Editor's Blog

Trimming the Fat

June 9, 2008
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A throwaway comment about restaurants led to a bit of pondering over how the challenges facing one industry can be applied to another.

Recently I was talking with a friend of mine who lives in the Denver metro area. Pretty much the usual this and that about family, friends, sports, etc.  Of course, these days no interstate conversation can be complete without the requisite comparisons of gas prices, job markets and so on.

He mentioned how a few high-end steakhouses in the area had recently filed for bankruptcy, and how a few more were expected to follow suit. Seems that while the wealthy continue to frequent such establishments as usual, the second-tier swath of well-off-but-not-wealthy diners are pulling the purse strings a little tighter.  And that’s having an effect on supply and demand.

We boiled it down to an objective exercise: assume 10 high-end steakhouses in a designated area. Apply current economic conditions and record the results:

Figure two of the 10 are the elite, those against which all others are measured, impervious to outside factors. Two others are on their heels, just as good, only not so well established. Figure another two are fully second tier, but are extremely well-managed outfits running all operations at maximum efficiency.

And then there were four. Four businesses that aren’t run very well and aren’t all that good at what they do.  They opened their respective doors roughly 3 to 6 years ago, riding the recovery wave of real estate wealth and home equity excess. Now that those spigots have pretty much closed down, expect these last four operations to do the same sometime soon.

That leaves six; the excess removed, the fat trimmed. And assuming this downward trend will once again cycle upward, these last men standing will be in prime position to reap the benefits of a recovering market while dealing with fewer competitors.

Does this track true? Only time will tell, and 40 percent attrition is high. But using history as indicator, and all things being equal, lean equals green for owners keeping their wits about them.
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