Going for the bottom is a crappy business

posted by Jeff | Thursday, January 12, 2012, 10:33 PM | comments: 0

We received a gift card for Macaroni Grill, a place we enjoyed going to from time to time prior to our move out west. In fact, we had our second (maybe it was the third) date there. As far as Italian restaurant chains go, it wasn't bad, and was relatively affordable. However, after two recent visits, we've noticed that it just isn't as good anymore. The menu is smaller, and everything actually appears less expensive. I fear this is the place is going the way of Friday's, a restaurant that used to be known for its great burgers and appetizers, and now serves a bunch of microwaved crap.

The lower prices and lower quality imply that they've made a decision to pursue a different market. By different market, I mean cheap people without taste. At risk of sounding like an elitist dick, I mean the people who can't live without Walmart and think McDonald's is good. While this might be a large market, where volume counts, it's a race to the bottom with like-minded businesses over low margin crap. Why would anyone want to be in a race to the bottom? That seems like a crappy business to be in.

The world of computers has seen the same kind of battle. Dell and HP compete by building the cheapest computers they can, making a few bucks on each one, hoping to make it up on volume. Then the report comes down that 2011 was a crappy year for PC sales... unless you happened to be Apple. Sure, they shipped half as many machines as HP or Dell, but because they concentrate on the premium markets, they likely make ten times the profit on every unit. Dell and HP make premium stuff too, and it's priced similarly to the Apple products (spec for spec, depending on where in the Apple product cycle you are, the Macs don't generally cost more), but they don't see it as their core business. Apple doesn't even mess with the low-end in their product lineup.

Going back to the world of food, you can't get out of a Chipotle restaurant without dropping at least six bucks, not counting a beverage. They have a super simple menu composed of limited ingredients, most of it premium stuff, organic and increasingly local. And every day at lunch, there will be a line out the door for what they make. Is McDonald's cheaper? Yes, if you can even call it food. But again, look at the P/E ratios of the two companies, and it's clear that the place going after the premium is the better business to be in.

Having worked in the dot-com world for many years, and non-Internet businesses that wanted to be more relevant in virtual terms, I've seen so many examples where decisions were based on entirely wrong things. Ten years ago, it was eyeballs. Be popular, be rich. Convert more people to customers, but don't worry about repeat business. Get the top spot on a Google search, be famous. It's staggering how misguided these beliefs are.

We talk about theme parks all of the time. People flip out every time Disney raises their prices, and yet, the crowds they can attract are staggering. Why? Because they deliver on the promise of treating you well and showing you a good time, in a way that almost no other entertainment venue can. Even if you're not in the same industry, you'll still compete with them for discretionary spending, and you'll never take it away from them with crap. I theorize that this is one of the many reasons that movie theaters install leather seats and invest in better concessions.

I really believe that consumers can appreciate high quality, craftsmanship and value, even in the crappy economy. I certainly don't mind spending a little more for something better. It's something that guides my business sense as well, and I've found that it has kept my little hobby going for more than a decade now. I hope, for the sake of our economy, others follow suit.


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