Author: Jim Weber

A few weeks back, I met with a dear friend and colleague. Let’s call her Jane, even though that is not her real name. Jane and I enjoyed a few glasses of wine and a flatbread appetizer. We meet a few times a year, although we were way overdue for this meeting. It is an opportunity for old friends to catch up, check in, and reminisce about our careers. Our visits are always enjoyable as I learn something new about Jane’s career and her experience. As she enjoys traveling, I enjoy hearing about her adventures abroad. As the evening progressed toward its usual conclusion, we began discussing the strategic errors we had observed that had led to a company’s failure.  I have been intrigued by this issue throughout my career and, on occasion, have written about common strategic mistakes. In this regard, I have observed that specific patterns continue to repeat. I was amazed that our short list correlated completely.  We ended the evening on a high note, thoroughly amused by our assessment that growing brands continue to make the same mistakes.  However, we were united in our confusion as to why managers continue to make these mistakes.  Our conversation became the inspiration for this post.

Common Strategic Restaurant Business Mistakes

• • • Failure to drive for optimal market penetration
    • Selling franchises outside of supply chain capabilities
    • Buying a competing brand and then converting it to the purchaser’s brand

The most common strategic mistake I have witnessed is the failure to focus on optimal market penetration. Market penetration is fundamental to success in most businesses. For the retail sector generally, restaurants, in particular, market penetration is the holy Grail. Penetration provides leverage and efficiency across the profit and loss (P&L) statement. More outlets contributing marketing dollars support effective local advertising and promotion. More units ensure the optimal deployment of general and administrative oversight, as well as related expenses. It provides more efficient purchasing and distribution of food and beverage products. Focusing development on a specific market also leads to a more efficient use of investment capital. The failure to achieve a significant level of market penetration before developing new markets is a red flag. However, market penetration seems to be a foreign concept for many growth-oriented restaurant brands. Regrettably, I have witnessed the failure of many restaurant brands that employed a scatter-gun approach across a region, rather than focusing on market development.  Not surprisingly, this remains a frequent cause of failure among restaurant companies.

Another common mistake made by growing brands is granting franchises that exceed the brand’s distribution capabilities. I remembered the time a former employer granted a franchise in Key West, Florida. Unfortunately, the company was unable to distribute to Key West. The franchisee had to arrange for an alternative delivery method that was costly, time-consuming, and unreliable. This is a common mistake made by growing franchisors. The need for revenue compels some to accept a new franchisee in a location without adequate support infrastructure. That is poor judgment and potentially corrupt. The worst examples I have witnessed have been created by East Coast Brands, which have limited regional penetration. On many occasions, these brands granted franchises to West Coast investors. I have also seen this error work in the opposite direction, with the same result. To some extent, the new franchisee shares blame for entering into the franchise agreement.

The third mistake we discussed is acquiring direct competitors. Acquisitions are problematic and generally prone to failure. I can’t tell you how many times I’ve seen a non-portfolio brand acquire another brand that competes in the same segment. Their goal is to expand their distribution by acquiring the competitor’s outlets. Notwithstanding this, they paid a premium to compensate for the target competitor’s brand equity, without regard to the target brand’s customer base and preferences. So, they end up converting the acquired brand and wonder why their revenues don’t meet expectations.

Summary and Conclusion (Break the Cycle)

Growth-oriented companies cannot afford to make these mistakes. They are business killers. Failure to seek optimal market penetration deprives the company of efficiency across the P&L and Balance Sheet. It reduces the ability to fund advertising and promotional expenses necessary for effective competition. Granting franchises outside the company’s primary trade area makes it challenging to provide adequate support to the new franchisee. This situation is ripe for lawsuits against the company for failure to comply with the terms of the franchise agreement. Acquiring competing brands as an alternate development strategy is another sub-optimal strategy. It is a costly way to develop new units that will likely underperform expectations.  Savvy professionals diligently avoid these ineffective strategies.

I appreciate your interest in ITB Partners.  For further information about ITB Partners and its Value-Added Strategy, please visit our website at www.itbpartners.com, or contact Jim Weber.

 

Jim Weber – Managing Partner,  ITB Partners

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Jim.Weber@itbpartners.com