Building a successful restaurant is hard.
The hours are grueling. New menus and dishes have to be created. Customers taste shift constantly and competition is fierce.
With all that effort, the profit margins are small and future upside or exit opportunities are limited.
Within this context, more than a quarter (26%) of new restaurants fail in the first year.
Despite the uphill climb, entrepreneurs, chefs, and food lovers continue opening new restaurants. A true labor of love.
The parallels with the entrepreneurial boom we see today are striking and there are important lessons we can draw from this highly competitive industry.
One restauranteur and business leader who stands out is Danny Meyer, CEO of Union Square Hospitality Group (USHG).
Photo Credit: Union Square Hospitality Group
Meyer has built USHG from an innovative award-winning restaurant to a global restaurant group comprised up of world-class Michelin starred restaurants (Eleven Madison Park) to a publicly-traded burger chain (Shake Shack) now in more than 10 countries around the world.
In Meyer’s 30 years, he’s built a long resume of successes as a disruptor and innovator. But his impact as an industry leader transcends food, but onto how restaurants build viable businesses.
Doing the Unthinkable? Making Hard Leadership Choices
In the 1990s, smoking in restaurants and bars was legal in the U.S. When a patron entered a restaurant, they were asked if they wanted to sit in the smoking or non-smoking section.
Anti-tobacco campaigns were building some momentum, but nothing sufficient to codify into law. So it was hard to imagine a world where restaurants didn’t have a smoking section. Except, Meyer’s saw the world differently.
Meyer’s believed smoking happened to someone whether they liked to or not. Even in a non-smoking section, no one could avoid the smoke from the smoking section. So in 1990 – twelve years before it would become law in New York– Meyer decided to do something almost unthinkable at the time at the time, he started banning smoking in his restaurants.
From a commercial perspective, the ban was notable because most in the industry predicted this new policy was the equivalent to commercial suicide.
But Meyer understood his customer.
He understood the option to smoke was a restaurant feature, not the benefit. In pricing, understanding the difference is a core pillar to value pricing. For Meyer, he knew smoking was not why customers went to his restaurants.
“[Customers are] not going to quit going to great restaurants just
because they can’t smoke.” – Danny Meyer
The result? A small dip at first, but no material impact on his restaurants.
He made a calculated bet his restaurants’ value transcended the ability to smoke and customers were willing to dine and pay (high prices) for the opportunity to enjoy his ‘product’.
There was risk involved in introducing this policy, but Meyer’s made a calculated, and in case, principled risk. His decision took guts at the risk of losing customers (volume). He also had clarity and confidence in his value proposition and the customers he served. Certainly more than the doomsday competitors in the industry.
Fast-forward almost three decades and smoking are now banned in restaurants and bars in 80% of the 60 most populated U.S. cities.
Redefining Pricing in Food & Hospitality: “Hospitality Included”
Tipping is an American sport. If you travel to a new city on business, you can easily tip 4 or 5 service providers before you enter your hotel room. For the vast majority of the world, the idea of paying someone more for a job they are required to do is a foreign concept.
The lesser known fact about tipping is the dependence the hospitality industry has on this supplemental income. Apart from food costs, wages comprises one of the largest costs for a restaurant. Yet as minimum wages continue to increases across the U.S., the squeeze on margins continues.
Tipping also created wages disparity within restaurants. Front-of-house employees (e.g waiters, maître-ds) took a lower alternative minimum wage but made up for the difference in tips. This could be significant as tips are multipliers of the menu price, so in higher priced restaurants, front-of-house can make substantially more than their salaried back-of-house (e.g. line cooks) peers.
This posed a few problems for restaurants including the challenge of hiring and retaining quality cooks. This also reduced the supply of cooks in high-cost metros like New York City as the salaried wages could be insufficient.
In 2015, Meyer aimed to change the economics by introducing a new program call “Hospitality Included”, which eliminated tipping from all USHG restaurants.
Hospitality Included was designed to eliminate the wage disparity within the restaurant, increase cook retention and ‘future-proof’ USHG from future minimum wage increases.
The burden of Hospitality Included would fall on customers through higher menu prices. In an already expensive food market like New York, this could mean average price increases of 20% or more.
“… if [customers are] willing to pay higher prices, it’s going to make it
easier for everyone else.” – Tom Colicchio, Chef, restaurateur and TV personality
Introducing Hospitality Included is a tough decision, but strategic. Meyer was attempting to undo the industry compensation model and recondition customer price knowledge and perceptions.
Meyer understood, not all restaurants and owners had the stomach for the price increases and changes to the wage structure but knew he could get ahead of his competition.
A restaurant’s cost structure, in its present state, is unsustainable. By reworking the pricing and business model he positioned USHG to invest in people (recruiting and retention) and the commercial growth. Through this program, he also shapes customer menu price perceptions and the user experience of dining – from how bills/checks to service expectations.
Meyer demonstrates why leadership is critical to pricing and pricing success, but the tremendous impact it can have on driving growth by redefining customer perceptions and experiences.
Final thoughts
While Meyer and USHG are best known for the innovative food and high-quality dining experiences, his experience as a business leader is invaluable case studies for entrepreneurs.
He demonstrates the importance of leadership in building successful companies. This is not only understanding what needs to be done but making the difficult decisions to defend the value you create and want to expand on.
In an industry driven by volume and ‘me-too’ pricing, Meyer isn’t a follower. He’s been bold with his pricing strategy and understands the value pricing has on growing his company.
Source: National Restaurant Association
He values the powering of pricing to change behavior, influence perception and make a positive commercial impact. A critical lesson entrepreneurs and seasoned business leaders can learn from.
Interested in learning more?
If you or your team is interested in having a hosted session on your pricing and monetization model, please contact us at: contact@helloadvisr.com
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