Valuation of the restaurant industry

Valuation of the restaurant industry

With the possible exception of a late night pizza in front of the tube while watching sports highlights, there’s really nothing as tasty as a good home-cooked meal. The sweet smell of food as it sifts through the house can sure help to calm the nerves after a tough day at work.

Fortunately for the restaurant industry, however, home-cooking is becoming a past-time limited to special occasion and holidays. The overall demand for restaurant meals will probably rise as a result of fundamental lifestyle changes. More specifically, people who just don’t have the time to cook anymore still need to eat.

Therefore, these days there is a stronger reliance on restaurants to supply us with the food we need so we can keep working so hard. Several companies in the restaurant industry have started to focus on the home-meal-replacement (HM) market. This can be in the form of either take-out or delivery and is for the people who like to eat at home, but just don’t like to cook there, or anywhere for that matter.

While this idea is hardly new, the HMR experience of most people is a fast-food style meal that just happens to be eaten at home. Now there is a new breed of ESMR meals that can be eaten at home that look and taste like they were made in that room with the microwave.

Boston Chicken is an early and aggressive entrant in the new style HR market, and it very likely that plenty others will soon follow suit.

Too Many Chefs in the Kitchen

The problem that the restaurant industry faces is not on the demand side (having targeted a pretty universal need), but instead on the supply side. There are just too many restaurants out there, and competition is going to increase since virtually every chain operator plans to expand.

While some growth plans are more ambitious than others, in a crowded market, even a moderate number of new entries can present challenges. Even more, barriers to entry are low in this industry, so new eateries are continuously appearing on the scene.

There is also no reason to expect great news on the cost front since labor costs are rising and food costs are likely to do no better than hold steady.

Fortunately, there is always room for a winning concept and investors in this industry have the distinct advantage of being able to taste their investments and form their own opinions, while watching other customers at the restaurant do the same.

If they haven’t already taken the food home, that is.

(Source: Value Line)

Copyright Quality Services Company Nov 17, 1997

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