Restaurant brand diversification: its effect on cost-efficiency and firm performance
Authors:   , Lee Hyewon 
Published: February 2023

[EMBARGOED UNTIL 8/1/2023] As a restaurant firm grows, it has the choice to remain a single brand or diversify into multiple brands. To be competitive and gain market share, some firms choose to grow by increasing the number of properties within the same brand, allowing the firm to share its costs among properties and achieve economies of scale. In contrast, some restaurant firms choose to diversify by developing or acquiring various brands as part of their growth strategy to reduce portfolio risks in business. Through this, the firms can mainly achieve economies of scope which are the formalized benefits of related diversification in terms of cost advantage by sharing internal resources through specialized management capabilities. Both of the abovementioned business strategies are popular for restaurant firms in the United States; however, the number of research on brand diversification's effects remains scarce in the hospitality context. Moreover, previous studies on brand diversification assert that managing a diversified brand enables a firm to gain economies of scale and economies of scope, they do not provide any empirical result on cost-savings effect. Rather than simply compare the effects of different diversification strategies on firm performance, this study identifies which strategy, either single brand or multiple brands, brings higher performance to a firm by reducing the firm's primary costs. The purpose of this study is to fulfil a research gap by accomplishing the three primary objectives: (1) to examine the impact of business strategy, single versus multiple brands, on a restaurant firm's performance, (2) to investigate the non-linear relationship between brand diversification and firm performance, and (3) to ascertain the relationship of cost-efficiency and brand diversification in the US restaurant industry. In essence, this study investigates the effects of brand diversification on firm performance in the restaurant industry. Specifically, if brand diversification has a negative effect on firm value, the focus is to investigate whether the cause is related to cost-efficiency of the operation. To achieve research purposes, the current study employs a two stage least square (2SLS) regression model including instrumental variable. The study sample comprises 68 publicly traded restaurant firms (36 single-brand firms and 32 multiple-brand firms) and 490 observations from 2010 to 2021. For measuring the level of diversification, the current study adopted adjusted Herfindahl index (AHI), and Tobin's q was used to measure firms' financial performance. In addition, slack-based measure (SBM) was employed to obtain overall cost-efficiency of restaurant firms' operation and main costs' inefficiency. The results of the study indicate the restaurant firms that used a single-brand strategy exhibited greater firm value than those adopting a multi-brand strategy. Second, there was a non-linear relationship between the degree of brand diversification and firm value. Finally, the results showed that an increase in the degree of brand diversification caused a rise in cost-inefficiency. That is, brand diversification had a negative effect on overall cost-efficiency, with selling, general, and administrative (SG&A) inefficiency being the largest. This result suggests that the negative influence of increased brand diversification on firm value arises from cost-inefficiency. This study contributes to the hospitality literature and the diversification theory by offering empirical evidence for the effect of brand diversification on performance. Further, this study probes the effects of brand diversification from a cost perspective and measured the relative efficiency of input costs to this end. Practically, this study provides insight into decisions regarding whether US restaurant firms should expand their brands or focus on a single brand.