Smart operators strike a balance between investors, employees and customersSmart operators strike a balance between investors, employees and customers

Steve

The primary objective of corporate executives and board members is to maximize the value of their company. This appears to be tacit acknowledgement that investors are the company’s most important constituents.


However, this may not always be the case, since customers, employees and investors all need to be viewed equally at a restaurant company. A decision based on the interests of one constituent must be weighed against its impact on the others. Furthermore, a constituent group could have different interests based on various factors, including the time period over which a decision is evaluated.


The investor constituent provides a good example of the latter, despite near unanimous agreement that maximizing shareholder value is the most important corporate objective. Investors with different time horizons could disagree on a strategy or tactic to maximize value. For example, if a restaurant company owns a lot of its locations with a low book value and higher market value than what appears to be recognized in its valuation, some shareholders could determine that a sale/leaseback transaction could unleash that real estate value and create value for shareholders. This could be a very successful tactic to not only demonstrate the value of the real estate, but also provide cash to pay a dividend, buy back stock, reduce debt, or take some other action that could help the stock price at least over the near term and provide a return to shareholders.


This action also would most likely reduce cash flow, because the lease payments probably would be higher than debt service costs. It also could raise the future operating costs of the company if sales per unit rise and percentage rent is paid. 


Finally, a leased facility offers management less flexibility to close or reposition the restaurant in the future. So, in this example, a sale/leaseback could help maximize value in the short run by exposing the real estate value of the company and providing cash to return to shareholders, but hurt the value over a longer period of time since cash flow would be reduced by the higher rent.


Conflicts among different constituents also must be addressed with an understanding of the importance each one has to the company. Menu pricing during a period of rising costs is one such situation. Investors’ desire for profitability is in direct conflict with consumers’ desire for value. Raising prices could maintain margins and profitability, but if it is done at the expense of “value,” the impact on the company long term could be negative. 


Management must fully evaluate the situation and understand the implications of favoring either the investor over the customer (raising menu prices) or the customer over the investor (holding the line on prices). A long-term perspective is essential, as is an understanding of the company’s market position and what drives customers to the restaurant.


High customer satisfaction created by a combination of elements, most importantly price, quality and service, is critical to the success of a restaurant company and contribute to its value perception. There is a cost to delivering these qualities that, if out of balance, could impair the value of the company. If management spends too much, profitability will suffer, but if it spends too little, sales likely will come under pressure. Once the restaurant’s value perception is established, it must remain intact.


A potential conflict also could exist between employees and customers. For example, when Outback first started, in an effort to provide great service, the wait staff served only three tables each. Many industry observers understood the benefit to the customer, but felt that the server would receive fewer tips than if he or she waited on a more standard four or five tables. However, in practice, table turns were faster and tips higher, so the server made more money because of the three-table decision. A tactic to provide great service to the customer ended up benefiting both the customer through better service and employees through higher tips.


Balancing the interests of a company’s constituent base always has been a challenge. Today, with financially oriented private equity and activist shareholders in the news so often, the challenge is even greater. A restaurant has a very personal relationship with its customers — one that is heavily influenced by the interaction with relatively low-wage workers either directly at the point of service or indirectly through the meal being prepared on-site.


Decisions need to take into account not only the direct impact on the relevant constituent, but also the indirect impact on others. Failure to do so could have negative unintended consequences.