Management case studies often help existing business owners understand and relate their own situation to that of another company, especially when the example shows what has failed at the business. The case study in this column is that of an actual business that closed its doors on the last day of August.
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They were my favorite bakery/deli. The pastry chef made the most awesome chocolate croissants and pastries. His sandwiches were made with fresh ingredients and lovingly placed on fresh bread straight out of his ovens. His lunch crowd seemed to be strong.
In summary, the bakery offered the very best products for below market prices.
Based on their products, I felt like the suburban Austin bakery was a sure thing to make it in the food service business. I talked to the owner often. I heard him complain about many things that affected his business, but I think he missed some key areas that could have helped him thrive. Here are a few business operations and management areas that the bakery did not address well.
Marketplace Pricing: Is your competition setting the price for your product?
The bakery management should have focused on the average amount a customer was paying for a meal at other nearby eating establishments and measured it against his own average ticket price. In the neighborhood, folks had lots of eatery choices, with the average breakfast or lunch cost at $10-$12 depending on the day and place. That $10-$12 represents what a consumer is prepared to pay in the area because they are filling other restaurants and paying that average price.
I am going to guess that the bakery’s average price per meal was only $7.50. For me it was a bargain and one of its attractions. I rarely spent over $6.00 on a meal and was prepared to spend the same $10-$12 that I spend everywhere else for breakfast or lunch (including tip).
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The bakery missed selling high profit margin items like gourmet coffee, iced tea, and carbonated beverages. Like most of his patrons I ordered water because there weren’t other attractive offerings. He missed out on gross revenues and profits because he didn’t sell fancy coffee for $3.50 or iced tea for $1.95. The bakery made some of the best soups I have ever had yet they charged $1.50 for a cup and $3.00 for a large bowl. They could have doubled their price on these high margin add-on sales.
If you are struggling with paying your bills, look more closely at your product cost compared to your product price, and evaluate your margin per item. Often there is room to increase your margin and still offer a competitive price. Also study your average sales revenue per customer per visit. Look for ways to up sell and increase to average ticket amount. Both are important, but most successful restaurants encourage their patrons to buy higher margin add-on items like soups or beverages.
Customer-Centric Management: Know when the customer is ready to buy your product.
Companies that focus on customers’ needs first usually succeed. In this case, the management of the bakery opened at 9:00 A.M. (more or less). The problem is 70% of the community he is based in commutes to Austin every day and drives by his place of business at 7:00 A.M. – 7:30 A.M. or so.
Most bakeries are open when the baker is baking because the aroma of the fresh bake goods adds appeal to the bakery and promotes sales. If he had opened up two hours earlier every morning he was much more likely to sell many more muffins, pastries and cups of gourmet coffee to go (had he offered gourmet coffee). By waiting until 9:00 to open he not only missed commuter traffic, he also missed a great deal of local breakfast traffic since many people in the community needed to be at work by 8 A.M.
He did do well on Saturday mornings for breakfast and brunch, but he missed sales opportunities and didn’t contribute to his fixed cost of doing business by not being open earlier during weekday breakfast times.
The key management learning tip here is: know your customer.
If you are selling to oilfield service companies you may need to be open 24 hours a day, every day but Christmas. If you are advertising that you serve breakfast and the typical breakfast hours are 7:00 to 9:00 A.M. you aren’t going to get as many takers if you wait until 9:00 AM to open. Businesses have to be open when their customers expect them to be open.
Management Tip: Today’s consumer expects a website and social media presence
Every business should have a website and or some sort of social media presence. Period. Everyone in management needs to understand this fundamental point. Even if your website is nothing more than an online brochure for your business, you need one. The bakery didn’t have a website. Worse, the spelling of their name made it difficult to find them on Facebook, Yelp, and Google Local Places.
Small business owners also need to consider social media as ways to reach consumers or other businesses. The bakery had a Facebook page but it was only updated about every 2-3 months. The owner often told me he just didn’t have time. For him, time he didn’t spend working on his Facebook page was lost revenue. He could have trained a high school student to maintain and update his Facebook page. The return on investment would have been huge.
There was a Yelp page for the bakery and I gave him a number of good reviews. Unfortunately he didn’t understand the value of having accurate information on Yelp and encouraging his loyal patrons to give him reviews.
According to a New York Times piece, “Yelp claims small businesses that advertise on its review platform produce an average $23,000 more a year in revenue.” I can say anecdotally that the bakery was certainly missing out by not having high Yelp rankings, which I could tell was solely a function of the number of reviews, since all his reviews were either 4 or 5 stars.
Given the bakery’s loyal following, I believe he would have done quite well building a Facebook and Yelp community and doing some advertising on those two platforms.
Regardless of the social media you decide to use and whether you choose to advertise on Facebook or Yelp, it is important for management to have both an Internet and traditional marketing strategy to let potential patrons know how good their products or services are.
Before a business can change management practices to generate higher and more profitable sales, an operational strategy must be in place and the ability to measure performance and key milestones of the strategy must be considered. Management must evaluate the tools they have to work with, acquire those they lack, and put in the time it takes to really manage a business.
Sadly, like my now closed favorite bakery, small business owners too often believe that having the best product is all they need to grow profitably and become hugely successful. Having the best product is a bonus. Knowing how to make it efficiently, price it, sell it, and get the word out is just as critical.
Sam Thacker is a partner in Austin, Texas-based Business Finance Solutions. Since 1994 he has been in the banking and finance industry as a commercial lending officer, banking consultant, and advocate for small business financing. He has originated over $400 million in loans to hundreds of businesses across many industries.