Obstacles To Entry Into Restaurants

Including typical start-up hurdles, like equipment and staffing costs, novice restaurateurs face important industry entry barriers.

Fremont, CA: Including typical start-up hurdles, like equipment and staffing costs, novice restaurateurs face important industry entry barriers. Perhaps, work with a restaurant consultant experienced in the local restaurant industry. The primary cost of the consultation might be formidable, but expert insight can prevent expensive beginner mistakes.

Location

Stay ahead of the industry with exclusive feature stories on the top companies, expert insights and the latest news delivered straight to your inbox. Subscribe today.

Restaurants live and die by location. Superb locations are visible, easily accessible to pedestrian traffic, and surrounded by businesses that complement the restaurant well. They also provide plentiful and cheap parking.

New restaurants might find it hard to snag such locations. Even if you find a good location, you confront sizable rent or mortgage costs, which can be hard to cover during the opening months of business.

Economies of Scale

Economies of scale mean average costs can reduce as a restaurant expands, but the greater initial costs pose an entry barrier for newcomers. For instance, a large restaurant has greater negotiating power with suppliers and can demand wholesale pricing.

New restaurants can't require such pricing, meaning their average supply costs are greater, so accomplishing similar profit margins entails charging more per diner than larger restaurants.

This inlet barrier also has a flip side. Suppose a new restaurant can create higher-quality or unique meals. In that case, consumers might choose its offerings over the standardized fare available at large restaurant chains, even if the new restaurant costs more.

Entrenched Competitors

When a new restaurant starts, it is an instant and direct competition with adjacent restaurants, which might already have loyal customer bases. Winning these customers over might be hard for new owners, especially if the new restaurant provides fare similar to restaurants with a lock on that niche.

For instance, a new pizza restaurant might not be able to unseat a longtime local favorite, despite offering lower prices. However, new restaurant owners can combat entrenched competitors by offering a different experience from existing options, such as serving food types no one else offers.

Regulatory Obstacles

Foodservice meets strict health needs, and alcohol service demands a license. These and other regulatory barriers might make life hard for new restaurant owners, though working with an attorney experienced in state and local regulations can ease the process.

In addition, contact a local restaurant association to access information regarding regional regulatory and licensing hurdles, which can vary by township or street. The association also might be able to suggest appropriate local legal counsel.

The restaurant industry is extremely competitive. You will have trouble standing out unless you hold a star chef or a novel cuisine. Gaining a competitive edge needs a detailed analysis of the demographics of the surrounding area and the nature of existing competitors.

And even if you are initially successful, new competitors could enter your market anytime to steal your clients. So don't hesitate to adopt successful strategies from your competitors, but understand that directly competing with an entrenched rival is a bad idea for a beginning restaurateur.

1. Find an area with a few competitors that serve food similar to yours. Pizza places, for instance, face enough competition from other types of restaurants without having to fight each other.

2. Select a highly visible location that has a suitable consumer base nearby. For instance, don't open a family restaurant in an area full of office complexes. A residential area with a high percentage of families with young children would provide more potential clients, especially if there are relatively few local restaurants currently serving that demographic.

3. Review the local competition after you've chosen a location. Chances are, any region you pick will have at least a few competitors who target the same consumers. Other restaurants are clear rivals, but supermarkets, convenience stores and other businesses selling prepared food are competitors.

4. Identify the strengths of each competitor. For example, a supermarket's ready-to-eat meals are convenient for shoppers who are there to pick up household items. Fine dining restaurants might have expert chefs who excel at cooking in a particular style, making them difficult to beat. Fast food restaurants offer quick service at low prices.

5. Identify the weaknesses of each competitor. For instance, a supermarket's ready-to-eat meals might taste stale after sitting for many hours, and fine dining restaurants might be too costly for some consumers. Fast food restaurants provide the same products everywhere, so consumers might be ready for something new.

6. Choose a focus for your restaurant that considers your competitors' strengths and weaknesses. Your restaurant should deliver a service that nearby competitors can't match, like novel foods, higher quality or faster service. Offering lower prices than your competitors might attract consumers, but don't compromise the quality of your food and service.

7. Analyze new competitors directly to identify potential drains on your business. Adjust your restaurant to compensate for meaningful shifts in nearby competition. For instance, if a low-cost pizzeria opens near your Italian restaurant, focus on your ability to produce high-quality entrees in addition to pizza to maintain your competitive edge.