Market Supply | 5 mins read

How Market Supply Impacts Businesses

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Cynthia Vespia

By Cynthia Vespia

What is Market Supply in the Restaurant Industry?

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Restaurant managers look at many different aspects of running a restaurant. But stopping at the surface level won't equate to success or increase a restaurant profit margin.

Supply and demand is a very serious component to take into account. Here's how the market supply impacts the restaurant industry.

Supply in Food Markets

In the restaurant industry, supply means the number of restaurants that make up a certain market in local, regional, or national settings. If a supply is too saturated in one area it increases competition.

New restauranteurs want to avoid a heavily competitive area that has a full supply of similar restaurants. The same is true of any business. If there is too much supply and not enough demand it will lower price points making it hard to earn profit. But in an area where the supply isn't meeting demand, the opportunity to introduce a higher price becomes suitable.

Ultimately, supply is determined by availability. If there's an extensive supply price drop but if there's a shortage then the price goes up. Producers can adjust their schedules to meet supply needs but it takes time for the adjustments to produce results.

Changes in supply and demand
Supply can change when the market changes. These instances include changes such as-

  • The size crop for the year.

  • Population changes - As the population increases, there may be an increase in demand for certain products. These changes can take effect even if they're not worldwide. Different segments of the world can see dramatic increases in demand where others may not. An example would be the market demand for pork in Asia but not in the United States.

  • Changes in income - In a recession, most consumers will limit their spending which can cause oversupply. The curve shift can impact production costs until supply and demand balance out.

  • Preference changes - Diversity in the United States has grown to create an increased demand for different food tastes. Ethnic foods like Chinese or Mexican cuisine oftentimes outsell more traditional American staples like hamburgers. The U.S. population has grown more diverse and many ethnic foods have spread to other groups. There is, for example, a large demand for Chinese and Mexican food among white Americans. This growth may happen at the expense of traditional foods such as potatoes and hamburgers. This shift supply moves in favor of the preferences expressed by consumers.

  • Changes to Substitutable Products - If a substitutable product increases in demand its counterpart can see a decline. For instance, corn syrup is often used as a substitute for sweeteners in recipes. If corn syrup sees a surge due to economical reasons it can impact the demand for sweeteners or sugars.

  • Changes in the population.
  • Changes in income or wealth.
  • Future price expectations
  • The size of the current year's crop.
  • Changes in tastes and preferences.
  • Changes in the prices of substitute products

How Has Market Supply Changed Businesses?

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Food supply has been heavily impacted by industrial and agricultural progress. Starting in the 19th century, small businesses in the food industry have played their part to make products available at affordable prices. Changes to the market supply have seen an increase in more organic products to meet consumer demand for healthier options.

Like other businesses, those in the restaurant industry have to incur any economic shifts that impact supply and demand. Restaurants have a leg up on other services as consumers come to rely on them even during an economic crunch. They are also the first to reap the rewards of growth during an upswing in business. A variety of different businesses from corporate to entertainment can have an impact on the restaurant industry. Some other changes include-

Consumers are becoming more health-conscious and seek food that will suit their new palate. Restaurants have needed to pivot in their production to meet these needs. Healthier meal options and more nutritious ingredients are what might sway a consumer into choosing one restaurant over another. As this trend for healthy eating continues to grow it has an impact on available supply.

Local supply becomes important as restaurants work with local businesses to buy produce and other food products. The trend continues through the 21st century as buy-local campaigns began to trend. Restaurants felt pressure to purchase from local businesses to garner support. This causes local suppliers of food products and restaurant supplies to meet the supply-demand as it grows. These suppliers have an impact on market price. If the supplies aren't available, restaurants will have to seek them elsewhere would cause them to change the price of menu options.

The United States Department of Agriculture states income is the number one driver of restaurant spending. Higher-level income drives supply as consumers demand more products. However, most businesses look for ways to keep their spending costs down while still meeting consumer demand. The first item on the line to go will be meal options. Because businesses account for a large amount of restaurant income when they cut their spending it causes restaurants to shift. On the other side, when income is flowing restaurants tend to spend more. Expansion plays an important part in supply and demand for the restaurant industry.

Supply and demand in new restaurants will be impacted by financing. If a bank reduces credit limits or expansion gets denied, it can heavily impact a new restaurant. When restaurant owners can't meet consumer demand based on these decisions it can cause detrimental impacts.

Conclusion to Market Supply

  • Supply can change when the market changes.
  • The market supply is a significant part of any business including restaurants.
  • Understanding how supply curves impact a competitive market is important for the success of any restaurant.
  • In the restaurant industry, supply is indicative of how many restaurants are situated in a certain area.