Many years ago I did a study of bowling alleys. I went all over the country, surveying sites, interviewing proprietors and the staffs, observing operations, analyzing what made them tick. At the time there were about 10,000 bowling alleys nationwide and about half of them were very small. There were a few large chains, a significant number of small chains, and a lot of single unit operations.
One of the things that I observed was that there appeared to be a natural limit to the size of a small chain—something around six to eight stores. I don’t think that’s unique to bowling. I think it’s a sort of practical rule of thumb. That’s just about the limit that a single individual can operate as a hands-on manager.
Above that number requires professional management and specialization. There’s another plateau at a couple of dozen stores.
You’ll never get rich with a single bowling alley. Or book store or restaurant. You might be prosperous with a small chain but it’s an enormous amount of work. No, to make a lot of money you need to have a lot of stores.
My point in all of this is that it’s not just the income of the owner that varies among a single unit operation, a small chain, and a large chain or franchise operation. It’s the ambitions and preferences of the owner or owners. That was brought home to me quite powerfully in conversation with a guy who’d started what by the 1980s was a Fortune 500 company on his kitchen table in the 1950s. There were big differences between running a small company and running a big one, in particular what the owner did. Jeff Bezos’s ambitions are different from those of a guy who owns a single bookstore.
That’s what came to mind when I read this article by Daniel Gross about a small chain of restaurants in Detroit that’s paying $12 an hour to its employees:
Around the country Thursday, fast-food workers and their allies demonstrated to call attention to the plight of low-wage service workers. One of the demands is that highly profitable, massive enterprises like McDonald’s and Burger King should pay employees $15 an hour, which is more than double the legally-required minimum wage in most parts of the country.
Many observers regard such a suggestion as absurd on its face— “economic fantasy at its most delusional and counterproductive,” as my colleague Nick Gillespie put it here on Wednesday. These are low-end jobs in a generally free labor market. Nobody is forcing anybody to work at McDonald’s for $7.50 an hour. Besides, these companies couldn’t function if their labor costs were to double. I mean, who can make money on fast food while paying $15 an hour?
But if you look hard enough, you can find some enterprising souls who are doing just that. I first wrote about Moo Cluck Moo this spring, when the high-quality fast-food burger-and-chicken joint on a hardscrabble location in Dearborn Heights, Micighian, was paying $12 an hour. Even in a weak labor market, with plenty of people willing to work for less, the owners decided they’d construct their business model so that they would pay significantly above the market. In September, Moo Cluck Moo raised wages to the unthinkable level of $15 an hour.
I think there’s definitely a niche for Moo Cluck Moo but, frankly, I’m skeptical that we’ll ever see a sign over a Moo Cluck Moo store reading “Over 6 billion sold”. Unless the ambitions and preferences of the owners and operators of the store change in ways of which I suspect Mr. Gross would disapprove, there will be limits to its growth.
The article does touch nicely on the critical success factors for a restaurant. The first is location. The second is controlling your rent. You can’t operate a store with a low price point in neighborhood in which the rent is prohibitively expensive.
Controlling wages comes after that somewhere. Interestingly, the cost of food is even lower—that’s why so many restaurants offer huge portions. There isn’t that much difference in cost between four ounces and eight ounces and large portions convince many people that they’re getting a good deal on what is actually pretty insipid food.
McDonalds is an exception to that rule. They’re obsessive about inventory and portion control. I suspect it’s to control shrinkage and they know their employees better than I do.