What explains profit inefficiency in the restaurant industry? Evidence from Sweden

This study investigates the drivers of profit inefficiency in the restaurant industry. Assuming that restaurants operate under monopolistic competition, we first present a characterization of the factors that explain restaurants’ departure from the profit frontier, focusing on the role of business experience, number of outlets, service model, restaurant typology, and COVID-19 shock. Based on Stochastic Frontier Analysis, we estimate how these factors explain the differences in profit inefficiency across firms using a panel dataset of 4128 restaurants in Sweden in the period 2017–2021. We find that the average level of profit efficiency is low (46%). Inefficiency increases with years in operation and is significantly higher among limited-service restaurants and single-outlet firms. Interestingly, no significant difference in profit inefficiency is detected during the COVID-19 pandemic. Our findings provide valuable insights for profit efficiency management.