Competitive Advantage: Restaurants/Takeaways

How to apply lessons to a tech startup.

The other evening, I recalled having a dream where I was working in my parents takeaway. It was in a relatively small village in North Lanarkshire, Scotland. The takeaway, “Ming’s Takeaway”, was adequately named after my dad.

Our house at the time, was attached to the shop, so I was always exposed to the shop during the evenings and weekends of my youth. The sounds of the metal wok hitting against the rim of the gas cooker resonated throughout the house, such that it was an inescapable sound.

When I was ten years old, I was asked by my parents to help out at the shop. It was then that I was taught about how to take orders from walk-in customers, to memorise 140+ different dishes and complimentary side-dishes, to operating the mechanical cash till, to answering the phone and scribbling an order on a paper pad no larger than an iPhone 4.

The takeaway business was one of my most valuable and earliest experiences at Sales.

The takeaway business was one of my most valuable and earliest experiences at learning about Sales… How to talk to a customer, how to persuade them to try a new dish or buy something that might give time a better experience.

Whilst I was growing up in this takeaway, I was also taught how each dish was made… Knowing how a product is made allowed me to answer customers questions on whether a dish was vegetarian friendly or whether I could recommend an alternative.

There’s nothing more awkward than the look a customers gives when they are unhappy with the answer.

My dad’s takeaway wasn’t necessarily the most famous but ultimately it was a great example of monopolising a business.


Following last years’ Peter Thiel’s Zero to One, the startup world was in a flurry about how to apply monopolising strategies to their respective businesses, especially when distinguishing the differences between Capitalism and Competition. (If you’d like a great summary, Stephanie Druga of Hackademia has this great summary [Here])

Now, my dad’s takeaway wasn’t recognised as some Michelin star establishment, and it didn’t win any awards. However, it did teach me a few things as I think back on that time.

Firstly, it was located in the middle of the main street Allanton, not on an off road, which makes passing trade a key feature of this location.

Image 1: Allanton Village

The takeaway was the only food business within the village. With a delivery driver, we were able to encompass not just the local village, but the neighbouring villages of Shotts and Hartwood.

Image 2: Encompassing Delivery Area

Now why was this important?

Shotts, has the prison and a Bus depot station. Both would, on average, order from us every week, which netted a regular large order every week. By servicing not just the local area, the business was able to compete with other takeaways in Shotts as well. Hartwood on the other hand had a mental asylum, which would also regularly call on the weekends.

So, what was also important about the location of Ming’s Takeaway?

As a secondary travel route, commuters going to Edinburgh, and as subsequent bonus, Livingstone, allowed returning workers to stop on their travels on this secondary travel route.

Image 3: Secondary Traffic Route through Allanton

What about local competitors in the area?

Within Shotts, if my memory recalls, there were two chip shops, and one other Chinese takeaway. This other Chinese takeaway was owned by family friends of ours, and as such, there was ample demand for Chinese cuisine within area.


Why is starting a restaurant such a terrible idea?

Have you ever been in a conversation where someone is talking about starting a restaurant?

Usually, the first thought that comes to my mind is to grab the person by the collar and with frantic fervour… “NO! Don’t DO IT!”. But then rational thought kicks in and I’m left nodding, patiently continuing the conversation to other things, like the weather.

(If you’re a fan of reading about Warren Buffett, Mary Buffett has written a few books on how Warren picks his stocks which provides a super simple introduction on how businesses created a competitive advantage.)

There are a few cliches that are repeated when setting up a food and beverage business.

  • Location:
  • Concept:
  • Get Talented Cooks:

Location:

Though location is important, however starting a restaurant in the city is incredibly weighted against your favour. Why?
Because all the best locations within the city are usually occupied with successful incumbent businesses that are propping rental prices above the city average. This is the primary reason of why rent is expensive near Soho areas, and as such, if you are a business owner with zero experience, your business will eventually fail.

That’s why some smaller business who expand slowly are more likely to succeed because they have created more of a financial moat than their competitors.

Concept:

A concept kitchen is nice to have in taking advantage of general consumer preferences that would have otherwise been missing. The process of locking in your concept allows you as a business to determine market fit with your choice of product cuisine.

But the main problem behind this kind of thinking is that, food has inherently a limited capacity for innovation and reinvention.

That means starting a hipster place that only serves vegan Korean food might satisfy the niche market… however, local tastes might not be satisfied beyond the point that the business is making a profit.

Therefore, exploiting a niche if more about exploiting the lack of supply that has a high enough demand to satisfy your cost of operations.

Talented Cooks:

You have to be aware, that you don’t need a 5 star chef if you’re operating a business at 2 stars.

So you’ve managed to get past the top two points quite successfully, congratulations…

Now how do you as a business owner get yourself a capable chef/cook to produce your under supplied product to a high demand market?

Well the first thing that comes to mind is that you hire the most authentic chef from the region that specialises in your product.

Now there’s a problem with this, because you’re off-loading responsibility to a third party, possibly a partner in your business.

Why does this create problems?

Firstly, most culinary chefs are not adept at focusing on the bottom line, or keeping costs at a minimum… Maybe they have an ego that has made them the renowned genius savant chef?

You don’t need a troublesome 5 star chef if you’re operating a 2 star business.


So why do restaurants fail so often?

Like a startup, there are a million things that can go wrong in a restaurant and it’s up to you to figure out how to solve them… Usually as things are crumbling around you.

Failure Rates for Restaurants have cliche headlines such as “Why Do 90% of Restaurants Fail in their First Year” [1]… Why is it that restaurants fail, and more specifically, what lessons can be applied to the infamous technology startup?

In the post-2010 Second Tech Boom, Starting a Startup has become the new Mid-life Crisis Alternative of “I want to start a Restaurant”.

The question that comes to my mind is that why do people have the sudden urge to put their hard earned money into a business venture that clearly has a statistically probability that is geared towards you failing financially?

This Quora discussion [2] is incredibly useful in answering why people get into a business venture wanting to get into the restaurant business.

To the question “Why do so many people with no restaurant experience think they can run restaurants?”, Jonas Mikka Luster writes in response:

Many factors figure into that, but there’s three that stand out. One is a little aside from your question but should be included: the dreaded chef-owner model. While many chefs might know the business, few know business in general
Secondly there’s the whole “food is easy” mentality. It doesn’t take much work to find it splattered across the web, TV, and print — everyone is “a chef”, everyone knows food, and there’s an implicit understanding that being good in some other field also makes one an expert in dining and food.
Lastly, it’s an investor issue. As I wrote in When Valley and Kitchen Collide, there’s a whole new breed of investors entering the market.

There’s a bunch of other interesting insights, like how the Food and Beverage industry is essentially selling a commoditised product since the nature food can not be reinvented. Even the very fabric of consumption is limited to the physical biology of the human body, along with the diverse and fickle preferences within each customer creates challenges in order to to retain consumer loyalty.


So why do restaurants fail?

Why you will fail [3,4]
1. Inexperience:
2. Bad People Management:
3. Lack of Accounting Skills:
4. Spotty Customer Service:
5. Weak Leadership:
6. Poor Product Execution:
7. Lack of Focus:
8. Inability to balance Family and business demands:


How can restaurants compete in a competitive market?

Successful restaurants need to ensure that their brand is synonymous with Quality Cuisine, Affordable Pricing and Good Customer Service.

So what does “Quality Cuisine, Affordable Pricing and Good Customer Service” actually mean?


How can prospective restauranteurs learn about the existing markets?

If you’re still adamant about setting up your own business, then I want you to go into the nearest (local) busy restaurant and I want you make a mental note to everything that they’re doing right and what they can do to improve business.

If you’re unable to analyse a business as soon as you walk in, then you’ll be unable to understand your competitors.

You need to practice this exercise every time you walk into a business. If you focus only on yourself like an isolated silo, you leave yourself open to competitors making significant improvements. If you’re unable to analyse a business as soon as you walk in, then you’ll be unable to understand your competitors.

  • What attracts customers to the business? is it pricing, customer service, convenience or even taste?
  • Are the staff pleasant, if so, how?
  • Is the pricing cheap/affordable, if not, how does the business satisfy the price for you?
  • Is the location convenient for regular customers, in the local area?
  • What does the signature dish taste like?
    (does it taste palatable, convene to the local tastes and preferences?, how would you improve on the recipe?)

One of the examples within Zero to One that we haven’t touched upon is the “need for secrets”. Since food inherently is easily a commoditised product, keeping the recipe secret or reasonably difficult to reproduce is another strategy that allows you to have more of a differentiating brand compared to your competitors. Though having a good recipe is good, it shouldn’t mean can be complacent by lowering the quality of your customer service or business.

Case Study about Chicken Curry

Question: Which one of these dishes would satisfy tastes in which markets?

Chip shop Curry [Source: http://www.jollyfryer.com/wp-content/uploads/2015/03/P1010259.jpg]
More Authentic Curry [Source: http://ichef.bbci.co.uk/images/ic/976x549/p02gbr5l.jpg]

Though the first image might not be appealing to most palates, it might satisfy a market that is not familiar with “exotic” tastes. Notice the lack of vegetables or greens… This could be a result of a lack of demand for varying tastes in the market.

In the second image, the meal looks a lot more appetising, with spices and herbs thrown into the mix. Would this work in a market that is adverse to spice? (yes there is such a palate, “Butter Chicken” being one specific dish).


Conclusion

So what are you saying here Denis, what value are you trying to give me when comparing restaurants to startups?

Well, in this example, developers are the chefs. Normally, there are few great chefs but many crappy cooks. Along the spectrum of culinary engineers, most are not taught about how to run a business. Why? because it’s not part of the curriculum.

“To run a business, you need to always be aware of the bottom line, how much money you’re bringing at the end of the day”.

In a startup, this isn’t always the case.

The time to production for a dish is usually much shorter than say, a developer to producing a feature within a software application.

With a tech startup, there are many moving parts in developing a software application. This is similar to a busy restaurant will operate.

The issue is that, as with many startups, unless you’re working on producing a physical product, say a a smartphone or some other piece of hardware, a developer will usually not physically see the sales process happen in front of them. In larger tech companies, there are many layers of human interaction such that an engineer will not even know who the end user will be.

This layer of abstraction creates a disconnect which makes it difficult for people within the business to keep track of performance.

Common pitfalls of startups similar to restaurants

With the glitz and glam of tech startups, many people forget that getting investment is similar to getting a zero interest rate loan (which comes with more conditions and caveats than a simple rate interest loan from a local high street bank).

With no revenue coming in the door, your startup is similar to a restaurant with no paying customers.

“Look around your startup. If you can’t spot the sales person, then you’re usually it.”

What is it about the glamour that people fall in love with?

Most people fall for the fame, fortune and get rich romanticised dream that a lot of television chefs are presenting them. However, the success of a celebrity chef isn’t necessarily in their restaurant, but in the the personal branding of the person themselves.

Therefore, if your brand is an unknown to your customer base, then how are you going to survive in such a competitive market?

In my next article, I will be discussing why everyone needs to develop a personal brand, and why as a consequence, most recruiters suck at it.

“Why you need to have a personal brand, and why (most) Recruiters suck at branding”.

Sources:

1. http://online.csp.edu/blog/business/why-do-90-of-restaurants-fail-in-the-first-year
2. https://www.quora.com/Why-do-so-many-people-with-no-restaurant-experience-think-they-can-run-restaurants
3. http://www.businessinsider.com/why-restaurants-fail-so-often-2014-2
4. http://online.csp.edu/blog/business/why-do-90-of-restaurants-fail-in-the-first-year

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