Invest Like the Best with Patrick O'Shaughnessy
· Patrick O'Shaughnessy, Nick Kokonas
[00:00:00] S0: Two incredible insights. The one being that last one there. Putting people in there but also the value of spending care and time choosing your first customers. It's so interesting how much of a business gets determined by who it picks at its first customers. I feel like that doesn't get talked about enough. [00:00:00] S1: And who you don't pick too. There are restaurants and restaurant groups that wanted to use us three years ago. When I saw what they needed and what they wanted to do I just went, "We're not quite ready for you yet." And they were like ready to sign on. And I was like, "No, we'll fail if we do this right now because we don't have this particular wait list feature or a walk in feature." There's so many different aspects. Like a restaurant actually sells 10 different things and at the time we could only service two of the 10. And meanwhile, they had five other systems that were servicing all 10 and I was like, "You know what, when we're ready for you I will call you and then I want you to take me seriously." And we did that over and over and over again. We didn't even have a sales team at all until three years in which is crazy. We grew the company very, very capital efficiently. And one of the ways we did that is can we onboard more a hundred restaurants this month? No. Okay, well let's just concentrate on doing 50 then and do it perfectly. [00:00:00] S0: That discipline is rare. I see it over and over again.
· Patrick O'Shaughnessy, Nick Kokonas
[00:00:00] S0: That discipline is rare. I see it over and over again. [00:00:00] S1: I think it's a Chicago thing too or maybe it's just that I've always ran profitable businesses. The concept of the phrase burn in a startup is just the worst word in the world because I'm not burning money, I'm investing it. The time horizon on investing money in a startup, tech startup especially, is a lot longer than people think. For every Instagram out there where you get a ton of users and all of a sudden it's like this ballooning unicorn and their first raise is $100 million at a billion dollar valuation or they sell it for a billion dollars or whatever. The vast majority of SaaS based companies have to work capital efficiently early on. Any time I saw a negative month which was going to be for a long time, I was like just viscerally upset. Intellectually I knew that in order to grow something that scalable you're going to have to have a long time horizon of investment. That said, my restaurants are making money in the second month that they were open. Now they were paying back a giant upfront investment but I can kind of go like, well yeah, in 18 months or 24 months, we'll have all that paid off and for as long as it runs after that it's profitable. The trading firm, was the same way. It's profitable. It was very strange to me working for a business that wouldn't be profitable for years. And I think because of that we attracted people who understood and welcomed that mindset. But that also was a mindset that turned off a lot of investors prior to COVID.
· Patrick O'Shaughnessy
[00:00:00] S0: I want to talk about what Tock did during COVID but I feel obligated to do some set up first around just the restaurant business generally speaking. You talked about the 10 ways it makes money. It makes me think of the old adage, a third, a third, a third of the margin goes to the manufacture, the wholesaler and the retailer in a lot of businesses. And I would just love to hear ... You always hear that restaurants make their money on booze. I would love you just to describe sort of the canonical restaurant business model. From the food in the ground through to the retail price at the restaurants. Generally speaking, how does a simple restaurant business work so that we can lay that groundwork before talking about how COVID changed things?
· Nick Kokonas
[00:00:00] S1: I'm not going to use a simple one. I'm going to use a complicated one and then go backwards. Gramercy Tavern is one of, I think, the best restaurants in America. It's a great place. It's iconic. Let's use Gramercy Tavern. When you arrive at the front door of Gramercy Tavern they have no idea what you're going to do. And when I say that, I mean that very literally. They have no idea what you're going to buy. They have a bar area there that's casual. That serves more casual fare. They have a walk up bar that you can be at. So now we have two different things that they're selling. Your casual restaurant and your bar. Then in the main dining room you sit down and they have an a la carte menu which is amazing. Michael Anthony's a great chef, great place. Then you have a tasting menu. They tell all the people sitting down, "If you want to do the tasting menu you all need to do the tasting menu. And then we have two kinds of tasting menus. We have the regular omnivore one and we have a vegetarian tasting menu." And if you do the tasting menu you can add on wine parings or you can buy the wine list. And then they have private dining. So they have two private dining rooms there that are sold for special occasions, corporate events, all that sort of stuff. Plus they have a cookbook. So eight things that they are selling. The bar, the casual, the a la carte, two prix fixe menus, private dining and merchandise. When you go to book that the only thing you say is I'm showing up. It's incredibly, incredibly inefficient. And what they'll say is they'll say, "Well yeah, but only 4% of the people buy the tasting menu." But that's because you're relying on the server to surprise them with this as an option and then everyone at the table needs to agree to it at that moment. If one person doesn't agree with it, it gets vetoed and everyone orders a la carte. If you put that up on a Saturday night when your demand is three times your supply ... There's 700 people that want to go there but you only have 250 seats. I'm making that number up. If you say, "Well, I'm going to put 100 of these up for sale as tasting menus only," you will sell all 100 and you will know before people come in what they're going to get. For those people, not the a la carte people. The people who want to do it at the bar, you have a separate button that says, I want the casual aspect.
· Nick Kokonas
If you imagine all that same thing applying to a pizza place, your favorite pizza place to go to get pizza on premise, there will be seats in front of the pizza oven that people like to sit at to watch the making of the pizza. There'll be the really nice corner table that seems like the regulars always get. And there will be private events and there will be T-shirts for sale. So I always went, what are the revenue sources? You mentioned the cost side as well and there is all of that. But restaurants never concentrated on their revenue side other than going like, "Whoever sells the most Mai Tai’s this month gets a bonus," to their servers. Which essentially means that you get a terrible sales pitch at the beginning. So my whole thing is, we gave restaurants tools to actually sell. The other part of that is if you sell more efficiently your margins get better and better because the last dollars in are the dollars you keep. Your fixed costs are known. Rent, utilities, all that sort of stuff. Your cost of goods sold look better and better and better when you have less waste. So it's actually good for the environment, it's good for your food costs. It's usually 30 to 35% labor, 30 to 35% food costs, 30% on your fixed costs and insurance and overhead and all that. What are you left with? 10%. Well, if you can eliminate food costs, if you can run more efficiently, if you can have high demand on a Tuesday at 9:30 at night you will make 20 to 30% per restaurant. I've had dozens of restaurants I've talked to where they've said it's completely impossible to make more than 20%. It's just not possible. Over and over and over again I see that when they make these small changes, even the casual places on the revenue side, suddenly it unlocks money that they just were like wow. The denominator's the same and the numerator got bigger. It's just not that hard but no one does it. No one runs it efficiently and people are scared of change. People are like, "Well, what about our customers that want to call on the telephone or what about the great customer that doesn't want the tasting menu?" And I was like, "Great, hold back four tables. Click that button and hold back four tables." I'm not telling you to change the entirety of your business for every person. I'm saying run some of those experiments we talked about at the beginning and see what the outcomes are.
· Nick Kokonas, Patrick O'Shaughnessy
And I've been incredibly unimpressed in general with the industry and their willingness to do that. [00:00:00] S0: What do you think the generalizable lessons are from these learnings at Tock about specifying revenue sources and exposing them to customers more deliberately, reducing uncertainty? If you were just thinking about business generally speaking, what lessons do you think could be very broadly applied not just to restaurants? [00:00:00] S1: Know what you're selling and then actually sell it, which sounds incredibly obvious. [00:00:00] S0: So stupid. Yeah.