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Should Governments step in to assist businesses in trouble?

March 25th, 2018

And is this something business advisors should think about?

There has been talk recently in the UK about the difficulty some businesses in the restaurant industry are having. Three “chains” have been specifically mentioned. They are Byron Burger, Prezzo, and Jamie’s Italian (one of Jamie Oliver’s restaurants.)

It’s interesting that when businesses are doing well the last thing they want is government interference. It’s equally interesting to note when things are tough they want all sorts of assistance ranging from legislative protection to subsidized financing among other things.

For a variety of reasons, most of which are outside the control of most restaurants, it seems things are tough and there’s no doubt some are hurting – you only need to look at the number of people in them at meal times to see that.

I’ve heard people in the industry (including a Minister responsible for the hospitality industry) talk about over-capacity, wage pressure, uncertainty about the impact of Brexit, etc. etc. What I have never heard anything about is “the businesses that are hurting have a poorly executed business model in place and are suffering as a result.”

I have eaten in representative establishments at all three of the above chains and my personal judgement, based on a tiny sample I might add, is that the problems reside with the business units themselves not the environment.

I do agree that there’s probably over-capacity in this industry which always happens when there are low barriers to entry and when economic conditions are buoyant. But that’s a normal characteristic of this industry and rival firms need to factor that into their strategic plan. It’s the way innovation creeps into the industry and poor performers are driven out.

Now to my restaurant visits.

I visited Byron Burger in Edinburgh last year. It was the worst hamburger I have ever had; the sweet potato fries were cold, the service was slow, the beer was warm and flat, the staff were indifferent and surly. I resolved never to return to that chain and never have. This highlights the leveraged negative impact that a bad experience in one establishment can have on a brand. Contrast this with the 5 Guys burger chain – I’ve never had a bad burger there and on every visit the restaurant was packed.

I visited a Prezzo establishment earlier this year in London. It was certainly better that my Byron Burger experience but once again, service was slow, indifferent, the food was OK but nothing to talk about. All together it was just another place to eat that was not in any way remarkable but happened to be more expensive than say Pret-a-Manger and not as good.

To be fair, Prezzo is not really in the Pret market segment but Pret stores always seem to be busy which I put down to a good business model being well executed. The point here being the Prezzo business model does not offer people anything particularly interesting that they can’t get somewhere else. Pret on the other hand has fewer competitors – Starbucks, Costa, Nero, and many independents are rival businesses – but Pret’s brand is very strong and MOST IMPORTANTLY, it consistently delivers what it promises to deliver.

And that brings me to Jamie Oliver’s restaurants. I love his style, I admire what he’s achieved and especially the contribution he is making to focus on more healthy eating for children. However, again here’s my experience.

I had a meal at one of his Italian restaurants and the food was fantastic. The service was Ok. But I thoroughly enjoyed the meal and made a mental note to return. About a week later I was in another part of London and decided to have lunch at a Jamie’s Italian with my heart set on the same ravioli that I’d previously enjoyed. But alas they’d changed the menu and I had to select another ravioli which was terrible as in both taste and temperature. This time the service was also terrible from both the wait staffs’ attitude to the speed of service. Will I return? Probably not.

Subsequently, as a guest of a friend, I enjoyed another meal at Jamie Oliver’s Fifteen restaurant and was blown away. Fabulous service, extraordinarily good food, terrific ambiance. Will I return? Of course. This was the restaurant he set up in 2002 to introduce unemployed youth to the industry.

I understand that menus will be changed from time to time. What I don’t understand is why so many businesses can’t seem to get a consistent service protocol working. If the product is of consistent quality and a customer always feels welcome and respected in any business s/he’ll always return and speak well of the experience. This is categorically NOT rocket science. Of course, the basic offering, in this case food and beverages, needs to be up to scratch and consistently up to scratch but that’s a competitive table stake.

And that brings me to answer the question I initially posed.

Should governments intervene to help businesses in trouble?

In my view the answer is categorically not. Tougher environmental conditions is the market’s way of separating the strong from the weak. This is the exact same reason governments should (generally) not protect inefficient industries with tariffs and other forms of support. Ultimately, resources will find their way to their best use if markets are free to operate.

I have added a caveat (the word “generally”) in the above statement. I did that because I was presenting a purely economic argument. There may be non-economic reasons for protection and other forms of intervention, but they will always carry an economic cost which is going to be carried by society in some way even though there may be a net social gain.

And finally, should business advisers be interested in this?

In my view they should. When you look at business performance across industries it turns out that the majority of firms (i.e. more than half) earn less than the industry’s average level of profitability. That means a relatively small number of firms are very successful and the remainder cluster around below average.

Because most firms in an industry are built on what we might call a dominant business logic i.e. they have a similar business model we might conclude that the performance difference between the best and the rest is due to better execution. However, I do not believe that to be the case. The best firms tend to be good at executing a different business model to the other under-performing firms.

It’s hard to see the forest for the trees when you’re in the middle of the picket which is why so many people tend to see “working harder” as the key to dealing with difficult times. As an external business advisor, you can help your clients understand that the best way to address business challenges is to re-visit their business model.

This means re-thinking what customers they want to serve, re-thinking the value they want to deliver to those customers, re-aligning themselves with different partners, implementing a different set of critical value-creating activities, changing their pricing model, and so on. The best time to do that is when an industry is hurting because that’s when a firm’s rivals are at their weakest which typically manifests itself as a downward spiral of service and delivered customer value because weak firms almost always look to cost cutting and price discounting as their turn-around strategy which rarely, if ever, works but usually makes them more vulnerable and prone to failure.

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