HBS Course Catalog

Challenges and Opportunities in the Restaurant Industry

Course Number 1564

Senior Lecturer Michael S. Kaufman
Spring; Q3Q4; 3.0 credits
28 Sessions
Paper/Project

Course Overview

Covid-19 has profoundly impacted the restaurant industry, with the timing and trajectory of its recovery playing out in real time. Consequently, this course will pursue two related paths: examining (i) the traditional business parameters of restaurants and (ii) the various forces that are changing and disrupting the restaurant industry, including Covid-19. We will consider management challenges confronted by restaurateurs ranging from entrepreneurs operating and investing in start-up restaurants and emerging chains to multinational chains, and evaluate opportunities inherent in typical restaurant business models as well as those created by changes affecting and shaping the industry.

We will use written cases, as well as “live” cases with protagonists facing real-time challenges. We will draw on industry analysts and investors, industry executives, HBS alumni active in the industry, and well-known chefs.

Background. Prior to Covid-19, eating out was ubiquitous. 9 in 10 consumers said they enjoyed going to restaurants and half of consumers considered restaurants to be an essential part of their lifestyle. Restaurants were, and will continue to be, an important source of employment: through February 2020, the industry was the 2nd largest private employer in the US, with over 60% of adults and 70% of millennials in the US having worked in the restaurant industry at some point in their life and 1 in 3 Americans having their first job experience in a restaurant. Restaurants have provided significant management opportunities for women and minorities: in 2018, 57% of first-line supervisors/managers of food preparation and service workers were women, 18% were African American, and 17% were of Hispanic origin. The number of women and minority owned restaurants had been steadily increasing.

Restaurants are also big business. In 2019, US restaurant industry sales topped $860 billion representing a $2.5 trillion economic impact and approximately 4% of the US gross domestic product, with more than one million restaurant locations across the US and 15.3 million industry employees. While scaled restaurant operations are frequently featured, interestingly approximately 70% of restaurants in 2019 were single unit operations. Restaurants have also attracted significant interest from venture capital and private equity and the industry recently spawned a number of “unicorns.” Despite the massive impact of Covid-19, there is no doubt that given the opportunity, both restaurateurs and consumers seek a speedy industry recovery. Variants, labor shortages, supply chain issues are among the barriers that the industry is seeking to manage.

Despite its pervasiveness and intimate consumer interaction, the industry has been lightly studied. We hope to engage not only with students interested in the restaurant industry, but also those interested in food and sustainability, applications of technology and, given the labor-intense characteristic of restaurants, the complex interaction of food and labor costs with consumer value. The course may also appeal to future consultants, investment bankers and venture capital/private equity professionals, as well as to students interested in general management, particularly in an industry subject to hugely disruptive forces and spawning compelling investment opportunities.

Content:

Growth and Scale. This module will examine the factors that have traditionally determined profitability and valuation, including actual and theoretical food costs, calculation of the “magic number,” and occupancy costs. It will consider growth potential and exit strategies for successful restaurants and emerging chains, including the advantages and disadvantages of franchising, institutional investment and leverage. We will also consider the challenge of scale – how to achieve it and how to manage it once achieved. We will consider the differential impact of Covid-19 on different restaurant brands and formats to understand lessons learned for the future of the industry. And importantly, we will consider whether the Covid crisis might lead to a more sustainable financial model for restaurants.

Menus and Food Safety. Chefs and restaurateurs often say they offer what their guests want to eat but many are also interested in the healthiness and sustainability of their offerings. We will examine whether and how chefs lead or follow trends, how they distinguish trends from fads, what drives their selection of menu items, how they manage their supply chain and whether post-pandemic, consumers are likely to change their food preferences. We will also consider the critical issue of food safety and the crisis management implications when a foodborne illness strikes.

Franchising. How does it work? When does it make sense from both investment and brand perspectives? Recent HBS alums have pursued franchising of quick-service restaurant brands – we’ll study both the challenges and opportunities they encountered. We’ll also view franchising from the franchisor perspective, including when a franchised brand goes off the rails.

Technology. We will examine the increasing challenges – and in light of the pandemic, the increasing necessity -- restaurants face in assessing, adopting, affording and maximizing the utility of technological changes such as mobile ordering, delivery, order tracking, kiosk ordering with upsell capability, fully automated, self-service check-out, fully integrated POS and kitchen queue systems, and advanced loyalty programs. We’ll also consider the rapid growth of “ghost kitchens” and how restaurateurs are developing asset light models providing consumers with increasing choices among brick-and-mortar restaurants and delivered meals.

Culture and Compensation. The execution of restaurant/dining experiences requires a focus on both hospitality and profitability – how can cultures be developed to deliver both consistently? Among the most significant challenges facing the industry are the decreasing availability, increasing cost, and high turnover in the labor force. We will examine the responses of the industry to these issues, especially in light of increasing concerns about how to bridge the gap between consumer willingness to pay/perception of value and the hurdles restaurants face in trying to pay living wages.

Monetize and Exit. We’ll examine how founders consider a partial or complete exit and the criteria they established for a possible sale, as well as how the markets evaluate a public restaurant company and the factors that drive valuation.

The Future. In our final module we will step back to consider what the future might look like focusing on major disruptors in the industry, including the impact of Covid-19, the advent of robotics, delivery services, new entrants including virtual restaurants and delivery only, supermarket and convenience store offerings, and completely automated establishments.

Three classes will be devoted to exercises that students will prepare and submit in advance of and debrief in class before industry experts who will participate in the class. These exercises will be graded.

Grading will be based on class participation (40%), the three exercises (30%), and a final exam (30%). Cross registrants will be accepted.






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