Taking the High Road

In June 1995, Dino explained why Independents must compete on the basis of superior food and service  (not lowest cost), while pricing their offerings high enough to remain profitable over time.

Here’s a novel thought. As Independent business owners, we have a competitive advantage over “Big Guys” with many times our financial resources!

Because of their deep pockets, Big Guys have the luxury of following flawed strategies for a long time before Judgment Day inevitably arrives. This includes: flawed strategies like costly barrage type advertising, deep discounting, and lower quality products. I call this the “Low Road.”

On the other hand, you and I have to balance our checkbooks on a much shorter time frame. We cannot afford flawed strategies. And we must compete on the basis of demonstrably superior quality sold to customers willing to pay for it. I call that the “High Road.”

Now, you’re probably thinking: “Sure, that’s fine when the Big Guys are not a competitive factor, but what if one moves next door? How do I stay on the High Road when he’s blitzing me with Low Road tactics?” Well, that’s exactly what Independent pizzeria owner Dean Richardson asked himself last summer when Little Caesars opened a stone’s throw from Dean’s Riverside, CA pizzeria. To drive trial, price-oriented Little Caesars even offered free home delivery from that location.

Riled by the threat to his family business, Dean’s first reaction was to fight back by slashing his own prices to match theirs and switching to lower quality ingredients to reduce costs. Just before embarking on this “Low Road” strategy, Dean called a family meeting to announce his battle plans.

Luckily, however, a cooler head prevailed! That is, Dean’s daughter Lisa spoke up that she had just read in La Trattoria (August 1994) about how the price wars had finally caught up to the biggest of the Big Guys (Pizza Hut) and they were losing money and customers. Lisa convinced him that despite the Little Caesars threat, the Richardsons should stick to what had proven successful in the past, that is, striving to further enhance their hard-earned quality reputation and not reduce their prices.

Taking the High Road wasn’t easy. At first, Little Caesars’ Low Road tactics caused the family anxiety as their sales dropped 25%! Refusing to give in to price pressure, the Richardsons held their ground. A month went by, and another. And then, sales inched upward as regular customers returned one by one, disappointed by the newcomer’s inferior quality. Finally, after six months, Dean’s sales actually surpassed their level when Little Caesars had first opened!

As the Richardsons’ experience shows, traveling the High Road sometimes provides a bumpy ride, but the Low Road is riskier. Consider these Low Road pitfalls:

• Big Guys Have Deeper Pockets – Competing on price draws customers’ attention away from your unique product superiority and towards “What’s your deal?” Big Guys’ deep pockets allow them to follow the Low Road strategy for longer than the average Little Guy can afford.

• Cheap Prices Lower Customer Expectations – The Low Road strategy of below-cost prices damages customer perceptions of quality. Once the damage is done, bringing prices back to profitable levels is very difficult.

• Below Cost Pricing Is Like “Eating the Seed Corn” – Just as farmers used to set aside a portion of each year’s crop as seed for the following year, to remain healthy, any business must generate enough after-tax cash flow to continually reinvest in the future satisfaction of customers. Below-cost pricing doesn’t generate cash flow and therefore eats into ownership equity.

Dean is convinced that taking the Low Road “would have been a critical mistake.” Had the family tried to compete on price, “We would have taken all the profit out of the till, damaged our quality reputation, and never would have been able to recover.”

Naturally, I’m pleased that La Trattoria column helped the Richardsons make the right strategic choice. I’m convinced that Independent restaurateurs do win by sticking to the one strategy Big Guys can’t touch: superior quality food and service! So when you’re up against Big Guy competitors, remember that old Scottish ballad. Let them take the Low Road, you take the High Road, and you’ll get to Scotland before them!