Invest Like the Best with Patrick O'Shaughnessy
· 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.
· Nick Kokonas
[00:00:00] S1: No, I know. It's so stupid. I'm telling you what, there should be a business course on that. If I ask Gramercy Tavern what you're selling they'd say food. And I'd go, "No. You're actually selling seven different experiences plus some merchandise." Meanwhile you haven't categorized those experience until after someone comes in. You haven't even informed the consumer that they exist. Do you want to be surprised? When you go to pick up your car that you bought, would it be really weird if the car had a different color and they tried to sell you on that one? Yeah, you'd walk out of the place. One of the talks I give to all of our new employees at Tock and to the industry is called Tuesday is not Saturday and seven other things you already know but are doing nothing about. It's really obvious, you don't need to be an expert in the restaurant business to know every restaurant in the world probably, or 99% with some anomaly, are busier on Saturday night than Tuesday night. Okay, so we have that. You're not going to get an argument even from a diner. Yeah, more people eat out on Saturday night. What are you going to do about that? How are you going to get more people in on Tuesday? What levers are you going to pull to get them in? And for some reason the whole industry, with the exception of the early bird special in the '70s and the blue plate special in the diners, the high-end industry just went like, "Yeah, no, we're too good for that. We're not going to pull the pricing lever because we might piss off the people on Saturday night." Because that was the argument given to me by my own employees. "Well, won't the people on Saturday be pissed if they're paying more?" No. Do people sitting on the 50-yard line on the 10th row, are they pissed off that they spent $500 on the football game instead of $80 to be in nosebleeds? No. That's like a normal thing. The other thing is, people can't buy what you aren't selling. You have to have the information readily available where people live and people live on the internet now on their phones. And if you are not selling there ...
· Nick Kokonas
Not just saying, "Hey, come to my restaurant, eat this delicious thing." But if you're not selling those experiences, if you're not saying, "Hey, we've got this awesome corner table at our pizza place that everybody wants and it's a $10 deposit per person because we can't have no shows at that table." The sunk cost of that $10 per person is mentally done a week before they arrive. They end up spending more once they get there and they're happier because they didn't need to wait for the table and they got the best table in the place. It's like win, win, win. Having those levers and those tools to actually sell, regardless of what business it is, is massive. Same thing goes for publishing. We publish all of our own books. Last week sold $120,000 of books in a week for our restaurant with margins much better than the restaurant. But we actually sell them ourselves. I have mailing lists. I have websites. I have Instagram and Facebook. We're running couple thousand dollars of ads per day. And we own the rights to the book. Done. Not that hard. That goes back to the original thing, own it. The publisher doesn't own our books. We do. And sell it. This is not hard stuff. It's amazing to me that so many people in the industry don't ... There's a lot of artists in the industry that view commerce as antithetical to their ethical beliefs, as weird as that sounds.