Public Restaurants (& Probably Retailers) Deserve a Class Action. Here’s How to Start

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Up until the 1800’s there was a widely held belief of spontaneous generation. That is, that living matter could spontaneously appear. It wasn’t until Louis Pasteur proved germ theory that the average person finally believed in the existence of “invisible” bacteria.

There are doubtless people that still believe in antiquated theories, but for the modernized world we learn and move on. That’s why it’s not uncommon to see lawsuits on grounds of negligence when health care providers fail to do things like sanitize equipment: the reasonable among us acknowledge the problems bacteria pose and there’s no rationale to ignore such risks.

As far as the law is concerned, negligence is defined as:

The failure to use reasonable care, resulting in damage or injury to another

Given as much as humans understand, why is it that mass negligence is still pervasive in nearly every retail category – particularly in restaurants?

Restaurants are hit doubly hard because they are, in essence, mini manufacturing plants. They use perishable inventory and are manufacturing product live for customer consumption while most manufacturing occurs in batches and product is not required to be instantly consumable. Thus restaurants are not only plagued by retail’s labor challenges but also by supply chain and manufacturing issues.

But where other manufacturing businesses have managed to implement six sigma and consistently improve, restaurants have done little.

So if patients can sue healthcare providers for ignoring proven science, can we shareholders sue retail management for ignoring proven science?

It certainly makes for an interesting debate.

As we laid out in an earlier article, the benefits of relevant sciences to retailers (restaurants in particular) are non-trivial and represent 2-5% gains in revenue, drastic reduction in expenses, and a bolstering of EBITDA by 20%+.

This is not theory, it is fact. 

Perhaps there are two questions to begin with.

The first logical question is:

What is the role of restaurant leadership?

Leadership in any industry ultimately owns the financial responsibility of a company. Their goal is to produce value for shareholders. If the CEO is the only shareholder, then they can run that business however they want.

But for chain restaurants that is not the case. There are external shareholders who are looking to the CEO to grow their investment. This entails increasing revenues, profits and other metrics to make the business more valuable.

Implicitly, there are a number of ways to do this. The CEO is given leeway to execute this the best way they know how and let the results speak for themselves.

The second question is:

How long should something be proven before we demand adoption by leadership, whom we’ve trusted to produce results for shareholders?

Grocers have benefitted from data share with their suppliers since the late 1970’s, decreasing their G&A while increasing revenues and profits. From the numerous conversations we’ve had with VPs of Supply Chain and CMOs at chain restaurants, all refuse to acknowledge historical fact – even when their suppliers, who have successfully implemented such practices at grocers for 40 years, are telling them the same thing! Instead, restaurant leadership evades disclosing the requisite information to start down this path.

Machine learning has technically been around since the early 1950’s, when Arthur Samuel wrote the first computer learning program to teach an IBM computer how to improve at checkers. But it’s a little disingenuous to imply that such algorithms were commercially licensable that far back. It wasn’t until the early 1990’s that machine learning became popular due to the intersection of computer science and statistics. Storage technology and computing speed improved drastically, allowing enterprise to use such techniques at scale.

Unlike data share with suppliers, which is a very specific application to retail, there are millions of Google-able examples of the successes of machine learning. Here’s one from a McKinsey article titled, An Executive’s Guide to Machine Learning:

In Europe, more than a dozen banks have replaced older statistical-modeling approaches with machine-learning techniques and, in some cases, experienced 10 percent increases in sales of new products, 20 percent savings in capital expenditures, 20 percent increases in cash collections, and 20 percent declines in churn.

Yet again, CEOs and COOs at chain restaurants refuse to have these conversations, despite millions of documented, real-world success stories over 20+ years.

Restaurants spend over $6B annually on advertising. But do they know if it’s actually working? Through data share and machine learning models, grocery suppliers are able to paint a more complete picture of lift. They then share the information with their grocery retail partners to change strategies as needed. True to the scientific method, trials are run quickly and cheaply at small scale, feedback measured, and decisions made on next steps.

Restaurant management does not adhere to such basic scientific principles and instead fires off marketing campaigns whenever they need to look like they’re doing something. This comes directly from reputable CMOs, CIOs and agencies who have spoken openly on their dismay.

Motion for the sake of motion is useless. Restaurants couldn’t rationalize why they’re running marketing, whom their marketing is targeting, or if it’s working. This requires the implementation of data science techniques restaurateurs avoid acknowledging, let alone applying.

 

 

So what can you do when restaurant leadership refuses to recognize such beneficial endeavors?

You must force leadership to publicly acknowledge them.

Emails, phone calls and live conversations are communication methods where management can feign ignorance. “I never heard about XYZ before…” Yes, I understand you’ll have email receipts and call logs, but that’s not enough.

You must get it on record. 

How do you do that?

By filing a shareholder proposal.

A shareholder proposal requires the company to document the proposal and vote. They will usually vote against it, but that’s not the point.

The point is that you’ve now, ON RECORD, forced leadership to review, vote and put IN WRITING a summary of a proposal that would benefit the company. You can include plenty of supporting information which leadership should review before they vote it down. You’ll also require leadership to explain WHY they refuse to adopt solutions that have worked at hundred of thousands of similar businesses – over several decades!

In essence, leadership can no longer claim they didn’t see the emails, or get your voicemail, or conveniently “forget” the conversation you might have had.

You’ve just required leadership to confront the Emperor Has No Clothes reality: that they’ve been collecting large sums of compensation while misserving shareholders and being negligent to the fiduciary responsibility of the company.

Even worse, chain restaurants are expecting customers to pay for their selfish behavior by passing along the… Click To Tweet

Well now activist investors have the ammunition they need to push in positive change for shareholders.

Not every shareholder can submit a proposal, of course. There are a few criteria:

  • The shareholder must own 1% or $2,000 of stock, usually for a period of six months
  • The proposal must be submitted six months before the next shareholder meeting, where voting takes place
  • The filer must follow legal guidance, which will require representation to ensure the company doesn’t try to skirt around it with a No-Action Request. Positioned properly, however, every shareholder proposal will be included on the ballot

The ask is very simple: use proven processes to earn shareholders more money. A single POS data feed would be enough to suss out potential ROI and it could be analyzed over a weekend.

It is crucially important that you do not give leadership a way to weasel out of the improvements. “Oh, we already do XYZ.”

That’s utter bullshit.

Demand that they produce a data feed from their POS that can be analyzed, for free, where objective ROI can be measured. This ensures that you unequivocally prove that the “XYZ” they’re “already doing” is nothing but spreading shareholder returns to their friends’ companies.

Where’s the risk in getting a FREE AUDIT on how you can improve your business?

Ironically, a better performing business means increased pay for leadership. Leadership, however, has refused to turn over that rock, and our best guess is because it puts them at the risk of revealing their lack of qualifications for serving in their current roles.

It’s now become the shareholders’ problem. Only when we get to this level of transparency can we shareholders discuss our grounds for a class action.

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