The Disadvantages of an Independent Restaurant
Between the fall of 2010 and 2011, the total number of restaurants in the United States decreased, mainly due to independent restaurants that shut their doors. Independent restaurants, those that are privately owned and generally have only one or a few locations, are often at clear disadvantages compared with regional or national chain restaurants. Some manage to overcome those disadvantages and succeed, while others succumb to the chain restaurant competition.
Chain restaurants, particularly national chains with locations across the country, usually centralize or regionalize their purchasing, and the sheer quantity of products they purchase gives them strong buying power. Independents invariably wind up paying higher prices because of their smaller volume of purchases, driving their profit margin down. Independently owned franchises of national chains get the advantage of bulk purchasing but have to pay high franchise fees, an expense that offsets some of the cost savings.
Large restaurant chains usually spend tremendous amounts of money on marketing and advertising their brand, resulting in widespread brand recognition. People know what to expect when they walk into a chain restaurant, regardless of where it is located. They know what their experience will be like, and what to expect in terms of food and value. Any new customer walking into an independent restaurant, especially in the casual and upscale-casual sectors, is taking a gamble, as the restaurant is an unknown to them. Restaurant management expert Bob Bradley says that many small restaurant owners fail to realize that even if their food is fresher and better than the chain restaurant down the street, many consumers simply don’t care. They are more interested in their overall dining experience, and they know what to expect when they walk into a chain.
Banks and investors tend to think that the bigger the business, the more secure their money will be if they invest. Most national and regional chains have a much easier time securing funding than small independents, which is why so many independents fail in the first year. When things get tight, banks are also more willing to work with larger chains, while tightening the reins on the independents. When a restaurant is under-capitalized, owners often start cutting corners, which is usually the beginning of a declining spiral in quality and customer traffic.
No matter how many years an independent restaurant operator has been in the industry, it can’t compare to the combined years of experience found at the corporate headquarters of a national chain. The larger chains, such as Chili’s or Red Lobster, hire only the best people to run the business, and these companies have entire departments dedicated to sales, marketing, finance and innovation. This is not to say that the owner of an independent restaurant can’t run a successful and profitable business, but he won't have the breadth and depth of resources to do it that a chain does.