Dizzy Whizz, Research Paper Example

An economic analysis of a business is a way to determine the business’s financial status in its industry. In addition, it gives an overview of the business’s competitive position. This overview can also predict how a business may fare in the future, based on existing trends. This analysis is based on a small business, starting with an overview of its history.

History and Location

This is an economic analysis of a small restaurant called Dizzy Whizz. Located in Louisville, Kentucky, Dizzy Whizz has been serving the community since 1947. This makes Dizzy Whizz, arguably, the most well-known, non-retail chain, community restaurant in Louisville. Even though this restaurant has been in business for over 60 years, it still only has the one location and still caters to 1940s and 1950s traditions of counter seating and curbside service. According to its website, Dizzy Whizz customers who choose to use the curbside service, instead of walking into the restaurant, do not order over a speaker, but a server comes out to their cars to greet them and take their orders by hand—just like in the old days. Customers also have the option of coming into the restaurant to place their orders and may eat inside the restaurant or get their orders to-go. The restaurant is open 7 days a week with hours of operation varying from 6:30 a.m. to 11:00 p.m., depending on the day of the week (DizzyWhizz, 2014).

As seen on its website, Dizzy Whizz is a family-owned “Mom and Pop” restaurant that serves a variety of dishes for breakfast, lunch, and dinner, with some reasonable prices, as seen on its online menu. However, its most popular menu item is its famous specialty burger—the WhizzBurger™—that it serves with the customers’ choice of sides, drinks and desserts.

Product Offering Demand

There are certain factors that have an impact on demand for products, particularly food products for people looking to eat meals outside of the home. Factors that influence demand for Dizzy Whizz products include those related to a customer’s income, demographics, and time constraints, as well as the restaurant’s location, prices, and food quality. This is a consumer demand economic model that considers household behavior (Stewart, Blisard, Bhuyan, & Nayga, 2004). According to a USDA report, this economic model postulates that consumers consider more than just prices when deciding to eat meals outside the home. They consider the cost of consumption (Stewart, Blisard, Bhuyan, & Nayga, 2004) factors such as travel time to the restaurant, time needed to prepare food, time needed to eat the food, and time needed for clean-up after a meal. Additionally, time constraints on the household manager who usually prepares food (opportunity costs) and the household finances are also factors that determine demand for restaurant food as well as how the quality of the restaurant’s food is perceived.

Therefore, since Dizzy Whizz offers menu items for all three meals of the day as well as snacks and desserts, its product offerings are well-suited to meet the demand for convenience, time savings, and the desire for its food.

Product Offering Supply

As with demand, there are also factors that influence the supply side of a business. Factors that influence supply for food products include today’s healthy eating trends, consumer dietary restrictions, affordability, and food taste, according to the United States Department of Agriculture (Guthrie, Lin, Okrent, & Volpe, 2013). However, Dizzy Whizz’s menu seems to have very few, if any, healthy choices. Therefore, factors influencing supply for this particular restaurant are likely accommodating the consumers who prefer Dizzy Whizz’s offerings, particularly its WhizzBurger™ and fries. This assumption is made from studies showing that Americans do not eat enough whole grains, vegetables, fruits, and low-fat dairy, but instead prefer high amounts of convenience foods, such as fast food (Guthrie, Lin, Okrent, & Volpe, 2013). This lends to Dizzy Whizz needing to ensure enough of its food offerings are available to consumers who choose to eat at its restaurant.

Price Elasticity of Demand

Two important concepts in economics that pertain to supply and demand are price elasticity of demand and income elasticity of demand. To explain, price elasticity of demand is the measure of how demand for a product changes with price fluctuations. For example, if demand for a product does not change very much with changes in prices, then it is inelastic. Altrenatively, if demand changes significantly with changing prices, then it is elastic. For example, a customer may no longer wish to purchase an item that has been marked up to twice its original price. Additionally, demand is more elastic for a product when there are many substitutes for that product (NetMBA, 2010). Examples of products that are usually inelastic are those considered to be necessities, while luxury product demand tends to be more elastic. According to NetMBA, price elasticity of demand is the proportionate change quantity divided by the proportionate change in price.

As noted above, Dizzy Whizz’s most popular food item is its WhizzBurger.™ The website does not show the price for just one burger but it shows a price of $5.55 for two of them, as a 2-for-1 special. Therefore, speculatively, the elasticity of demand for the WhizzBurger™ is likely to be inelastic. This is because, first of all, the product is a food item, which is a necessity in life. Second, the price of the burger has likely fluctuated over the years, but people still continue to buy it. Demand for this item has not responded much to price fluctuations over the life of the product thus far, and this will likely remain the same, based on the restaurant’s sales history (DizzyWhizz, 2014). In addition, demand for this product is likely elastic because there are many substitutes for it in the marketplace. As far as changing the price of the WhizzBurger™ to increase sales, I would suggest leaving the price as is, because Dizzy Whizz has been in business for over 60 years and the WhizzBurger™ has been in existence for over 50 of those years. Therefore, they must be doing something right, as the burger is still the most popular item on the menu, according to the website (DizzyWhizz, 2014).

Income Elasticity of Demand

According to the World Health Organization (WHO), income elasticity of demand refers to the measurement of the effects of changes in income on demand. The WHO explains that income elasticity is represented as the change in consumption (in percentages) with a 1% change in income (WHO). Suttle (2010) states that “income elasticity measures the relationship between sales and consumers’ incomes.” This means product sales of any product are likely to decrease, if the purchasers’ incomes decrease.

As far as the WhizzBurger™ is concerned, regarding income elasticity, I assume that if someone’s income decreases, then that person would likely not eat at Dizzy Whizz, or any other establishment outside the home, as much. This is because most people will find ways to cut corners and save money when they find that their finances are in a crunch. Therefore, it remains that even though food is a necessity, as stated above, food at restaurants is not a necessity. Therefore, in tough economic times, people are likely to forego eating out to save money on food and the gas it takes to travel to the restaurants. However, even if incomes fall, Dizzy Whizz could still see people coming into the restaurant and buying their food, if they offer substantial discounts and specials during tough economic times. Many times, companies, small businesses in particular, may need to be creative with their product prices, according to the flow of the economy.

Cross-Price Elasticity of Demand

Various products fall into categories of substituting, complementing, or not being related to each other. This is determined by calculating cross-price elastic for a product, and this helps determine the elasticity of the quantity demanded for a product as it is affected by price changes of another good (EconPort, 2006). For instance, if the price of home video gaming systems decrease, then it is logical to assume that video game sales will increase, as people will have purchased the cheaper gaming systems and will thus buy more games. This is also an example of two products (video gaming systems and video games) complementing each other.

Products that complement the WhizzBurger™ include fries, soft drinks, and desserts—other menu items that go well in a meal together. Substitutes for the product include burgers from other restaurants or burgers cooked at home. Regarding cross-price elasticity for the WhizzBurger™ and its complements, it is safe to assume that if Dizzy Whizz offered a substantial discount on one or more of its complementary items to the burger, then it would likely sell more burgers. For example, if the restaurant offered a free drink with the purchase of the burger and fries, then people would likely take advantage of that type of a deal. Moreover, the burger could complement itself, as Dizzy Whizz could offer a 2-for-1 special, which would likely increase sales. Regarding substitutes, if another restaurant offered a 2-for-1 special that was better than Dizzy Whizz’s special or if Dizzy Whizz did not have a special at all, then more sales for the other restaurant might equate to less sales at Dizzy Whizz for similar items.

I would say that cross-price elasticity for Dizzy Whizz is somewhat strong, in general, but in particular, its products are unique to its restaurant and it likely has a cult following, being a staple of the community for more than 60 years. However, if I were selling this product, I would not take for granted that the business has been there for so long, because people may turn out to be sensitive to prices and other variables in the marketplace, when it comes to spending their money. In addition, sometimes people just want more variety, and while they may love eating at Dizzy Whizz, they may want to try something different from time to time.

With this in mind, as a manager, I would need to understand the importance of keeping track of data pertaining to prices, the status of the economy, and what the competition was offering. These factors would determine how my customers may be thinking about how, where, and when to spend their money. I would run specials and keep track of how many people took advantage of the specials, so that I could determine the best combination of discounts and offerings to present to the customers. In addition, I would offer discount coupons for my customers, both in person and on the website. I would also keep track of my best-selling items so that I know how much supply to keep available for the demand. This would help me determine the nature of costs and predict how customers will spend their money at the restaurant.

Cost Concepts

Specific cost concepts must be considered for any business. These relate to the nature of costs, such as fixed and variable costs, explicit and implicit costs, and sunk costs a business.

According to Bagad (2008), variable costs vary according to production volume and include wages, consumables, and raw materials. Variable costs are only incurred with production Additionally, fixed costs are those that do not change in the short term. Fixed costs must be paid with or without production. Examples of costs that are fixed include bills, rent, and machinery (Bagad, 2008).

Explicit costs include loan interest, taxes, and rent. These costs are cash paid for services. Implicit costs are not actually incurred costs, rather they are non-cash, hypothetical costs, such as savings from owning a building rather than renting one or savings from paying a manager’s salary because the owner is the manager. Finally, sunk costs are those incurred in the past and have nothing to do with current production. Examples of sunk costs include machinery that was bought and paid for in the past, which only the depreciation is accounted for (Bagad, 2008).

These costs concepts are important for successful management of a restaurant such as Dizzy Whizz. Restaurants have specific costs associated with operations such as occupancy costs. This falls under fixed, explicit costs. However, for Dizzy Whizz, it is a sunk cost, since the restaurant is family-owned and is not paying rent (DizzyWhizz, 2014). However, related costs to occupancy costs are real estate taxes, insurance, utilities, phone, Internet, etc. Other costs the restaurant is likely to have is equipment and personnel costs. According to Thompson (2014), normal restaurant operations include equipment and maintenance for the equipment and supplies.

Industry Structure, Conduct, and Performance

Dizzy Whizz could tailor its conduct to vary according to what comes out of tracking information about sales of its products and its customers’ response to special offerings. The structure is dependent on supply and demand and the restaurant should cater its structure according to which products are the best sellers, which would also be influenced by the restaurant’s performance. This relates to how the restaurant can do in the competitive market.

Business Types

Business types include competitive, monopolistic, oligopolistic or monopolistic competition. According to Vitez (2014), a competitive business capitalizes on advantages in the market in relation to garnering a significant piece of the market share for its specific industry. One form of competitive business is monopolistic. According to Merriam-Webster, monopolistic competition regards businesses with similar products but compete based on market conditions  (Merriam-Webster, 2014). Examples of products that compete monopolistically include books, furniture, and computer software. In oligopolistic competition, the actions of businesses within an industry affect their competitors, particularly pertaining to price, according to (Merriam-Webster (2), 2014). These businesses usually include big industries such as steel and aluminum. Dizzy Whizz falls under the plain competitive category. It is an establishment that offers food and drinks for sale in a sit-down restaurant atmosphere with the option of having people order take-out. This type of business competes with other small and large restaurants for consumers’ business and money set aside for eating outside the home. According to the United States Department of Agriculture, Americans spend almost half of the money set aside for food on meals and snacks away from home (Stewart, Blisard, Bhuyan, & Nayga, 2004).

Increasing Profits

Various variables exist that influence how a business can make decisions to maximize its profits. It is important that a company’s business manager understands that strategic marketing decisions that result in increased profits are closely linked with controlling costs. A business may be generating revenue; however, if its costs are very high, then its profit margin will be low. This means a company needs to pay attention to its pricing structure relative to its cost structure (Doole & Lowe, 2006). As it pertains to Dizzy Whizz, the restaurant business manager should understand basic accounting methods to be able to monitor and track the business’s costs, expenses, and revenues correctly. This is important to determine profit margins. Additionally, the manager should realize that increased sales volume means increased costs, so pricing strategy must be adjusted accordingly to ensure the restaurant is making a profit.

Dizzy Whizz’s pricing strategy is partially seen by the few menu items it shows on its website. It is significant to note that because the restaurant only has the one location, then it is not able to use price discrimination as a strategy. However, it does offer monthly specials such as two WhizzBurgers™ for $5.55. This is 2-for-1 pricing strategy. The restaurant also offers another special of one WhizzBurger™ with fries, Cole slaw, medium drink, and a chocolate delight dessert for $6.59, which is a bundling pricing strategy (DizzyWhizz, 2014). These are attractive prices compared to some of the prices found at other restaurants.

Government Regulations

One of the main factors influencing the restaurant business is adhering to government regulations for food safety. Restaurants are routinely inspected to ensure they are complying with federal safety standards, to protect public health. This includes proper food handling, preparation, and storage regulations, as well as restaurant cleanliness and sanitation. Additionally, the building must be in good order and comply with building safety codes. In addition, restaurants are under regulation regarding insurance, licenses, and permits. The Dizzy Whizz site does not have any information about their regulatory compliance; however, the restaurant must be in adherence with required standards, or else it could not have remained open for more than 60 years.

References

Bagad, V. S. (2008). Managerial Economics and Financial Analysis. Pune: Technical Publications.

DizzyWhizz. (2014). About Us. Retrieved from Dizzy Whizz: http://www.dizzywhizz.com/about.php

Doole, I., & Lowe, R. (2006). Strategic Marketing Decisions. Burlington, MA: Butterworth-Heinemann.

EconPort. (2006). Experimental Economics Center. Retrieved from Cross Price Elasticity: http://www.econport.org/content/handbook/Elasticity/Cross-Price-Elasticity.html

Guthrie, J., Lin, B. H., Okrent, A., & Volpe, R. (2013, February 21). Americans’ Food Choices at Home and Away: How Do They Compare With Recommendations? Retrieved from United States Department of Agriculture: http://ers.usda.gov/amber-waves/2013-february/americans-food-choices-at-home-and-away.aspx#.VGT58fnF98E

Merriam-Webster (2). (2014). Oligopoly. Retrieved from Merriam-Webster: http://www.merriam-webster.com/dictionary/oligopoly

Merriam-Webster. (2014). monopolistic competition. Retrieved from Merriam-Webster: http://www.merriam-webster.com/dictionary/monopolistic%20competition

NetMBA. (2010). Price Elasticity of Demand. Retrieved from NetMBA Business Knowledge Center: http://www.netmba.com/econ/micro/demand/elasticity/price/

Stewart, H., Blisard, N., Bhuyan, S., & Nayga, R. M. (2004). The Demand for Food Away from Home. Economic Research Service. United States Department of Agriculture. Retrieved from http://www.ers.usda.gov/media/306585/aer829_1_.pdf

Suttle, R. (2014). The Importance of Income Elasticity in Decision Making. Houston Chronicle. Retrieved from http://smallbusiness.chron.com/importance-income-elasticity-decision-making-33994.html

Thompson, M. (2014). What Are the Variable and Fixed Costs in a Restaurant Operation? Retrieved from Houston Chronicle: http://smallbusiness.chron.com/variable-fixed-costs-restaurant-operation-81771.html

Vitez, O. (2014). Competitive Business Strategies. Retrieved from Houston Chronicle: http://smallbusiness.chron.com/competitive-business-strategies-4623.html

WHO. (n.d.). Estimating price and income elasticy of demand. Retrieved from World Health Organization: http://www.who.int/tobacco/economics/2_2estimatingpriceincomeelasticities.pdf