When we helped Scott Beck, an experienced entrepreneur and the former COO of Blockbuster Video, launch Einstein Bagels 30 years ago, he emphasized that small chains, compared to their larger counterparts, were at a great disadvantage because they lacked access to prime locations, efficient marketing, important technologies and bulk buying power. He was keen to avoid this by growing Einstein’s fast enough to rapidly become a large national chain.
Fast forward 30 years and this wisdom no longer holds true. In fact, small chains now have many advantages over the big chains. Indeed, the tables have turned as the following six strategic advantages of small chains show.
Employee Engagement and Recruiting
Employee engagement is the most important advantage that small chains have. The CEO of Burger King recently predicted that labor shortages were going to continue indefinitely—maybe they will for Burger King and other big chains, but not for small, well-run, mission-driven chains. High-quality employees often relate to local chains’ missions and personalities. It’s simply “cooler” to work in these types of businesses.
In addition, small, limited-service companies often make it easy for customers to tip, which helps smaller chains offer higher-paying jobs (and people who wouldn’t even think of tipping at Burger King love to support their local favorites). Plus, customers prefer to eat at restaurants where the employees are happy, and employees like to work in restaurants where the customers are happy. This powerful virtuous circle drives high levels of employee engagement, which means friendlier and faster customer service, more throughput and better, more consistent food quality. Large fast-food chains with their plug-and-play frontline employees—often teenagers who don’t like their jobs—can’t compete with these levels of employee engagement. Also, most smaller chains have flatter organizational charts, where the founder/CEO and the other important decision makers are close to frontline workers and customers and vice versa. The advantage of the 360-degree-feedback loop these org charts foster for senior managers goes well beyond employee motivation and workforce sustainability.
Location, Location, Location
Three decades ago, landlords who owned prime real estate leased most or all of their space to large chains, preferring tenants who had bankable lease signatures. In other words, tenants usually had to be large companies with high Dun and Bradstreet ratings. Small companies were considered less reliable in their ability to consistently pay rent. Today, landlords prioritize restaurants that attract the most high-quality customers because they support their other retail tenants, many of whom are struggling due to growing competition from online retailers such as Amazon as well as the ongoing ripple effects of the pandemic. Small chains with big personality and local roots often draw in the most desirable customers.
Previously, only large chains had access to important and expensive technology that impacted HR issues, marketing, and all aspects of operations. Today, inexpensive and effective off-the-shelf and even customized technology increasingly available to small chains is narrowing this advantage. In addition, big chains’ large and complex tech stacks can decrease their ability to adapt to a rapidly changing world. Toast (a company with a $10 billion market cap), which features a sophisticated POS system and other technologies, is a great example of a company providing important high-tech functions to smaller companies. Another example is Lunchbox, which focuses on sophisticated loyalty and push marketing for relatively small chains. BentoBox, a company that builds low-cost, high-functioning, restaurant websites, has created over 8,000 websites for indie restaurants and small chains, making it easy for more restaurants to excel with state-of-the-art website technology and graphics.
Great Stories Generate Great Marketing
Marketing has, perhaps, evolved more than anything in the restaurant industry. Today, hyper local and social media marketing are much more important than national TV or radio campaigns—with streaming media and DVRs, many people don’t even see national campaigns. When it comes to branding, locals almost always have a big advantage over the big chains (with a few exceptions like In-N-Out Burger and Chipotle). Local marketing often features colorful personalities, more unique and locally appealing food, and usually includes a mission beyond just making money. These mission-driven businesses are very important to many customers (and employees) and attract a lot of invaluable (often free) attention in social and traditional media. Their local roots alone give them a substantial edge in branding over large chains.
Sourcing is Part of the Story
Large chains used to be able to buy most products cheaper than their smaller competitors, but now, with ongoing supply chain problems, the large quantities of food they need are often difficult to obtain. Smaller chains tend to source their products from smaller, more local suppliers. These suppliers may be more expensive, but they often deliver fresher, higher-quality products—without as many supply chain delays and headaches. In addition, a growing number of customers and employees appreciate and go out of their way to support local and environmentally sustainable sourcing. According to ongoing surveys of consumers conducted by the Hartman Group, environmental sustainability, which includes buying local, is important to more than half of respondents and these numbers keep growing.
Smaller Companies are More Nimble
In this age of COVID, supply chain disruptions and an unpredictable world, being small has big advantages in terms of adaptability. This agility is relevant across the full range of restaurant business-related functions, from price increases to menu changes to sourcing, employee scheduling and recruiting to marketing and sometimes even technology. Smaller chains have the ability to pivot without many of the challenges that larger businesses often face.
Why Big Chains Still Have Some Advantages
The fact that large chains have more drive-thrus is arguably their biggest advantage. This gap will be difficult for small chains to bridge because the real estate necessary for drive-thrus takes time to build out and is expensive. Bigger chains also have more customized technology. For example, they often have more personalized and sophisticated push marketing and loyalty programs as well as better smart-phone-based employee training and onboarding programs. Large chains also offer more career advancement opportunities than smaller chains, which can help them attract and retain quality managers and executives. However, fast growing small chains also excel at attracting the best management talent.
Right now, the lending and capital raising markets are flooded with money, which means funding is more available to small chains. However, the big chains still have substantial advantages over small ones when it comes to financing, except those able to convince VCs, investment bankers, private equity companies and/or other investors that they are rapidly becoming big chains, like Sweetgreen and CAVA have recently done. High-quality, low-cost sources of money to fuel growth and to fund investor and entrepreneur liquidity and exit strategies are still much easier to obtain and less expensive for big companies. New fintech companies and companies focused on investing in smaller chains will hopefully close this gap. Also, relatively new SEC regulations that make it easier to buy and sell stock in privately held businesses should help.
Clearly, the restaurant industry of today looks a lot different than it did 30 years ago when Scott Beck told us that small chains were at a disadvantage compared to big chains. We believe small chains will continue to play a larger and larger role in the industry and those that emphasize flat organizational charts and local roots will continue to prosper. QSR recently published its 40/40 List highlighting many of the most promising small chains in the country. We predict that several will become innovative big chains of the future.
Richard French is the CEO and principal founder of the Works Café, a nine location, fast-casual chain in Northern New England and Upstate New York. The Works Café was included in QSR’s most recent 40/40 List.
Stuart Skorman, a serial entrepreneur based in Northern California, has been a strategic adviser to the Works Café for 14 out of the 33 years the company has been in business.