I’ve always been a fan of the ‘service firm life cycle’ (SFLC) despite the fact that it is judged to be old-fashioned and too simplistic by some experts. I remain a fan because time and time again the concept and its underpinning ideas are demonstrated to be insightful when looking at real-life industry examples. As in this case.
This article in the The Caterer identifies that “the future of the Burger & Lobster (restaurant chain) is in significant doubt after the mid-market brand recorded a pre-tax loss of more than £7m”. With a first opening in 2011, the operation had gone through the introduction and multi-site rationalisation stages of the SFLC, and was well into the growth stage (see pages 72-74 of our book) with 14 outlets. Although revenue in 2015 was growing, this is largely through opening new outlets. However profits have been hit for two main reasons.
First a significant rise in cost of sales from 43% to 47%. This should not happened during the growth stage. Costs are meant to be sorted out and fixed during the multi-site rationalisation stage, when the business model and operating model should be firmly established – to enable smooth growth. In this case, the main problem seems to be that the concept is heavily reliant on two main foodstuffs (the clue is in the name) and the cost of lobster in particular has risen significantly, whilst the chain has maintained its fixed price menu at £20. The idea behind having a menu offering just three main items has some clear advantages, such as purchasing economies of scale and potentially less food waste. But having a fixed price menu when the cost of a key material is known to fluctuate widely is not a sound business model. Which is why in June 2016 the company has had to revise its pricing policy.
Second, profits have been hit by pre-opening costs of new restaurants and an increase in head office costs. Now both of these are entirely predictable during the growth stage. The SFLC model predicts that cash flow will be a major problem. Indeed to overcome the challenges of funding growth, the model explains that many operators choose to franchise their operations so that growth can be funded externally. In this case it seems that we will have to see how deep the pockets of the founders are….