How Shake Shack Flipped The Burger Restaurant

The Restaurant Industry in the United States

Restaurant industry sales in the United States have been growing over the past decade and exceeded US$536 billion in 2016. US$259 billion was attributed to the full-service restaurant sector, which includes premium restaurants and fine dining. The limited-service restaurant sector represented US$223 billion of sales. These include the traditional fast food outlets like McDonald’s and also the newer category of gourmet fast food outlets – like Panera Bread and Shake Shack.The restaurant industry can be segmented into three major categories:

1. Full-service (premium) restaurants

Premium restaurants represent 48% of the industry but it is a highly fragmented market, consisting of many small businesses rather than a few big ones. Market players strive to maintain a reputation for delivering a unique, satisfying and memorable customer experience. Even if they can afford to expand and open new restaurants, they are often reluctant to because it may negatively affect this reputation in the perception of customers.

The main advantages in this category are that customers are willing to pay premium prices for the high-quality dining experience on offer. However, the fragmented nature of this market means customers can easily find substitutes and new restaurants can enter the market relatively easily. Also, premium restaurants do not have strong bargaining power with their suppliers. In many cases, the ingredients used are scarce, forcing premium restaurants to accept prevailing market prices.

2. Limited-service fast food restaurants

This category of restaurants is huge. Nine out of the top ten restaurants in the United States by revenue come from this category. Despite its huge size, it represents a typical red ocean market dominated by McDonald’s for now. The success of these companies is largely dependent on huge media expenditure and economies of scale. Customers have plenty of fast food options to choose from, making price an important competitive factor in this category. Not surprisingly, the fierce rivalry among competitors is accompanied by high marketing budgets.

However, players in this category have two advantages. First is the high barrier to entry – new fast-food restaurants simply cannot compete on the economy of scale or brand recognition of established chains. Second is the weak bargaining power of their suppliers – fast food restaurants can negotiate the best deal as there are so many suppliers of meat, flour, and potatoes to choose from.

3. Premium fast food restaurants

Premium fast food is a hybrid category that combines high-level customer experience and convenience with moderate price. In general, players in this category open restaurants based to satisfy certain market niches. For example, Panera Bread, the largest restaurant in this category, targeted customers demanding healthier options that used fresh and organic food. Other players sought to reduce menu choices and improve quality such as the hamburger chain, Five Guys. Customers are generally the young middle-class segment that can afford to pay a relatively higher price for fast food.