The Success Paradox

Did you ever notice a business operating in your neighborhood that seemed to be doing everything right, packing in the customers, raking in the money, generally outselling all of their (apparent) competition, and then vanishing without a trace? Not a seasonal business (like a Christmas tree lot or a pumpkin stand) or one that was intended as a one-off event (like a public liquidation sale), but a regular business that seemed too good to possibly fail – and yet, somehow did? Ever wonder how that happens? Well, needless to say, there as at least as many causes of business failure as there are failed businesses in the world, but many of those failed businesses were doomed from the start, never worked in the first place, or had some fatal flaw built into their business concept. I’m speaking here of the paradox of a company that was so successful that it actually did them in.

Consider the case of two restaurants I’ve patronized frequently over the past few years. I’m not going to name any names, again, because I don’t want to publicly embarrass anyone (and I’m not that keen on being sued, either), but neither of these cases is exactly unique. If you ask around, there are probably parallel cases in your neighborhood. First, we have the case of a diner, not that far from here, that was packed full most of the time, and on high-traffic times (like Sunday morning and early afternoon) literally had a line out the door. The wait for a table could be over an hour, and even if you could get a table, the atmosphere was like being in a basket full of kittens, but the food was good, the service was excellent, and the prices were reasonable. They also catered to the fitness and bodybuilding crown in the beach cities, offering huge “protein plates” with no carbohydrates and enough cholesterol to choke a horse. People would wait hours for a table.

So what happened to them? Well, people got tired of waiting for a table and began exploring the other options for brunch in the area. Some of these, like the IHOP location I mentioned back in November, took this opportunity and ran with it, siphoning off a lot of the diner’s less patient customers. Other customers got tired of the noise, the crowds, and the sensation that somebody else’s child was about to run over your foot every few seconds, and changed their eating-out patterns, too. The stress level got to a lot of the veteran employees (lowering the quality of service and eventually the quality of the cooking, as well), and the owners spent money on the wrong things (new menus, an outdoor seating area, more television sets, and so on) instead of keeping their operational standards high.

The upshot is that the last few months, the Sunday Brunch traffic has dropped off until there’s no wait for a table at all. The owners are attempting to cut costs (presumably to keep profits up) by scheduling fewer waiters, using busboys for more direct service functions. They haven’t gone under yet, and may still be able to pull out of this tailspin – IF they return to what made them a success in the first place. But each week there are fewer and fewer cars in their parking lot when we drive by…

The other case is even simpler. The owner of a very popular restaurant was getting a divorce, and did not want to pay his wife any spousal support. So he shut down the restaurant during the proceedings, ostensibly for “redecorating”, figuring his effective income would drop to zero, he’d be off the hook, and he could just re-open and go back to raking in the profits. Unfortunately, many of his operating costs continued while he was closed, such as rent, advertising, interest on loans, and so on, and the divorce case dragged on far longer than he’d expected. I can’t say for sure if his wife or her attorneys did so on purpose (to counter his “no income” tactic), but the upshot was the same. By the time the dust settled, the owner was in bankruptcy, with no way of re-opening the restaurant even if he’d wanted to. The runaway success of his enterprise had made him think he could game the system, but as previously noted, the laws of Economics may not be as precise as those of Physics, but they’re just as difficult to ignore…

Of course, in addition to overconfidence, lack of concentration on your core business, bad spending choices and pure hubris, there are other errors that attack successful businesses. But that’s a post for another day…