Nature of competition in the market and strategies of long‐term profitability

It can be concluded that the market is monopolistically competitive, it allows firms to achieve profitability in the long-run.

The barriers to entry are form average to rather high: on the one hand, it costs pretty much to enter the market, and organizing the business won’t be too easy (many obstacles have to be overcome), and on the other hand it is not always possible to find a suitable location and it is very hard to attract customers from the incumbent firms because this industry is extremely sensitive to customer loyalty.

The suppliers are rather powerful because of their concentration and because luxury restaurants don’t constitute the dominant part of their sales. The costs to switch between suppliers can be high, so good relationships with suppliers are of great importance for the firms, so many restaurants tend to work with more than one supplier at the moment and to build long-term relationships. Some of the ingredients bought are exclusive and therefore have no substitutes. However, suppliers do not form a monopoly and there is no threat of forward integration for the restaurants.

The buyers are not too price sensitive, so they don’t force the luxury restaurants to reduce prices (at least the successful restaurants that have already attracted their most loyal customers). However, the industry specific factor is quality; the customers are very demanding, so the restaurants need to increase their costs in order to provide outstanding quality both of the food and of different complementary services. Another factor increasing buyer power is that switch costs are low. All in all buyer preferences are very important for restaurant’s profitability.

Threat of substitutes is very low. Though there are many different forms of entertainment for rich customers, eating out something exclusively in a luxury atmosphere is an opportunity that can’t be fully substituted. This is one of the main sources for industry profitability.

The competition between incumbent firms can be described as monopolistic competition. A small number of firms (a bit more than a dozen) compete with rather differentiated products. The industry growth is not high, while some significant exit barriers exist; these factors increase rivalry. But the product is differentiated and price elasticity of demand is low, so price competition is unlikely to occur. Most competitors do not face capacity restrictions (although capacities are limited, most elite restaurants fully use them only seldom).

The industry in general is very stable: although the number of competing firms, suppliers and buyers sometimes changes (usually it doesn’t change rapidly), the nature of five forces influencing profitability remains unchanged in is not very probable to change in the nearest future. So in defining the profitable strategy it is not reasonable to rely on industry changes. The possibilities for a single restaurant to reshape the industry profitability are also low.

The main forces that are due to draw attention are suppliers and buyers. They have much power and any company that could somehow reduce it would get a key to higher profitability. As to suppliers it can be close relationship with them, long-term contracts with as many suppliers as possible, both local and worldwide, of food and of beverages, to exploit differences between their offers and to reduce potential switching costs. And buyer power can be reduced, for example, by placing the restaurant close to them (inside the hotels or business-centers) and thus increasing customers’ switching costs. Competition can be won in the short run by shaping the tastes of the consumers (determining the fashion), but the competitors will adjust very quickly, thus restricting the firm’s ability to enjoy extra-high profitability in the long run.

Sources

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1http://www.squidoo.com/top10Friday

2http://www.gurmandia.ru/catalog?check=_ge%3D3000&lt=&ge=3000&text=-+%D0%9D%D0%B0%D0%B7%D0%B2%D0%B0%D0%BD%D0%B8%D0%B5+-&metro=0&kuch=0&submit=%D0%9D%D0%B0%D0%B9%D1%82%D0%B8

3http://www.quickmba.com/econ/micro/indcon.shtml

4http://free-intenet-journal.blogspot.com/2009/08/restaurant-business-in-russia-today.html

5http://www.vamostravel.com/city_breaks/st_petersburg/dining_out.asp

6Mankiw N.G.Principles of microeconomics. – Mason: South-Western Cenage Learning, 2009. – 545 p. (346-347 pp.)