Strategy and Industry Analysis

Threat of New Entrants:
Cracker Barrel operates in an industry that is capital intensive, yet the barrier to entry in the restaurant industry is low. With low barrier of entry firms can enter at a high pace than other industries. Since 2007, over 1,099 full-service restaurants have entered the market. That is a 334% increase in little over five years. Even with the extensive legal barriers that the restaurant industry poses, these are not enough to detour new entrants. Cracker Barrel stays competitive in this environment by leveraging their superior distribution and leaning on their size to create a small edge through economies of scale. The later is not as lucrative within the restaurant industry, since the economic conditions have drove suppliers to diversify their buyer streams to hedge against a given firms collapse. This in turn, diminishes the ability of firms to create substantial economies of scale.

Bargaining Power of Suppliers:
The restaurant industry displays characteristics that support the notion of low bargaining power for suppliers. Cracker Barrel and other industry leaders purchase large amounts of commodities. With suppliers unable to differentiate themselves, their overall bargaining power is low. The only time suppliers have bargaining power in the restaurant industry is when a buy is dependent on a specific vendor for a high portion of their goods. Cracker Barrel falls into this category with its retail components. The most recent 10-K report states, “approximately one-third of our 2013 retail purchases were directly from vendors in the People’s Republic of China.” Even though this type of sourcing is normal within the retail industry, rising wages in the People’s Republic of China could create a situation where these suppliers become price makers. Based on Cracker Barrel’s size and their sensitivity to rising prices, which increase their variable cost, they would be able to mitigate drastic rise in supplier power via other supplier bids. Recent years of segmented cost of goods sold support the notion that Cracker Barrel has not been adversely affected by rising labor cost in the People’s Republic of China. The uptick in percentage of cost of good sold to revenue, instead, resulted from lower price markups on retail merchandise.

Bargaining Power of Customers:
Cracker Barrel is faced with an industry wide standard of being price takers when it comes to bargaining power of customers. Customer tastes and preferences are the sole component that drives sales figures within the industry. To compete for consumers who not only have varied taste, low switching cost, and more importantly depleted discretionary income; Cracker Barrel must continue to offer quality food at a low-to-median price point. Even though Cracker Barrel’s average check per guest during 2013 was $9.68, which represents a 2.5% increase over the prior year; they must continue to find ways to improve cost controls, and hold prices steady. If Cracker Barrel can continue their cost leadership approach, they will be able to cater to a wide range of customers whom their competitors cannot gain access to due to price. The one area of concern is that Cracker Barrel’s business model relies heavily on travelers. This specific consumer segment is notoriously looking for value. Cracker Barrel can support their slightly higher menu prices, compared to other restaurants that target travelers, by their differentiating factors of quality of food, service, and retail. These elements add value to the consumers dining experience that fast food and other full-service restaurants cannot offer.

Threat of Substitute Products:
Cracker Barrel not only competes with other full-service restaurants but the restaurant industry as a whole. Taking this into perspective, the threat of substitute products is rather high. Based on a highly competitive market and consumers displaying classic signs of elastic demand for food; Cracker Barrel must find ways to combat the increasing threat of substitute products. Furthermore with the current economic conditions, consumers have less discretionary income, and coupled with low switching cost, consumers that previously frequented Cracker Barrel are seeking out quick service restaurants that offer more value. Cracker Barrel has combatted this trend with the creation of two separate strategies. First, management has focused their attention on controlling rising cost. To mitigate the affect of rising costs, they are investing largely in new technology and kitchen equipment that will support operations and reduce cost. Secondly, they have expanded their product mix and introduced Wholesome Fixin’s ®, which are healthy menu options geared towards Millenials. While Standard & Poors estimates Millenials restaurant spending to currently be at 22% - 24%, this number is expected to rise to 40% by 2020. These strategic strategies should allow Cracker Barrel to compete in an environment where threat of substitute is high.

Rivalry Among Existing Firms:
Based on quantitative and qualitative analysis, the full-service restaurant industry is characterized by high levels of rivalry among existing firms. Cracker Barrel exist in a mature industry that is experiencing slow growth rates. Since the end of the recession, the full-service restaurant industry has produced annual revenue growth measures of 2.7%. Industry experts expect this trend to decline to a rate of 1.8% and continue at that pace for the near future. This slow growth means that existing and new firms are competing for the same consumer. Cracker Barrel’s five-year average growth rate is 2.12%, yet this number is distorted by the sales growth in 2012. Taking this into consideration, Cracker Barrel is right on par with the industry forecast. With slow growth rates, low switching cost for consumers, and a low level of market share concentration Cracker Barrel is experiencing ever increasing levels of rivalry from existing firms.

Generic Strategy:
Cracker Barrel’s generic strategy is cost leadership. It competes in an industry that is in the mature stage of market. With bargaining power of consumers being directly tied to price, to compete Cracker Barrel must focus on low cost. Even though Cracker Barrel has a slightly higher average check price, it still measures on the low end in the full-service restaurant industry. To generate better profit margins,

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[ 2 ]. Cracker Barrel Old Country Store, Inc. (2013). Form 10-K 2013. Retrieved from SEC EDGAR website http://www.sec.gov/edgar.shtml
[ 3 ]. Cracker Barrel Old Country Store, Inc. (2013). Form 10-K 2013. Retrieved from SEC EDGAR website http://www.sec.gov/edgar.shtml
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