Competition in the Restaurant Industry and How Entrepreneurs Can Differentiate Their Businesses

A look at how intense competition is in the restaurant industry and the possible strategies aspiring entrepreneurs can implement

The restaurant industry is a highly competitive and populated industry. As such, entrepreneurs need to get creative in order to attain sustainable growth for their businesses. This article outlines the different factors that affect the competitive intensity within the industry and how entrepreneurs can successfully operate within the business environment.

Existing Competition

Our conservative estimates based on reputable sources suggest there are approximately more than 17000 restaurants competing within the food services industry with an online presence. The presence of numerous competitors in an industry could lead to highly competitive behaviour such as price discounting, advertising, and product/service improvements as companies vie for market share. This makes it more challenging for new entrants to establish themselves in the restaurant industry due to the fact they cannot afford to drive prices lower than established brands that enjoy economies of scale. However, due to the advancement of technology, there are a few innovative strategies aspiring restauranteurs could implement to create sustainable enterprises.

Industry Growth 

Industry growth is very slow in the restaurant industry. Between 2016-2019 industry revenue grew by a Compound Annual Growth Rate of 1.50%. A slow revenue growth rate signals a competitive business environment characterised by low-profit margins and businesses vying for more market share. The dangers of low-profit margins were laid bare during the pandemic as smaller restauranteurs and cafes ceased operating.

Product Differentiation

Product differentiation within the industry is moderately high and largely based on different types of cuisine and income groups. In our analysis of over 500 restaurants situated in Pretoria, using data from Zomato, we found that pricing strategies vary substantially depending on the type of restaurant. For instance, the average cost for a meal for two is R198.30, R264.04, and R463.80 for cafes, casual dining, and fine dining restaurants respectively. We also found that there is a weak positive correlation between ratings and pricing: more expensive establishments tend to garner higher ratings. This could be attributed to the fact that more expensive restaurant outlets are able to charge higher prices due to higher quality food and service. Nonetheless, the weak correlation suggests that a higher price is not always accompanied by higher customer satisfaction. For instance, one Casual Dining outlet that charges an average of R380 for two had a 2.6-star rating. As stated in our previous article, a lot of variables impact customer satisfaction and perceived service quality.

The most popular types of food services in Pretoria are Casual Dining, Cafes, Fast food/quick bites, Fine Dining. Given the economic climate in South Africa and the cost of operating a high-end restaurant, it is no surprise that there are significantly more Casual Dining and Café outlets than Fine Dining outlets in Pretoria.

As stated earlier, restaurants tend to differentiate themselves according to restaurant type and cuisine. Pertaining to the type of cuisine, Café, Steak & Grill, Continental, Fast Food, and Italian oriented restaurant outlets have the largest share of the pie in our sample. Cafes are the most popular, accounting for approximately 24% of our entire sample.

In terms of disruption opportunities, aspiring entrepreneurs can look at the least saturated market segments: healthy food, Greek, African, and French cuisine present are noteworthy. However, our opinion is that differentiation strategies should transcend the status quo of competing solely on cuisine. The cuisine is a fundamental ingredient and even though success may originate from that it should not end there.

Switching Costs

Switching costs within market segments are moderately low and depend on the different types of cuisine within the different restaurant categories. However, if a consumer wants to switch from predominately patronising cafes to patronising casual dining, the costs are slightly higher (assuming variables such as income do not change). Likewise, if a usual casual dining consumer wants to increase the share of his/her wallet spent on Fine Dining, he/she will incur more costs. In practice, this could explain why there are significantly more casual dining restaurants and cafes compared to fine dining restaurants.

Low switching costs within the same market segment signal high competition as customers can easily switch between different brands depending on their preferences. To combat this, restaurants usually implement customer loyalty programs to reduce customer churn. The infographic below illustrates a few best practices.

As our brief analysis shows the restaurant industry is quite competitive due to relatively slow industry growth, the disruptions accelerated by the pandemic, moderately low switching costs within market segments and market clusters, and moderate product differentiation. Here are a few strategies entrepreneurs can implement and trends to capitalise on.

Self-Service Systems

McDonald’s was one of the first food service establishments to implement this process innovation in South Africa. For instance, students residing in Hatfield place their orders at self-service machines and collect their orders from the counter. Assistants are on standby to help customers navigate the new systems. This makes the ordering process more convenient as it reduces queuing time, and the user interface is very user-friendly. If you want to implement self-service systems, Oracle is a reputable supplier of such systems.

Virtual Kitchens

Starting a restaurant may seem daunting when you think about the capital outlay. Wouldn’t it be great if you could start a restaurant with all the benefits of a physical location, solid customer base and skilled staff without the exorbitant costs? That is where the virtual kitchen trend comes into play. In practice, this could take the form of an entrepreneur launching a delivery-only restaurant in which a customer orders a meal from an app or 3rd party distributor, and then the order is prepared in a kitchen that is leased by the entrepreneur and delivered by a 3rd party to the customer. This is perfect for entrepreneurs looking to reduce fixed costs and leverage delivery capabilities of 3rd party delivery apps. It is also ideal to test your brand concept and see if there is sufficient demand. Furthermore, there is room for scalability as you can onboard different chefs and team members located in other cities when you are ready to expand your business.

Hobby-Inspired Restaurants (Psychographic Segmentation)

Kuai is our favourite use case for a food service provider that aligned itself to a hobby that is relevant to its target audience: they formed partnerships with gym centres in order to get their target market’s attention. Research shows that the differentiation norm in South Africa is too focused on cuisine. Entrepreneurs should use psychographic segmentation to create unique value for their customers. This could mean forming partnerships with international sports clubs, building a business that is aligned to historical events or hiking or other interests.