The Death Spiral at Struggling Restaurants

Source: Wikimedia

I see it time and again.  A restaurant begins to face declining revenues for competitive reasons.  Perhaps fast casual restaurants begin to take share, as Panera and others have done.  Perhaps dietary trends cause a shift in consumer preferences.   As the restaurant grapples with declining sales, it makes two moves to try to reverse its fortunes.  First, it broadens the menu, adding a variety of new dishes.  This move often backfires for two reasons.  The new menu items blur the firm's distinctive positioning in the marketplace.  What precisely is this restaurant all about, and what does it specialize in these days?  Broadening the menu also adds a signficant amount of complexity to the operation.   Speed and quality of service suffers.  As the menu expansion fails to generate strong revenue growth, the restaurant makes its second big move. It cuts costs, particularly with regard to staff.  Of course, speed and quality of service declines even further as a result of the cost cutting.  The death spiral intensifies.   

We have seen this death spiral transpire at Bertucci's, a pizza restaurant based here in the Northeastern United States.   Over the course of the past two years, I have seen the menu continue to expand.  Service has suffered.  As service declined, people stopped going to the restaurant.  Cost cutting affected the quality of the experience.  Several weeks ago, the company filed for bankruptcy.  It's unfortunate, as the company once offered a terrific family dining experience.  

Sbarro: In Strategy, You Have to Choose

The Wall Street Journal reports today on yet another reorganization at Sbarro, the operator of Italian eateries in malls throughout the US.  Sbarro has already experienced two bankruptcies in its history.  What's the new plan for turning around the company?  They will open neighborhood pizza shops with dine-in, take-out, and delivery options for consumers.  They will focus on pizza.  The firm argues it has suffered in recent years due to substantial declines in mall traffic.  Ok, the strategy sounds readonable so far.  However, then you read that the CEO believes that there is still an opportunity to add mall food court locations.  Huh?  He says, "There are 900 malls in the US with food courts, and we're in a third of them.  But instead of them representing 90% of our sites, I'd like them to represent less than half."

The question, though, is whether a company with limited resources and a history of financial troubles can do multiple things at once. Are the two business models (malls vs stand-alone) fundamentally different? Can you optimize both?  Many companies fail because they simply cannot make tough choices about what to do and what not to do. Sbarro may succeed, but it might increasing its odds by making a choice about what it really wants to be.  Instead, it appears to be falling into the trap of seeing a large market (malls) and not being willing to walk away.  However, it shouldn't fixate simply on the size of that market.  It should consider whether it can run mall and stand-alone businesses efficiently together.  

Who benefits the most from Yelp?

HBS professor Michael Luca has conducted some terrific new research on the impact of Yelp.  He examined the effect of reviews.  He found that a one-star increase in the quality of a review led to a 5-9% increase in sales for a typical restaurant.  However, he found that positive Yelp reviews had much more impact for non-chain restaurants than for chain restaurants.  That makes sense, of course.  Smaller, independent restaurants have less means of reaching potential consumers.  The large chains have national advertising to build brand equity, and they develop a reputation over time.  I know that I rely on Yelp when I'm traveling to identify independent restaurants of high quality.  This research suggests that smaller restaurants should focus on encouraging their loyal and satisfied customers to review on sites such as Yelp.   However, the restaurants need to be careful.   Many review sites screen for obvious "planted" ratings or other efforts to manipulate ratings.  Customers too are quite discerning.  They often can determine the authenticity of a review.