What’s the Problem with Chain Restaurants?

Jun 25, 2024 | Finconomics 101, No Bull Economics

The Problem with Too Much Cost Cutting Post Banner

When managers become convinced that their business has become a zero-sum game, they naturally seek to become the low-cost provider in pursuit of share. While it is good to drive efficiencies, cost cutters can take their eye off driving top-line growth. This framework provides a clue about why the $1B+ restaurant chains have been losing share for the last 10+ years.

Analysis

The $1B+ restaurant chains have lost -7.3% domestic share relative to the entire industry over the last 10 years. While covid lockdowns initially helped the chains, the independents regained their momentum with a vengeance afterwards. No wonder so many of the big chains have given up on their home market in pursuit of international growth…

We posit that the $1B+ restaurant chains have suffered share losses because of their strategic emphasis on implementing scale-based cost cuts while the scrapy independents focus on driving top-line growth in the local markets where their customers live & work. While national marketing & advertising programs maybe more “cost-effective”, the chains have been consistently outcompeted by small operators who know what type of service, menus & pricing are most pleasing to their local customers.

While we greatly appreciate the franchise model because it can provide a framework for small businesses to flourish, an overly restrictive franchise system squeezes the creative life energy out of the system. This challenge is aggravated by the push to consolidate franchise systems into the hands of the largest operators who resemble corporate managers more so than local restauranteurs. In conclusion, while cost cutting efficiencies may have their place in a punk economy, operators must learn to distinguish between cutting fat & cutting bone…

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