Spanish Tapas are more than a referent of our Spanish traditions and culture. Foreigners come every year to Spain to try and enjoy the different tastes of our typical cuisine. Many of the most well-known Chefs at international level are Spanish and the Mediterranean diet is considered one of the healthier in the world. This is the reason why Spanish restaurants are opening abroad with high success. Being said that, any entrepreneur might be considering the option to navigate in this profitable business. However, before doing any investment we strongly recommend to analyze carefully the industry which is quite competitive and sensitive to changes in customers’ demand.
Since we want to maximize the reward from a possible investor, we are going to focus on the USA market because it has one of the largest DGP and population with purchasing power and then, more security and sustainability to start up a new business. In addition, the Hispanic population in the USA has already surpassed the 14.99 million, making any business related with Spanish food more profitable due to the cultural approach to the Spanish culture in terms of tastes and ingredients.
In order to deliver recommendations, we need to understand the competition and profitability of the restaurant industry in the USA. Bellow we will analyze the five main threats affecting this industry applying the Porter´s framework.
Porter’s Analysis about Spanish Restaurants in the US
The threat of Suppliers
Since the market relating to suppliers is so big and widespread there is always another supplier near that might offer his products for a better price. Restaurants in this market can find plenty of alternatives thus, the threat of suppliers is rather low.
The disadvantage for a small firm is that their large-scale competitors (such as big chain restaurants) could bargain the prices, whereas small firms cannot. Despite that, the amount of suppliers is plentiful and in close proximity, which gives the small firms power to choose and possibly also bargain.
The threat of Buyers
Americans are the biggest consumers of food at restaurants conditioned by their lifestyle focused in their jobs and with medium to high purchasing power. However, American palates are changing since there is an increased social media and television coverage that expand consumer awareness. Some 52 percent of millennials are more likely to visit a restaurant that offers new or innovative flavors, according to Technomic’s most recent flavor consumer trend report.
All in all, Spanish dishes and Mediterranean food are the kind of meals that Americans are demanding since they offer a healthy and flavor variety of ingredients and innovative dishes. According to the Fishbowl’s top 30 emerging brands report, Mediterranean food is considered the second choice for consumers in United States. In other words, a Spanish restaurant will be highly attractive for consumers at this market being the threat of buyers very low.
The threat of new entrants
A threat of new entrants appears when entry and exit costs to an industry are low and the technology needed to start and maintain a business is commonly available. According to Forbes, the initial investment needed to set up a new restaurant goes from $100,000 to $300,000. However, renovating an existing restaurant with a similar concept, enter the industry through a franchise agreement or lease premises and equipment will cost less.
Restaurants are highly regulated by various state and local health authorities but, getting the necessary licenses are pure administrative procedures and the cost of them to open a restaurant in the USA is between $5,000 and $6,000 according to Inc. 5000 magazine. As a conclusion, this threat can be considered very high mainly because entry costs are low.
The threat of substitutes
The high availability of substitute options contributes to the strength of this force which cannot be ignored. Consumers can easily move away from Spanish Restaurants toward substitutes because it is easy to do so, based on the low switching costs and in the high availability of options (other dining restaurants or eating at home). In this regard, high differentiation is an important factor and the concept of tapas that allow customers to try different dishes during the same visit might become a differentiation factor address a competitive advantage. In addition, and according to the ZAGAT report for 2016, the national average checks per person was $36.30, thus maintaining the prices close to average will decrease the risk of losing clients.
Restaurants can mitigate this threat by being updated about the latest trendy foods, tastes and preferences among their customers. Also the American culture is becoming high tech demanded thus, adding technological aspects, such as online reservation systems or reviews in their business will become a competitive advantage.
Rivalry among existing firms
Looking at the bar chart, it can see the restaurant market sales is growing, encouraging new investors in this market. Since the restoration industry does not require economies of scale, has a low initial capital investment requirement, low consumer switching costs, easy access to distribution channels, and low exit costs, many competitors can be already found in the market.
For this reason, there are already many Spanish restaurants well established in USA, which could also be positive since consumers have already been exposed to this type of food and might have developed a taste for it.
The deep analysis of the Five Forces Framework indicates that there are several threats in this industry and the potential for industry profitability could possibly be low. The high threat of new entries, the rivalry among existing firms and the threat of substitutes, are forces that each one on their own could extract industry profit. At the same time the suppliers’ and buyers’ power is low, the market sales in the industry are growing, the American consumers’ purchasing power is high, the Spanish Tapas cuisine is increasingly popular and consumers are demanding healthier food, which means that with a good business strategy, such as a differentiated product, competitive prices, technological adaptations, and a good marketing strategy, there is always a possibility for extending the pie.