The restaurant industry and the 5 forces Essay
The restaurant industry and the 5 forces
In this assignment we are going to analyses the restaurant industry in Ireland and we are going to apply the Porter’s Five Forces and Pest on this industry for to be able to write a report to give some advice to a new restaurant that is trying to enter in the market.
The restaurant industry
To have a restaurant in the past before recession, was easier than nowadays .An equipped kitchen, one room and a kitchen chef and owner with a supply list were enough for to work Monday to Friday lunch time and pay the staffs, and Monday to Saturday dinner for a profit. When Ireland was hit by recession in 2008 the restaurant industry suffers as much of any other industry in the world. The disposable income money wasn’t there anymore so customers started to cook at home as they could not afford to pay 36 euros for a Steak. Restaurateurs have to adapt the whole organization for to survive in the market. With over 2,500 restaurants in Ireland, the Restaurant sector employs 64,000 people and contributes €2 billion to the Irish economy each year. Restaurateurs had to start to pay attention on customer’s needs and wants, trying to meet and satisfy then with an affordable price. Restore consumer confidence in the country is another important factor to be considered.
2. Explanation of Porter’s five forces
Porter’s five forces is a powerful tool that helps analyses the level of power of five important factors in a specific industry. Understanding where power lies, is easy to take advantage of a situation of strength and improve a situation of weakness, avoiding the wrong steps. It works by looking at the level of power of five important forces that affect competition: The five forces that affect competition are:
In here is important to analyse how easy is for suppliers to increase the prices, it depends on how unique is their service or product, the number of suppliers in the market, the cost of switching to another supplier. The fewer the suppliers choice you have, and more you need their help, more powerful your suppliers are. Bargain of Buyer power
In this case needs to be taken in consideration how easy is for buyers to drive prices down. This can happen if the number of powerful buyers is few, so they can often dictate terms to you. Competitive Rivalry
The number and the capability of your competitors are the main driver in this case. If you have many competitors, and they have equally attractive product as you have, thus you have a little power in the situation, because consumers and suppliers can go elsewhere if they don’t get a good deal from you. But if you are in the other position of to have a unique product, you can have a huge strength. Threat of substitution
This is affected by the ability of your consumer to find a product similar as the one that you sell with a better deal. If substitution is easy and viable, then this weakens your power. As example we have Coke that can be substitute by Pepsi. Threat of New Entry
The power of the business can be also weaken by the facility of competitors to get into the market. If is not expensive, and not many barriers are imposed new competitors can quickly enter your market.
Figure 1 – Porter’s Five Forces
3. Applying Porter’s Five Forces in the Restaurant industry in Ireland Rivalry
The restaurant industry is extremely competitive as the growing of customers demand is very slow and there are no charges for to swap restaurant to dine, and people tend to do that as there is many kinds of restaurant on the market. Customer’s after recession are looking for good value food, with a great service. As the restaurant revenue depends on customer traffic, marketing become part of the daily Restaurant routine. For to have a competitive advantage to the others is important to use different strategies not only price, but also promotions.
Threat of new entrants
The threat of the new entrants is high, as low entry barriers are presented. For to open a new restaurant the capital required is low. The product differentiation in restaurant is difficult as everyone is providing high quality food, with good quality service.
Threat of Suppliers
The supplier’s bargain of power is very low as the supplier that sells the beef is not the same as the one that supplies the fish. The reason behind is to buy what is best of each supplier and provide a great quality food. Doing that the industry loses the power of bargain. There is a low cost in case of change suppliers or switching products for substitutes.
Threat of Buyers
Buyer’s bargain of power is very strong as there are no extras costs choosing another restaurant to dine. Nowadays with internet and social network, customers are very well informed about quality, prices and offers. Buyers are looking more for casual dine than a fine dine, a place where they can go have food and drink for a set price and maybe stretch for a bit longer having some cocktails afterwards.
Competitive pressure from the suppliers that offer substitute products can be strong or not, depending on product to be substitute. If there is a substitute product that is similar and almost there are no difference customer will not notice it, but if customer come for that specific product with no focus in the overall experience of fine dining than will be a problem. We have as example a restaurant that launch a lobster burger dishe, and it was promoted in the newspaper, social network and radio. The demand was very high, but in another hand the supply of lobster is attached to the climate weather and season. So it would not be possible in this case to substitute the lobster for langoustine.
4. Pest analyze in the restaurant industry
Political environmental factors – Stability political has to be considered for to open a new business in the restaurant industry. Economy environmental factors- If will be necessary to get loan of the bank for kitchen appliances or for to start up the business, is necessary to check if the interests are high or not. The inflation also needs to be taken in consideration as it can provoke higher wage demands. Social environmental factors- As a social environment we can realize that people are more educated in relation to health food habits; they are changing from diet products to healthy products. Also there are more and more people with lactose and gluten intolerance or vegetarians. Women are working as many hours as the men’s so there is nobody to cook at home. Government is increasing the media attention and incentives to “healthy living”. Technology environment factors- The social network is playing an important role in the marketing of restaurants, is important to have a website, Facebook and twitter for let people know what you offer and to listen to what consumers want.
As a result from the Porter’s five forces and PEST applied in the Restaurant industry here is the recommendation to the new entrant to the market: -Restaurant industry is a market with low cost entry, but a high cost for to keep it for the first year until you get the customer flow in the door. -After recession people become more careful with spending money and more interest where they money would end up. Is important to understand your customer mentality and needs, so every restaurant has in their menu written underneath “all our beef is source in Ireland”. Some places even have a page on their website showing from where their products are source. -Before recession restaurants would sustain their staffs wages with the lunch’s sold during the week, and their profit would be made in the dinner time, mainly on the weekends.
Now there are no demand for lunch time in a normal restaurant , people are going only for sandwiches and soups on the bakery around their office corner, so be prepared for to make the difference in the dinner time attracting customers with different drinks and desserts. -The service has change also, before the server would have to provide an excellent service, now is important to provide a good quality service and always try to upsell without been pushy. -Menu need to be change more often, so you will be fishing customers through your door , so make then be interest with different dishes such as popping candy ice-cream and edible garden deserts. – Another option for the evening is to let people know what you have through your social network posting every day prices, or the daily special. – The early bird menu went very well in the beginning of recession people realise they could have three courses meal and a glass of wine for 25 euros, but now restaurants used it too much and most of them end up given smaller portion or a wine with inferior quality to the customer.
So early bird menu does not attract customer as much. -Be prepare for to work hard building your channels of communication to reach your customers, but once is done is important to bear in mind that restaurant industry is a hard work trying provide more attractive product than your competitors. -Before was normal to have runners, waiting staff, and polishers, bar staff. Every staff would play a different role, so for to serve one table or 30 tables would be always necessary to have at least 4 staffs. If you hire an experiment waiting staff that is able to run the food and polish afterwards you are already optimizing your profit.
Example of a website from a restaurant with their product picture and its entire social media available.
As part of my own experience I can tell that changes in the restaurant industry are crucial for the life cycle of the company. For a new entrant in the industry is important to be attending to customers’ needs and wants. As this factors had change a lot since 2008. Is important to know that in the beginning you may have a huge audience of people but after three months people will lose their interest and is important to bear in mind that creating news dishes and promoting it in the social media will make the difference against your competitors. Restaurant can be very profitable but is important to have a stock control for don’t affect your profit. In my opinion restaurant is a great business that can be consider like a machine that needs all the parts in the right place very tight for to work well and have an excellence performance.
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