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Silicon Valley Big Money Is Trying to Trick Restaurant Operators

As I have been watching the industry over the last couple of years, I’ve concluded that the big Private Equity and Venture Capital firms from Silicon Valley are trying to hoodwink the restaurant industry.

What are the five big initiatives that most large restaurant companies have been focused on in the past couple of years:

  1. New POS Systems (Toast, Par, Oracle)
  2. Delivery (Uber Eats, Door Dash, Grubhub, Postmates)
  3. Carry Out
  4. Mobile Ordering
  5. LMS Systems (Learning Management Systems)

Have you ever asked yourself why you have been thinking about or focusing on these initiatives? It’s because these companies have raised millions/billions of dollars across their industries and they have been marketing/selling to you in every way possible.

Here at OpsAnalitica we have never raised money, we are bootstrapped and proud of it,  but we know a lot of people that have. For those of you who might not be as familiar with Venture Capital or Private Equity money, here is a crash course.

  • You trade equity/shares in your company for cash.
  • Investors are looking for Unicorns, Google was a unicorn, they give tons of money to companies to get them to grow as quickly as possible.
  • When a company raises 100 million dollars, they don’t always get all 100 million on day 1. They might get 33 million on day 1 and then they have promises to get the other 66 million over the next 12 to 18 months if they make their numbers.
  • If a company deploys the money and grows by some agreed upon metrics, they get more money. If they miss their numbers, then the investors can pull their future investments and the company runs out of cash very quickly.
  • These investors want you to spend as much money as you can as quickly as possible to try and generate as much growth/market share as possible.
  • This isn’t about responsibly spending money, they don’t want you to stretch this money out for 10 years, they want it completely spent in 18 months. Fast is the name of the game.
  • The belief is that you can grow market share and customer base quickly then you can figure out profitability when you are big enough.
  • When these guys get money, they hire the best of the best as quickly as possible. They focus on Marketing, and Sales People.
  • If you ever watched HBO’s Silicon Valley you see what it was like for those guys. Also, it is a hilarious show.

Over the last five years or so, the products I mentioned above, POS’s, Delivery, LMS’s, Carry Out, Mobile Apps have all been vying for a dominant share of the restaurant market. These companies have been getting acquired or raising massive amounts of capital to grow and to establish themselves as the number 1 players in their spaces.

Here is an article from 2018, The Spoon Blog, $3.5 billion invested in Food Delivery Start-ups This Year.

3.5 Billion, lets be conservative and say that 2 Billion of those dollars were deployed in selling restaurants and customers that food delivery was a must have.

Let’s talk POS Systems, look at this article from Venture Beat Toast POS raised $500 million dollars with a 2.7 Billion dollar valuation. This articles takes you through a series of other POS company capital raises that easily exceed over a billion dollars.

If you have been going to the NRA show over the last couple of years, you cannot spit without hitting a POS company.

LMS systems, aren’t as sexy as POS systems and Delivery but they have been raising money as well. Look at this article from Elearningside.com. These guys in this article have raised between 500 million and 1 billion dollars.

My point is this, that these companies have been getting billions of dollars in free money that they have been using to tell restaurant companies that they need their products to be successful.

The ROI numbers for the restaurants aren’t jiving with the marketing.

Remember, when you take 100’s of millions of dollars in investments, you can make yourself look huge, credible, and successful overnight. You can have a software platform, marketing & sales teams, conferences, ad’s on every type of media, public relations articles and interviews for your executives on TV, billboards across every city and airport, literally in a couple of weeks.

Raising money not generating revenue becomes the story, because people wouldn’t invest in your company if you weren’t growing and making real money, right? WeWork and Uber!

Because this type of investing is relatively new we sometimes forget that these companies are paper tigers, they haven’t generated their operating captial from actually being successful, organically fueling their growth through happy satisfied customers that got an ROI from their investment in their services. They are getting handed billions of dollars in cash and told to spend it.

Everyone is buying into it, every time we talk with an enterprise client they seem to have another project going around one of the aforementioned systems or platforms. Are those platforms generating an ROI?

Let’s look at the reality in the market today. As of  the end of January 2020, 3 restaurant companies filed bankruptcy in the last 10 days: Bar Louie, Village Inn & Baker Square, and Krystals. All of these companies had delivery and POS systems. I would hazard to guess that they had LMS systems as well. You could call in and order food or do it online and pick it up.

These companies all bought into the hype of the marketing and sales but it wasn’t enough to save them. Why? Because it doesn’t matter if you have a great POS system and Delivery if no one wants to eat your food. 

Restaurant customers care about the basics of the restaurant experience: clean restaurants, safe and delicious food, served by nice people, they care about sticky floors and tables, clean bathrooms, they care about wait times and food that doesn’t have them sitting on the can 30-minutes after they eat it.

The restaurant industry is in one of the toughest most competitive markets it has ever faced. I’ve learned from my own experience working at corporate for a large restaurant chain that when times get financially tough the first thing that goes is a focus on the basics of running great restaurants and delivery exceptional experiences.

The restaurant companies stop executing on the basics at the store and corporate level. Once you aren’t executing on the basics, then nothing else matters and nothing you do to increase revenue will work. As things get worse the leadership team starts looking for Hail Marry’s, delivery was that for a lot of chains.

Here is the reality, if nobody wants to come and eat in your restaurants because your operators aren’t delivering the Basics of good restaurant management and service, they sure as hell aren’t going to pay extra to have that horrible experience delivered to their homes. A fancy POS, better training, better mobile ordering experience, none of those are going to work either.

In this RestaurantBusinessOnline.com about Bar Louie’s bankruptcy they sited “The inconsistent brand experience coupled with increased competition and the general decline in customer traffic visiting traditional shopping locations and malls, resulted in less traffic.”

Inconsistent brand experience is code for bad operations and gross food. Delivery and mobile ordering is supposed to fix these issues of declining mall traffic because it shouldn’t matter where you are located right?

The point is that in the last five years as the labor and restaurant market has gone haywire that a lot of restaurant chains started to put all of their hopes into these highly marketed solutions to get their businesses back to profitability and lost sight of the basics of running great restaurants. That loss of focus is putting them into a hole.

One last dig at delivery as the savior of all things: in 2018 Subway inked deals with all 4 major delivery platforms, throwing 9,000 plus restaurants on delivery. It was the largest system to go on delivery at that time. Subway’s decline is staggering and reminds me of my days at Quiznos. Delivery isn’t working for them because nobody wants to go to their restaurants and they have more of them anyone else.

Here are some restaurant statistics that kind of drive home the importance of focusing on the basics of restaurant management first:

This is from the Steritech Diners Dish 2018 Customer Survey, let’s first look at basic restaurant cleanliness: 

Let’s look at the impact that a foodborne illness outbreak could have:

Here are some quick delivery statistics:

Now lets look at some statistics around employee turnover from Seven Shifts. The fact is that training is important but that we have to move away from our traditional method of memorization based training to a more business process oriented approach.

The fact is that employees arent staying long enough to warrent teaching them to memorize things. This is where checklists and daily processes with a training back-up can improve employee efficiency. To learn more about how Opsanalitica can help you improve employee efficiency and business process, click here

I know I through a lot at you in this blog. What I want you to take away from this blog post is the following:

  1. That the delivery, pos, and LMS companies have litterally spent billions of dollars marketing and selling to you that their solutions are going to change you world.
  2. None of those solutions will help your business if you don’t have a restaurant that is already popular and focused on the basics of great restaurant management and customer experiences.
  3. If your restaurants are hurting financially, double down on great experiences and the basics and get those inlign first before you add new sales channels. 

I’m going to leave you with one last thought around what is happening in the industry. My business partner got this in his daily email about restaurant technology.  

Red Lobster is going to grow through delivery, I don’t even want to guess what that is going to taste like. Grubhub says it can’t make 3rd party delivery work.

Grubhub was supported by millions of dollars of other people’s capital.

Please, please, please return to focusing on the basics of great restaurant management, systematize your operations, put all of your emphasis on wowing your customers, and your business will grow fast and sustainably.

Then when you are just crushing it, all these technologies will take you to the next level.

We at OpsAnalitica can help you rock the basics of running your restaurants and improve your business processes.