The restaurant industry is extremely competitive and is highly influenced by constantly changing consumer preferences and habits. One of the building blocks you must put in place before opening a new restaurant is market research. Just like a well-crafted mission statement will help guide your business decisions, identifying and understanding your target customers and competitors through market research will give your new restaurant concept a competitive edge.
Carlos Silva, co-founder of Memphis Championship Barbecue in Las Vegas, told Entrepreneur that he initially overlooked conducting market research and had to play catch up before was able to establish a solid presence with customers:
"We opened our first business in the middle of nowhere, and we had to work to get people to go to it.”
We want you to avoid Silva’s mistake by taking the time to research your market carefully, early on in the process of starting a restaurant. We’ve helped make your research research even easier.
For more insight to help you better understand the restaurant industry and the restaurant market read How to start a Restaurant: Your 13 Ingredient Recipe
A Money Guy’s Restaurant Market Research Tactics
According to Certified Public Accountant turned restauranteur Roger Fields, effective market research enables you to:
- Identify the types of customers you will attract
- Hone in on the best type of food to serve
- Predict realistic average check amounts
- Select the most effective marketing channels and campaigns
- Find the most lucrative hours and meal service periods
As you gather data and insights into your target customer base, you will be focusing on and clarifying your ‘regular customer’ persona. The higher the percentage of regular customers in your base, the more predictable your business will be so it’s important to cater to their needs first.
Fields’ 4.5 star-rated book Restaurant Success by the Numbers is regarded as one of the best guides to starting a successful restaurant from scratch by restaurateurs. One Amazon reviewer writes, “The book will probably save me thousands of dollars before the end of THIS year.”
Read on for a breakdown of 5 of the most potent restaurant market research tactics reccomended by the certified money guy:
1. Identify and understand your customers
You may have an idea of what you want or who you think your typical customer is, but that could vary greatly from the folks most likely to dine at your restaurant. To keep your business profitable, clarify your hypothesis, then stress test it using market research. If you have a particular concept in mind, find a market where your type of restaurant will thrive.
As a real-world example, Fields explains what happened when he tried to open a trendy Mexican restaurant on the west side of Midtown Manhattan. He chose the concept to match the existing kitchen in the restaurant they bought and tried to capitalize on national trends for Mexican cuisine.
Yet, he admits, he didn’t pay much attention to understanding who his customer would be. When the business started to lag, he realized the local population of struggling artists could not afford to eat regularly at his restaurant. Meanwhile, for the other segments of the local population – baby-boomers and the pre-theater crowd – the trendy Mexican concept was too niche.
After identifying key factors of the existing customer pool, he transitioned the concept to
Southwest-style fare and décor, and the restaurant flourished. Fields elaborates on his lessons learned, “Your restaurant’s concept—its menu range, cuisine, atmosphere, and price structure—should be selected to attract the particular type or types of customers who are most likely to patronize your restaurant (primary target customers).”
If you want to save time and money on concepts that aren’t the right fit for the local crowd, Fields recommends identifying the following key demographics to zero in on your target customer:
- Average age
- Marital status
- Average disposable income
- Average household size
- Education level
- Average rent and prices of houses, condominiums, and apartments
- Population trends
- Food and beverage sales
- Major employers and industries
Also take note of any “neighborhood traffic generators,” according to Entrepreneur, such as other retailers, industrial or office parks, schools, colleges, and hospitals – anything that attracts people to the surrounding area.
2. Get to Know Your Target Market
How do you know who’s out there and what they like to eat?
There are informal (cheap) and formal (pricey) methods to assess your concept’s target market. The easiest approach is the in-person visit and dine-in at any competitors in your area. Pay attention to the experience and use your phone to discreetly record your observations for later analysis. And don’t forget to tip well!
When it comes to informal research, be sure to pay particular attention to foot traffic volume; how many people live in a square mile; whether there are apartments, houses, or a mix or the two; the makes of cars parked on the streets–or coming in and out of garages; what other businesses are in the area and what other restaurants?
Then dive deep into specific local competitors by dining at each, collecting or photographing menus, studying the price ranges, service speed and quality, and peak times. We’ll look more closely at comparing the competition below.
Beyond personal observation, you can speak with nearby restauranteurs and real estate professionals for more insight about what kind of individuals work, live or dine in the area. Area demographics can also be found online, at local libraries, chambers of commerce, economic development and city planning offices, local business improvement districts and from the U.S. Census.
Websites like Claritas allow users to enter a zip code to find demographics like income, age, or ethnicity and then to link these segments to lifestyle traits, including what they watch and buy, and where they live.
If you’re a member of the National Restaurant Association, you’ll have access to their extensive library of consumer data. Non-members may have to pay for some reports while others are free for everyone.
And if you have the budget, you can also purchase demographic information from credit card companies that compile the dining habits of cardholders. You can gather information on residents living in a particular zip code, including how often a group of potential customers eats out, the average amount they spend for each meal, and the types of restaurants they are likely to frequent.
On a more formal level, you can craft an online survey to collect the dining preferences and habits of locals using websites such as Google Surveys, SurveyMonkey, Fieldboom, and AYTM (Ask Your Target Market). In contrast to focus groups, digital surveys are an easy way to collect anonymous feedback from a large set of people while being less time intensive than an in-person session.
Experts suggest making sure the survey takes less than 7 minutes to complete and is designed to facilitate quick answers. For instance, instead of asking open-ended questions, the survey can use scale-based responses that measure the intensity of behavior and feelings on a topic.
Finally, you can employ the knowledge and expertise of a market research firm that will not only craft and distribute surveys, but they will also help test your brand and concept to make sure your restaurant concept is staying on target as it grows.
3. The Pitfalls of Market Saturation
Your pre-opening research should include not only finding out if your concept is a good fit for local customers, but how your concept fits into the existing pool of restaurants in your market.
In Fields’ example of pivoting from a Mexican to a Southwestern concept, he says his restaurant was the only Southwest-style dining concept in Manhattan’s Theater District, and that this gave it a unique competitive edge.
Your local market may just have too many restaurants for the area’s demographics.
Keep in mind, the ratio of restaurant seats to population may not always give a clear picture in and of itself. For example, urban or metropolitan areas with plenty of wealthy couples without kids may eat out more often than more suburban areas with lower income and more children.
Other factors that may indicate that your local market is overly saturated such as much more restaurant closings than new ones opening and a high turnover of restaurant ownership. State and local restaurant associations can provide these insightful figures.
Restaurant Business recently cited the fact that chains such as Ruby Tuesday and Dickey’s Barbecue Pit have closed locations, while others have filed for bankruptcy protection as proof that overall, the U.S. has reached market saturation for restaurant.
Another sobering statistic is that the number of restaurants is growing at about twice the rate of the population, according to the New York Times. The Boston Globe traced a recent string of high-profile restaurant closings by experienced operators who called it quits after a relatively short run to an overly saturated restaurant market in Boston.
4.Dig Deep Into Your Serviceable Market
Determining your target market means distinguishing your Total Addressable Market (TAM) from your Serviceable Available Market (SAM). The TAM is the total market demand and is used for estimating a specific market’s potential for growth. To calculate TAM, multiply the total number of customers in a market by the average annual revenue of each customer, according to HubSpot.
Your business won’t appeal or be able to service the entire potential customer base so you must find your Service Available Market (SAM) for a more realistic forecast of how much revenue you could bring in. To calculate SAM, multiply the total of targeted customers by the average annual revenue of these types of customers.
We’ve been using the term “market” a lot and some of you may be wondering how exactly the geographic borders of your concept’s market are determined. Again, there’s no simple answer. You need to consider the eating habits of typical ‘regular customers’ of your specific concept. For example, those who dine at fast-food chains or at diners typically choose one very close.
Meanwhile, a hot, upscale concept may be deemed “worth the drive” to customers in a large geographic area. In fact, according to the National Restaurant Association, a fine-dining establishment can draw customers from as far away as twenty or thirty miles.
Studies referenced in Restaurant Success by the Numbers show that casual dining restaurant with standard table service typically draw customers from a one-mile radius while other studies have shown that 60 to 80% of a restaurant’s customer base lives within a five-mile radius.
Determining your serviceable market can get even more complicated if you have to consider transient vs. permanent populations.
Consider Manhattan, where droves of employees commute to the city for work Monday through Friday from surrounding cities and states. A transient population might frequent dining concepts within a few blocks that they can enjoy during a lunch break of before catching their train home. In Fields’ own experience, his and other restaurants in Manhattan’s Theater District get 50% of their business from transient diners – those who do not live in the area but visit in order to see a show.
5. Know Your Customer and Competitor Mix
In the restaurant business, all customers are important. That means that even if you identify your target ‘regular customer’ persona, you still need to satisfy less frequent guests’ needs. As Fields writes, “the goal is to position your concept to appeal to as many different demographic groups and meal periods as possible.”
For instance, if you’re opening your concept in a college town, you may guide much of your decisions to cater to the millennial and post-millennial student population. However, you still need to consider how you will meet the needs of customers who are the families visiting students, university staff, sports fans and any locals who are not associated with the school.
Likewise, when studying your concept’s competition, know that there are two different kinds of competitors. Primary competitors consist of nearby restaurants that offer similar cuisine, pricing, service levels or atmospheres. Any nearby concept, particularly in they generate similar check sizes, are considered secondary competitors, regardless if they have anything else in common with what’s offered at your concept.
For restaurants that serve similar menu items to yours at similar prices, Fields recommends visiting them and taking note of the following:
Market Research Checklist
- Identify what makes them unique as well as how your concept can attract their customer will improving on their dining experience.
- Are your primary competitors formal or casual? Is this working for them?
- Does their location offer your competitors any advantages or disadvantages?
- Are competing restaurants easy to find and access?
- Are their waiting areas and parking lots full? If so, what are peak times?
- Do they offer takeout and/or delivery?
Then do some additional sleuthing:
- Discretely speak with their customers to find out what they like about the food, menu and concept.
- Read social media and newspaper reviews of the restaurants to learn about their reputations.
Better Market Research, Better Forecasting
The high fiscal risks of opening a new restaurant can feel daunting. Yet, the odds of starting launching a successful concept are surmountable when you are armed with knowledge. Proper market research will let you thoughtfully and strategically approach and overcome the challenges you’re bound to face on the way to your next restaurant grand opening.
The bottom line is that you must ensure there is enough market demand to make your business viable. You can do that by getting to know your target customers and market, weighing market saturation, determining your serviceable market, and understanding your customer and competitor mix.
Without this market research, you could do most things in your restaurant right -- great food, trendy concept, awesome décor, expertly trained staff – yet there would be no customers present to enjoy them.