S Restaurants: What Has To Be Fixed In 2019?

We have made it to a new calendar (fiscal) year. There were a number of gotcha moments through the year, which reinforced what happened in the prior year, the prior year before that, and on. We all hope to learn life and business lessons, but things often happen through the year that prohibits us from addressing those issues. Sunlight is always the best disinfectant. In hopes of a better year going forward, here is my top three list of What Has To Be Fixed in 2019.

Need Number One: the dynamic between founders and the need of the future development of their brands has to be worked out. To see this, we only need to look at the 2018 drama at Papa John’s (PZZA) and John Schnatter. Founder driven caustic statements and behavior happened over time, was then discharged; he then sued the board; the brand became immersed in the no-win political drama, battered the brand reputation and reliability; and saw sales and same-store sales falling sharply, upset franchisees, store closings, reduced royalties, extra ad fund spending etc. The founder problem was like a freight train moving down the tracks; we all knew it would hit the car on the tracks eventually.  To a much lesser degree, lesser founder turnover kinks could be could be seen at Chipotle (CMG, Steve Ells) and Starbucks (SBUX, Howard Schultz).

I don’t know exactly how long a founder should remain, but like in other professional organizations I’ve worked, perhaps at a mutually agreeable point, founder could move to an ex-office role for 2 or 3 years to assure continuity. Of course, what stock they have is what they have. There are wonderful management consulting, executive search and other management experts that can advise on what the right point may be.

Need Number Two: Do More Than Talk About Cutting Down on Employee Turnover. The people availability problem is at all-time highs but few companies are addressing it systematically. Restaurants all mention people problems and the difficulty it poses but it’s hard to detect those who really address it. For example, generally only Darden (DRI) and Starbucks (SBUX) are noted “best to work” award winners. Turnover in multiunit supervision, corporate staff, unit management and store crew levels have to be addressed separately with linkages analysis. I note historically over the decades that turnover begets new waves of turnover. I have a hard time believing in the 2019s that if a new District Manager. comes into position, that all or even many of the DM’s store general managers have to be replaced or should leave. The same for a new CEO coming in. If that is so, then our leadership is the only personality based and that is sad after the last century of management science advances.

While store level promotion ladders are now common, I see less of it at corporate or multiunit supervision levels. For an adequate people plan to be in place, there has to be some rotation. My own experience is as I saw more things, I understood more dimensions. There is no reason why an area supervisor couldn’t spend a stint in marketing, or that a financial manager couldn’t spend a stint as multiunit supervision, for example.

At the store level, it makes little sense to talk about culture but yet short circuit it every day with angst about labor cost percentage or average wage. As one solution, the concept of theoretical labor cost is doable and developable. The industry has grappled with and come to understand theoretical food cost. The same can be done with labor, which would control things like a costly labor market or a more efficient building layout. It does not make sense to force compliance with a fixed percentage, it just has to vary.   

 This rotational plan would be useful for franchisors in connecting with their franchisees. Decades ago, corporate staff, franchisees and franchisee senior staff were more intermingled; in fact, having staff and company units was one of the ways to solidify the franchise system. This cross rotation isn’t occurring as much anymore.

Need Number Three: Hockey Stick Business Planning should be banished.  Inspired by the shape of the stick itself, a hockey stick forecast is one that assumes a tremendous zoom up of business results over a very short time. It could be stated in terms of new sales, same-store sales, and new unit openings, marketing campaign results, profitability, earnings per share and the like. The hockey stick looks nice in EXCEL, or POWERPOINT, or in front of the Board of Directors or investors. But despite the best-laid plan, something in the environment intervenes; something happens and plans are missed.

Hockey stick planning sends out dysfunctional signals. For example, it causes organizations and people to gear up for some development that takes longer to unfold, where time could have been useful. Think about the 1970s story of the roast beef initiative at McDonald’s[1]. They rushed to get ready and forgot to get the supply chain assured and they failed to think about shrink loss. Many of us know, roast beef and prime rib shrinks when cooked. How to price for that shrink loss? McDonald's was reacting to a hockey stick planning, and McDonald’s roast beef didn’t turn out so well.

Hockey sticks disappoint investors and the credit markets. In the IPO boom of 2011-2016, some brands forecasted they had a unit development potential of 1000 or even 5,000 units in the United States. While interesting initially, when it didn’t happen, there were disappointed investors and decreased stock prices from the IPO period. Dealing with that naturally diverted management time and attention from the basic business [being polite, we won’t name the brands and stock symbols as we like them and hope for the best going forward]. They are still working their way out of it.

Hockey stick problems aren’t just for investors. The hockey stick causes no end of people, supply chain and marketing problems too. In the social media/everything is available instantly era, the potential for brand deterioration is great. Avoiding hockey stick planning can make for more manageable store operations and execution. Even the asset light, 100% franchised brands need to consider that ultimately value is about the brand and the execution.


[1]McDonald’s: Behind the Arches, John F. Love (1984)

Disclosure: I have no position in the stocks mentioned, nor plans to initiate a position.

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