Red Robin Gourmet Burgers: Industry Analysis on Supplier Power and Relationships, Exams of Introduction to Business Management

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Red Robin Gourmet Burgers

Industry Analysis

BUSA 499

Scott Austin

Julie Paulson

Andy Stolz

Oakley Tyler

Emily Ward

Industry Report

Red Robin Gourmet Burgers, Inc., together with its subsidiaries, develops, operates, and franchises casual dining restaurants that serve gourmet burgers in the United States and Canada. As of December 30, 2007, the company operated 384 restaurants, of which 249 were company-owned, and 135 were operated under franchise agreements, including 1 restaurant that was managed by the company under a management agreement with the franchisee. As of the above date, Red Robin Gourmet Burgers, Inc. had restaurants in 40 states and 2 Canadian provinces. The company was founded in 1969 and is headquartered in Greenwood Village, Colorado (RGB, 2009). Red Robin is a member of the foodservice industry. Foodservice is defined as the sale of food and drinks for immediate consumption either on the premises from which they were bought, or in designated eating areas shared with other foodservice operators, or in the case of takeaways transactions, freshly prepared food for immediate consumption (Datamonitor, 2008).

Porter’s Five Forces Analysis

The Threat of New Entrants

This is an area that puts Red Robin under pressure. Although there are some barriers to entry, there are also many things that make this an easy market to enter. This puts them under constant pressure to differentiate themselves from all of the other foodservices facilities they are surrounded by. When people are going out to eat, they consider a lot of other restaurants in their decision. The number of substitutes in this industry is very high, and that is due to the low barriers to entry. All of these things considered, there are still many small barriers that would deter someone from entering this industry. The three main barriers faced by possible entrants are rising food prices, economies of scale, and the fact that this is already a heavily populated market that has reached maturity. Although these are not as strict and

Another factor that makes this market appealing is the limitless amount of suppliers. There are many different places to get the supplies that you need to make your food. This allows you to search around to find you cheapest and most quality options. It also ensures that you are getting competitive prices on your supplies because the supplying industry is also mature and very densely populated. This gives possible entrants a sense of confidence that they will be able to keep variable costs low. Another issue to consider is the fact that there are relatively low levels of capital involved in running a restaurant. This allows entrants easy access to this market, because it does not require very much cash, and less capital is at risk in comparison to many other industries. This increases the number of people that have the capabilities to enter this market. This is a large contributor to the density of this market. Low levels of required capital make it very easy to enter. The final issue to consider is the inability to maintain a true competitive advantage. This was listed as a barrier, but it is also a contributor to the markets attractiveness. It makes possible entrants believe that they can compete with even the largest of restaurant chains. Their food can taste just as good, and their environment can be just as fun. Everything can be easily duplicated, and this allows everyone to compete with everyone. Although there are several factors that make this industry difficult to enter, there are far more that make it a simple one to enter. Everyone can compete with everyone, and no one can truly establish a competitive advantage. It is also inexpensive compared to many other industries. The restaurant industry is a very easy one to enter, and this forces Red Robin to be continuously innovating in their marketing strategy to appear better than the rest of the competition. Without doing this, they will lose customers, and in turn, they will lose their market share.

Bargaining Power of Suppliers:

It is understood that if suppliers are giving their customers a commodity good than the suppler holds little power. This is because there are great chances of more than one supplier supplying that commodity. With that being taken into account we can now look more in depth at the bargaining power of suppliers in the foodservice industry. By doing this we can better understand why the suppliers do not hold an extreme amount of power. In the following situations the buyer is Red Robin and the suppliers consist of those providing the food to Red Robin. If there are only a few large suppliers and they are more concentrated than the industry to which they sell then the supplier holds power. In the foodservice industry there are fewer suppliers than there are firms. In this situation the suppliers hold more power because they represent a higher percentage of the industry in comparison to an individual firm such as Red Robin. In the foodservice industry there are a number of satisfactory substitutes available, and because of this the buyer holds power. There are a number of different suppliers in

the industry that offer comparable products, thus providing the buyer with more power. For example, if the supplier of Red Robin’s hamburger buns decides to raise prices, Red Robin could either get a new style of bun or buy from a different supplier. This places power in Red Robin’s hands. In the foodservice industry suppliers’ goods are critical to the buyer’s market place success; as a result the supplier has power. Without the food products being supplied to Red Robin they would have little success. They would not be able to stay in business if they could not get suppliers to sell them the food products needed to run their everyday operations. The products supplied to the foodservice industry are for the most part standardized, and as a result the suppliers hold power. Like most of the industry, the food products supplied to Red Robin are standardized. The process could be very easily duplicated. If one supplier refused to supply Red Robin it would be relatively easy to find another supplier to begin supplying the products. The products supplied to the foodservice industry are all commodities, and this means the buyer holds power. These commodities consist of many items including meat patties, hamburger buns, and chicken breasts. Since the items are commodities it is easier to find different suppliers if Red Robin is unhappy with the one they are using. From these situations we can see that both the suppliers and Red Robin hold power. However, because the products being supplied are commodities the suppliers hold little power. Although Red Robin may hold more power, they do not have enough to completely influence the activities of the suppliers, but their option to switch suppliers would be relatively easy. **The following is a general supply chain for the foodservice industry and is not company specific. **

1. Raw materials (chickens, cows, grains, potatoes, etc)
2. Transportation
3. Processing facility (butcher animals/ mix and cook grains into baked goods/ slice potatoes into fries)
4. Transportation
5. Storage facility (cold storage for meats and vegetables/ dry storage for grains)
6. Transportation
7. Red Robin restaurant (prepare the food for consumption)
8. Customers go to Red Robin to eat prepared food By dissecting the supply chain for Red Robin it is clear to see that they fall towards the very end of the chain. They must realize that they are close to being the end consumer of the products being supplied, but because they buy their goods in bulk for their restaurants they do hold some amount of power in the supply chain.

By taking these questions and situations into account it is easy to see that both the buyers and Red Robin have some amount of power. However, the buyers clearly hold more power in the relationship. Because of this Red Robin must continue to give the customers/buyers what they are looking for when they go out to eat. If Red Robin does not do this it is easy for the buyer to switch to an alternative or a competitor.

Threat of Substitute Products:

Due to the nature of the industry that Red Robin belongs to, there is a high threat of substitute products. Because of the high threat level, Red Robin must always be proactive not only in their food products but also in their pricing. If they price products too high their customers will result to buying substitute products. The problem that arises from this is that Red Robin may not carry that specific substitute. This means they would lose that customer to a substitute. Substitute examples for Red Robin: Beef patties for burgers- chicken patties, turkey patties, veggie patties, etc French fries- side salad, mash potatoes, soup, bread, etc Soft drink- water, juice, beer, wine, etc Red Robin tries to remain competitive and reduce the risk of substitute products by creating a menu that offers a wide variety of food types. Red Robins menu has food ranging from burgers, fries, salads, Mexican, and Italian just to mention a few. In addition, they remain reasonably priced on all their meals. By offering a wide variety of food on their menus and pricing their meals competitively, Red Robin is able to reduce the threat of substitute products. However, they are not able to totally eliminate the threat, and due to the nature of the industry they will probably never achieve that.

Rivalry

Rivalry in the foodservice industry is high due to many factors including the large number of firms within this industry. Many firms are competing for the same market which creates struggles for leadership within this market. Rivalry is also generated from businesses that are not within the foodservice industry because consumers can make the choice to not go out to a restaurant to eat at all, and simply cook their meal at home. However in today’s fast paced society, the convenience factor of going out to eat in order to save time is generating growth in the foodservice industry sector, and with low barriers to enter and exit this market, rivalry has intensified. There are also very low switching costs within the industry which increases rivalry. A customer could freely switch from one product to the other. The foodservice industry is very large and prices can vary immensely depending on the restaurant that a consumer might choose to go to. This alone creates immense rivalry amongst competitors within this industry.

The foodservice industry also has very low levels of product differentiation. A customer can purchase a hamburger and fries at any fast food restaurant and receive a similar product from each establishment. Brand loyalty definitely comes into play here because some people may favor McDonald’s over Burger King or Applebee’s over Red Robin. However the low amount of product differentiation amongst these establishments creates even more rivalry. Within a certain price range any consumer has many different businesses to choose from to eat at. The change in preference for any consumer could change on a day to day basis depending on mood or personal tastes. If a person can get a similar product at many places, they could be more likely to go to different establishments, rather than staying loyal to one.

PEST Analysis

Political

There are many important issues to consider when thinking about the political environment surrounding the restaurant industry. There are many laws and regulations that have been put into effect that change the ways restaurants must do business. This can add expenses, time, and difficulty to all of the individuals in the industry. The main laws involved in the food industry are those regarding child and teen labor, minimum wage, tips, overtime, taxes, and food safety. A lot of these are also related to other industries. However, food safety is one that is very industry-specific. The food safety laws are very specific and have specific rules for each type of food. This can greatly increase your expenses, because of all of the addition care that must be taken due to these laws. Also, this requires more training of your employees to ensure that the food is properly taken care of. This can be a very expensive and time-consuming set of laws and regulations to follow. The issue of taxes and tips is also something to consider. This requires extra accounting methods and can also increase time and expenses. The treatment of these tips is something that occurs behind the scenes, and most people do not consider it. However, it must be taken care of, and companies must leave room in their budgets for these additional accounting methods to consider. Another issue that not only applies to the food industry, but all service industries is the Americans with Disabilities Act (ADA). All of their restaurants must be handicap- accessible to treat possible employees with disabilities fairly. This is also something that can add to the expenses of a restaurant because handicap accessibility is not always easily attained. They also must comply with the public health rules at the same time. One overshadowing issue that is potentially harmful to this industry is that of genetically altered food. The restrictions on this type of food are much stricter in Europe,

time, such as, cooks and managers. Waiters, hosts and bus-people, are typically part time workers ranging from the ages of 16-44 (Bureau of Labor Statistics, 2008). However we can see a trend of younger workers entering these fields because of the low level of skills required for hire and the flexibility of the late night shifts, as some are students. The compensation of these workers usually is the state minimum wage and no benefits such as retirement, health insurance or dental insurance are provided. An Industry average wage for a wait staff member is $7.08, compared to an average hourly wage of a first line restaurant manager which is $12.22. As a result the turnover rate is very high in these fields, which can add to costs overall. However, with the unemployment rate at around 7% nationally there is no shortage of willing, under-skilled workers to hire. This could work to the industry’s advantage since they are less willing to negotiate upwards in pay and benefits and more likely to attempt to retain their positions. The General Contractor industry plays a major role in the development of the Restaurant industry. Since the construction industry is based upon business cycles we are seeing a slight downturn in building over the last year. Since expansion is based upon demand, we can see that this industry is slowing slightly and simply maintaining the current number of restaurants they are building. A growing demand for building projects that use environmentally friendly and energy-efficient materials has spurred a green movement in the construction industry as well. This is something that consumers are looking for when they patronize a new restaurant and can also give a restaurant a competitive advantage within the industry as well as reducing overhead costs. With the push to go green, builders are now trying to use recycled materials and reduce their waste during construction. Since most consumers demand transparency in the business they affiliate themselves with, restaurants could in fact, when expanding, post how much of their restaurant is recycled and how little waste they used in building that new restaurant. By exposing their carbon footprint they are gaining the trust and respect of consumers who are very concerned with the environment. Along with building is the cost of the raw materials, such as lumber and other supplies. As we see a shift to the decline of building overall, we also see a decline in the prices of these raw materials. This could be, if the market sustains it, a good time to be building new restaurants since the cost is significantly lower because of the economic times. Executive Director, Achim Steiner of the UNEP, stated early this year, "We need to deal with not only the way the world produces food but the way it is distributed, sold and consumed and we need a revolution that can boost yields by working with rather than against nature," added Steiner. The United Nations predicts that in the next 10 years food costs will have gone up 30-40% (The Economic Times, 2009). In the U.S. finished food costs have risen 3.8%, along with the rise in proteins, flours and kitchen staples. This means the restaurant industry needs to be purchasing smarter and attempting to cut costs without sacrificing quality. They can do this by consolidating the products between vendors and purchasing locally.

Social

With the food supply chain now expanding globally, health and environmental concerns are placed at the feet of not only government officials, but also restaurants. With the recent outbreaks in contaminated food, more consumers are demanding the higher standards be met when inspecting food for mass consumption. Restaurants have been petitioning congress to vamp up safety precautions and to require safety plans to be submitted not only by local growers, but foreign as well. This would ensure that if a recall was necessary the grower would now face full responsibility since they deviated from their plan. “The National Restaurant Association and its members are increasingly involved not only in ensuring safe food preparation inside the restaurant, but in driving changes all the way back through the supply chain, to take on a more influential role across the entire life cycle of food” (Donohue, 2009). Along with the call to ensure safety of food served in restaurants, is the demand to serve healthier options to clientele. With the growing rate of obesity in North America the lower calorie options are attracting more and more customers who still wish to eat out, but stay on their diet. This could be a great market niche to expand upon and really differentiate your restaurant in the marketplace. Another social factor impacting the industry is the desire to buy local produce. This of course is contingent upon where your restaurant in located, however a restaurant could offer seasonal meals and side dishes depending upon their location and the time of year. This would reduce their carbon footprint, ensure the highest quality of produce, and help to support the local community, which is great public relations and a good marketing platform. In regards to the employees of the restaurant industry, most have the attitude that this is temporary job, meant to sustain them through their education or until something better comes along. Most restaurants are doing nothing to attempt to retain their employees, such as giving benefits or extensive training. With most at minimum wage the turnover is significant and has an impact on the overall culture of the business. The job is a high stress job, which requires you to be on your feet throughout the shift dealing with customers in a friendly way that exemplifies your company. This can be hard on an employee, and thus the employee attitude must be taken into account for your competitive advantage in the industry. A restaurant that focuses on its employee will see a happier, healthier employee with a higher level of loyalty to the company. Along with the stress of working in a restaurant are the added hazards, especially in the kitchen areas. With stoves and ovens on, the workers are cramped in a tight space working very quickly to get the orders out in a timely fashion. This can cause an unsafe work environment and thus safety issues need to be addressed. Restaurants need to have extensive safety training for all employees, and constant updates on current safety procedures as they become due. This will decrease a company’s liability and potential for lawsuits against them.

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