Restaurants and Institutions

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The "Value Chain" is Broken
July 27, 2008

Let's face it, business stinks.

The "Value Chain" forged by our customers and our enterprises has been broken.

When customers find value in a restaurant offering, they reward the establishment with their frequency and loyalty.  Basically they return more often and they spend more each time they visit.  Each time they visit, the two sides, consumer and operator build their "Value Chain" together.

My fifth and final piece of the "Five Compelling Worldwide Trends, 2008" is no longer a projection.  It is already fully in place and the shifting target of the value sensitive consumer has been moved beyond the reach of many well-intentioned managers.  This isn't a slow moving trend this is a break point which will require months to overcome.

In previous blogs, I have discussed the idea that value is a transitory thing.  So is customer loyalty.

One day customers define value as big portions, the next day value means quality products, and then on the third day value equals low price.  In a contracting economy consumers demand all three.  The "Value Chain" has to be very strong in order to hold.

Today customers, like many operators, are feeling pessimistic.  Gasoline while easing this week, still lingers around $4.00/gallon.  Other than some of the QSR leaders and a few LTOs on selected full-service menus, domestic restaurant sales are shrinking.

Those customers who just last year were willing to pay a little bit more to be eating at a trendy new spot, are this year finding it hard to justify even a visit to their old haunts with a deal coupon.  In the Wall Street Journal, reporter Dana Mattiolli wrote this about a young advertsing account exec, "A few months ago Jessie Snider, 23, began to feel the pinch of the rising cost of gasoline, food and, well, everything.  'Lunch was the first thing I cut back on,' says Ms. Snider."  She's bringing lunch from home instead of heading out to the restaurant next door.  Ms. Snider's broken link in the "Value Chain" is price.

In her column for the Boston Globe last week, Ellen Goodman wrote a pretty agitated piece about the "Self-serve and slave" economy.  She's upset that she has to pay full price at restaurants, airlines and hotels but do all the work herself.  Ms. Goodman's broken link in the "Value Chain" is service.

Unfortunately as retailers the industry is facing a similar broken "Value Chain" crisis itself.

Food and commodity prices are skyrocketing, the wholesale price for eggs and wheat are almost triple what they were last year.  This means even the fall-back tactic of using traditionally low cost pasta as a safety net is gone.  I don't need to mention the costs of cheese, butter, meat and energy.  Just as it is for our customers, for restaurants one broken link in the "Value Chain" is price driven--rising purchase prices with no chance for menu price increase.  This stress means that a second link in the "Value Chain", portion size, is also broken.

This week the Federal Minimum Wage rose by $.70 an hour.  In today's perfect storm scenario revenues are declining, customers are demanding more service, and the dollar cost of labor has risen.  For restaurants, this means the third broken link in the "Value Chain" is service--in inability to offer more of it at a time when the pressure is on to be competitive.

One of the most challenging things about hard economic times such as these is the prospect of having to re-forge these broken links over the coming months.

Halfway through 2008 and it is now apparent that this is a year requiring innovation, new models of management, and changing strategies for survival.  It will also require a hammer, heat, and an anvil. 

Posted by Chris Muller on July 27, 2008 | Comments (2)