Scaling Up to Oblivion
Why did Jamie's Italian fail? What goes wrong when businesses try to scale.
Things mentioned in this podcast:
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Transcript
Hello and welcome to the Cognitive Engineering Podcast, produced by me, Fraser McGruer, for Aleph Insights. In this series of podcasts, we take a look at interesting topics and discuss what we think they tell us about analysis and decision making. I'm here with Nick Hare and Peter Coghill of Aleph Insights, and this week we're discussing the failure of Jamie
Speaker B: empire, which was founded in: Speaker A:Oh good, because I was going to say, I don't like your tank, so I like him. I had. And actually, I do think he feels this. And I think he actually, I think he's got a, I think he's a good person. Anyway, go on.
Speaker B:I had, I mean, so one of the worst meals I've ever had at Jamie's Italian in Reading and I had a saltimbocca alla romana. Now that's not something, it's actually not very easy to get that badly wrong. It's basically a piece of, well, pork usually, but it's supposed to be veal, but usually pork wrapped in parmigianum and sage and more or less just a sauce made with the kind of meat, the pan juices. It's really straightforward. And it was awful. It didn't taste of anything. I've never had a saltimbocca that I haven't enjoyed. And this was dreadful. So yeah, they were bad. Doesn't that mean a sauce in your mouth? I don't, I don't actually, even though I love the dish, I've never actually looked into what it's called, but anyway, there we are. So they've got our business. And I think what we're interested in is, you know, how can you be a big restaurant chain one minute and then the next minute just, you know, be out of business? Like what, why is it hard to, what, what goes wrong when you scale up? And are there lessons we can learn about, you know, business in general, what kinds of businesses you can and can't scale up easily?
Speaker A:Right. Which is interesting because some, you know, we don't often talk about your own business, Aleph Insights, but I think, you know, maybe we can sort of talk about that a little bit. Maybe you've got plans to be the Jamie Oliver of analysis and decision making or maybe not.
Speaker B:I don't know where to start with how wrong that sentence was, but yeah.
Speaker A:Okay, well chip in. So, I mean, what are the problems of scaling up? Are there any other examples we can draw upon? How do you want to kick things off?
Speaker C:Well, we can perhaps put it into contrast of other restaurants, which are, have been successful for many, many, many years of a similar, similar type. So I'm thinking Prezzo, similar mid range kind of Italian style restaurant. Casual dining it's called. Casual dining. Yeah. And, and, but enormously successful. I don't know. I think they have upwards of 40 branches in the UK.
Speaker B:More. Yeah. I mean the, your sort of the stat, the, the kind of Prezzo, ZZ Polpo, Cafe Rouge, what's the other one? Pizza Express. They ubiquitous on every town centre you go to has got like, you know, two or three of those. And they're obviously, they've got, they've got a hundred, I think Prezzo has recently had to close 90 of its restaurants. You say that they're successful. Then not according to the business press. Apparently the casual dining sector is in trouble.
Speaker A:All right. Well, hold on. I'm having trouble framing this discussion for a moment because so far we're talking about restaurants and we can talk about why the casual dining sector is in trouble and that sort of quite specific to that sector. We can talk about scaling up in general, but also I think, I think something I think is worth talking about is kind of the opposite problem, which is being unable to scale or being, this is going back to when I was a freelancer. One of the issues I had was that I was just doing everything and I'd love to have scaled up a bit, but there was a problem at the other end. So maybe one, maybe it's a sort of a foolish way to frame it, but one problem is scaling up massively and at the other end of the scale is not scaling at all. Is there a sweet spot in the middle?
Speaker B:Yeah, I think you're right. I mean, and I think, and actually it does feel a bit like, you know, business models for running something like a restaurant are a bit like walking or running in that you can kind of do one or the other, but there isn't a thing in between you can do, you know, that you, you basically have to have a whole different business model if you're going to have a chain. And, and, you know, even though superficially, I mean, from an economic point of view, when you look at the kind of production function for a restaurant, i.e. you take some inputs, you turn them into outputs, you know, for the same inputs, you literally just replicate your restaurant. It's like a unit. If it generates profit, in theory, you just take an identical restaurant, you plonk it in Reading, and then presto, you know, it's just, you've doubled your output, right? So, I mean, in terms of returns to scale, it is pretty linear, you know, like restaurants can scale up and down. And then it's not going to make a big change. It's not like if you've got two restaurants, suddenly both restaurants become more productive or anything as such. But when you, when you, obviously, there are sort of economies of scale that you have to start worrying about. So particularly the fact that, you know, costs of talented people are going to increase, you know, you're going to, it's going to be, you're going to run out of, you know, people who are, you know, suitably qualified to run restaurants. Managers, particularly, you know, of restaurants are really important, and they're quite hard to find. And obviously, with the first restaurant that you found, you generally, you will have a very close relationship with the staff, they'll be quite bought into it and making it successful. And of course, by the time you're on restaurant two, three, 10, 100, totally different set of motivations have kicked in. And so, you know, there are these kind of, the problems at the cost end, and ingredients as well. I mean, you can't, you can't, you know, quality ingredients tend to be quite scarce. You know, you have to start buying from bulk sellers, and they, the quality, you know, naturally, the quality is going to be lower.
Speaker A:I mean, it seems to me that two things is one, one of the, let's say with this first restaurant, I don't know what it was, but let's say Jamie Oliver was super successful. I think it was 15. Okay. And let's say one of the reasons why he was successful was partly the reasons that you said is that there's that personal touch, and you've got way more control over all sorts of factors or a closer eye on them, let's say. But also, similarly, on the customer side, there's, it's very attractive, that kind of personal service and personal touch, etc. And so that's one issue I can imagine, certainly with restaurants, and I'm sure it applies to other sectors as well. But there's a second thing you started talking about was issues facing casual dining in the UK at the moment. And something is getting even more casual and like pop-uppy at the moment in the UK, as I know it is elsewhere. And I would imagine that's a challenge to that kind of model. So that I don't know if we want to continue talking about the restaurant sector, if there's something you want to come in with.
Speaker B:I feel like, yeah, I mean, I think it's right. But I feel like I want to save structural changes for a bit later further down the line. At the moment, can't we just stick to, you know, slagging off restaurant chains?
Speaker A:So let's keep it. So yeah, I don't know, let's keep on slagging them off. Peter, anything?
Speaker C:Yeah, well, on the other extreme, you have, you have restaurants like McDonald's and Burger King, which were used to be little branches or with a small number of restaurants and are now multinational global brands that provide a service at a particular level, but have somehow mastered the approach of massive scale restauranteering. So, yeah, what, how do they work? I mean, I think they work by taking a very systems approach to it and capitalising absolutely on all the economies of scale which act in your favour. So you centralise production. So, you know, the McDonald's tomato sauce is probably made in a massive factory in the States somewhere and shipped all around the world.
Speaker A:I think it's probably a tomato sauce factory in China somewhere. That's all. The whole city runs on it. It's probably a tomato sauce factory. I mean, I hope it is.
Speaker C:Yeah, it's not just some by-product.
Speaker A:It's not some weird thing like people picking tomatoes out the ground.
Speaker C:No, I think, well, I think McDonald's do take it seriously. There's a quality, there's sort of their approach to the food. They want to make it as good a quality as they can for a certain price. But they standardise everything. So, you know, the eggs are totally standard anywhere in the world where they're sourced. The customer service approach is standard. There's a big manual and all the employees go on a training course and earn points as they progress. The management structure, all their careers are highly managed and there's a McDonald's way of doing things. That's how it's done. They invest lots of money in research and consultancy on how to optimise all these things. And they're regarded as a very good employer, as I understand it.
Speaker A:So let's assume for the moment that McDonald's is not going to fail any time soon. What is, and you've mentioned a bunch of stuff there, is that, are the things that you've mentioned, are they the difference between McDonald's and Jamie's?
Speaker C:I think they are. I think Jamie's, I think they attempted to try to replicate this personal experience, a nice small restaurant feel. And that's expensive because you need more motivated staff. You need more staff. You can't sort of systematise everything so it's all on a script. All those things give you economies of scale in terms of savings. So I think that's the difficult bit, the unscalable bit is the human interaction bit, having any kind of relationship with people.
Speaker B:But I think also the type of food. I mean, there's something about a cheeseburger or an egg McMuffin which makes it very easy to systematise. It's made of lots of identically sized components. They can be cooked for exactly the right amount of time. But if you want to cook, every piece of chicken is different. Every steak is different. Every piece of saltimbocca is different. And you're going to need to have someone who knows what they're doing. They just need skills that you don't need to cook a cheeseburger.
Speaker A:If there's any restaurants out there that need business consultants, operations consultants, they should know where to come. I think you guys are nailing it. Not that I'm an expert in this area.
Speaker B:But I think there's also an argument to be made that McDonald's actually is operating in a totally different market. I mean, it's not even substitutable for the kind of thing you want to do. I mean, I can see at the margins it would be like, you know, that if you've got a bunch of kids with you and you want to go and get something to eat, you know, certainly if you're middle class, you would want to go to Pretzo or whatever, you know, ZZ. That's the first thing. You can't let us take them to a nice restaurant, but you can take them to a ZZ. It doesn't matter as much if they mess things up and the staff will give them crayons. You know, that's one of the advantages of those things. And I think, you know, what Peter was talking about, this kind of maintenance of homogeneity across a large chain actually is really the key selling point. I mean, why has one McDonald's got the same branding as another McDonald's? Why do they want to have the same branding everywhere? It's so that people, because people will pay for predictability. People want predictability. And I have to say to my shame, to my eternal shame, I have done that once with a former girlfriend of mine. I was in Italy and we were really skinned and our Italian was very bad and we were in this very small town which had a McDonald's and no doubt lots of fantastic Italian restaurants, but they were actually pretty intimidating. This was before the internet. You couldn't just look up where the good places were. So we ate at McDonald's in Italy. Be careful. If you want, I can edit that out later. Otherwise, you're going to get thrown
Speaker A:out of North London.
Speaker B:The honesty, I think, you know, I'm proud of my honesty and transparency, so I don't mind if it stays in. But as I said, I am ashamed of it. I certainly wouldn't do that today.
Speaker A:Okay, so where do we go? Have we nailed what's gone wrong with scaling up restaurants? Do you want to talk more about restaurants? Do you want to move on?
Speaker B:Well, I think there is this, well, so I tried to look at what the data might tell us about how scale works with restaurants. You can kind of look at the distribution of how many restaurants there ought to be, you know, if they worked in a certain way. So if scaling was kind of uniformly easy, so if it was just as easy to go from two to three as it was to go from one to two, and likewise, you know, if it was just as easy to go from 100 to 200 as it was to go from 200 to 300, you would expect to see broadly an exponential distribution of the numbers of branches that a restaurant has, which means, you know, you'd get sort of 10% less, let's say every 100. So in other words, there'll be kind of 10% fewer restaurants with, you know, 200 as they were with 100 and 10% fewer with 300 as they were with 200 and so on. But you don't get that at all. You get far fewer large restaurants than if that was true, which suggests that yes, it is. So they're distributed more or less on a power law without going into the stats. The point is that what that suggests is that basically it is harder to scale up than, you know, you can get, there are a lot more people stuck at a small size, which suggests that scaling up is easier the smaller you are and becomes kind of harder as you get bigger. So yeah, yeah. So I just, I think the data support what the kind of business press says, which is that, I mean, restaurants are actually a very difficult thing to scale. So partly the reason, you mentioned it earlier about trying to go from one of you to two of you when you're freelancing. Restaurant profit margins are very low. There's something like five, 5% or something in the UK, which means you can't really ever get the finance to expand. If you were just going to, if you were just going to rely on profits to expand, then, you know, it would take you, it would take you 10 years to get enough money to start a new restaurant, which is why you need to borrow to expand. Well, if you're going to borrow to expand, you might as well borrow to expand to five or 10 or 20 restaurants. And the thought is that private equity has been encouraging too many people to expand too much. So we've been kind of awash with Byron and ZZ and, you know, and so that's, that's one of the, one of the purported causes
Speaker C:for that. I'm surprised that so many private investors have jumped on that bandwagon given
Speaker B:that the expected return is only going to be 5% at most. I guess they think they can spot the ones that are going to grow big and be very successful. So it must be a short
Speaker C:term thing because they don't stick around forever. You know, restaurants aren't popular
Speaker B:forever, are they? Well, I was looking at what one of the, one of these investors was saying, and it was very much that. It's like, I don't want to invest in something fashionable. You know, you've got to think, is this going to still, is this still going to be attractive in 5, 10, 20 years time? Yeah. Is Byron still going by the way? Didn't they get into trouble as well? I think they've had to close some restaurants. Or am I thinking of gourmet burger kitchen? There's lots of them, aren't they? Yeah. Byron burgers are really good, actually. I agree. But again, you know, do we need one? Do we need every other shop to be a Byron
Speaker A:burger? Yes. Or a McDonald's, one or the other. Peter, anything to come in on? Well, yeah,
Speaker C:it might be more, it might be interesting to extend it to other businesses as well. Yeah, absolutely. I did a bit of stats looking at, and there's a similar trend in just general business. However, there's a spike at the top end for business in terms of number of employees that they have and their turnover. So there's a sort of lull in the middle. So this would apply for wider businesses. It's easy to be very small, and it's easy to be big, because they exist, but quite difficult to maintain a medium size. You're forced onto one end or the other. And I think that's... Sorry, what are some of the sectors you were looking at? This was all sectors. Right. This was all sectors for finance, defence, etc. This was top level stats from ONS. And I think there's a couple of trends there which sort of force that to be like that. One being that a model for growth is, for big companies, is a sort of mergers and acquisitions model. So you grow through swallowing up small companies rather than inherently growing your own capability. So you want to get into a new market, and rather than developing your own in-house capability, you'll find profitable looking companies and buy them. So companies tend to coalesce into large lumps. And I think also that investors tend to want stability. They want things that are... They want a simpler, more legible portfolio, so large companies are a good bet than lots of small companies. And so you... Sorry. You either want large companies rather than medium-sized companies because they're more stable, more likely to give you guaranteed returns. Or you're on that kind of end of investment where you're an angel investor or you want to take a small company and grow it to a point where it can be sold. So there's sort of two type things. Something that I've never really understood is how this mergers and acquisitions model actually works. To me, it sounds like a pyramid scheme that eventually you're going to run out of things to buy, and it's going to fall over. You can't attract any more investment to buy more businesses. So why do large businesses just naturally fall over?
Speaker B: ury anyway. They were, in the: Speaker A:Okay, well, actually, that sort of brings us nicely. I think we've sort of, we've covered that all off quite nicely. But it brings me on to something I want to talk about, sort of talking about nostalgia. Earlier on, you were mentioning a terrible meal that you had at one of Jamie's Italian restaurants. I want you to think, what is the worst meal that you've ever paid for in a restaurant? And it has to be in a restaurant. But also, another challenge for you, can you think of the best meal that you've ever had as well? So that is what I would like to talk about, if that makes sense. Yeah. That sounds good. You kick off. No, no, no, no. I want you to go first.
Speaker B:All right. I think maybe this just sticks in my mind because it was recent. But last year, as we were getting ready to fly to our holidays, we went to a restaurant in an airport called, I think, I think it was a Little Frankie's. It was one of these awful kind of almost like ballardian nightmare situations of a restaurant in a sodding airport pretending to be a little sort of Italian-American diner. And the food was unspeakable. It was and, you know, got about 10 chips with, you know, what was supposed to be kind of chicken and chips. And the chicken was just like this. Their so-called sort of buffalo chicken wings was just some wings that had been heated up that had a load of Frank's red hot sauce sprayed all over them. It was so bad. And of course, it was all like, you know, restaurant prices like 10, 12 quid for a main course. It was so bad. And I mean, you know, that's a really classic example of quantity and quality being kind of locked in this, you know, eternal trade off.
Speaker A:Also, you said it was in an airport, yeah?
Speaker B:Yeah. You were trapped, right? Best? Well, a little bit cliched, really, but probably Le Gavroche, which is, of course, Michel Roux's Michelin star restaurant in Mayfair. It was perfect, really. It was about seven courses or something. Each came with a different glass of wine or sherry. And there wasn't just nothing about it that was wrong. There's just every, you know, sort of, and lots of different things as well. Like there was a souffle and, you know, a kind of roast lamb and some fish. Some bloke with a violin. It was just incredible. There wasn't a bloke there. Michel Roux did come out and say hello to us, which was nice of him. But yes, I think it's just, you know, to be honest, if I gave you an example of some fantastic restaurant I went to in Poland, which was really amazing, I'd be fibbing because that was really the best meal I've ever had.
Speaker C:Peter? So my worst meal, I just got back a couple of weeks ago from a round-top of Scotland cycling trip, North Coast 500. I can see what's going on here. Oddly, it was a one-off restaurant. So, you know, it should be good by the sort of models that we've been talking about, but it was terrible. So it was a hotel, very nice. Back in the day, it was probably a really nice Highland hotel, very grand, very big. But today, it's a bit like going into the Hotel and the Shining. It's very odd. It was just bizarrely odd. It was several coach loads of very old people who looked several hundred years old enjoying this terrible electronic keyboard tribute act. It was baffling. Anyway, the restaurant itself, I wasn't feeling terribly hungry. I think I was a little bit ill or something. So I went for a vegetarian option, thinking that would be the safe thing. And I was presented with a plate with this little, tiny little, looked like it'd come out of a box from Iceland or something tart. I thought, well, it's probably going to be edible. But it was stone cold in the middle and fiery hot around the outside. So it just hadn't been cooked right. And the vegetables were all terribly wilted. So I never do this in restaurants. I'm not normally a fussy eater. So I sent it back saying, it's just not cooked right. This is cold in the middle. So they spent half an hour faffing around, by which time everybody else had finished their meals. They brought me back another one. Exactly the same. So I gave up with that at that point and decided to have a pudding instead and decided to go for something super safe. So I thought, I'll have the apple crumble. You can't go wrong with that. You can't get that wrong. Turns out you can, right? Within two mouthfuls in, I found the longest, thickest curly black hair I've ever seen in my life. So at which point I just lost all appetite and decided to go and drink whiskey instead. Did you pay? No. They were gracious. I mean, the weird thing about the Highlands is, given that they are becoming increasingly dependent on tourism and it's a potential tourist gold mine, because it is a wonderful, beautiful place. They are not very customer centric. They're Scottish. That might be part of it. I'm Scottish, I'm allowed to say that. It's like they're doing you a favour by just feeding you a tour. But they were gracious and they did discount the entire bill. And briefly, your best? Briefly, the best. Not a particularly posh place, but I'm a huge fan of the Skylon restaurant in the Festival Hall. Oh, I've been in there. They do good cocktails. They do excellent cocktails. It's like having a cocktail in a James Bond set. And then the bar, the grill, it comes and goes. I've been there a few times. The first time I went there, it was fantastic. I had the best Chateaubriand of my life. It was helped, but I was on a quite hot date. So that helped. But it was a really, really just wonderful meal.
Speaker A:Hey, I like the sound of that. That sounds good. Yeah, no, very briefly with me. I had a meal in quite a posh restaurant in Beijing once. And the main course was lobster spaghetti, right? Or lobster noodles. And you might think, oh, that sounds all right. But actually, the noodles were themselves were made of lobster mince. Some poor lobster had been kind of minced up and its shell had been sort of artfully placed on the plate. But it was just all kind of lukewarm-ish. And it was just, it was just vile. I just couldn't eat it. And each course was worse than the previous. Best one, again, going back to this middle class thing, probably I went on a cycling trip with my wife years ago in the Loire Valley. And every single village kind of restaurant we stopped at just served perfect food from heaven, accompanied by the most amazing wine. So yes, there we go.
Speaker B:Yeah, the crappy restaurants in France are still better than good restaurants anywhere else.
Speaker A:Yeah, I've had some pretty ropey stuff in France as well, though. Okay, we'll end it there. Anything anyone wants to say before we close this podcast out? Okay, bon appétit. Until next time, thank you for listening. I'm Fraser McGruer, you've been here with Nick Hare and Peter Coghill of Aleph Insights. Until next time, goodbye.
