They must be doing well ...
... just look how many stores they are opening!
I’ll confess I was a bit sad to see Le Pain Quotidien put all but one of its sites into administration last week. I wasn’t a hugely regular customer, but I liked the brand and it is always uppermost in my mind that when this happens a lot of good people will have lost their jobs.
(I did have to agree with someone online, however, who pointed out that having a brand name that people can a) spell and b) pronounce would probably have helped a bit!).
What has prompted this week’s Moving Tribes thought, however, is a really interesting post on LinkedIn making the comparison between LPQ (gone into admin, clearly not doing well) and other upmarket bakery chains (most notably Gails) who are expanding like a brush-fire and therefore presumably doing well.
I really like the post and the thoughtful comments it inspired, but it also made me think of 2 key watch-outs when you are analysing consumer businesses.
Expansion is not a lead indicator of profitability
The first is that a business opening new stores (or bakeries) is not necessarily great evidence that the business model is strong. Expansion of a store estate happens for all sorts of reasons.
Some of those are perfectly valid - you might have a business which is generating a handsome profit per store and just want more of the same. On the other hand, you might operate a business with a significant fixed cost (a manufacturing plant, or a product license for example) and therefore need to drive more sales to get ‘over the hump’ and into profit. Many retail expansion stories are indeed evidence that the model is strong and working.
But not all.
Some expansions are well intended but ultimately backfire. Consider all those posh burger chains who came, grew and then blew up again. Somewhere along the way, 4 or 5 chains each with 10 successful restaurants all decided with investment backing to drive up to 100 outlets, without considering that if they all did it at the same time they would saturate the market and all fail.
Others are well intentioned but the result of a misreading of the market - I can think of several clothing chains, for example, who have misread the enthusiastic buying power of middle class families on holiday in seaside towns and concluded that they have a huge national brand on their hands. Some may be right, many aren’t.
And some store expansion programmes are just plain, simple mistakes. It often feels to me like the DNA of retailing, in particular, is that you demonstrate how successful you are by bragging about how many new stores you are going to open. Many retail annual results announcements still lead with this braggadocio, even as more and more evidence gathers that customers have moved on and their core model no longer works.
So when yet another posh bakery opens in your town (can there really be that much demand for flourless chocolate cake), don’t be too tempted to consider it an investment opportunity.
Beware survivorship bias
The LinkedIn discussion I mentioned earlier also turned quickly into a dissection of things that Le Pain Quotidien were doing wrong (which had presumably driven their demise) versus things that other brands were doing right.
And perhap predictably, the answer turned out not to be that simple.
“LPQ’s sites were in London, so it is the lack of commuters that killed them”.
“But hang on, all of Ole and Steen’s sites are in London and they are doing OK”.
And so on. Reminding, us, I think, that working out the drivers of success in business is rarely as simple as just looking at a sample of winners and a sample of losers and trying to discern the difference. There are a huge range of other factors involved, and very often as many failed businesses that follow the ‘winning’ strategy as there are successful ones.
My conclusions? It is sad when any business fails, and this is an unbelievably tough time to be running a hospitality business, or a retail one. There will, sadly, therefore be more business failures ahead - and some of the ‘winners’ crowing about the speed of their store openings might yet be amongst them.