1. Copyright © 2014 by John Wiley & Sons, Inc. All rights reserved. Chapter 14 Restaurant Business and Marketing Plans The Restaurant: From Concept to Operation, 7th edition Courtesy of Panificio 1

2. Copyright © 2014 by John Wiley & Sons, Inc. All rights reserved. Objectives After reading and studying this chapter, you should be able to: –Describe the various forms of business ownership –Discuss the advantages and disadvantages of each form of business –Identify the major elements of a business plan –Develop a restaurant business plan –Conduct a market assessment –Discuss the importance of the four Ps of the marketing mix –Describe some promotional ideas for a restaurant 2

3. Copyright © 2014 by John Wiley & Sons, Inc. All rights reserved. Introduction Business plans –Increase probability of success Communicate to financial backers Restaurants –Are experiencing extreme challenges Difficult times 3

4. Copyright © 2014 by John Wiley & Sons, Inc. All rights reserved. Introduction (cont’d) New restaurant operation has a choice of legal entities –Sole proprietorships –Partnerships –S corporations 4 Courtesy of Panifico

5. Copyright © 2014 by John Wiley & Sons, Inc. All rights reserved. What Business Entity Is Best? Under law, all businesses are operated as: –Proprietorships –Partnerships –Corporations Each has different tax consequences –Advantages and disadvantages 5

6. Copyright © 2014 by John Wiley & Sons, Inc. All rights reserved. What Business Entity Is Best? Under law, all businesses are operated as: –Proprietorships –Partnerships –Corporations Each has different tax consequences –Advantages and disadvantages 6

7. Copyright © 2014 by John Wiley & Sons, Inc. All rights reserved. What Business Entity Is Best? (cont’d.) Choice of entity affects: –Federal income taxes –Liability to creditors and other persons –Legal and/or personal relationships among owners –Legal life and/or transferral of the business entity 7

8. Copyright © 2014 by John Wiley & Sons, Inc. All rights reserved. Sole Proprietorship Simplest and the most prevalent –Restaurant operator does not draw a salary for federal income tax purposes Reports as income the profit for the year or deducts, as an expense, any loss for the year –Proprietor is not an employee However, income is subject to self-employment tax 8

9. Copyright © 2014 by John Wiley & Sons, Inc. All rights reserved. Sole Proprietorship (cont’d.) Advantages –Simple and reasonable salary –Funds can be withdrawn Without tax consequences –Business can be discontinued or sold Minimal tax consequences 9

10. Copyright © 2014 by John Wiley & Sons, Inc. All rights reserved. Sole Proprietorship (cont’d.) Disadvantages –Owner cannot participate in qualified pension and/or profit sharing plans –Owner is liable for everything –No legal existence apart from the owner(s) 10

11. Copyright © 2014 by John Wiley & Sons, Inc. All rights reserved. Partnership Any venture where two or more persons endeavor to make a profit –General partnerships Complete liability but full management rights –Limited partnerships Share limited liability with no services performed Advantages –Flexible –No double taxation –Choice of limited or general partnership 11

12. Copyright © 2014 by John Wiley & Sons, Inc. All rights reserved. Partnership (cont’d.) Disadvantages –Same problems of legal liability as sole proprietorship –Partner may create debts for the partnership –Difficult to divide assets if business fails –Death, disagreement, and/or ill health can make perfection into a nightmare –In bad times partners always see the other as at fault 12

13. Copyright © 2014 by John Wiley & Sons, Inc. All rights reserved. Partnerships 13

14. Copyright © 2014 by John Wiley & Sons, Inc. All rights reserved. Restaurant as a Corporation Legal entity similar to a person –Can borrow, buy, conduct business, and must pay state and federal taxes on profits Deciding whether to incorporate –Often depends on insurance coverage If available, a restaurant may decide not to incorporate Insurance will cover and limit sole proprietor’s liability, which might cause financial ruin in the event of a mishap or lawsuit 14

15. Copyright © 2014 by John Wiley & Sons, Inc. All rights reserved. Restaurant as a Corporation (cont’d.) Advantages –Limited liability –Ease of availability and affordability of insurance through group plans –Corporate fringe benefits are available –Can sell and distribute stock –Investor friendly 15

16. Copyright © 2014 by John Wiley & Sons, Inc. All rights reserved. Disadvantages –Double taxation –Takes a lot of money to set up –Usually requires legal and accounting advice Can be costly –Can lose control if too much stock is distributed 16 Restaurant as a Corporation (cont’d.)

17. Copyright © 2014 by John Wiley & Sons, Inc. All rights reserved. Corporate Form 17 © John Wiley & Sons, Inc.

18. Copyright © 2014 by John Wiley & Sons, Inc. All rights reserved. S Corporation Permits business entity to operate as a corporation –Allows it to avoid paying corporation taxes –Avoids a double tax upon liquidation Built-in gains from appreciation of assets –Useful for a family restaurant –Ideal if owners do not want to accumulate after-tax income or if shareholders are in a low tax bracket 18

19. Copyright © 2014 by John Wiley & Sons, Inc. All rights reserved. S Corporation (cont’d.) Provides tax advantages for dependent children or parents Corporation taxes are avoided –Profits from restaurant are taxed according to income brackets –IRS requires officers draw a fair salary so company earnings are not overstated Benefits over two percent of annual salary cannot be deducted 19

20. Copyright © 2014 by John Wiley & Sons, Inc. All rights reserved. Buy–Sell Agreement with Partners Preserves continuity of ownership in the business upon sale –Made up of several legal clauses that can control business decisions Who can buy a departing partner's or shareholder's share of the business What events will trigger a buyout What price will be paid for a partner's share 20

21. Copyright © 2014 by John Wiley & Sons, Inc. All rights reserved. Legal Aspects of Doing Business Steps required in California: –Form a business entity –Identify necessary permits and licenses –Identify local restrictions on proposed business licenses –Obtain environmental or similar permit as needed –Obtain state sales tax permit –Determine applicability of employer registrations –Get insurance 21

22. Copyright © 2014 by John Wiley & Sons, Inc. All rights reserved. Legal Aspects of Doing Business (cont’d.) –Comply with relevant statutes and regulations with respect to employee’s wages –Fulfill occupational and health requirements –Assess applicability of antidiscrimination laws –Check for eligibility for government assistance –File fictitious business name –Meet posting requirements –Obtain and return tax return filings –Learn reporting and notice procedures in event of employee injury 22

23. Copyright © 2014 by John Wiley & Sons, Inc. All rights reserved. State Registration Plans to open a new business should be discussed with the secretary of state’s office –Fees run about $100 for registering a new business –Most states have income tax on wages –State Department of Employee Compensation must be contacted –Cities require permit to operate a business 23

24. Copyright © 2014 by John Wiley & Sons, Inc. All rights reserved. Sales Tax New business is registered with the state revenue –Most states require an advanced deposit or bond 24

25. Copyright © 2014 by John Wiley & Sons, Inc. All rights reserved. The Patient Protection and Affordable Health Care Act (PPACQ), and Other Regulations Most important topic affecting restaurants Restaurants and hotels may also have to deal with other regulations and laws 25

26. Copyright © 2014 by John Wiley & Sons, Inc. All rights reserved. Business Plan Improve chances of operational success –Assist in obtaining financing –Communicate to potential investors –Define operational purposes Key ingredient: –Sustainability 26

27. Copyright © 2014 by John Wiley & Sons, Inc. All rights reserved. Business Plan (cont’d.) Elements –Cover sheet –Description of the business –Description of concept, licensee, and lease –Market analysis and strategy –Competitive analysis –Pricing strategy 27

28. Copyright © 2014 by John Wiley & Sons, Inc. All rights reserved. Business Plan (cont’d.) –Advertising and promotional campaign –Other information –Financial data –Existing restaurant balance sheet –Appendices 28

29. Copyright © 2014 by John Wiley & Sons, Inc. All rights reserved. Business Plan (cont’d.) Mission statements –Generally do not change Goals –Reviewed as often as necessary –Established for each key operational area Strategies or action plans –Who is going to do what, when, and in what order –Specific dates 29

30. Copyright © 2014 by John Wiley & Sons, Inc. All rights reserved. Marketing Philosophy –Patterns the way to relate to guests, employees, purveyors, and the general public Fairness, honesty, and moral conduct –Finding out what guests want and providing it at a fair price –Asks would-be operators: Who will be my guests? Why will they choose my restaurant? Where will they come from and why will they come back?” 30

31. Copyright © 2014 by John Wiley & Sons, Inc. All rights reserved. The Difference Between Marketing and Sales Marketing –Broad concept –Includes sales and merchandising –Determines who will patronize the restaurant and what they want in it –Ongoing effort –Gets into psyche of present and potential patrons –About solving guest problems 31

32. Copyright © 2014 by John Wiley & Sons, Inc. All rights reserved. The Difference Between Marketing and Sales (cont’d.) Sales –Part of marketing –Focuses on seller needs –Activities that stimulate the patron to want what the restaurant offers –Sales mentality exists when seller thinks about only of his or her needs Pushes an item on a customer –Closely related to advertising, promotion, and public relations 32

33. Copyright © 2014 by John Wiley & Sons, Inc. All rights reserved. Marketing Planning and Strategy Marketing plans –Must have realistic goals while leaving a reasonable profit margin Guest satisfaction, market share, sales, and costs SWOT analysis –Strengths, weaknesses, opportunities, and threats Strengths and weaknesses: internal factors and can, over time, be controlled by management Opportunities and threats: external factors 33

34. Copyright © 2014 by John Wiley & Sons, Inc. All rights reserved. SWOT 34 © John Wiley & Sons, Inc.

35. Copyright © 2014 by John Wiley & Sons, Inc. All rights reserved. Market Assessment and Market Demand Market assessment –Analyzes community, potential guests, and competition –Helps to answer the all-important questions: Is there a need for a restaurant? Who will be the potential guests? Market demand factors –Population in the catchment area –Demographic split of this population 35

36. Copyright © 2014 by John Wiley & Sons, Inc. All rights reserved. Market Potential Estimated maximum total sales revenue of all suppliers of a product in a market during a certain period –How many people in the market area are potential customers? –What is the potential for breakfast, for lunch, for dinner? –Will your restaurant attract guests from outside the immediate market area? –Who is your market? 36

37. Copyright © 2014 by John Wiley & Sons, Inc. All rights reserved. Market Segmentation, Target Market, and Positioning Market –Total of actual and potential guests –Generally segmented into groups of buyers Similar characteristics –Within these groups are target markets Groups identified as the best for the restaurant 37

38. Copyright © 2014 by John Wiley & Sons, Inc. All rights reserved. Marketing Director 38

39. Copyright © 2014 by John Wiley & Sons, Inc. All rights reserved. Typical Segmentations Geographic –Country, state/province, county, city, and neighborhood Demographic –Age, sex, family life cycle, income, occupation, education, religion, and race Behavior –Occasions, benefits sought, user status, usage rates, loyalty status, and buyer readiness 39

40. Copyright © 2014 by John Wiley & Sons, Inc. All rights reserved. Positioning Once the target market is identified –Important to position the restaurant to stand out from the competition Focus on advertising and promotional messages Key to positioning –How guests perceive the restaurant Involves tailoring an entire marketing program 40

41. Copyright © 2014 by John Wiley & Sons, Inc. All rights reserved. 41 © John Wiley & Sons, Inc.

42. Copyright © 2014 by John Wiley & Sons, Inc. All rights reserved. Competition Analysis Analyzing competition’s strengths and weaknesses –Helps formulate marketing goals and strategies to use in the marketing action plan Comparison benefit matrix –Shows how your restaurant compares to the competition You choose the items for comparison (e.g., name recognition, ease of access, parking, curbside appeal, greeting, etc.) 42

43. Copyright © 2014 by John Wiley & Sons, Inc. All rights reserved. Marketing Mix: The Four Ps Every marketing plan must have realistic goals –While leaving a reasonable profit margin Cornerstones of marketing –Place (location) –Product –Price –Promotion 43

44. Copyright © 2014 by John Wiley & Sons, Inc. All rights reserved. Market Share Analysis 44 © John Wiley & Sons, Inc.

45. Copyright © 2014 by John Wiley & Sons, Inc. All rights reserved. Place/Location One of the most crucial factors in a restaurant’s success Ingredients for success –Good visibility –Easy access –Convenience –Curbside appeal –Parking 45

46. Copyright © 2014 by John Wiley & Sons, Inc. All rights reserved. Product Main ingredient: excellent food –People will always seek out excellent food Especially when good service, value, and ambiance accompany it Three levels of restaurant product –Core product: function part for the customer –Relaxing and memorable evening –Formal product: tangible part of product –Physical aspects, décor, and a certain level of service –Augmented product: other services –Valet parking, table reservations, etc. 46

47. Copyright © 2014 by John Wiley & Sons, Inc. All rights reserved. Product (cont’d.) Product analysis –Covers quality, pricing, and service Atmospherics –Design used to create a special atmosphere Experiencing greater emphasis Product development –Innovative menu items Added to maintain or boost sales 47

48. Copyright © 2014 by John Wiley & Sons, Inc. All rights reserved. Product (cont’d.) Product positioning –Conveys the best face/image of the restaurant What people like most about it How it stands out from the competition Restaurant differentiation –Owners usually want their restaurant to be different in one or more ways Call attention to food or ambiance Product life cycle –Introduction to decline 48

49. Copyright © 2014 by John Wiley & Sons, Inc. All rights reserved. Price (cont’d.) Cost-based pricing –Calculates cost of ingredients Multiplies by a factor of three to obtain a food cost percentage of 33 Competitive pricing –Checks competition to see what they are charging for the same item © John Wiley & Sons, Inc. 49

50. Copyright © 2014 by John Wiley & Sons, Inc. All rights reserved. Price (cont’d.) Contribution Pricing Method of computing a product’s selling price so that the price contributes to the gross income Amount of labor cost involved with the preparation and service of the menu item Price and quality –Direct correlation 50

51. Copyright © 2014 by John Wiley & Sons, Inc. All rights reserved. Promotion Goals of a promotional campaign –Increase consumer awareness –Improve consumer perceptions –Entice first-time buyers –Gain higher percentage of repeat guests –Create brand loyalty –Increase the average check –Increase sales (particular meal or time of day) –Introduce new menu items 51

52. Copyright © 2014 by John Wiley & Sons, Inc. All rights reserved. Promotion 52

53. Copyright © 2014 by John Wiley & Sons, Inc. All rights reserved. Advertising Extent to which a restaurant needs to advertise depends on several variables –In-house advertising Filling in the Periods of Low Demand –Tie-ins and two-for-ones –Loss-leader meals –Mailing lists 53

54. Copyright © 2014 by John Wiley & Sons, Inc. All rights reserved. Advertising Appeals Six benefit appeals used in restaurant advertising: –Food quality –Service –Menu variety –Price –Atmosphere –Convenience 54 © John Wiley & Sons, Inc.

55. Copyright © 2014 by John Wiley & Sons, Inc. All rights reserved. Social Media Potential for attracting customers –Twitter –Facebook –Pinterest –Tumblr –Instagram 55

56. Copyright © 2014 by John Wiley & Sons, Inc. All rights reserved. Travel Guides for Free Advertising Listing can be worth thousands of dollars in extra sales –Mobil Travel guides –AAA Tour Book pages 56

57. Copyright © 2014 by John Wiley & Sons, Inc. All rights reserved. Free Advertising Yellow Pages Advertising Local telephone director Mailing lists Develop guest loyalty and increase sales by regular mailings –Newsy and informational –Photos of guests 57