Course Overview

Spring 2021 will be the fourth year of offering this course. As of this writing (April 2020), Covid-19 has profoundly impacted the restaurant industry, with the timing and trajectory of its recovery still uncertain. 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 such multinational chains as McDonald’s, and evaluate opportunities inherent in typical restaurant business models as well as those created by changes affecting and shaping the industry.

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.” The continuing impact of Covid-19 is, as of this writing, unknown, but there is no doubt that given the opportunity, both restaurateurs and consumers will seek a speedy industry recovery. We will study how that recovery might best be enabled.

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: An outline of the course as of April 2020 is as follows:

Economics and Growth 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.

Labor. 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.

Technology We will examine the increasing challenges restaurants face in assessing, adopting, affording and maximizing the utility of technological changes such as mobile ordering, order tracking, kiosk ordering with upsell capability, fully automated, self-service check-out, fully integrated POS and kitchen queue systems, and advanced loyalty programs. Which changes are necessary and at what cost? We will also examine the role of technology in addressing issues of food safety.

Menus and other ESG concerns. 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, and how they manage their supply chain. We will also consider packaging - from both food safety and environmental perspectives.

The Future. In our final module we will 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.

Class guests will include industry analysts and investors, industry executives, HBS alumni active in the industry, and celebrity chefs.

Grading will based on class participation (35%), the three exercises (30%), and a final exam (35%). Cross registrants will be accepted. Classes will use the extended sessions on selected dates; see Canvas at term start.