The Death Spiral at Struggling Restaurants
I see it time and again. A restaurant begins to face declining revenues for competitive reasons. Perhaps fast casual restaurants begin to take share, as Panera and others have done. Perhaps dietary trends cause a shift in consumer preferences. As the restaurant grapples with declining sales, it makes two moves to try to reverse its fortunes. First, it broadens the menu, adding a variety of new dishes. This move often backfires for two reasons. The new menu items blur the firm’s distinctive positioning in the marketplace. What precisely is this restaurant all about, and what does it specialize in these days? Broadening the menu also adds a signficant amount of complexity to the operation. Speed and quality of service suffers. As the menu expansion fails to generate strong revenue growth, the restaurant makes its second big move. It cuts costs, particularly with regard to staff. Of course, speed and quality of service declines even further as a result of the cost cutting. The death spiral intensifies.
We have seen this death spiral transpire at Bertucci’s, a pizza restaurant based here in the Northeastern United States. Over the course of the past two years, I have seen the menu continue to expand. Service has suffered. As service declined, people stopped going to the restaurant. Cost cutting affected the quality of the experience. Several weeks ago, the company filed for bankruptcy. It’s unfortunate, as the company once offered a terrific family dining experience.