Can two businesses share the same facility? In Springfield, Missouri, two restaurants are giving it a go (Two Restaurants Combine In Tough Economy, NPR, Dec 3). Specifically, a new outfit, Andoro’s Pizzeria, has moved in with Scramblers an established breakfast joint. The businesses operate somewhat independently — no one gets pizza in the morning and eggs and pancakes are not available at dinner — but adjustments are required at lunch when customers can order off both menus. This is clearly a marriage of convenience:
For Andoro’s owner Tony Magliaro, being able to share costs with Scramblers allowed him to break into the Springfield market. “The reason why we did it is because of the way the economy’s going. It’s a lot lower startup money; as far as going by yourself, it probably would’ve been triple the money,” Magliaro says. … The owners of both restaurants say they don’t know how long this arrangement will last, but both are willing to tough it out until the economy looks better for independent restaurants.
However, it brings up a topic that I have pondered for awhile but have never been able to model or formalize properly. To wit, how should a firm think about its hours of operations — especially when demand is relatively concentrated? This is the problem for a diner such as Scrambles. The rent is the same at 8:00AM and 8:00PM but people only want eggs and bacon at one of those times. How can a firm broaden its demand across the hours of the day in order to offset some of the fixed costs inherent to the business?
Shacking up with a pizza parlor is one answer. Another is to broaden the menu. That is the story of Cosi — the Deerfield IL based “premium” quick service chain. At some level, Cosi seems like a Starbucks wanna be, offering lattes and pastries. However, they also offer a full line of sandwiches and in some locations have even served alcohol. The goal, to quote an old Wall Street Journal article, is “to utilize the box more” by attracting patrons “from wake-up call to last call” (In Fast Food, Bigger Doesn’t Ensure Success, Mar 18, 2003). (Aside: How has that worked out for Cosi? Not so great. The company’s web site contains a news release that opens with this awesome sentence “Cosi, Inc., the premium convenience restaurant company, today announced that it had received notice from the Listing Qualifications Department of the Nasdaq Stock Market indicating that, for the last 30 consecutive business days, the bid price for the Company’s common stock had closed below the minimum $1.00 per share required for continued inclusion on the Nasdaq Global Market under Nasdaq Listing Rule 5450(a)(1).” I have never seen “premium” combined with imminent delisting.)
There is, of course, another way of dealing with the problem. These restaurants are effectively expanding their hours of operations and incurring higher variable costs in order to spread their fixed costs over larger demand. But what if demand isn’t very responsive to increased offerings? The Andoro’s-Scrambler deal wouldn’t work if people in Springfield didn’t want to eat pizza. Then moving pizza in with breakfast wouldn’t increase sales. That gets us to one of my favorite businesses, Saturday Audio Exchange. Saturday Audio Exchange sells audio and video equipment and is open only on Saturdays and Thursday evenings. That sounds crazy but they opened in Reagan’s first term. Here is how they explain their business model:
What’s With The 10½ Hours A Week? There are a lot of benefits to only being open a limited number of hours. One is keeping costs down. Not many people are out buying stereo equipment on a weekday afternoon. So why spend the money on having a fully staffed store open if no one’s coming in? We have found it’s much more cost effective to have a large part time staff working limited hours. That way we can hire knowledgeable and experienced people that we otherwise could not afford. So you can get a great deal and great help picking the gear you want. And since no one is on commission you can be confident the advice you get isn’t biased by somebody’s paycheck. Also, since almost everybody here works somewhere else most of the time, we’re happy to be here and avoid “Retail Burn-Out.” The bottom line is that by running a cost effective store we keep prices down so you can save some bucks on quality gear and still get all the qualified sales advice you want.
There is an added point. There are inherently economies of scale in running most services. Finding some way of collapsing a week’s worth of demand into Saturday afternoon should mean better service at higher levels of utilization and an even more efficient cost structure. The question, of course, is whether Saturday Audio Exchange is in fact cramming a week’s worth of demand into its 10 1/2 hours. Presumably they lose some demand from those who can’t bend to their restrictive hours of operations. But one wonders whether this approach would also work in other businesses where customers are willing to invest in searching for the right product.