Supply & Demand in the Restaurant Industry

by Dani Arbuckle; Updated September 26, 2017
Cheerful teenagers having lunch in restaurant

Restaurateurs are often passionate people who pour their love of food into their business. But passion alone will not build a successful restaurant. Supply and demand governs all businesses in a market economy, including restaurants. To be successful in the food business you need to understand how these forces impact you.

Supply: The Availability of Restuarants

In the restaurant industry, supply simply refers to the number of restaurants in a particular market, whether that market is national, regional or local. The greater the number of restaurants -- or supply -- the greater the competition. As a restaurateur you want to avoid markets with an oversupply of restaurants. When there is too much supply in any industry it will drive down prices, making it difficult for businesses to thrive. The restaurant industry is no exception.

Demand Side: The Customers

Supply doesn't mean anything on its own. You need to consider it in light of demand. In the restaurant industry, demand is driven by restaurant patrons, who provide sales. There's only an oversupply of restaurants if the number exceeds customer demand. For instance, in a small town where few people spend money eating out, a dozen restaurants may exceed the local demand. But in a large urban center where many people spend a lot of money to eat out regularly, hundreds of restaurants may not be enough to keep up with demand.

Estimating Supply and Demand

It's essential to look at the supply and demand in the local area where you will be operating. To estimate the supply of restaurants, the University of Wisconsin Extension recommends making a list of the competing restaurants in your area. Write down the name and type of restaurants, and an estimate of how busy the area is during peak hours. You can get an estimate of how busy it is by talking to others in the local restaurant industry, by checking out the restaurant in person or even by calling to ask about the best and worst time to get a reservation. To estimate demand you should look at the demographics for area residents. According to the University of Wisconsin Extension, residents in the immediate area are typically the most important demographic for restaurants, but you should also consider area workers and visitors, if applicable. The Bureau of Labor Statistics provides data about regional spending habits, including the amount of money people spend eating out. You might also be able to get demographic and spending data from local business associations such as the Chamber of Commerce, or you can hire a marketing firm to research local spending habits. Specifically, a marketing firm can survey the local population to find out what kinds of restaurants they spend money at.

Favorable Markets

As a restaurant owner you obviously want to seek out markets where there is more demand than supply. When demand is high and there are few restaurants to fill it, you can expect more potential customers. Conversely, if there is an oversupply of restaurants you can expect fewer customers. Just be aware that market conditions can change quickly and restaurant owners must be able to adapt. For instance, if there is an oversupply of fine dining restaurants in a city and an excessive demand for casual restaurants, then the owner of a fine dining restaurant can benefit from re-launching as a casual establishment.

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