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Market Analysis
Developing a business plan for an existing business or conducting a feasibility study for a new venture requires a thorough analysis of market conditions. Market conditions in your area have a significant impact on the profitability of your restaurant. The strength of the local market affects how many customers you will serve and the menu prices that you can charge. This guidebook will help you analyze your market so that you can gauge the potential of your existing or proposed operation and make more informed operating and investment decisions.
On the pages that follow are a series of checklists to help you collect and analyze information as part of a restaurant market analysis. The checklists, tailored to the restaurant industry, will serve as a learning tool to help you understand the many market factors that influence your profitability.
Types of Questions Answered
By conducting a market analysis, you will be able to answer questions such as:
What trends are emerging in the food service industry?
What are the strengths and weaknesses of my competition?
Is my location suitable?
Does my concept fill a niche in the market?
What is the potential number of customers I can serve per year?
Applications
This guidebook will provide you with an industry-specific market analysis format that can be used in a feasibility study, business plan or marketing plan. The following will help analyze the market potential of an existing operation, an expansion or a new development.
Existing operators can use a market analysis to identify opportunities to improve sales. The analysis can provide valuable information on market conditions to help in forecasting and budgeting. It also provides a foundation for an effective marketing plan.
Prospective operators can use a market analysis to project sales volume for a new restaurant venture. The analysis can provide essential information required in a business plan or feasibility study. Through careful analysis of the market, the risks of a business investment can be lessened. Using your market analysis findings, you can estimate the financial potential of your venture by creating financial projections. If you are a prospective restaurateur, these projections will help you determine if your venture is feasible. Software for developing
restaurant financial projections is available through the University of Wisconsin-Extension, Center for Community Economic Development.
Conducting Your Analysis
The sections that follow include data collection checklists and worksheets. While the section on projection sales should be the final step, the other sections can be completed in any order. Remember that your efforts in studying the market will provide you with information to make better, more informed decisions.
Market Analysis Components
Industry Trends
Location and Facility
Area Characteristics
Competition
Knowing Your Customer
Projected Sales
Industry Trends
Studying industry trends is one of the first steps in conducting a market analysis. It will help you identify opportunities and threats in the industry that may affect your profitability.
Studies on consumer eating and drinking patterns are available from various sources. Such studies report recent changes and trends in consumer attitudes and behaviors regarding food away from home. They can identify changing trends before they become apparent in your local market. The following are
some of the sources of industry trends data available to you:
National Restaurant Association
State and Local Restaurant Associations
Industry Groups (International Foodservice Manufacturers Association)
Hospitality Industry Databases
Industry Publications
The following industry trends checklist provides a sample of topics you might want to study as part of your market analysis. Use it to complete this part of your market analysis.
Growth in Industry Sales
Quick-service vs. table-service
Chain vs. independent
Various types of restaurants (steakhouses, ethnic…)
Catering
Deli, bakery and takeout operations
Monthly/seasonal dining out patterns
Industry sales outlook
Market Demand
Economic trends
Consumer confidence
Demographic trends
“Food away from home” trends
Factors that motivate one to dine out
Eating habits of different market segments
Menu Preferences
Appetizers/soups
Entrees
Sandwiches
Desserts
Nutritional concerns
Menu pricing
Alcoholic beverage consumption
Seafood, red meat and poultry trends
Vegetarian trends
Restaurant Success Factors
New and popular concepts/themes
Customer service innovations
Pricing practices
Food production methods
Labor saving techniques
Local Market Area
Demographic and economic statistics will help you determine the restaurant sales potential of the market area you plan to serve. By comparing these statistics with those of other areas and the state, you will be able to evaluate the strength of your market area.
The first step in this analysis is to define the geographic size of your market area. Be reasonable in estimating how far people will travel to reach your site.
Once your geographic market area is defined, you should obtain demographic data that describes the people who live and work in the area. Are there many affluent singles, elderly with discretionary income or families? Descriptions of the population’s age, income, education and gender will help you understand the market area you plan to serve.
Obtain economic statistics such as business growth trends, eating and drinking place sales, and tourism visitation data. They indicate the overall economic health of the market area. This is important since restaurant sales are closely related to local economic conditions.
Data on your market area is available from various sources such as:
Bureau of Census, U.S. Dept. of Commerce;
Private marketing data entry forms;
Local economic development agencies and data centers;
Small business development centers;
County extension offices;
Local Chambers of Commerce
Library resource materials such as: Sourcebook of Postal Codes
Demographics and Sales and Marketing Management
In addition to studying economic and demographic data, you should also determine the dining out behaviors and preferences of local residents. Lifestyle Segmentation Reports provided by marketing group data firms provides a useful source of consumer behavior information. In addition, you can learn about their favorite foods, frequency of dining out, and preferred restaurants through survey and focus group research.
The following market area checklist will help you collect data to evaluate your market area. The following checklist includes information relevant to your proposed restaurant. Use it to complete this part of your market analysis.
Geographic Market Area
Market area radius (one, two, three miles, etc.)
Market area
Demographic Characteristics
Population
Age distribution and median age
Gender
Ethnic groups
Household income distribution
Marital status
Dwelling types
Households with children
Education
Economic Characteristics
Eating and drinking place sales
Employment levels
Types of employment
Number of and growth in business establishments
Local developments planned
Seasonality and tourism visitation
Dining Out Preferences and Lifestyles of Local Residents
Lifestyle segmentation data provided by marketing data firms
Interview with local residents
Observe eating habits in other restaurants
Analyzing tourist visitor origin can be a complicated process. As these visitors may be traveling great distances, it can be more difficult to acquire customer information than with a traditional analysis of local residents. Nonetheless, understanding these customers requires obtaining information about their places of origin, as well as data about their demographics and lifestyles.
A technology called geographic information systems (GIS) can be used to solve these problems. Combining GIS with your customer address lists or chamber of commerce inquiry records, allows you to profile tourism customers both geographically and demographically. Furthermore, GIs technology can
use this information to search (prospect) for new potential customers in other communities that match your geographic or demographic criteria.
III. Competition
Existing market area restaurants can provide valuable information to help you analyze demand and market opportunities. You can assess their competitive strengths and weaknesses and learn from their successes and failures.
First, identify how many restaurants are in your market area. Then, identify those restaurants that appeal to the types of customers (market segments) that you plan to serve. You should also identify all other
restaurants located in your immediate area because they can also influence your business. Consider including bar and grills, catering services, food delivery services, grocery stores with deli, etc. Refer to the Yellow Pages and your local Chamber of Commerce for listings of area food-service operations.
It is important to identify any market area restaurants that have closed, and for what reasons. Also, learn what new restaurants are planned for the market area and determine how they might affect your proposed operation.
After identifying your competition, visit and evaluate each restaurant. Speak with the manager of each operation if possible. Use the following checklist to complete this part of your market analysis.
Location
Community traffic patterns
Proximity to sources of demand
Accessibility
Visibility
Surrounding neighborhood
Parking availability
Sign visibility
Appearance/Comfort
Exterior appearance and theme
Interior appearance and theme
Atmosphere
Cleanliness
Heating and ventilation
Menu
Theme
Variety and selection
Signature items
Price range and value
Beverage service
Food Quality
Taste
Presentation
Portion size
Consistency
Service
Days open
Hours of operation
Service style
Quality of service
Speed of Service
Extra services offered
General Information
Number of seats
Estimated seat turnover by day and by meal period
Types of guests served (age, income, origin…)
Is business increasing or decreasing?
Banquet facilities
Entertainment
Franchise affiliation
Reviews by food Critics – ratings in travel guides
Local reputation
Advertising and promotion methods used
Overall
Strengths
Weaknesses
Location
Location is a critical consideration because it affects your ability to draw customers. It is important that your site be visible, accessible, convenient and attractive to your market. How you evaluate your location will depend on the type of restaurant you are planning and the type of customers you hope to serve.
Two major choices face prospective restaurateurs: What kind of restaurant should I open and where should I open it? Typically, you will have already selected either a location or a concept for your restaurant. It is important that your location and concept complement each other. It is critical that a site be chosen based on market factors, not because of a low price.
Different types of restaurants will have different location requirements. However, certain elements should be analyzed regardless of the type of restaurant you are planning. Use the following checklist to complete this part of your market analysis.
Description of immediate area
Residential and commercial profile
Adjacent land uses
Proposed developments
Safety
Special appeal of location
Map of area (sources of demand, competition and relevant landmarks)
Proximity to Customers and Competition
Major demand generators (retail, offices, lodging, hospitals and etc.)
Number of potential customers within a one to three-mile radius
List of direct competitors
Traffic Volume
Pedestrian traffic counts
Highway/Street traffic counts
Peak and off-peak traffic periods
Street and road patterns
Speed limit and traffic signs/lights
Accessibility
Proximity to major streets and highways
Ease of entrance and exit
Parking (guests and delivery)
Pedestrian accessibility
Compliance with Disabilities Act for accessibility
Visibility
Visibility from road
Effectiveness of sign
“Curb appeal” of building
Landscaping
Exterior lighting
Other Issues
Zoning
Environmental Issues
Easements and restrictions
Growth Patterns of Surrounding Areas
Concept Refinement and Evaluation
An effective concept establishes a restaurant’s identity. It distinguishes the operation from others in the market area and allows the restaurant to attract particular customer groups.
Understanding customer preferences is essential in developing an appropriate concept. It is important to realize that concepts appropriate for one area may not be appropriate for another. Using data already gathered, this section will help you refine your concept and evaluate its suitability for your market area.
Concept involves the entire dining experience, not just the type of food offered. Elements that define a restaurant’s concept include decor, lighting, menu, food preparation and presentation, service, price, location, and size. Even the name of the establishment conveys a sense of the concept.
To help refine your restaurant idea, describe your proposed operation in one or two sentences. Use the elements in the concept refinement worksheet to expand upon your concept statement. The following questions will help you determine if your concept is suitable for your market area. Use the information from earlier sections to answer them.
What segments of the population are you targeting with this concept? Consider age, income, marital and family status, and other relevant demographic characteristics.
How large are these market segments within your market area? Is the market growing?
What share of the market can you reasonably expect to capture?
Will this customer base be large enough to support your operation?
Answer these and other relevant questions to determine if your restaurant idea is suitable for your market area. Use the following checklist to complete this part of your market analysis.
Concept – vision statement:____________
Restaurant name:____________
Independent or chain affiliation:____________
Theme (ethnic, regional?):____________
Atmosphere – decor:____________
Menu (sample appetizers, soups, entrees and desserts):____________
Signature Items on menu:____________
Food preparation, presentation, portions:____________
Alcoholic beverage service: ____________
Service: ____________
Banquets – Catering: ____________
Entertainment:____________
Price range:
Breakfast____________
Lunch____________
Dinner____________
Number of seats:____________
Hours of operation:____________
Overall, concept is different and unique because:____________
Projecting Your Sales Potential
At this point in your market analysis, you have completed your data collection. You have analyzed industry trends, market area demographics, economic statistics, competition, suitability of your location and restaurant concept. You are now read to estimate your sales potential based on these factors.
Sales in a restaurant are a function of the number of customers you serve (covers) and spending per person (average check). A key indicator of future sales performance is past sales performance. Existing restaurants can rely on their historical records for this information. Prospective operators must look to comparable restaurants for data on their past performance.
While there are no formulas for calculating your sales potential, your prior research will help you make more informed and reasonable estimates. The steps that follow will help you estimate your covers, average check and sales potential.
Review Your Competitive Position
A review of your restaurant’s relative strengths and weaknesses will help you to determine your competitive position in the market area. Compare your operation with your competition using the criteria below. Be sure to keep in mind your concept and the types of customers you hope to attract.
Competitive Strengths < > Weaknesses
Concept/Theme * * * * *
Proximity to Customers * * * * *
Traffic Volume * * * * *
Accessibility * * * * *
Visibility * * * * *
Atmosphere * * * * *
Menu Appeal * * * * *
Food Quality * * * * *
Service Quality * * * * *
Entertainment * * * * *
Reputation/Reviews * * * * *
Franchise Affiliation * * * * *
Pricing * * * * *
Hours of Operation * * * * *
Management * * * * *
_______________ * * * * *
_______________ * * * * *
_______________ * * * * *
Forecast Customer Volume
With an understanding of your competitive position in the market and with estimates of volume of other operations, you are ready to make projections of your customer volume potential. The customer volume projection worksheet will help you estimate how many customers, or meal “covers,” you will serve. The following instructions will help you complete the worksheet:
Divide your operating year into season that describe the variability of your business (peak season, middle-season, and off-season). Enter the number of weeks in each season in the
appropriate box.
For each season, estimate the number of daily covers for each meal period. Sum the daily covers to determine the weekly totals.
Calculate the number of covers per season by multiplying the projected
number of weekly covers by the number of weeks in that season.
Sum the totals from each season to determine your annual covers
Customer Volume Projection Worksheet
Breakfast Lunch Dinner Total
Weeks Covers
Peak Season:
Monday
Tuesday
Wednesday
Thursday
Friday
Saturday
Sunday
Weekly Total
Peak Season Total
Middle-Season:
Monday
Tuesday
Wednesday
Thursday
Friday
Saturday
Sunday
Weekly Total
Peak Season Total
Off-Season
Monday
Tuesday
Wednesday
Thursday
Friday
Saturday
Sunday
Weekly Total
Peak Season Total
Total Year
Project Your Average Check
Average Check includes both food and beverage sales. It should be projected for each meal period as
there can be significant variations among breakfast, lunch and dinner menu prices.
Be sure your average check for each meal period represents an affordable and acceptable price-value
that is consistent with your concept and the target markets you hope to attract. Pricing should be
competitive with other similar restaurants in your market area.
Project Your Sales
Sales are calculated for each meal period by multiplying your projected number of covers by the average
check. Use the following worksheet to calculate your projected annual sales.
Sales Projection Worksheet
Breakfast Lunch Dinner total covers X average check = total sales
When you are done, compare your annual covers, average check and sales projections with industry averages of similar operations. If reasonable, use your sales projections as performance goals for the future.
The Next Step: Financial Projection
Once you complete your market analysis, you will be better equipped to developed realistic financial projections for your proposed restaurant. These projections will help you determine the financial feasibility of your venture.
This guide was updated in 2003 by Bill Ryan and Michael Chrisler of the University of Wisconsin – Extension Center for Community Economic Development and the Small Business Development Center. Assistance provided by Hannah Kirking. This publication was originally written in 1994 with assistance from John Goodpasture, Carl Boger (University of Wisconsin-Stout), James Buergermeister (University of Wisconsin-Stout), Alice Kempen (University of Wisconsin-Extension, Rhinelander), William Way (University of Wisconsin-Stout), and George Weyer (University of Wisconsin-La Crosse,
Business Outreach).
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