Invest Like the Best with Patrick O'Shaughnessy
· Patrick O'Shaughnessy, Nick Kokonas
[00:00:00] S0: Just to pour evidence on the pile, I still tell people about that all the time. And it's interesting to me how often businesses seem to want to go down the fairway and sort of not be risky and how incredibly boring but also how bad a business decision that is. Because if it was just a lava cake or something I wouldn't talk about it. [00:00:00] S1: There is an important distinction here and that is this. People have copied that now. Anything good gets copied. And if you google up restaurants in South America and Asia that are copying it, they don't copy it well. They'll literally just take a bunch of food and dump it on a table. No, no, no, no. If you're going to try to do this very risky kind of potentially polarizing thing, you have to make it elegant and beautiful too. Execution ... The ideas are great. I tell people all the time. You can have all the great ideas in the world. If you do not execute them at a high level it's going to fall flat. Grant, when we first opened, wanted to show movement in food and he had this little bacon on a wire thing and stuff. And now there's a bunch of steakhouses that put thick steakhouse bacon on a clothes pin. Our thing may have been dumb, and we only did it for four months, but they didn't really get the point of it. It looked beautiful at least. And now they've got clothes pins holding bacon on a wire. You have to figure out the core of why it's special and that's a tricky thing to do a lot of times.
· Nick Kokonas, Patrick O'Shaughnessy
[00:00:00] S1: There is an important distinction here and that is this. People have copied that now. Anything good gets copied. And if you google up restaurants in South America and Asia that are copying it, they don't copy it well. They'll literally just take a bunch of food and dump it on a table. No, no, no, no. If you're going to try to do this very risky kind of potentially polarizing thing, you have to make it elegant and beautiful too. Execution ... The ideas are great. I tell people all the time. You can have all the great ideas in the world. If you do not execute them at a high level it's going to fall flat. Grant, when we first opened, wanted to show movement in food and he had this little bacon on a wire thing and stuff. And now there's a bunch of steakhouses that put thick steakhouse bacon on a clothes pin. Our thing may have been dumb, and we only did it for four months, but they didn't really get the point of it. It looked beautiful at least. And now they've got clothes pins holding bacon on a wire. You have to figure out the core of why it's special and that's a tricky thing to do a lot of times. [00:00:00] S0: Going back to the kind of way the business itself is run and the service delivered, you guys have been extremely innovative in things like ticketing, selling meals ahead of time, not at the restaurant. Things like dynamic pricing. Can you talk through how you arrived maybe at those two concepts at first and the impact that they had on the business once they were in place?
· Nick Kokonas
[00:00:00] S1: I had never spent a day working in a restaurant. And then even after we opened Alinea, my role was to coordinate. I was like the producer of a film. I found everybody, got them involved, worked with the architect, the interior designer, did all the permitting, the liquor license, the legal, all that sort of stuff. But I didn't actually work in a restaurant ever until the day we opened. And I certainly didn't intend on working at the restaurant. I expected that I would do the financials and the books and things like that. But I would also hand that off to the general manager, say, or things like that. About 18 months after we opened Grant was diagnosed with stage four cancer and at the time was given six months to live. He's 11 years cancer-free. That's a story in and of itself. But at that moment I went in to the restaurant, started going in every night for service. Not doing just the business side but really looking at the other aspects of it. I just would look around and be like why in the world do we have an empty table right now when we have 60 people on the wait list? Well, they just didn't show up. And of course I knew that when I went to other restaurants I'd have an 8:00 reservation and be told to wait at the bar for 45 minutes. And I started asking really, really basic questions. Why is it that I go to a restaurant, have an 8:00 reservation, and then am told to wait for 45 minutes? Is it because they're disorganized or so many people came? And it's like no, actually they lied to me and told me they had an 8:00 table when they knew that they didn't have one till 9:00. And why would they do that? Well, because if they told me 9:00 I would have gone to the restaurant down the street that lied to me and told me 8:00. And then conversely a lot of people lie to the restaurant. They would call Alinea back then and they would say like, "Hey we want a table for six on March 23rd." Say, "I'm really sorry, all we have is a table for four." They would say, "Okay, I'll take it." And then they'd show up with six people. Or worse, they'd want a table for two and they'd say, "Oh I'm sorry, we only have a table for six." "Okay, we'll take it and we'll just bring four friends." They show up as two. So all of a sudden you have two people sitting at a six top and you've just forgone $1,000 in revenue.
· Nick Kokonas
Now you multiply that out over the course of the year and we were losing over a million dollars of revenue through those two things happening. One of the basic things that people don't do in the restaurant industry, and it drives me nuts even with our own staff, is no one multiplies it out by seven days a week, 52 weeks a year. So if you have something that's costing you even $20 a day, add it up. It's a low margin business because you're not looking at these chunks of revenue. I was just going why in the world if we have a wait list of 200 people can we not just limit it to the people who actually are willing to come in and take a little bit of a deposit first? And what's fascinating about that is that when I said that to people I was like, "Look, baseball games, concerts, theater, every other form of entertainment does some sort of ticketing." And I was told that it was a terrible idea because restaurants are not entertainment. And I was like, "What are they?" What's really fascinating about restaurants and food in general is that because we are biological creatures that need to eat, people have all sorts of emotional and cultural and ethical baggage on top of what a restaurant is. And you're seeing that now during the pandemic. And at the heart though you don't need to eat out. Eating out is a social endeavor. It's entertainment. It might be art. And it definitely is sustenance as well. At the core of it, we could charge ahead. I was told by everybody I talked to that it was a terrible idea. Literally everybody except for my wife. Grant thought it was a terrible idea. Our general manger at the time thought it was a terrible idea. Notice I say at the time. It was very, very, very frustrating because I kept having this notion in my head where I'd wake up every day going, "We really should just take a $50 deposit and then the problem is solved." I honestly knew nothing about behavioral economics at the time. I didn't know if these were things that were tested. I just knew that as a derivatives trader if everything went to zero at the end of a day that's like an expiring option. And that option value changes the closer you get to expiration. And yet we kept all of our values constant. In other parts of the world that wasn't the case. I sat down one day in 2014 and wrote this long essay. But before then I skipped ahead.
· Nick Kokonas
When we were building Next, I just decided this is like a theater like restaurant. It changes three times a year to an entirely new menu. I'm going to sell tickets to this. And again, everyone in my own company thought I was an idiot. So I had to hire an outside programmer, had to not get a phone on purpose. We barely built it in time and it broke right away because it was a home brew software. But then the first day we sold $562,000 in tickets to a restaurant for the first time ever. And I remember that as one of the happiest days of my life. Because I turned on this thing and people did it five or six or seven years of me kind of looking at this going like, I'm pretty sure this'll work. I'm pretty sure this'll work. And everybody in the industry telling me no and all of my employees rolling their eyes at me. I remember I called Grant up and we were opening night for Next. And I said, "You've got to come to my house." And he was like, "Dude, we're opening a restaurant tonight. I can't. Things are falling apart here." And I was like, "Just come. Just for 10 minutes." And he showed up literally in his chef whites and clogs. And I must have looked like hell because I had spent like 10 straight days like a bad movie eating pizza and drinking wine and trying to get this thing set up. So I hadn't shaved, I hadn't showered. I looked like a The Big Lebowski. And I took him up to my little third floor office and I showed him. I'm like, "Click on that button, that table will become available and then it will instantly sell." And he did it and he was like, "What happened?" And I was like, "We just got $625 in our bank account and that person's not going to dine for two months. And any one that you open will instantaneously sell." And he was like, "That's amazing." And I was like, "Yeah, it's fucking amazing." And then he just laughed and was like, "Okay I'm going to go cook." And that was like one of those moments where you go like, I have a time machine. When I was a trader, there was, exchange traded funds were just starting and the natural hedge for them was the futures at the mercantile exchange. I was the guy who said we need to connect these two exchanges via closed in cellular network so that people can talk to each other instead of using all these hand signals and phone calls.
· Nick Kokonas
The moment that I got that turned on after over a year of work getting the regulatory approvals for it and everything, I had a five second time machine on the market. Now people are down to like picoseconds now with high frequency trading. But at the time literally five second time machine. I could see what was going on in New York five seconds before it arrived in Chicago. This felt like the same thing. I can run my restaurant in a way that no one else in the world can and it worked. I mean we sold every single seat for a year. We made over 30% margins in the first year. We blew out all of our goals while providing people with an incredible value. That opening menu was $85 for a 12 course menu. It was incredibly satisfying and then incredibly frustrating as well because even after I did it people would say, "Oh, well that works for that one." In any business you're kind of constantly having to prove that it works outside of your own niche. Even if you look back at the articles they would say, "Oh yeah, this is a really unique restaurant. This one's different than all the others so it works for them but it won't work for pick your casual pizza place." And I was kind of going like no, no. That's why the variable word is in there. You could charge $5 and still affect people's behavior. It took four years but four years later I just couldn't take it anymore and so I started Tock.