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Restaurant unit economics can benefit from competing interests

<p><em>This is part of NRN&rsquo;s special coverage of the 2016 NRA Show, being held in Chicago, May 21-24. Visit <a href="http://nrn.com/">NRN.com</a> for the latest coverage from the show, plus follow us on <a href="http://twitter.com/nrnonline" target="_blank">Twitter</a> and <a href="http://facebook.com/restaurantnews" target="_blank">Facebook</a>.</em></p>

Domino's logoWhen Domino’s Pizza Inc. wanted to redesign its restaurants to make them friendlier to walk-in customers, it hired the design team of Chute Gerdeman to develop a new prototype.

But it also hired an industrial engineering consultant, Profitality, to make sure the new design maintained the chain’s trademark efficiency. 

“When we went to work on Domino’s, they were already an exceedingly efficient machine. They still are,” Juan Martinez, principal with Profitality, said during a session on unit economics at the NRA Show. “And then here comes the retail designer that loves space. They’re like native gasses. They expand in the room given. They want more.

[CHARTBEAT:3]

“So Domino’s decided to bring in police. Our job was not to make it more efficient; it was to keep the same efficiency.”

While the design firm and the industrial engineering firm “went back and forth,” Martinez said, “We landed in the right place.”

The lesson of Domino’s demonstrates the push and pull between representatives of all of the different elements that go into a restaurant — design, efficiency and food quality among them — and how, despite the tension that often exists between them, they can come together to create a concept that satisfies customers and has strong unit economics.

Domino’s “Pizza Theater” concept took a restaurant that focused almost exclusively on delivery, rather than carryout, with a counter up front that hid the food preparation in back. 

The new design opens up the space and practically puts customers in the kitchen to showcase how the chain freshly prepares each pizza — something Lynn Rosenbaum, vice president of retail environments for Chute Gerdeman, said Domino’s didn’t get credit for with its previous design. And the design didn’t sacrifice efficiency.

“What happened in Domino’s was a wonderful thing,” Rosenbaum said. “Customers became happier because of the design of the space. And the product didn’t change.”

Unit economics drive restaurant success. Those that create concepts that sell food customers want efficiently can more easily fund growth and expand.

“Any investment thesis in a restaurant concept starts there,” said Steve Romaniello, managing director of Atlanta-based private-equity group Roark Capital. “Without good economics you can’t attract capital, and without capital you can’t grow.”

McAlister's Deli logo​Romaniello noted his own firm’s experience with McAlister’s Deli. When he joined Roark in 2008, he was given responsibility for the concept. Sales were down; margins were down. Franchisees stopped investing in the brand and didn’t build new restaurants.

McAlister’s board and CEO focused on unit economics. “We improved food quality, added innovative options to the menu,” Romaniello said. They also hired Profitality to work on efficiency and a design firm to work on the prototype. 

The result? “Sales skyrocketed,” Romaniello said. “Customer ratings went through the roof. Franchisees started making money and quadrupled their rate of growth.”

Balancing creative tensions

(Continued from page 1)

Unit economics combines many factors that often compete with one another. 

For instance, food quality often competes with demands for more efficiency. 

Corner Bakery Cafe restaurant“The best driver of great sales is great food,” said Ric Scicchitano, senior vice president of food and beverage at Corner Bakery Cafe. “If you don’t have good food, all the good storefronts in the world are not going to drag [customers] back in. That doesn’t mean you can’t look inside the model and improve it. But don’t be so focused on food costs. Look at overall costs.”

Scicchitano provided a pair of examples. Corner Bakery does a lot of sautéing and started using induction burners to cook food faster, but without hurting product quality.

But he noted that Martinez recommended that the chain start using rapid-cook ovens to prepare panini sandwiches in under a minute, instead of the eight to nine minutes it typically takes. Scicchitano said no, because “then you’d have to eat it,” and no one wants a rapidly prepared panini.  

But the two did find common ground in a process that cooks a panini in less than three minutes, and is currently under test.

Scicchitano said that restaurants could take steps to make their businesses more efficient by working through the supply chain. Sometimes suppliers can pre-cook some proteins to make the process more efficient. And he said that concepts must align the culinary demands of a research-and-development department with what the supply chain can provide. 

“Make sure the culinary team is not chasing something you can’t deploy through your existing supply chain,” he said.

Design also helps unit economics by making restaurants more amenable to consumers — highlighting a chain’s strengths, for instance, or by improving throughput. Design can help ensure that when they leave, customers “have a product they’re happy with, and they’re happy with the experience,” Rosenbaum said. 

But design also has to work within a brand’s resources. 

“Good design fits in the budget,” Rosenbaum said.  “We’re constantly faced with the dollars a franchisee may have to spend. We can’t design prototypes that are not replicable. If we don’t, we fail.”

At the end of the day, many areas come into play to drive a concept’s unit economics. And while there’s frequent tension between these different elements, when they come together they can drive success.

“All of these areas — menu supply chain, marketing, operations, industrial engineering, retail design — all are part of unit economics,” Romaniello said. “Which one, if I had to pick just one — the right answer is all of them. More important is that when you do bring them together, they work in synergy and alignment.”

Update: May 24, 2016  This story has been updated to clarify that Corner Bakery and Profitality ultimately compromised on a panini cooking process.

Contact Jonathan Maze at [email protected]
Follow him on Twitter: @jonathanmaze

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