Demand uncertainty and investment in the restaurant industry

Jayoung Sohn, Purdue University

Abstract

Since the collapse of the housing market, the prolonged economic uncertainty lingering in the U.S. economy has dampened restaurant performance. Economic uncertainty affects consumer sentiment and spending, turning into demand uncertainty. Nevertheless, the highly competitive nature of the restaurant industry does not allow much room for restaurants to actively control prices, leaving most food service firms exposed to demand uncertainty. To investigate the impact of demand uncertainty in the restaurant industry, this study focused on the implications of demand uncertainty for investment. The first essay in chapter 3 examined the impact of demand uncertainty on investment and how the impact varies with industry-specific features: franchising and segment. The results showed that the investment rate decreases with the level of uncertainty and the association is nonlinear. That is, the investment drops more rapidly as the level of uncertainty increases. This study further revealed that there is no significant moderating effect of franchising on the uncertainty-investment relationship. When it comes to segment, full-service restaurants are more adversely affected by demand uncertainty than limited-service restaurants. The second essay in chapter 4 explored how managers cope with uncertainty when making investment decisions. In the absence of a clear imperative of what is efficient, managers are likely to scan other peers in the market and mimic their behavior. Focusing on this idea, it tested whether the investment is influenced by peers’ investment activities and whether peer-sensitive firms produce better investment outcomes. Consistent with the hypotheses, sample restaurant firms appeared to be affected by their peers in making investments. The results also indicate that uncertainty is a powerful force that leads firms to follow peers. In addition, it was seen that investment of peer-sensitive firms is not as effective as that of less-sensitive firms in growing market share. Lastly, the final piece of dissertation in chapter 5 analyzed the effectiveness of investment made under uncertainty. The findings indicate that a rise in investment in times of high uncertainty leads to a larger market share, suggesting that well-targeted investment can help firms turn crisis into opportunity to pull ahead of competitors who retreat in the face of uncertainty. However, increased depreciation costs and dwindling sales can hurt the profit margin in uncertain times.

Degree

Ph.D.

Advisors

Jang, Purdue University.

Subject Area

Management|Finance

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