segments to the point where there are now establishments

designed strictly for customers to pick up fully prepared food to be brought home.

Such examples include Foodies Kitchen (New Orleans), Tasteez (Denver), and Eatzi’s

(Dallas). Such operations are best described as a hybrid of restaurant and upscale

supermarket. Each of the three primary areas identified above are discussed in turn.

TAKEOUT. Takeout is an old, established part of food service, but its continued growth has increased its prominence. Consumers have indicated their interest in takeout with

their growing patronage. Not surprisingly, operators have responded to this consumer

interest. Nearly all quick-service operations offer take-out meals, and quick-service

operations account for the lion’s share of takeout sales. The vast majority of mid-

scale table-service restaurants also offer takeout, as do many upscale operations (and

the number of restaurants offering takeout is only increasing). Thus, increased sales of

takeout food are fueled not only by consumer preference but by the wide availability

of takeout food service.

DRIVE-THROUGH. Initially, drive-through service was introduced as a part of an existing quick-service restaurant, and that is still an important use of the drive-through. Since

its introduction, though, it has become an integral part of the QSR service strategy.

Further, it should be mentioned that drive-through is no longer limited to the burger

chains; it has also been adopted by such chains as Starbucks and is also being tested

by 7-Eleven.

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The Dining Market and the Eating Market 79

The drive-through came into its own, however, with the introduction of the double

drive-through. These operations enjoyed the advantage of low capital costs because of

the small building and relatively small size lot on which they could be fitted. Highly

simplified menus gave them an operating cost advantage, too, and fast delivery times

appealed to many customers.

It quickly became apparent to QSR operators that the double drive-through was a

serious competitive threat, and the competitive response was not long in coming. Exist-

ing QSRs improved their drive-through facilities and used their powerful brands in a

promotional push. Many QSRs that lacked drive-through facilities added them. In the

shakeout that followed, a number of double drive-through chains that had been growing

rapidly went out of business. Some survived, but these now serve a specialty niche. The

dominant force in the drive-through market is the branded QSRs, such as McDonald’s

and Burger King. Certain companies, such as Checkers, Sonic, and Rally’s, are defined

by the double drive-through concept.

DELIVERY. Delivery is a slightly different segment of the industry. Delivery operations do not fit well in the same unit with table-service operations for a variety of reasons.

Not only does demand peak just when the dining room is busiest (as is also true with

takeout), but the parking lot is jammed with customers’ cars just when delivery vehicle

traffic in and out is at its peak. Moreover, the skills of the service staff are different.

A person who is very effective as a server in face-to-face service will …