Foreword for Franchise Money Maker Readers
There is an unprecedented amount of negative commentary from the media, describing the economic malaise that is dragging down consumer dependent operators. This is the way the media operates. They get on a “theme” and then build the case to support it, whether it is valid or not. The following article puts the current situation in perspective, and provides a road map for restaurant, retail, and hospitality entrepreneurs to succeed.
The table below shows the most recently reported same store sales (and traffic when it has been disclosed) for most of the publicly held chains. It is pretty sobering when we see the numbers stacked up. The only real exception lately has been Domino’s, which of course dominates the pizza delivery business. Even Starbucks (with caffeine and Howard Schultz), Shake Shack (with the Danny Meyer hospitality culture) and Wingstop (with 75% takeout) who come to mind as bucking the trend, have seen their comparisons slow lately. There is, in essence, hardly any place to hide.
Every industry observer knows by this time that it has been tough out there, and the results we show below have apparently continued into April and early May. You should especially note the traffic trends which in so many cases are negative even if price increases and “menu mix” have helped the nominal same store sales. The question is why. Reasons cited, and all are valid, are: increased competition, lower mall traffic, the stretched consumer, lower grocery prices, political distractions, the weather (sometimes), and of course company specific problems at chains such as Applebee’s and Kona Grill. It has become increasingly clear that if the Millenials are going to get off their couch and take a break from binge viewing on Netflix, they are requiring an “experience” rather than a “fuel stop”. We believe that a growing number of dining customers have had enough of the institutionalized “service by rote” that is provided at so many national chains.
We believe that, after fifty years of chain restaurant growth at the expense of “independents”, the local owner/operator has a chance again. The individual proprietor doesn’t have survey cards on the table, or use anonymous shopper services to gauge the operations because he or she sees every meal that comes out of the kitchen and can watch the customer reactions in the course of the dining experience. At the national chains, how often does it happen that a service person, arriving sometimes before you have had your first bite, asks you “how is everything”. If you mention that something is wrong, they turn into a “deer in the headlights”. For this you are expected to pay a 15-25% tip. Many diners, and potential diners are finally saying “basta”. Our observation is that the chains that are doing the best are those with the superior hospitality “culture”. If I were an operator, I would be channeling Howard Schultz and Danny Meyer, who have written the book in QSR and Full Service Dining, respectively. Part of the experience can be a bit of “theatre”, as demonstrated by the assembly and cooking process at the fast casual pizza leaders such as MOD and Blaze (written up, as “Up & Comers” on our Home Page). TopGolf and Barteca (which we have also written up as “Up & Comers”) provide an unusual “experience” and are doing well. The last example of a special “culture” is a Michigan based chain, where I have recently become a Board member, called HOPCAT. The Millenials, who we all agree will drive consumer spending patterns are flocking to Hopcat, averaging over $4 million in each of twelve locations, not only because the food and drink are good, but the hospitality quotient is obvious. There are no staff uniforms, the service interactions are not “canned” and 90% of the waste is recycled. The staff and the customers really care about this stuff. They cared about it, a lot, at Chipotle, and that may be one reason that customers are returning more slowly than most of us would have forecast.
WHAT TO DO
The newest challenge to the restaurant industry, while operators cope with higher labor, higher rents, potentially higher commodity prices, and the well know external factors as cited above, is how to compete with the increasingly competitive independent operators. It can be done, but not with national advertising and a “one size fits all” approach to operations. Menus must be increasingly tailored to local taste, décor should reflect the neighborhood, marketing must be increasingly directed to the surrounding communities, just to mention a few obvious considerations. As part and parcel, staff has to be chosen to provide the necessary hospitality quotient. While a publicly held chain has to be thinking strategically, they must pay increasing attention to the local detail. If I were to put it bluntly, forget about a national “footprint”. Operate the hell out of your stores market by market. Part of the traffic you are losing annually could well be the result of better performance by local competitors, and the Millenials’ inclination to support them. A historical example of a great chain (in their day) that grew in concentric circles from their Nashville base, was Shoney’s. They put the numbers on the board every quarter for twenty years without jumping across the country. Ray Danner finally retired, younger management wasn’t as disciplined, diversification cost them some focus, and the brand finally faded, but the operational example that succeeded for so long still applies.
We believe that independents are taking market share, for the first time in many decades. It only has to be two or three percent a year (one out of forty or fifty customers) but it adds up over time. You may be running a multi-unit chain, but you must compete store by store, against other chains and independents alike. That independent operator, who is feeling better these days, has his financial life on the line, doesn’t have the corporate “support” and large legal and accounting expenses that you must overcome. He can manage labor more efficiently, perhaps “off the books” with no workmen’s comp and health insurance. He will be in his store on Friday and Saturday nights, meeting and greeting his customers. Keep that in mind as you build your national footprint.