CASE Study Demand Estimation for The San Francisco Bread Co.
Given the highly competitive nature of the restaurant industry, individual companies cautiously guard operating information for individual outlets. As a result, there are no publicly available data that can be used to estimate important operating relationships. To see the process that might be undertaken to develop a better understanding of store location decisions, consider the hypothetical example of The San Francisco Bread Co., a San Francisco-based chain of bakery-cafes. San Francisco has initiated an empirical estimation of customer traffic at 30 regional locations to help the firm formulate pricing and promotional plans for the coming year. Annual operating data for the 30 outlets appear in Table 3.5.Table 3.5 The San Francisco BreadMarket Demand (Q) Price (P) Competitor Price (Px) Advertising (Ad) Income (I)1 596,611 7.62 6.54 200,259 54,8802 596,453 7.29 5.01 204,559 51,7553 599,201 6.66 5.96 206,647 52,9554 572,258 8.01 5.30 207,025 54,3915 558,142 7.53 6.16 207,422 48,4916 627,973 6.51 7.56 216,224 51,2197 593,024 6.20 7.15 217,954 48,6858 565,004 7.28 6.97 220,139 47,2199 596,254 5.95 5.52 220,215 49,77510 652,880 6.42 6.27 220,728 54,93211 596,784 5.94 5.66 226,603 48,09212 657,468 6.47 7.68 228,620 54,92913 519,866 6.99 5.10 230,241 46,05714 612,941 7.72 5.38 232,777 55,23915 621,707 6.46 6.20 237,300 53,97616 597,215 7.31 7.43 238,765 49,57617 617,427 7.36 5.28 241,957 55,45418 572,320 6.19 6.12 251,317 48,48019 602,400 7.95 6.38 254,393 53,24920 575,004 6.34 5.67 255,699 49,69621 667,581 5.54 7.08 262,270 52,60022 569,880 7.89 5.10 275,588 50,47223 644,684 6.76 7.22 277,667 53,40924 605,468 6.39 5.21 277,816 52,66025 599,213 6.42 6.00 279,031 50,46426 610,735 6.82 6.97 279,934 49,52527 603,830 7.10 5.30 287,921 49,48928 617,803 7.77 6.96 289,358 49,37529 529,009 8.07 5.76 294,787 48,25430 573,211 6.91 5.96 296,246 46,017Average 598,412 6.93 6.16 244,649 51,044The following regression equation was fit to these data:Q is the number of meals served, P is the average price per meal (customer ticket amount, in dollars), Px is the average price charged by competitors (in dollars), Ad is the local advertising budget for each outlet (in dollars), I is the average income per household in each outlet’s immediate service area, and is a residual (or disturbance) term. The subscript iindicates the regional market from which the observation was taken. Least squares estimation of the regression equation on the basis of the 30 data observations resulted in the estimated regression coefficients and other statistics shown in Table 3.6.A. Describe the economic meaning and statistical significance of each individual independent variable included in the San Francisco demand equation.B. Interpret the coefficient of determination (R2) for the San Francisco demand equation.C. What are expected unit sales and sales revenue in a typical market?D. To illustrate use of the standard error of the estimate statistic, derive the 95 percent confidence interval for expected unit sales and total sales revenue in a typical market.Table 3.6 Estimated Demand Function for The San Francisco Bread
