Why are the small companies more successful than big ones?
In the hospitality sector the progressive small companies are outperforming the large ones to a significant extent.While of course the hospitality sector is just as much about site economics as scale economics, I have long puzzled about why this is the case. As a software supplier (and a small operator of 3 sites) who therefore gets to talk to lots of operators, my thesis is as follows:
The advantages of the large operators (for which I am defining as 100+ sites) include many things such as focused marketing, category management, menu engineering, and analysis. They can also afford to deploy many systems and processes which require the scale of many sites. In addition they can often access more capital more cheaply and perhaps still also have the pick of the sites through the strength of their covenants. So, if they can design and create better businesses why are they not more successful?
The answers to this are less easy for the spreadsheet driven VC analyst to spot, and I probably need to justify them as I am sure there will be plenty who disagree!
1 – Focus. Where you have fewer sites you can give the site more attention. When I set up my own pub restaurant I was fearful of the might of M&B nearby. I still look at their pricing, but I know we can deliver a more relevant offer to the Range Rover drivers of Harrogate. I know my customers because I see them,and talk to them. We have a more conservative customer base and we design the menu for them and also to fit the gap in our local market. Another example is that we get lots of students working with us. This is great in the holidays, but a real challenge in May when everyone is doing exams. So we don’t allow team holidays in May, which is a complete departure from my training.
2 – Trust. I think one of the gentle, and hard to observe changes that occurs when you grow a business is one of trust. A small team trusts all its people to do a good job and supports them in delivering that. The management team know their strengths and weaknesses and supports them where they are poor and releases them where they are good. It is never one size fits all. A Head Office driven culture gradually develops a control culture that removes the empowerment of the teams and strips away responsibility. This is of course corrosive but is understandable where lowest common denominator procedures start to rule the roost. And of course we all know that if you treat people like children they will behave like children – or leave.
3 – Consistency. Consistency is a real brand challenge. I once went around ten restaurants supposedly all doing the same risotto dish. Over the course of my visits I encountered a multitude of ingredients and a multitude of cooking processes, all of course swearing that they had made it even better than the core brief. But how can you run a consistent brand and an inconsistent menu, let alone expect consistency from the people on the frontline, safeguarding your reputation, every shift? Great shift leadership is the solution, and it’s something that smaller operators focus on nailing. The only way seems to be to either dumb the menu down to a cook in the bag process (it’s a long time since I had risotto from a bag), or to have a collection of sites that have an individual identity, and not be phased by each chef taking a different approach. In truth this probably depends on whether you can automate the offer. MacDonald’s is very consistent, but it does give the opportunity for others to make a better burger.
My old boss and mentor, Tony Hughes, once said to me that he thought no brand should be larger than seventy sites. I didn’t understand what he meant at the time, but fifteen years on I think I do. The balance between the tensions above either require a different way of running our business, or they in effect reach an optimal level where trust at the site level is not lost, there is enough focus so that the MD know all the sites well, and a sufficient level of consistency can be achieved. I would like to think that the improvements in technology should allow this number to grow, as we can see more of what is important without being on site. It will be interesting to see if the outperformance of the SME improves or deteriorates over the coming years.
But we still can’t measure smiles, or an attentive team, or a plate of food that makes you excited. That still comes from sitting and observing. And that comes from the other secret ingredient. Passion.